India’s budget woes

These lines from the latest research report of JP Morgan caught my eye:

At some level, today’s move was not surprising as indirect tax growth is presently running 5.8% oya (till September) compared to a budgeted  growth of 25.9%. Furthermore, this year’s disinvestment target is getting increasingly challenging to completely meet. Therefore the resources raised by today’s move – while small in the grand scheme of things —  would reduce the Planned expenditure cuts needed to meet this year’s fiscal deficit target of 4.1% of GDP. But we continue to believe the government will do whatever is needed on the expenditure side to meet its deficit target.

The report dealt with the decision of the Indian government to raise excise duties on petroleum products. I could not believe that indirect tax revenues were running at 5.8% (YTD) compared to the budgeted increase of 25.9%. Even if disinvestment starts now and happens in the next four months, one is not sure if it would meet the government’s target.

It is too tempting to say ‘I told you so’ and I will say it. In July, when the Finance Minister announced the budget, I wrote that the government was too hasty and wrong in accepting the previous government’s budget target of 4.1%. Unfortunately, so far, events have proven me correct. There is no joy in it, however.

The JP Morgan Research Report goes on to add the following:

But we continue to believe the government will do whatever is needed on the expenditure side to meet its deficit target.

I am not sure if one should be pleased with that. First, it is an uncomfortable reminder of Mario Draghi’s ‘whatever it takes’. The Eurozone economy is not exactly in the pink of health two years after he uttered those famous words.

Second, if the government does whatever it can to stick to the 4.1% budget deficit ratio target, the first question that pops up in my head is the question of what it does to economic growth? Plus, will there be accounting gimmicks that the UPA government deployed?

There was a Press Release by the Ministry of Finance on 7 November that the Central Board of Direct Taxes (CBDT) that almost confessed (as correctly noted by my friend) that the tax administration regime hitherto was adversarial. The question is whether the government’s budget woes would keep the tax administration adversarial.

Surprised that not many are asking these questions. They should.

Tempting fate all over again

I did not realise that quietly another fortnight+ has gone by since I blogged last. These days, it is hard to sustain enthusiasm and comment on the charade that goes on, in financial markets. The Dow-Jones Index is up nearly at 18000 and the S&P 500 index is ensconced at above 2000 and India’s Sensex index is above 28000 points.

I just began reading Dr. William Bernstein’s ‘The Four Pillars of Investing’ – in his first chapter, he repeats several times the iron law of asset returns: high returns in the past will beget low returns later. We have experienced it repeatedly in the last three decades when most of us grew up. But, we refuse to internalise the lessons.

Take a look at these stories that get little attention these days:

… amount of debt on balance sheets climbs back to levels seen in early 2008 before the financial crisis. To make matters worse, their ability to make interest payments is about where it was in 2007…

Even with historically low borrowing costs, the ability of companies to make interest payments is about the same as before the global financial crisis. Coverage ratios, a measure of earnings to interest expense, average about 4 times for U.S. high-yield companies, compared with an average of 3.8 times in 2007 and early 2008, according to Deutsche Bank. Companies with lower ratios have higher debt burdens.

Investors have piled into junk bonds for their relatively high yields amid the suppressed rates. That has allowed the least creditworthy borrowers to raise $1.64 trillion in the bond market since the end of 2008, according to data compiled by Bloomberg. [Link]

The indifference to risk is universal, it seems.  Look at the opening paragraphs from the MINT story:

Easy global liquidity conditions, juxtaposed with optimism surrounding the India story, is allowing a larger number of Indian companies, many of them rated below investment grade, to raise capital in the international bond markets. Much of this borrowing has come via overseas subsidiaries of Indian firms, allowing them to raise capital without having to adhere to the Reserve Bank of India’s (RBI’s) stringent external commercial borrowing (ECB) norms that restrict the cost at which such money can be raised and also the end-use of such funds. [Link]

This news-story in MINT followed my MINT column where I had queried if hubris was raising its head in India once again. The story answers my headline query in the affirmative, I guess. I find it hard to believe that corporations in India and investors worldwide could so easily forget lessons of such a big crisis such as erupted in 2007-09.

Perhaps, the wise words of H.R. Khan, one of the deputy Governors in the Reserve Bank of India appear to be a tad too late. In any case, it would not have mattered even if he had uttered them a year or two earlier. Such is the power of instant gratification and greed. For what it is worth, let me repeat his words:

Khan warned against “too much complacency” due to the stability of the rupee against the dollar. “People are now so comfortable with the rupee that there are issues of hedging. Too much of complacency is happening due to the stability syndrome,” said Khan. In a speech last month, Khan had said the hedge ratio for external commercial borrowings (ECBs)/foreign currency convertible bonds (FCCBs) declined sharply from about 34 per cent in fiscal 2013-14 to 24 per cent during April-August 2014 with a very low ratio of about 15 per cent in July-August 2014. Khan said excess leverage, excessive unhedged currency exposure and not-well-thought-out outward foreign direct investment were the three things that added to vulnerability. Stating that he was “chastened” by the massive jump in foreign investments by Indian companies, Khan chided corporations for not doing enough research before taking their decisions, as many had to exit such investments in distress. “You’ve gone without proper research, due diligence and adequate planning. So, you now see large-scale disinvestment of such assets,” Khan said. [Link]