India’s Modish Maelstrom Muddle
Indian equity foreign institutional inflows began to trickle back after January’s disappearance as the pre-election budget targeted a 4.5 percent of GDP deficit despite continued staple handouts and modest privatization aims. Leading opposition candidate Modi was received by international diplomatic and business delegations despite his alleged responsibility for communal attacks as state governor addressed in a new controversial book “The Hindus.” Rajiv Gandhi is pegged as the Congress Party standard-bearer, and a dozen smaller groups have coalesced as the “third front” in a bid to replicate an alternative bloc’s success in winning New Delhi’s leadership. January consumer price inflation also dipped to 9 percent on food relief as the central bank nudged the policy rate 25 basis points to 8 percent with governor Rajan blasting industrial country counterparts for coordination refusal. The rupee has stabilized after temporary balance of payments adjustments restricting gold imports and opening a $35 billion expatriate deposit window. In its banking system review rater S&P predicted a tough year ahead with stricter loan classification even as farm credit mandates were eased for government and private providers. Corporate investment remains a sore spot at half the pre-crisis level of 18 percent of GDP with Nokia and Vodafone extending their tax disputes with authorities. Candidate Modi has pledged to improve the climate as a recent Ernst & Young survey found half of multinational companies planning expansion, especially from the Middle East and in the media and technology areas. Interest may have diverted from China as the PMI comes in under 50 and industrial profits rise just over 10 percent. Corporate leverage at 120 percent of GDP is a key risk cited by rating agencies with power and construction conglomerates carrying twice as much debt as equity. Trade jumped 10 percent in January but the surplus eroded on services weakness, as Bank of America’s regular portfolio manager poll showed 45 percent again contemplating a “hard landing” scenario. Their fears were stoked by bond market and exchange rate gyrations, as yields spiked for lesser-grade bank and company issuers and derivatives players took a big loss on a slight yuan band depreciation push. Property developer troubles reflected in fixed-income values could magnify on reports of lower nationwide activity as a second-tier bank announced an indefinite loan suspension.
On the subcontinent Pakistan after a 2013 surge has also sputtered as the central bank chief resigned ahead of the IMF’s first program evaluation. Foreign reserve and tax collection goals were missed, and terror attacks and power shortages are still rife. However the US pledged to maintain the aid pipeline during a bilateral “strategic dialogue” as the military presence fades in next-door Afghanistan, and several dozen state energy holdings will be privatized as a $10 billion Chinese-funded nuclear power station was begun to serve Karachi. Three natural gas import terminals are also under construction and supplies may come from Iran if reconciliation becomes fashionable.
