Nov 13 2017

Global Markets – 29 Oct to 11 Nov, 2017

It has been slightly more than a year since I have started tracking crude prices, more particularly, India’s basket of crude – since June 03, 2016, to be exact. For the past three weeks, crude prices have been hitting their highest weekly closing levels since the time I have been tracking. Prices have breached the US$60 mark, to close at $62.40 as on Nov 09, 2017. While the impact of this rise is multi-fold for an oil importing country like India, I want to talk about two direct outcomes.

The first is that our import bill will increase significantly considering that oil imports account for the highest proportion of all items imported. This will consequently push up our trade deficit, and put pressure on the Rupee.

The second impact is on public finances. Strong revenue generation in FY17 had helped the government to keep the fiscal deficit within the budgeted numbers very comfortably during last year. This performance in revenues was made possible by a strong growth in indirect taxes, which grew by Rs.176 Lakh Crores, or 25% over FY16. 53% (Rs.94 lakh crores) of this increase in indirect taxes came from Central Excise collections – helped by regular increase in excise duties on fuel which the government imposed as crude prices dropped, thereby artificially keeping up the retail prices and shoring up the revenues.

As crude prices increase in the international market, there is a growing clamour for reducing the duties, which the government has acceded to by implementing a Rs.2 cut in excise duty recently. If prices do not show any sign of letting up, the demand for further cut in duties will become stronger, which the government will have to consider. This could directly impact the public finances, and consequently the fiscal deficit of the country.

Possibly foreseeing this, the government has only budgeted for a 4% increase in indirect taxes in FY18. As of the first 6 months of the fiscal, we have achieved 49.2% of budget estimates in indirect tax collections, which gives some room to the government to look at any cut in duties.

The other noticeable aspect (which I touched upon in my last update), is the increasing cost of foreign currency financing. LIBOR has been moving up, and from the levels of 140 bps seen in mid Apr, 6M LIBOR has moved up to 161bps, as of Nov 09, 2017; 12-month LIBOR is at 188bps. Rupee funding, where available, is looking to be increasingly attractive, given the sufficient liquidity enjoyed by the banks.

Finally, September data of core sector and IIP growth have come out and this is one of those months, where, the performance of the two have diverged despite the high weightage of core sector in IIP. Yes, this is not the first time it has happened. If you plot the two, you can see seven such instances in the past 21 months since Jan 2016, where one index has grown since the previous month, while the other has declined. However, considering that core sector accounts for nearly 40% weightage in IIP, one would assume a significant correlation between performances of the two, which it has for most of the times.

Public finances – Deficits decline in Sep 2017

  • India’s twin deficits declined in Sep 2017 on the back of strong growth in revenues, and tight control over expenditure during the month
  • Fiscal deficit declined from Rs.525 Lakh Crores (L Cr) to Rs.499 L Cr, while revenue deficit declined from Rs.431 L Cr to Rs.379 L Cr
  • These are still high compared to Budget Estimates for the year, and the revenue deficit is still over the year’s estimates

·       Revenues in Sep have grown 21% over last year, while expenditure seems to have been controlled in Aug and Sep; expenses have declined by 12% in Sep

·       Overall revenues have grown by 12% YTD, while expenses have increased by 11.4%

·       However, what is worrying is that capital expenditure seems to be getting the axe more than revenue expenditure, and this might not be a good thing in the long run

·       Overall capital expenditure still is on the positive side, registering an 8.5% growth YTD over same period last year

·       Closing the first half of the year, we have spent about 54% of the yearly budget of Rs.2,147 L Cr, while revenues have hit about 41% of Budget Estimates of Rs.1,600 L Cr

·       YTD revenue growth of 12% is thanks to a strong growth in indirect taxes collection, which has grown by 25.6% YTD as against same period in the previous year

  • Considering the change in tax structure due to implementation of GST, it will not be meaningful to do an item-by-item comparison of individual components of indirect taxes
  • As far as direct taxes are concerned, there is a 16% growth in Income Tax collections, and a 11.3% growth in corporate tax collections during H1 FY18

IIP growth slows in Sep, while core sector performance improves

  • The fairly good performance of IIP in Aug seems to have been lost out in Sep, with growth dropping down to 3.8% during the month, as against 4.5% for Aug 2017
  • For the Apr-Sep 2017 period, IIP growth stood at 2.5%, lower than 5.8% during same period last year
  • The Sep performance of IIP is in direct contrast to the Core Sector performance for the month, which improved from 4.4% in Aug to 5.2%

·       Looking at use-based classification, capital goods registered a growth of 7.4%, while consumer non-durables hit double digit growth of 10% in Sep

·       Both these segments also improved their performance from Aug, apart from intermediate goods, which grew at 1.9% in Sep, as against a decline of -0.7% in Aug

·       Consumer Durables, which had grown by 10.4% in Sep 2016, and by 3.4% in Aug, declined by -4.8% in Sep 2017 and was one of the major reasons for the drop in performance