INSUBCONTINENT EXCLUSIVE:
India's plunging auto sales are making investors nervous
Their bigger worry should be the vanishing new roads.The country's top six automakers reported a 29 per cent decline in August sales
A 45 per cent slump in commercial vehicle sales by Tata Motors Ltd., the No
1 Indian truck maker, added to the gloom
With GDP growth facing its longest slump since 2012, India is in a quasi-recession, Teresa John, an economist at Nirmal Bang Equities Pvt
in Mumbai, said in a report this week.The bond market seems to agree
A five-year swap, which allows investors to lock in a fixed interest rate by promising to pay a floating overnight rate, has dived to its
lowest since the 2008-09 global financial crisis
The swap, a proxy for how traders view short-term rates will behave in the future, is signalling expectations of very deep cuts in the
policy rate.A Rough Road AheadWhile those cuts would push up bond prices, a 5 per cent-plus drop in the rupee so far this year will undercut
the dollar value of capital gains for global investors
New money may be dissuaded by low initial yields plus the risk that the rupee could fall more.A contrast with Indonesia may be helpful
Like its bigger neighboring economy, Indonesia, too, is hungry for capital that would create jobs for its teeming youth population.But while
Indonesian government bonds have attracted $8 billion in foreign money this year, net inflows into Indian debt securities have been $4.5
Indonesia's economy will also slow because of the US-China trade war
Still, Jakarta has the fiscal headroom to follow through on its intention of slashing corporate tax rates by 5 percentage points to 20 per
If that's not enough to spur business activity, President Joko Widodo can also channel fresh investment into a brand new capital city.That
brings us to Prime Minister Narendra Modi's pro-growth spending ambitions
A $70 billion plan to build a 35,000-kilometer (22,000-mile) road network is under way
Highways can act as a powerful stimulus by creating new construction jobs, spawning fresh orders for excavators, graders and rollers, and
putting spending money in the hands of people whose land is getting acquired.Trouble is, India doesn't have fiscal resources
Even involving the private sector to share 60 per cent of the cost of new roads - against a guaranteed annuity for 15 years - is getting
The agency has to slow down
Realistically, it can award between 3,100 km and 3,500 km annually over the next four years, according to SBICAP Securities, a big drop from
the record 7,400 km of contracts it gave out in the year ended in March 2018.An Uphill ClimbIn the absence of more spending in an area with
a high fiscal multiplier, deeper interest rate cuts may be needed to arrest plunging GDP growth
That overburdening of monetary policy is something investors will take into account.More crucially, monetizing existing roads could generate
the much-needed upfront funds to build more new ones
But a 3-km stretch sold to investors for 30 years garners resources to build only 1 km of new highways
That's partly because the previous government came up with a law to ensure landowners get 34 million rupees per hectare as compensation,
versus just 7 million rupees in 2013
All very noble (and extremely populist), but where's this money going? Why can't PM Modi's all-pervasive Goods and Services Tax pull
some of it back for the exchequer to ease the financial constraints on infrastructure?Investors can keep asking, but a government that has
only recently admitted to a widespread slowdown won't accept that its GST is fatally flawed
Some tax cuts for the auto industry may cheer the equity markets
But for bond investors, what matters is not only how much more the private sector can spend out of any tax relief, but also how much less
the government will get, and therefore what its borrowing will be.Let equity markets worry about cars
Bond investors have their eyes on the road.(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial
He previously was a columnist for Reuters Breakingviews
He has also worked for the Straits Times, ET NOW and Bloomberg News.)Disclaimer: The opinions expressed within this article are the personal
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