October Policy
RBI is likely to maintain status quo on rates…
With the month of September almost coming to a close, the question shifts to the stance of the RBI in the forthcoming credit policy in October. Remember, the RBI may have cut rates by nearly 200 bps since January 2015 but the CPI inflation during this period has gone down by more than 600 bps. This high level of real interest rates is one of the prime reasons why bank lending is not picking up. A rate cut would solve this problem. However, the RBI may choose to hold rates in October and prefer to err on the side of caution. Here is why!
CPI inflation is up sharply…
If there is one development in the last 2 months it is the sharp rise in inflation. The CPI inflation is up by 190 basis points from 1.46% in June 2017 to 2.36% in August 2017. Out of this 190 basis points rise, nearly 152 bps has been contributed by food prices alone. The RBI may tend to believe that higher MSP on most food crops may result in a sharp rise in inflation as we saw between 2009 and 2011. The second worry is on the core inflation where oil prices play a key part. Brent Crude has already settled above the $55/bbl. mark and oil is now promising to get closer to the $60 mark. That will imply a sharp rise in core inflation and that could be a further boost to CPI inflation. The RBI may not be too keen to risk setting lower rates, especially at a time when inflation is showing upside risks; both on the food and core inflation front!
Fiscal Deficit
Should the government give up on its fiscal discipline?
The first quarter GDP at 5.7% and the GVA at 5.6% came in as a shock to the markets and to policy makers. In fact, the government has shown alacrity and hinted at a special fiscal package of $7.7 billion to boost growth in the Indian economy. The move, it is feared, will lead to the fiscal deficit overshooting its original target for the year by 50 bps. So, we may end up with a full year fiscal deficit of 3.7% instead of 3.2%. The question is whether such a higher fiscal stimulus at the cost of fiscal discipline is justified at this juncture. The answer is a clear “No”. Here is why!
We are already stimulating…
To be fair, the government is already giving the economy sufficient stimulus. If one breaks up the IIP number and the GDP numbers, the only sectors that are outperforming are either the sectors that depend on government spending or on government policy. Thus, steel and natural gas sectors are outperforming. Similarly, under the services category we get to see the best growth in public services, social investments and defense services, all of which are stimulated by the government. In fact, the biggest stimulus to the infrastructure sector in India is also coming from government’s massive spending on roads. Most of the government spending already has strong externalities. The problem is that private investment is not picking up and that looks unlikely to change. More stimulus, therefore, may not help!
Tata Sons
The consolidation of power has just about begun…
Back in 1992 when the original satraps like Rusi Mody, Darbari Seth and Nani Palkhivala posed the first major challenge to the Tatas, Ratan Tata learned an important lesson. It was necessary to consolidate his ownership over Tata Sons. What Ratan Tata must have learned from the Mistry saga is that his control over the Tata group must be absolute and unquestionable. The all-important meeting of the Tata Sons board on 21st September needs to be looked at in that light!
Taking Tata Sons private…
The proposal to convert Tata Sons into a private limited company was easily passed through by a comfortable majority, despite objections from the Mistry camp. This will have two major implications. The Tata family will now be able to exercise much greater control over the operations of Tata Sons and therefore the Tata Group as a whole. Secondly, the Mistry group will be largely marginalized as they will not able to even sell their shares without the explicit consent of the Tatas. That will virtually obviate the risk of a group of businessmen led by Mistry trying to take control of Tata Sons through the back door. Of course, the eventual decision will rest on the National Company Law Tribunal (NCLT), but it is doubtful to what extent NCLT could really make a difference to the final decision that has been taken in the board meeting with a decisive and comfortable majority.
The preference share issue…
The board meeting also passed a significant resolution that preference shareholders will have a right to vote if dividends were skipped for a period of 2 years. Why is this so important? It needs to be remembered, that Ratan Tata is the largest holder of preference shares in Tata Sons. There wasa dispute over whether Mistry family’s share in Tata Sons was to be calculated with or without considering the dilution due to preference shares. In fact, if the dilution due to issue of preference shares is considered then the share of the Mistry family in Tata Sons comes down sharply from 18.4% to 2.86%. Ratan Tata, individually, becomes the most significant shareholder in Tata Sons giving him total control over the group in the process.
