Major events for the week are release of trade data for the period April’18-Feb’19 showing sharp increase in merchandise trade deficit, worsening of crisis in Jet, a ‘hostile’ bid by L&T and purchase of government’s share in REC by PFC. On the international front, US Fed keep the rate increase on hold signalling building stress in US economy.
India’s merchandise trade deficit for the year so far (April’18-Feb’19) has risen sharply to $165 billion as per the data released late last week. The deficit has risen largely due to sharp increase of almost 32% in crude oil imports and could be the highest since FY13. Excluding Oil, imports growth is only 3%. Crude oil import remains Achilles’ heel for the domestic economy with over 80% of consumption being met through imports. Government brought about major changes in oil & gas exploration policy last month to augment domestic supply. As per reports, government is also considering further increasing import duty on some consumer products to rein in the imports. While merchandise trade remains on the deficit side, India recorded surplus in services export which stood at about $72 bn during the period. As a result, net trade for the period stands at $93 bn.
Jet Airways continues to hog the headlines with Etihad, a key shareholder with 24% stake, declining to infuse more funds into the airlines. That was one of the conditions as per the revival proposal put forward by the lenders some weeks back. Lenders led by SBI had agreed to provide short term funds as per the proposal. The ball now is in lenders’ court which may have to take a controlling stake in the airline to keep it afloat. Keeping the airlines functioning is crucial as its failure could cause severe disruption in the aviation sector in particular and impact the economic sentiments. Jet promoter, Naresh Goyal, has been asked to leave the board of directors and things may fall in place if he agrees to that. Lenders may need to rope in a professional management team to oversee the functioning of the airline on short-term basis and a unique experiment if it comes to that. That could be similar to the takeover of IL&FS board by an independent board after government’s intervention last year.
L&T and Mindtree were other highlights of the week after L&T entered into an agreement to purchase the stake of Mr Siddhartha, the largest investor in Mindtree. The promoters of Mindtree holding about 13.3% stake, however, are opposing the deal fiercely for obvious reasons. Mr Siddhartha, was a passive investor, unlike L&T which would work with an active strategy towards Mindtree. Mindtree’s promoters response has been emotional rather than based on logic and the chances look slim that they would be able to derail the deal. However, L&T may have to shell out more to increase its stake in the company as large part of stake is held by institutional investors. The institutional investors may not be averse to L&T taking control but would certainly want to be sufficiently rewarded for the same.
Power Finance Corporation (PFC) has entered into an agreement to purchase government’s share in rural electrification corporation (REC) worth nearly Rs 14,500 crore. The development has been quite swift as government had taken the decision to sell the stake just 3 ½ months back. PFC and REC and both government owned lending institutions engaged in financing power sector projects. While PFC specializes in generation projects REC is more involved in distribution segment. While the move is driven by the need to meet government’s divestment target, it serves an even bigger purpose of consolidating government owned lending institutions. However, PFC may face pressure in its balance sheet and may need to raise equity resource to maintain regulatory norms related to capital adequacy.
While Indian monetary policy is followed mostly in India alone, the decision of monetary policy of US is watched across the world as it affects the entire world. In its second meeting for this year, the Fed led committee decided to keep the rates unchanged this time too. The Fed had been going all steam increasing the rates thrice during 2018 and had projected similar increase in 2019. However, even more important is downward revision in growth and employment projections. The change in growth estimated has resulted in downward revision of its target policy rate implying no rate increase during 2019. This would come across as relief to global economy also as higher rates in US leads to flight of capital from emerging economies to US. This not only reduces the capital available in these economies but also puts pressure on the exchange rate further affecting the economy.
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