Bankers cagey about India
Owing to growing large scale bank frauds and ‘underpriced’ political risks.
It may look unusual that global investment bankers, led by Goldman Sachs and Nomura, are suddenly changing their perception about India as a rewarding investment and growth destination. Last month, Nomura's research report on India went to the extent of saying that political uncertainty in India is on the rise and the 'ruling BJP is on the back foot', a development that could hurt reforms. The Nomura report concludes that the political risk is 'certainly underpriced.' The investment bank report bluntly concludes that an early Lok Sabha election in the fourth quarter (September-December) of 2018, instead of the normal April-May of 2019, can't be ruled out. Nomura's report came almost simultaneously with Goldman Sachs' report downgrading its India forecasts in the wake of a $2 billion-plus PNB fraud. The global investment banker warns that the growing bank frauds could spark tighter regulation of the banking sector constraining credit growth. In a note to clients, Goldman Sachs lowered its real gross domestic product (GDP) forecast on India for the year to March 2019 to 7.6 per cent from 8 per cent earlier.
Until the last report, Goldman Sachs had firmly stood by the Modi Government. This is its first clear negative report on India in the wake of the sudden exposure of a series of high-value bank fraud and increasing number of India's big business houses facing bankruptcy cases. Goldman Sachs had been strongly backing Narendra Modi and BJP since 2013 end when Modi, then Gujarat Chief Minister, was named BJP's Prime Ministerial hopeful for 2014 Lok Sabha elections. Goldman Sachs' open support to Narendra Modi and BJP antagonised the then ruling Congress party along with some others in the Opposition.
A Goldman Sachs note titled 'Modi-fying our view: raise India to Marketweight' kicked up a storm. The note by Sachs' Timothy Moe and his team cited six key reasons in favour of its prescription. But, it is the first reason — "optimism over political change, led by BJP's Prime Ministerial candidate Mr. Modi, is dominating economic concerns" — sparked the outrage. Moe argued that Modi and his party have in the past focused on infrastructure and capital spending and that "a BJP-led government may be beneficial for the investment demand pick up, in our view." Moe and his team said: "Currently, the macro challenges that India faces in terms of external and fiscal imbalances, high inflation and tight monetary policy are being dominated by expectations of political change, specifically that the BJP-led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014.
It further said: "Equity investors tend to view BJP as business-friendly, and BJP's Prime Ministerial candidate Narendra Modi (the current Chief Minister of Gujarat) as an agent of change. Current polls show Mr. Modi and BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year (2014). Even though the actual general election outcome is uncertain, the market could trade this favourably over the next 2 quarters, which argues for modifying our stance."
Senior Congress party leader Anand Sharma, then the Union Commerce Minister, reacted strongly before the media against the Goldman Sachs report as "inappropriate and objectionable." Sharma said: "We don't need this kind of daily certification or assurance. We are a self-confident nation. We surely would not be entertaining prescriptions when it comes to Indian democracy from those who are totally disconnected. We have more than 800 million voters, any prescription would be insulting their collective wisdom and they should refrain from that." In response, Goldman Sachs said "our Asia Pacific Portfolio Strategy report... contains no political bias nor any political opinion by Goldman Sachs or its analysts. It simply notes that investor sentiment is being influenced by party politics. We stand by that assertion and by our research."
Now, the same Goldman Sachs are singing a different tune somewhat to the embarrassment of the government. The global investment banker's warning on the PNB fraud's impact on GDP growth is a body blow for the government, which had hoped that a $32 billion bank recapitalisation plan would spur lending. Last month's disclosure of the PNB fraud has sent bank shares tumbling. The case, along with a flurry of smaller loan frauds reported by other banks, has sparked new concerns that credit growth is unlikely to pick up quickly in an economy where state-run lenders, which account for two-thirds of banking assets, are already saddled with a mountain of bad debts. Few will disagree that the credit quality problem is real. With nearly four downgrades a day, India Inc is far from getting over its poor credit quality problems. At a time when corporate balance sheets were expected to become stronger, the trend seemed to reverse in the last quarter of 2017, recording as many as 351 downgrades compared with 922 in the nine months to September. Over-leveraging is believed to have dogged company balance sheets for nearly four years with cash flows shrunk in a slowing economy.
The latest Goldman Sachs report appears to be quite depressing, if not damaging, for the government. "Markets and investors are questioning whether the problem is more systemic," Goldman analysts wrote in the note. The markets feared the PNB fraud would likely offset some of the positive effects of bank recapitalisation and hit overall credit, investment and GDP growth. India regained its status as the world's fastest growing major economy in the last October-December quarter, as it grew 7.2 per cent, its fastest in five quarters. But, the investor sentiment took a hit after the still unravelling PNB fraud, the biggest in India's banking history. The incident prompted the government to ask banks to scan all their bad loans above Rs500 million ($7.7 million) for any sign of wrongdoing.
(The views expressed are strictly personal)