Author: Thyagarajan

Is high inflation ingrained in Indian economy?

Inflation to India is what deflation is to Europe. The persistently high inflation since 2006, especially food prices, have raised serious structural economic concerns. It is no secret that RBI has failed miserably in controlling price pressure with its so-called interest rate hikes. While RBI has lost its face, the common man has lost his ‘weight’.


Several factors like capital stock deficiency, demand-side drivers, import price pressures, embedded inflation expectations, weak monsoon, etc have played their part at various intervals to keep food prices elevated for an elongated period of time.

For the second month in a row, consumer price inflation- a more realistic cost-of-living index as it captures retail prices- remained at double-digit level in May.

Retail inflation rose 10.36% in May, marginally up from 10.26% in April. In cities, it was even higher at 11.52%, compared to 9.57% in rural India. The Wholesale Price Index (WPI)-based inflation in May stood at 7.55%.

imageThe reason why RBI’s monetary tool has been ineffectual in taming inflation is because the current food price-driven inflation is fuelled by supply side constraints rather than just aggregate demand.

Although current year production of cereals has been very strong, food inflation is still in double-digits as food consumption patterns have changed with the populace moving towards high protein food like milk, eggs fish, vegetables from cereals. While measures like centrally-sponsored welfare schemes, high subsidies, sixth pay commission wage hike, etc have boosted disposable income and created demand for goods and services, the government has been unable to increase supply to meet the rising demand. Inadequate infrastructure and lack of manufacturing capacity and poor stock management has meant grains continue to rot while humans go hungry.

Instead of rooting for repo rate cuts, Pranab and co would do well to increase agricultural output and productivity to alleviate pressures on food prices. These would include a focus on technology, improved supply chain, water management, rural infrastructure, agricultural diversification, and private sector investment in marketing and agro industry. Reducing farm subsidies and raising productivity is needed to reform the agriculture sector.

Sustained wage pressure (thanks to MGNREGS, the government’s flagship employment programme and higher crop MSPs) has kept food price inflation high even in years of record food production as was the case in 2010-11.

imageImport price pressures have also been a crucial factor for overall inflation. Inadequate pass-through of international crude oil prices has failed to curb wasteful consumption leading to a high degree of suppressed inflation. Any rise in global commodity prices will put upward pressure on prices in India.

Recent RBI survey pattern reveals high inflation expectations among Indian households. Since food price hikes are driven by supply-side shocks, it has led to speculative behaviour by traders, thus feeding into high inflation expectations. The onion crisis in late-2010 is a stark example of this.

imageAlso, the steep hike in minimum support prices (MSP) of various kharif crops last week and in the last five years have added to the structural uptrend in food price inflation and complicated RBI’s job. The sharp MSP hike, at a time of high inflation also shows the utter lack of policy co-ordination between the central bank and the government in achieving price stability.




While hyperinflation may be a matter of history, India is in the midst of an inflationary spiral that threatens to push economy into further chaos.

India Losing Plot but Govt in Denial Mode

Once the darling of the BRICs, India is now nothing more than a “gasping elephant” and is in danger of becoming the first ‘fallen angel’ among emerging economies.

Last week, Fraport AG, the world’s second-largest airport operator, said it plans to exit Delhi International Airport Ltd (DIAL) and will also shut its business development office in India due to lack of opportunities.

Contrast this with 2009 when the UPA won the elections with a decisive mandate, investors gave it a resounding thumbs up hoping that the new-found political stability would usher in a wave of reforms and revive investment climate.

imageFar from pushing the pedal to speed up reforms, the Manmohan Singh government has squandered the advantage it enjoyed by enmeshing itself in a series of scams, policy paralysis, ministerial tiffs, mismanagement of political events, fiscal profligacy, etc.

This has resulted in growth tumbling to a nine-year low in Jan-March quarter, fiscal slippages and inflation staying stubborn above 7% due to supply side bottlenecks, rendering monetary policy useless and hindering investments.

Adding to the gloom, global ratings agency S&P rubbed salt into the wounds of investors when it warned that it could downgrade India’s credit rating to junk due to slowing GDP growth and political roadblocks to economic policymaking.

imageThe agency, in its report titled “Will India be the first BRIC fallen angel?”, said that the main reason behind the country’s political impediment to economic liberalization was the nature of the leadership within the Centre and not the allies supporting it or the “unhelpful” Opposition.

Apart from asking RBI to cut policy rates and make credit cheaper, Pranab and his economic battery of advisors have done little to steer the economy from its troubles. Given India’s external financing needs, augmenting foreign inflows are crucial.

But the about-face in foreign direct investment policy for retail and insurance sectors coupled with uncertain regulatory actions like GAAR and retrospective amendments have scared foreign investors, drying up fund flows.

Infrastructure projects have missed deadlines due to policy hurdles/ inaction and power and coal shortages. Investment growth has decelerated sharply as rising interest rates and policy paralysis stifled gross fixed capital formation with trends slowing from the 17%YoY CAGR seen during FY04-08 to 4% y-o-y in FY12.

imageIndia’s problems are entirely self-inflicted as policy making has come to a standstill. Instead of setting its house in order by addressing power distribution losses, meeting infrastructure project deadlines and plugging the twin deficits, the government has taken the easy way out, i.e., blamed its ills on overseas problems like the sovereign debt crisis in Europe and a slowing US economy.

And now it is betting on lower oil prices and a normal monsoon to revive the economy. Failure on these coupled with a bad external shock and weak economic management could see growth falling to 4-5% levels, a ‘remote’ scenario that S&Pimage feels is possible.

Placating foreign investors by harping on long-term fundamentals and growth dynamics have run their course. Time has come to get rid of policy bottlenecks by addressing land acquisition and environmental clearance problems, policy and execution reforms, taking steps to enhance farm productivity, eliminating supply-side constraints, etc.

On the expenditure front, credible fiscal consolidation is needed. Failure to meet the projected 5.1% deficit target will damage India’s standing and deepen the crisis of confidence.

The writing on the wall is clear and there is no simple fix- it is either perform or perish.

India Inc lands ‘bailout’ via CDR route

Mascotte Air India / Air India Mascot

(Photo credit: Wikipedia)

Headwinds from struggling domestic economy as a result of rising inflation, interest rates, lower profitability and weak demand continue to weigh on corporate India. This has severely impaired their ability to service debt and a record number of companies are knocking on the doors of corporate debt restructuring (CDR) cell to recast their loans.

The total number of debt restructuring cases received by the CDR cell increased from 305 (debt aggregating Rs 1,38,600 crore) as on March-end 2011 to 392 (debt aggregating Rs 2,06,493 crore) at the end of March this year.

The total amount of debt approved for recast by the CDR cell was Rs.1,50,515 crore as of March 31, with new debt of Rs.39,601 crore adding to the sticky loan amount in 2011-12, the highest since the CDR cell was launched in 2001.

imageCreditors bring cases to the CDR cell, an informal forum of bankers approved by the Reserve Bank of India, to renegotiate repayment terms with struggling borrowers and help them avert the defaulters tag.

A large number of iron and steel, infrastructure, telecom and textiles companies are in the danger zone. Some of the big-ticket cases that have taken the restructuring route include telecom tower services provider GTL [stockquote]GTLINFRA[/stockquote], shipbuilder Bharati Shipyard [stockquote]BHARTISHIP[/stockquote], Air India, Kingfisher Airlines [stockquote]KFA[/stockquote], Hindustan Construction [stockquote]HCC[/stockquote], Leela Hotel [stockquote]HOTELEELA[/stockquote] and several sugar and steel mills. Jindal Stainless [stockquote]JSL[/stockquote] is the latest entrant to this infamous club. It has approached lenders to reschedule repayments of its over Rs 9,000 crore debt.

Bank loans to large airlines and State Electricity Boards (SEBs) and Discoms (distribution companies) also face the risk of default, though these are currently not under CDR restructuring. Air India’s Rs 22,000 crore CDR and those of SEBs, which is close to Rs.30,000 crore, were restructured outside the cell.


The slowdown in industrial growth resulted from rising input and borrowing costs, due to which investment and consumption growth moderated in interest-sensitive sectors.

imageWhile a slowing economy hurts the ability of companies to repay their debt, some bankers feel many promoters, who have got their loans restructured, are misusing the corporate debt restructuring (CDR) mechanism by passing on their burden to the lenders.

Amidst such dire situations, the government is only doing more harm to lenders. Last month, the centre directed lenders to rejig Rs 35,000 crore of loans to textile firms, adding more restructuring burden on banks. Ideally, the minimum interest rate to which the coupon is reduced to in a restructuring package is the base rate. The package involves bringing debt service coverage ratio to a respectable level, converting part of loan into equity etc.


Public sector banks [stockquote]PSUBNKBEES[/stockquote] continued to witness a rise in bad loans during the March quarter due to restructured assets. During the March quarter, SBI [stockquote]SBIN[/stockquote] recast loans worth Rs 5,100 crore against Rs 2,100 crore in the December quarter. Banks have to set aside more money in the form of provisioning on restructured advances, which affects profitability.

The macro environment remains challenging with sluggish business outlook, policy uncertainties, limited access to fund raising avenues for highly leveraged companies and project implementation delays. Clearly, we have not yet seen the worst on bad loans front.

India finds itself on a slippery slope

Oil companies raised gasoline (petrol) prices by Rs 6.28 per liter or 11-12% at the retail level, sparking severe outrage from politicians and the so called ‘aam aadmi’. Apart from political rhetoric, it would help to look at the economic implications of fuel price hikes and the entire subsidy mechanism.

imageSince petrol prices are technically decontrolled, the hike will not bring down the fiscal subsidy bill. For that to happen, the paralytic government must get bold, meaning, it has to go out and raise the prices of diesel, LPG, kerosene as oil companies continue to bleed on selling these fuels at below-market prices. Although global crude prices have come off significantly from $125/ barrel mark, the benefits have been offset by the sharp depreciation in the rupee.

But the pressing issue is the entire subsidy sharing mechanism. Global prices of crude oil play a decisive role in the domestic pricing of petroleum products since more than 75 per cent of the country’s crude oil requirement is met through imports. The government subsidizes its refiners (downstream companies like IOC, HPCL and BPCL) to sell fuel below cost, and pushes drillers (upstream companies like ONGC, GAIL and IOC) to foot part of the bill while it bears the rest.

imageOil Marketing Companies (OMCs) had lost a record Rs 1,38,541 crore on selling fuel at government- controlled rates during the last fiscal. While the government will make up 60 per cent or Rs 83,500 crore of the total revenue loss, upstream PSUs will shell out 40% or Rs 55,000 crore as their share of the subsidy burden. Out of the Rs 55,000 crore, ONGC will bear Rs 45,188 crore (82%), Oil India will shell out Rs 5,978 crore (11%) while GAIL will contribute Rs 3,834 crore (7%).

imageThis time around, all OMCs will get full reimbursement which means they will not have to share the subsidy burden. As a result, both IOC and BPCL have reported solid numbers in Q4. Net profit of IOC trebled to Rs 12,670 crore from Rs 3, 905 crore a year ago while BPCL reported a four-fold hike in profits in Jan-Mar quarter at Rs 3,962 crore against Rs 935 crore a year ago.

imageThe ad-hoc subsidy mechanism and the financial jugglery with one oil PSU compensating the other has only worsened India’s fiscal position and the balance sheets of oil firms. It may be politically unfeasible but the sensible thing to do is to eliminate subsidies. While it may push costs and spike inflation, Pranab & co must get rid of price controls and allow oil companies to pass on higher global energy prices to curb wasteful consumption and rationalize energy usage. Cheap energy has discouraged energy saving which can be seen in the sharp spurt in sales of diesel-driven passenger cars.

Simultaneously, supporting measures for the needy—such as well-targeted cash support programme to compensate households for the price increase is easy to implement and understand.

Pussyfooting on this issue will only increase the subsidy burden further even as consumption rises while the rupee depreciates further. This is a potent mixture that can send the macro-economic picture into further tailspin.

[stockquote]IOC[/stockquote] [stockquote]BPCL[/stockquote] [stockquote]ONGC[/stockquote] [stockquote]HINDPETRO[/stockquote] [stockquote]GAIL[/stockquote]

FCCBs–Is Disaster Lurking?

Las Vegas bail bonds financing


Corporate India’s worry lines do not simply end with high input costs, slackening demand, rising credit costs, and low business sentiment. Lured by buoyant share prices, companies went overboard with their fascination for Foreign Currency Convertible Bonds (FCCBs) and raised foreign capital to fund their expansion plans from 2005-06 to 2007-08 when the bubble was just about to burst.

Riding on their heady valuations, the conversion price on such bonds was set at a steep premium, about 25-150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons.

But the crash in stock prices post the 2008-financial crisis has caught many companies that opted for the FCCB route on the wrong foot.

imageAlthough the benchmark indices have largely recovered and are about 20% below their 2008-highs, the share prices of companies with outstanding FCCBs are way below their peaks.

FCCBs worth more than US$ 7 billion is maturing by March 2013. With the first option of equity conversion knocked off, redemption pressure stares at issuers as they have to either buyback or repay the bond holders. Ratings agency CRISIL estimates that FCCBs worth Rs 220 – 240 billion may not get converted into equity shares as the current stock prices of issuing companies are significantly below their conversion price.

Take the case of Jaiprakash Associates [stockquote]JPASSOCIAT[/stockquote]. The Gaur-controlled entity issued FCCBs worth $400 million in Sept 2007, with the conversion price set at Rs 165 per share for bondholders. The stock is now quoting at Rs 64.00.

The same is the case with Tata Steel [stockquote]TATASTEEL[/stockquote], Suzlon [stockquote]SUZLON[/stockquote], RCom [stockquote]RCOM[/stockquote], Subex [stockquote]SUBEX[/stockquote], Educomp Solutions [stockquote]EDUCOMP[/stockquote], GTL Infra [stockquote]GTL[/stockquote] and others. RCom escaped the noose by tapping Chinese banks for refinancing its $1.18-bn FCCBs that were due on March 1, 2012. Suzlon, whose shares have lost about 60 percent in the last one year, is also in talks to raise $300 mn to refinance its FCCBs maturing on June 12.


Suzlon is currently trading at Rs 21.70 while the conversion price of its foreign currency bonds maturing this year are set at Rs 97, making them unattractive for bondholders to convert into shares.

If companies with low promoter holding opt for downward revision of the conversion price, it will only lead to further dilution of their equity stake and drag their share prices lower.


Moreover, the recent rupee fall has dealt a crude blow to companies. For example, a company would now need to pay an amount of about Rs 5,504 crore (based on current rupee value of Rs 55.04 per US dollar) towards the principal amount to a bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400 crore at the start of 2010 when the rupee was quoted at Rs 44.

During these times of severe liquidity crunch, plummeting currency, highly leveraged balance sheets and tight cash flows, the upcoming redemptions can leave many companies paralyzed.

Unable to meet debt obligations or restructure terms of repayment with bondholders can lead to messy legal fights and winding up petitions as seen in the dispute between Wockhardt [stockquote]WOCKPHARMA[/stockquote] and its investors. The countdown has begun and the coming months will determine if India Inc can survive the redemption pressure or is another crisis looming?