India’s Compounded Common Man Muddle
Indian shares’ positive momentum stalled as Prime Minister’s BJP was drubbed by the Common Man (AAP) party in Delhi’s city elections and took only three of seventy seats as the long-dominant Gandhi-led Congress was shut out completely. The winners’ founder and chief Kerjiwal had previously attained and then resigned the top municipal post after campaigning on an anti-corruption platform against the predecessor government. The group has already criticized the new land acquisition regime fast-tracking business and infrastructure development and has managed to mobilize mass demonstrations. The political setback came as the administration presented GDP provisions putting growth near 7 percent the past fiscal year and prepared its first full budget which could lift the $30 billion foreign investment ceiling in local debt. The central bank has been on hold but eased the cash reserve ratio ahead of the end-February submission, and is expected to reduce the benchmark slightly should CPI inflation stay around 5 percent and the rupee be in the 60-65/dollar range with oil price relief. The PMI is over 52 and manufacturing’s share of the economy may be almost one-fifth with the output calculation changes. The World Bank believes the overall growth pace will better China’s over the next two years, but India’s poverty rate could be double its rival’s. The inaugural Modi budget will highlight this gap and likely boost education and health spending after a financial inclusion push opening over 100 million bank accounts for low-income customers. Banking shares were mixed on the initiative as investors await tougher NPL classification rules that could send the portion to 15 percent. Family conglomerates have returned to favor both at home and abroad, with Ambani issuing Asia debt at a record 4 percent yield as fund managers overweight the stock despite the steep P/E ratio. The Modi team’s rapprochement has extended to diplomacy with US President Obama visiting to sign a civilian nuclear accord and officials again offering aid to Sri Lanka after its surprise opposition presidential victory. The move is designed to reverse years of Chinese primacy in loans and investment post-civil-war, which Beijing may no longer be willing to sustain with aggregate debt approaching 300 percent of GDP according to estimates. Consultants McKinsey reports it quadrupled post-crisis to near $30 trillion, and of the $2.5 trillion corporate bond market one-third is local government financing vehicles no longer valid under an updated municipal borrowing framework.
In 2014 that shadow segment was up 25 percent as total social financing jumped 15 percent to $20 trillion two-thirds in standard loans. Into the New Year holiday the Kaisa property developer default saga turned uglier as both sides hired legal advisers to scrap over obligations outstanding at twice the original amount disclosed as potential acquirer Sunac rethinks the risk. Home prices again fell in almost all cities as Moody’s tallied one-fifth of bank credit as real-estate related. In January RMB financial sector positions were down another $17 billion extending last year’s trend on net repayments and common currency depreciation fears.
