Moneycontrol PRO
UPCOMING EVENT:Are you 45+? Planning for retirement? We have just the right webinar for you - Planning for Retirement with Life Insurance on 27-Jan, 3pm. Register now!

India's kid glove approach to problems worrying: Kotak

Even as the market appears to rejoicing over the recent burst of “reforms” by the government, Kotak Securities is of the view that some of the recent decisions will only postpone or even compound the real challenges facing the economy.

January 15, 2013 / 05:01 PM IST

Moneycontrol Bureau


Even as the market appears to rejoicing over the recent burst of “reforms” by the government, Kotak Securities is of the view that some of the recent decisions will only postpone or even compound the real challenges facing the economy


“We are concerned that the Government is still not addressing the real challenges facing the economy (balance of payments, fiscal and bad loans) and continuing with a rather ‘kid-glove’ approach to the problems,” Kotak strategists Sanjeev Prasad, Akhilesh Tilotia, and Sunita Baldawa write in their report.


According to the trio, the time for soft options and procrastination is long gone, and the country’s policy makers will have to take bolder steps if India is to get its rightful place in the world order.


Following are the three major areas where the government needs to get its act together, according to the Kotak report.


Balance of payments:


The government has so far managed its problem of widening current account deficit by raising foreign investment limit in government securities and corporate bonds, and allowing companies to raise overseas loans. Strong foreign portfolio flows because of favourable global liquidity has also helped.
But we do not see any urgency on the part of the Government to address the real issues of (1) low export competitiveness (2) large imports of gold (3) poor exploitation of India’s significant potential in coal and hydropower leading to higher-than-required imports of energy and (4) unaccounted income.


Fiscal deficit:
Rather than reducing entitlements and subsidies that India can simply not afford, the Government has chosen to follow the convenient path of selling stakes in PSUs (some times to its own companies), rolling forward certain payments (due to the Government-owned oil companies) to the following year and forcing the oil companies to bear a portion of the oil subsidies. The subsidy problem will only intensify as consumption of fertilizers, food and fuels increase in India.


Also, large Government borrowing inevitably contributes to high inflation and interest rates with its negative implications for investment in productive assets and high cost of capital.

Non-performing loans:
Indian banks have typically opted for the softer option of restructuring of loans (even ever-greening, in some others) rather than forcing underlying changes in the way the companies operate. India needs to change the practice of restructuring and the treatment of restructured loans. We believe the lending practices in India would improve dramatically in case banks have to recognize any loan that needs to be restructured as an NPL first. Banks will no longer have the luxury of lending recklessly under the convenient approach of restructuring loans and providing for a small portion of the restructured loans (2.75% currently) in the Profit & Loss statement.

first published: Jan 15, 2013 10:25 am
Sections
ISO 27001 - BSI Assurance Mark