An increasing number of foreign investors have started believing that Indian financial sector is suffering from schizophrenia. Things are pretty good in Asia’s third largest economy and they are even getting better, but the banking community remains a depressed lot on piling of bad assets and tardy credit pick-up.
Indeed, the banking sector is not in pink of health and almost every lender is showing a rise in bad and restructured assets, but one should not press the alarm bell as once the growth momentum is back to the economy, things will definitely look up, they say.
These investors are taking heart from the fact that things are looking better on the macroeconomic front and are radically different from what they were in May-June 2013. Fiscal deficit at 4.6% of gross domestic product (GDP) in fiscal year 2014 is below the government’s original forecast of 4.8% and pleasing to the ears of global rating agencies even though it is being achieved by compressing public spending. The current account deficit (CAD) is also drastically down to $45 billion, thanks to curbs on gold imports and narrowing of the trade deficit. The government’s estimate of CAD is better than that of the Reserve Bank of India, which had projected little less than $50 billion CAD, or 2.5% of GDP, down from its record high of $88.2 billion, or 4.8% of GDP in 2012-13. In the first half of 2013-14, CAD narrowed to $26.9 billion (3.1%), from $37.9 billion (4.5%) in the corresponding period of 2012-13.
Last year, the government had hiked import duty on gold thrice to 10%. The Reserve Bank too imposed a series of curbs to restrict imports of the yellow metal.
Gold imports, which touched a high of 162 tonnes in May, fell to 19.3 tonnes in November. The curb on gold imports may not remain forever but with inflation coming down and real interest rate inching up, savers may shift focus from gold to financial assets.
Meanwhile, for the April-December 2013, exports aggregated to $230.3 billion, and imports to $340.3 billion, keeping the trade deficit at $110 billion, sharply down from $147 billion in the corresponding period of the previous year. The trade deficit has been improving continuously, easing pressure on the local currency. It fell to $9.9 billion in January this year from $10.1 billion in December and $20 billion in January 2013. Going by Reserve Bank of India data, on annualized basis, the trade deficit is down to around 7.5% of the GDP during the 12 months ending January from 11.3% in the previous year.
The rupee, which hit its lifetime low of 68.85 a dollar on 28 August, slipping some 20% since January 2013, has substantially recovered since then. It has gained close to 11% in past six months and many currency dealers say it could gain even more. The Reserve Bank mopped up some $34 billion through the dollar swap windows for FCNR(B) funds and banks’ overseas borrowings between mid-July and November, and now the central bank holds close $294 foreign currency assets.
Indeed, the factory output continues to contract and in the absence of industrial activities the growth momentum will take awhile to come back to the economy, but the good news is inflation is coming down. The retail inflation in January slowed to a two-year low of 8.79%, sharply down from 11.16% in November, mainly because of a more-than-expected 13% drop in vegetable prices.
The wholesale price inflation too sharply cooled off from a high of 7.52% in November to 5.05% in January—its eight-month low. The quarter percentage point hike in the interest rates in the Reserve Bank’s last policy review in the last week of January has also sent a strong message that the Indian central bank is determined to break the back of inflation and it is independent. This is one of the reasons why the rupee is doing better compared with some of the emerging market currencies.
Indian bankers are a worried lot on tardy credit offtake, rising bad assets and a depressed investment climate. Bank credit has grown 14.8% year-on-year, down from 16.4% from a year ago period, but in the past there has been even lower credit growth. The investment climate may change for the better with the government planning to widen the scope of the Cabinet Committee on Investment (CCI) to fast track core sector projects. The plan is to automatically send those projects to CCI for clearances that have been awaiting approval for more than three months. Headed by Prime Minister Manmohan Singh, CCI was set up in January 2013 to identify and fast track mega infrastructure projects, stuck in the absence of administrative clearances. Once the projects are cleared at a faster pace, Indian banks’ health will improve and they will be in a better position to deal with bad loans.
The positive outlook of the foreign investors is also reflected in the equity market. Since January, there has been a marginal outflow (about $6 million) but one needs to see this in the overall context. Barring Indonesia, all other Asian markets and most emerging markets have seen a far higher outflow of foreign money.
Most bankers feel that the worst is over for the Indian economy and yet they are not excited, a classic case of sentiment being worse than reality. If Bharatiya Janata Party’s prime ministerial candidate Narendra Modi comes to power after the general elections, the sentiment may catch up with reality. At this point, Modi assuming power at the centre is not a hope but seems to be the prayer for the entire financial sector. The flipside is if that doesn’t happen, it will dampen sentiment and blur reality.
