In India’s Union Budget, its fiscal deficit has been quoted at 6% of the gross domestic product (GDP); the GDP is estimated to be slightly more than US$1 Trillion (March 2009 budget estimates). Reports place the total fiscal deficit of all the central government and state governments at higher than 10% of GDP.
Also, where borrowing from the public would have been one option for the government to contain the fiscal deficit, announcements that they plan to borrow from the market for expenditure-related reforms have sparked fears about the government’s public debt increasing. The government through RBI had borrowed Rs. 96,000 crores between April 2008 and September 2008. This year, the government intends to borrow Rs. 2.4 lakh crores (US$48 billion) in the same period, which is around 250% higher than that of last year.
so where are the threats?
Access to international credit may become pricier for India Inc: Global rating agency Standard & Poors (S&P) in February 2009 announced a negative outlook for India’s long-term sovereign credit rating, primarily on account of higher fiscal deficit. Although the S&P has not changed its long-term rating of BBB-, any further deterioration in the fiscal deficit would have led S&P to give a rating of BB+, which indicates junk bond grade credit (more speculative in nature). These ratings are very important because they determine how easily, and at what rate, India’s companies can get access to international credit; with low ratings, corporate India will need to pay higher interest rates as premium on prevailing interest rates for their borrowings. Higher financing costs are an unnecessary addition at a time when our industries are already dealing with shrinking demand and margins.
Prices of government bonds are plunging: The government emphasises that in the immediate term, borrowing and risking a growing deficit are inevitable if it has to sustain economic stimuli to revive growth. However, the impact of this increased government borrowing is already being felt in the bond markets. With the sudden increase in the supply of government-issued securities (G-Secs) in the markets, the takers have dwindled, and the prices have fallen drastically. Evaluate the returns on Gilt funds that invest in government securities, and you will see a decreasing trend over the last month.
...and the opportunities?
There are ways other than public borrowing, though, that the government can look at to bridge the deficit gap – and they can open up new opportunities for you.
Become stakeholders in the Public Sector success stories: India today has PSUs that figure in the Fortune 500 list of companies. The government has classified the profit making PSUs as Navratna (9 Gems) companies and miniratna companies. As of March 2009, there are 18 Navratana companies and 58 miniratna companies, and the government has announced that it would prefer to list these companies on the stock exchanges as a means of raising funds, as this would also allow the public to reap the benefits of the performing PSUs.
Recent news reports have been quoting a study released by SMC Capital, India, which shows that the IPOs offered by PSUs have given investors far better returns than the private sector IPOs. The study attributed this success to the PSU’s stronger balance sheets, and more realistic expectations from the market in terms of pricing. The difference in the returns shown by the study is quite stark. Where the PSU investors have more than doubled their money over the last five years (2004-05), private sector investors have earned less than 4% during the same time.
Look out for the surge in the telecom sector: The auction of the 3G spectrum for the telecom industry, which was supposed to happen in January 2009, has been postponed to end-2009, as recently announced by the telecom minister. At a reserve price of Rs. 2,020 Crores for national license, the government expected license fees from the auction in the range of Rs. 30,000 to 35,000 Crores (6-7 Billion USD) last year. As of today, there is no clarity on the reserve price for the auction. But we assume that whenever the auction happens the government is going to gain at least Rs. 30,000 to 35,000 Crores.
This is one move that has been closely watched for a while by telecom industry watchers adopting the auction mode will make the process of distributing spectrum licenses a lot more transparent and efficient. Opening of 3G services entails a lot of activity for the telecom players - building of infrastructure as well as mobilisation of capital for bidding for the licences and following expansion. This sector is bound to see corporate as well as capital market action now
The government has announced that it intends to target fiscal consolidation in the next 2-3 years, and considers it more important to spend on supporting growth. The ways it adopts to do this will have some impact on your portfolio, and so will bear some watching.
The expected fiscal activities of the government will boost sectors like Infrastructure, Telecom, Energy and Public Sector Companies, and we expect that these will lead the growth.