Monday, July 31, 2017

NEA's improving balance sheet, excess liquidity, & justified CA deficit in India

After years of very high net losses, NEA was able to decrease losses to NRs970 million in FY2017, down from NRs8 billion in FY2016, thanks to its efforts to plug leakages and the hike in tariff.
  • NEA slashed electricity leakage (power theft and tempering of reading meter in collaboration with NEA employees) by around 3 percentage points in the last fiscal year, resulting in savings of at least Rs2 billion
  • Revenues increased significantly to Rs40 billion in the last fiscal year, up Rs8 billion from the previous year’s Rs34 billion
  • Cheaper imports through the Dhalkebar-Muzaffarpur cross-border transmission line (IRs3.60 per unit) were increased and imports from Bihar state-controlled entities (IRs5.50 per unit) were decreased

Faster disbursement in the last month of FY2017 boosted liquidity in the in the banking sector. Excess liquidity stood at around NRs94 billion in the last week of July 2017. This is a good news for BFIs struggling to entice deposits and meet the regulatory credit to deposit threshold of 80%. Government disburses almost 45% of capital spending in the last month of fiscal year. 

However, this sudden bump in liquidity is not going to lead to lower retail interest rates. The deceleration of remittances means slower deposit growth and the BFIs need to balance their books to meet the CCD ratio after aggressively expanding credit in the last three quarters of FY2017. 

Level of current account deficit in India justified for now

According to External Sector Report 2017, excess current account imbalances (deficits or surpluses in excess of levels deemed consistent with medium-term fundamentals and desired policies) represented about one-third of total global imbalances in 2016. The other sources of external imbalance are real exchange rates, external balance sheets, capital flows and international reserves. Key messages: 
  • Increase subdued demand: Excess surplus countries with fiscal space need to have more fiscal stimulus as well as structural reforms to spur domestic demand and foster competition
  • Depress excess demand: Excess deficit countries need to have more fiscal consolidation, gradually normalize monetary policy in line with inflation developments, and implement structural reforms to boost competitiveness and savings

Here is the IMF’s assessment of India’s external sector (pp.23-24):

Overall Assessment

The external sector position in 2016/17 is broadly consistent with medium-term fundamentals and desirable policy settings. India’s low per capita income, favorable growth prospects, and development needs justify running CA deficits. External vulnerabilities remain, although they have been reduced since 2013. India’s economic risks stem from intensified global financial volatility including from a faster-than-anticipated normalization of monetary policy in key advanced economies, longer-than-expected cash normalization following the currency exchange initiative, as well as slower global growth. Like other EMs, too great a reliance on debt financing and portfolio inflows would create significant external financing vulnerabilities. Therefore, there is need to remain vigilant to safeguard the Indian economy. The flexible exchange rate policy followed by the Reserve Bank of India is sound, and the current policy of at times smoothing exchange rate volatility is appropriate. It is also important to maintain adequate levels of international reserves.

Potential Policy Responses

An increase in non-debt creating capital flows through FDI will help improve the CA financing mix and contain external vulnerabilities. In particular, further efforts to revamp the business climate and ease domestic supply bottlenecks are essential to improve investment prospects, attract FDI, and boost exports. Further liberalization of ECBs should proceed cautiously and be carefully monitored, given continuing corporate vulnerabilities. Monetary policy framework has been strengthened, but further supply-side reforms and continued fiscal consolidation are key requirements to achieve a low and stable rate of inflation in the medium-term as well as to keep gold imports contained. Continued fiscal consolidation is needed, including by implementation of the goods and services tax and further subsidy reforms. Safeguarding financial stability and enhancing the ability of the financial sector to contribute to growth are also necessary policy steps.