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Needed A Balancing Act

Monday, December 23, 2013
By Siddharth Rajpurohit

Siddharth Rajpurohit AVP Research, Tathastu Investment Adviser Pvt. Ltd.

The dawn of 2013 was very gloomy as India woke up with a number of overhangs such as a 2G Scam, Iron ore mining ban, Coal scam, huge CAD, high Inflation and Interest rate which has rocked the Indian economy.  India was not only facing a fall in GDP growth rate, but with the fear of getting stuck in some scuffle, the government officials almost became indecisive. This led to prolonged environmental clearances for a number of Infra and Construction projects which were already agonized by land acquisition issues, leading to further deepening of the slowdown.

The significant fall in KG D6 gas output aggravated the woes for the Indian economy as a number of dependent sectors such as fertilizer and gas based power plant just went topsy-turvy. The power plants build on the anticipation of a cheap domestic gas from Reliance’s KG D6 are now unviable as running on imported gas or coal is not cost efficient for them.

The repercussions of the tussle in Infra, Mining, Power and other industry fell on the Banking sector, which is now suffering with huge NPA’s just eating in to their net worth build over ages. The GNPA levels in the PSU banks have hit a high of 4.5% now and the pain is still to remain for another one or two more quarters. 

The year started with already significantly depreciated currency due to high CAD but the news of US Fed to start QE tapering soon in July-August 2013 further worsens the situation. Hot money in the domestic bond market started to fly out of India which increased the pressure on INR. INR/USD touched a high of 69.5 before stabilizing near 60 – 62 levels backed by a number of policy steps taken by the new RBI governor for USD inflow and the curb of gold import by finance ministry.

The weak INR inflated the crude bill for India and led to significantly higher than budgeted fuel subsidy bill.This has a negative impact on fiscal deficit which would ultimately have an adverse impact on sovereign rating already just a notch above Junk. But the weak INR did wonders for the export oriented industry such as IT and Textiles.

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