Economy: Government pushes for counter-cyclical policies :: Kotak Sec, report link

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--> Looking into the logjam in ‘me too’ registrations for agri-chemicals. ‘Me too’
registration process has been stalled as Gujarat High Court has ruled that there are
lacunas in the ‘deemed registration’ process as companies don’t register the technicals,
delaying the launch of ‘me too’ products by competition, thereby inflating their profits.
Follow-up of this ruling could unleash changes in the regulatory regime: (1) ‘exclusivity’
periods could reduce to three years only and (2) definition of ‘new’ molecule could be
made more crisp, reducing the number of eligible molecules. Both these changes could
reduce IRRs for future in-licensed products and hence would have negative implications
for companies whose business models are reliant on the same.

Making a case for a looser monetary stance 

The report points out that moderating inflation outturn is a confluence of (1) decline in prices of 

global commodities, including oil and agricultural commodities, (2) decelerating rural wages and 

lower MSPs increases, (3) weak aggregate demand as growth remains subpar and (4) credibility 

of the monetary policy to anchor inflationary expectations. Against the backdrop of easing 

inflation dynamics, the review cautions against tighter-than-required monetary stance. It argues 

that with the assumption of (1) RBI reaching its January 2016 target of 6% and (2) unchanged 

policy rates, the real rates will reach levels seen nearly a decade ago. While high real rates were 

justified in 2004-07 cycle when the economy was overheating and asset markets were 

booming, the current cycle represents a situation where the economy is just starting to recover. 

Investment cycle marred by ‘balance sheet syndrome’

The mid-year review pegs the FY2015 growth at ~5.5% (Kotak 5.5%) and highlights risks of 

growth remaining subpar due to a lack of durable rebound in investment. According to estimates, 

the stalled projects amount to more than 13% of GDP (of which 60% is in the infrastructure 

space). The low and falling corporate profitability is a reflection of the over indebtedness of the 

corporate sector with median debt-equity ratio at 70%, one of the highest in the globe. This high 

debt overhang is unlikely to lead to any capex recovery cycle as it also has its implications for the 

banking sector balance sheets. Risk aversion of the banking sector will effectively limit fund flows 

to the real sector. The way forward to incentivize private investments would be (1) to clear 

backlog of stalled projects, (2) reforms in the coal sector and auctioning of coal blocks and 

(3) speedy environmental clearances, land and labor reforms, etc. However, as all this would take 

time, the review makes a case for a pro-cyclical push to public investments in an effort to provide 

for the crowding-in effect for the private capital expenditure cycle. 

Review highlights risks to achieving revenue projections for FY2015 

The report notes that the difficulties in achieving the fiscal deficit target for FY2015 are 

essentially on the back of over-optimistic revenue targets. The overestimation on revenue in 

FY2015BE is based on certain assumption such as (1) high tax buoyancy of 1.5 in FY2015BE as 

against the recent historical average of 0.8, and (2) higher nominal growth estimates (at 

13.4%) in the Union Budget than the current scenario of lower-than-expected inflation and 

subpar growth. The revenue overestimation owing to (1) and (2) is estimated to be ~`780 bn 

(0.62% of GDP) and ~`270 bn (0.22% of GDP), respectively. However, the review indicates 

that the government will be able to meet its FD/GDP target of 4.1% for FY2015BE. While such 

overestimation of revenues needs to be avoided, the expectation is that landmark reforms such 

as implementation of the GST (that will put the revenue side on a sustained strong footing) 

along with increasing use of direct transfers would provide the space within the Union Budget 

to deliver the pro-cyclical push to public investments. 

LINK
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily22122014al.pdf