What does the FM’s stimulus package indicate?

The Finance Minister’s announcement of a stimulus package harbours well for the economy that has seen a sustained slowdown. Measures to revive growth come at a time when the world economy at large is buffeted by global headwinds and trade slowdown. All of these does indeed impart some sort of stability and underpins a new growth impetus for India.
 
Following the persistent slowdown, there have been widespread demands of a fiscal stimulus package from various quarters since Sitharaman’s budget to spur growth. But given the precarious fiscal situation, as many economists have warned, it had left the FM very little room to offer a package without breaching the fiscal deficit target. However the FM’s announcement made it evident that she has sought to revive the “animal spirits”, a term initially coined by John Maynard Keynes and found several references in the economy. On top of it she has also tried to unclog the liquidity blockages to ensure smoothening of credit flows and has tried to incentivise demand in certain sectors, without the new measures having any broadscale impact on the country’s finances.
 
Decoding some of the moves
 
The Budget proposal to hike surcharge on Foreign Portfolio Investors (FPIs) had spooked foreign investors, which was supposed to impact 40% of the FPIs as per industry estimates. Nonetheless, the present decision to rollback this enhanced surge is indeed a welcome concession, as the massive capital outflows that stemmed because of this decision could be reversed and instead, aid in the rupee’s appreciation.
 
The withdrawal of the surcharge on FPIs would boost a sagging market. However, a sustained rally on the market is only expected when there is a visibility of good earnings growth and a reversal of the slowdown in the economy.
 
Other steps such as infusion of INR 70,000 crore as capital in state-run banks, to smoothen credit flow that will benefit corporate, retail and market segments is another credible move. However, past instances of capital infusion simply have not proven sufficient and addressed banking issues that has prolonged the country’s economic recovery. An example of this is that while the RBI has announced successive rate cuts, it has not simply got transmitted to bank’s lending rates, whereby hitting both the supply and cost of credit. India’s banking industry dominated by PSUs will be competitive, more efficient and profitable only if there is a structural design change, featuring operational interdependence, empowered bank boards, better governance standards and improvement in quality of lending.
 
Meanwhile, withdrawal of the draconian angel tax that tightened the noose around startups dependent on angel investors is a welcome move. For instance, any startup that has registered itself with the Department for Promotion of Industry and Internal Trade (DPIIT) and has completed all the required valuations would not be bothered by tax authorities. This waiver of the angel tax that would subsequently simplify the flow of risk capital for young startups generally spellswell for a thriving ecosystem. But this response to “tax terrorism,” which had somewhat put a dent on the government’s conduct acts as a post-dated cheque. For a tax that has been in operation for seven years and has been responsible for snuffing out nascent startups, its removal should have occurred earlier.
 
Crucially, the automobile sector that has experienced a lackluster growth for a considerable time has also been accorded some attention. An increase in one-time registration fee has been deferred, a depreciation benefit on vehicles has been doubled, a ban on the purchase of vehicles by government departments has been lifted and a renewed emphasis has been laid on helping a supply chain emerge for the local manufacture of electric vehicles. All of these measures help with both the inventory buildup and creating a new market for e-vehicles, but car manufacturers are unlikely to ramp up production until they see a sustainable return to normal volumes.
 
On the whole, Sitharaman’s stimulus package should rein in investor sentiment and create confidence within the market. This in itself could power the growth engine such as India’s long-languishing investment rate. However, what is needed is to sustain the growth and this could only start with driving up consumption levels which implies more money in the hands of people.
 
India Outbound
September 30, 2019
 
 

source https://indiaoutbound.org/what-does-the-fms-stimulus-package-indicate/

The millennial angle in India’s auto sector slump

Finance Minister’s Nirmala Sitharaman’s logic on explaining the slump in the automobile sector has clearly brought much humour on social media platforms. She stirred a hornet’s nest when she attributed the “mindset of millennials,” who prefer to use Ola and Uber, as one of the critical reasons behind the Indian auto sector’s spectacular fall. According to Sitharaman, millennials today would rather opt for Ola, Uber and other ride-hailing services instead of paying monthly installments for a car.
 
Sitharaman’s comments coincidentally come a day after the automobile sector reported its steepest monthly decline in sales since 1997-98. Vehicle sales across categories including passenger vehicles, two-wheelers and commercial vehicles fell 23.5 % year-on-year, according to the industry body Society of Indian Automobile Manufacturers (SIAM).
 
What resulted from Sitharaman’s statement is it set the stage for a debate. While there are some takers to her side of logic, other industry analysts have merely panned it. Obviously, for the sake of a sound argument, what matters is to figure out that if there exists a direct correlation between buying a car and hiring a taxi. In plain terms, what this implies is whether Sitharaman’s comment has substance or was it off the mark?
 
For one, along with passenger cars, the sales of bus and trucks also saw a precipitous 39% fall last month, thereby compounding the auto industry’s travails. Analysts have said that in this case, it would be far-fetched to lump the blame on millennials, since they would rarely own a bus or a truck. What this broadly implies is a general fall in consumer demand within the Indian economy, something that extends far beyond the millennials and their purchasing behavior.
 
Second, cab aggregators like Ola and Uber are largely restricted to metro cities and to some extent tier-2 cities. Sitharaman’s argument does not explain why vehicle sales have slumped in rural India. For instance, two-wheeler sales, a key indicator of demand from rural India, fell 22% year-on-year in August, according to SIAM.
 
Third, according to some analysts, the crisis of non-banking finances companies or shadow banks have also hit car sales. Although the government in recent times has taken measures to ease up the liquidity crunch in the sector by allowing credit flow, but the supply of easy finance has taken a toll where over three-fifth of vehicles sold are financed through loans.
 
Also, for the record, the concept of ride-hailing services such as Ola and Uber have come to India during the last 6-7 years. Thus, it might be premature to blame them for the disruption, given that the sector has seen some rosy years during the time of their existence. On the larger front, the auto slowdown is more a function of the country’s broader economic woes than of any one specific factor. Consumption, the main pillar of the economy is down in the dumps with GDP growth falling to a six-year low. This is playing out in case of consumers who are holding back purchases because of uncertainty.
 
Hence, it would be wrong to construe the mindset of millennials as the factor behind the slowdown. The reasons for the auto-industry’s plunging fortunes are varied and the millennials aversion to owning cars is only miniscule fraction of this complex issue.
 
India Outbound
September 25, 2019
 
 

source https://indiaoutbound.org/the-millennial-angle-in-indias-auto-sector-slump/

Negotiation is the only way forward: drone attack in Saudi Arabia

A weekend drone attack on Saudi Arabia that cut into global energy supplies and has halved the kingdom’s oil production threatened to exacerbate tensions in the already fragile Middle East. The responsibility of the attacks was claimed by the Houthis, a rebel group in Iran, who struck at the world’s biggest petroleum-processing facility. That matters greatly because as a result, the Saudi Aramco, the kingdom’s state–owned oil company was forced to suspend production of 5.7 m barrels a day. It usually produces and exports around 9.8 million barrels of oil (latest OPEC figures) to consumers around the world, primarily in Asia.
 
Naturally, what this means is a strain in the supply security, and its ripple effects were felt in the oil market where the price of Brent crude surged 18 % (on Sunday evening) before pulling back to a 12% increase. Meanwhile, the strikes also expose the vulnerability of Saudi infrastructure to attacks, historically seen as a stable source of crude to the market. Although on a short-term basis, oil from strategic storage to meet demand and temper the impact on prices could help, this attack introduces a new irreversible risk premium into the market.
 
There are two reasons for this risk premium. If the Saudi outrage gets prolonged and oil prices rally significantly, then it is likely that shale producers (primarily the US) will raise output. But there exist constraints on how much the United States can export because oil ports are already near capacity. Second, oil from storage could keep the market supplied for some time, but oil markets will tend to become increasingly volatile if the storage is exhausted and the possibility of a supply crunch arises.
 
While Saudi Arabia had stopped short of blaming Iran for the attacks, the possibility that Iran has a direct linkage with the attacks was made explicit by Mike Pompeo, along with the U.S government’s damage assessment of one of the stricken oil facilities. These developments come at a time of increasing tension between Iran and the United States. Since the Trump administration’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA)- the nuclear deal with Iran and the renewal of its sanctions has led to an eruption of sorts. From the US launching airstrikes against Iran, to the rise of Iran’s provocation in the Gulf and consequently, Iran’s enrichment of uranium, the situation is teetering on the brink of a war.
 
The U.S has also maintained a “maximum pressure” campaign against Iran that is meant to throttle its economy already reeling under severe sanctions. On the other hand, however, Trump has expressed his desire to meet Iranian President Hassan Rouhani with no pre-conditions that has roiled some of his top advisers.
 
Though it would be premature to call the present act of Trump, who had been publicly pining for a meeting with Rouhani, an extension of an olive branch, one should remember that it takes two to tango. And in this, Iran has been vehement in showing its reluctance to come to the negotiating table with him.
 
What is clear is that the recent spike in the US-Iran tension could spell doom for not only the oil market, but for global energy markets where the Strait of Hormuz has become a maritime flash-point in the US-Iran conflict. For a region that is already reeling under multiple conflicts, what is required is stability and for the sake of it, a bilateral meeting is the most optimal shot.
 
India Outbound
September 23, 2019
 
 

source https://indiaoutbound.org/negotiation-is-the-only-way-forward-drone-attack-in-saudi-arabia/