Last Updated on Apr 6, 2021 by Manonmayi
Economic trends not only impact the macro economy but also have a far-reaching impact at micro levels. Here are such economic trends of 2019 that contributed to the present state of Indian Economy.
- The sluggish auto sector claimed various jobs
- Indian Railway Catering and Tourism Corporation (IRCTC) issued IPO and propelled the IPO market
- SC favoured DoT’s definition of AGR due to which telecom’s faced heavy fines
- Reliance Industries Ltd.’s stock surged 40% in 2019 and its market capitalisation crossed Rs. 10 lakh crore
- NBFCs contribution to credit availability reduced, which had a severe impact on the economy’s growth
- 10 PSU banks merged into 4 to achieve efficiencies of scale
- Onion’s soaring prices made the country cry
- Corporate tax rate cut, a double-edged sword, put companies in dilemma
- Karvy’s allegation of misusing and misappropriating clients stock prompted SEBI to step in
- Moody’s downgrades India outlook citing economic slowdown
Table of Contents
The sluggish auto sector claimed various jobs
Automotive industry, one of the biggest in the Indian economy, faced a serious breakdown this year as growth plunged to 5% and car sales slumped by 41% in August — the sharpest in 2 decades. The sector that generated ~35 million people and contributed over 7% to the GDP. However, the slowdown during the year has claimed ~1,00,000 jobs. Engulfed by the slowdown were 5 sectors of the industry: two-wheelers, commercial vehicles, passenger cars, construction equipment, and tractors. This had cascading effects including inventory pile-up, production cuts, and lack of investment. Government’s push for electric mobility and banking crisis further dampened auto demand and aggravated the situation.
Indian Railway Catering and Tourism Corporation (IRCTC) issued IPO and propelled the IPO market
IRCTC, the only entity that offers catering, packaged drinking water, and online ticket booking services to users of Indian Railways made the biggest stock market debut in ~2 yrs. The Rs. 645 cr-IPO subscription was open between 30th Sep and 4th Oct at a price band of Rs. 315 to Rs. 320 and was subscribed a whopping 112 times. IRCTC is a monopoly and simply collects ticket revenues but doesn’t run the railways. This results in high revenue on top of which the entity has cash balances greater than its net-worth. Now you know why such a high subscription number!
SC favoured DoT’s definition of AGR due to which telecom’s faced heavy fines
The 14-yr old battle between the Department of Telecom (DoT) and telecom operators of defining the Adjusted Gross Revenue (AGR) ended on 24th Oct when the supreme court favoured the former. This move caused a major blow to telecoms as they had to pay high charges, amidst debt pressure and decreasing revenues. Alone Bharti Airtel and Vodafone Idea had to pay fines equal to Rs.50,000 of the AGR post SC’s declaration.
DoT calculates the licence fee and spectrum usage charges payable by operators based on the AGR. While DoT defines AGR as both telecom and non-telecom services, operators stressed considering just the former. Though operators requested SC a leeway of at least 6 months to pay AGR dues, DoT demanded the fines be deposited within 3 months after making a self-assessment of the dues.
Reliance Industries Ltd.’s stock surged 40% in 2019 and its market capitalisation crossed Rs. 10 lakh crore
On 28th Nov, Reliance Industries Limited became the first Indian company to have a market capitalisation value of Rs.10 lakh crores. The stock surged ~41% since 2019 started. The stock rallied after Reliance Jio announced its plans of increasing tariffs and following suit with its competitors. Analysts opined that this move, together with the increase in average revenue per user (ARPU) would boost revenue. The spur in the stock was also a result of RIL’s announcement to reshuffle debt by transferring a chunk worth Rs. 1,08,000 crores from Jio to Reliance Industries by end of 2019-20, a move that will make Jio a net debt-free company. In addition, RIL also plans to restructure its telecom and digital assets and sell a stake to strategic investors.
NBFCs contribution to credit availability reduced, which had a severe impact on the economy’s growth
The Non-Banking Financial Company sector is facing a major crisis, which has had a significant impact on the already slowing-down economy. This is what happened. NBFCs borrow short-term funds from banks or issue commercial papers to mutual funds and on-lend it as long-term loans. When the credit availed by NBFCs becomes due, they either have to renew their debt or raise fresh funds to repay the short-term loan. Unable to repay the debt, some firms of the IL&FS group, defaulted on the loans. The lenders of funds to NBFCs feared more of such instances and refused to lend funds. Some lenders hiked the cost of funds by 150 bps. Since NBFCs are key lenders to small and medium enterprises, retail customers that banks refuse. With a restricted credit flow in the economy, growth of businesses is hampered and borrowers are defaulting on credit. Analysts say that though NBFCs will resort to borrowing from alternative sources, they will use most of the funds to refinance liabilities and repair their balance sheets. They also opine that NBFCs will take at least 12 months to recover from the crisis.
10 PSU banks merged into 4 to achieve efficiencies of scale
Finance Minister Nirmala Sitharaman announced the merger of 10 PSU banks into 4, after which the count of Public Sector Banks will come down from 27 to 12. Via this move, the government aims at strengthening the Indian banking system. This mega-merger will help the banks that are involved to achieve efficiencies of scale and strengthen their balance sheets. It will also help optimise costs and render better services to customers. To borrowers, the merger will not increase the interest on loan so you will continue paying EMIs as is.
Onion’s soaring prices made the country cry
The entire country has shed tears during November because of a steep rise in the prices of onions, one of the most important kitchen ingredients. This crop makes up for 10% of the vegetables in the country and contributes 0.6% to the overall inflation. This year onion price rose 3.99% in September from last year, and vegetable prices grew by 15.4% as per Bloomberg. In some states, the prices surged to as high as Rs.100 a kg. The late arrival of monsoons and floods in the onion-producing states of the country caused the rise in prices. Compared to last year, onion production dipped to 20 lakh tonnes this year from 30 lakh tonnes. To curb the spur in onion prices, the centre imposed a ban on onion exports and also imported it via private trade.
Corporate tax rate cut, a double-edged sword, put companies in dilemma
The centre reduced the corporate tax rate from 30% to 22% for existing companies and from 25% to 15% for new manufacturing companies. This move is aimed at boosting investments and reviving the economy. The tax rate cut can also lure manufacturers who are looking to leave China amidst trade war and the associated business uncertainty. While domestic companies can choose either higher or lower tax rates as per their feasibility, the loss-incurring companies of capital-intensive sectors such as steel, engineering, and infrastructure are confused which regime to stick to. The question now is if they want to increase their profit by opting for lower tax rates or pay high taxes at current rates and carry forward the losses. While previously companies could claim depreciation on new plant and machinery, report net losses and carry it forward for over 8 years to reduce their tax liability, they may not be able to do the same in the new corporate tax regime.
Karvy’s allegation of misusing and misappropriating clients stock prompted SEBI to step in
The National Stock Exchange alleged Karvy Stock Broking Limited (KSBL) to have violated SEBI guidelines and misappropriated clients’ shares. It says that Karvy pledged Rs.1,096 cr worth client’s shares as collateral to borrow and fund Karvy Realty Private Limited — its real estate arm — between 1st April 2016 and 19th October 2019. In addition, KSBL also transferred clients shares to its own account without taking the stock exchange route. These allegations prompted SEBI, which banned Karvy from transacting on behalf of clients until the allegations are proved to be true. As many as 2.4 lakh Karvy are impacted by the news and stand the risk of losing money.
Moody’s downgrades India’s outlook citing economic slowdown
Moody’s Investors Service, world’s one of the most reputed rating agencies changed its outlook for India rating from stable to negative riding on the fact that economic downturn could be structural and the government reforms would be ineffective. This would increase the already high levels of debt. In addition, Moody’s also pointed out that the financial sector would be stressed and would have a far-reaching impact on other sectors such as the automotive and retail. Days after downgrading its India outlook, Moody’s also cut India’s economic growth forecast for 2019 from 5.8% to 5.6% citing that the slowdown was continuing longer than expected. In 2018, Moody’s had predicted GDP of 2019 to be 7.4% but given the current situations, the rating agency lowered the GDP rate to 5.6%.
