While presenting the Union Budget for 2021-22, our Finance Minister, Nirmala Sitharaman said that the union government has set a disinvestment target of Rs 1.75 lakh crore for 2021-22, lower than Rs 2.1 lakh crore it hoped to garner from disinvestment in 2020-21, as adverse market conditions because of the pandemic affected government's disinvestment plans. She said that several strategic sales including IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, Pawan Hans, Air India, among others, would be completed during the year. Moreover, the government would also privatise two public sector banks and one general insurance company in the year. The policy, promised as part of the Atma Nirbhar Bharat package, states the government will exit all businesses in nonstrategic sectors, with only a ‘bare minimum’ presence in four broad sectors. These strategic sectors are — atomic energy, space and defence; transport and telecom; power, petroleum, coal and other minerals; and banking and financial services. In India’s brief but tortuous history of disinvestment since it began listing PSUs on the stock markets through minority stake sales in the 1990s, this is undoubtedly the boldest stance yet.
India’s History with Disinvestments
For the first four decades after Independence, India was pursuing a path of development in which the public sector was expected to be the engine of growth. However, the public sector overgrew itself and its shortcomings started manifesting in low capacity utilisation and low efficiency due to over manning, low work ethics, over capitalisation due to substantial time and cost over runs, inability to innovate, take quick and timely decisions, large interference in decision making process etc. Hence, a decision was taken in 1991 to follow the path of Disinvestment.
The change process in India began in the year 1991-92, with 31 selected PSUs disinvested for Rs.3,038 crores. In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advice, supervise, monitor and publicize gradual disinvestment of Indian PSUs. Against an aggregate target of Rs. 54,300 crores to be raised from PSU disinvestment from 1991-92 to 2000-01, the Government managed to raise just Rs. 20,078.62 crore (less than half). Interestingly, the government was able to meet its annual target in only 3 (out of 10) years. In 1993-94, the proceeds from PSU disinvestment were nil over a target amount of Rs. 3,500 crores. The reasons for such low proceeds from disinvestment against the actual target set were unfavourable market conditions, offers made by the government were unattractive to private investors, opposition in the valuation process, lack of political will and no clear cut policy on disinvestment.
In the period from 2001-02 - 2003-04, maximum number of disinvestments took place. These took the shape of either strategic sales (involving an effective transfer of control and management to a private entity) or an offer for sale to the public, with the government still retaining control of the management. Some of the companies which witnessed a strategic sale included Bharat Aluminium Co. Ltd, CMC Ltd, HTL Ltd, Maruti Suzuki India Ltd, among others. During this period, against an aggregate target of Rs. 38,500 crore to be raised from PSU disinvestment, the Government managed to raise Rs. 21,163.68 crore.
From 2009 onwards, a stable government and improved stock market conditions initially led to a renewed thrust on disinvestments. The Government started the process by selling minority stakes in listed and unlisted (profit-making) PSUs. This period saw disinvestments in companies such as NHPC Ltd., Oil India Ltd., NTPC Ltd., REC, NMDC, SJVN, EIL, CIL, MOIL, etc. through public offers. The government has year over year since increased their disinvestment targets and is moving away from running businesses reaffirming Narendra Modi government’s philosophy that “It is not the government’s business to be in business”.
Why Governments shouldn’t run businesses?
‘Public sector is not for making profits’. This excuse is offered many times to explain away the losses which a number of public sector entities make. ‘Public sector should be an ideal employer’. This is invoked to justify giving away large share of value added, sometimes even exceeding the entire value added, as salaries and benefit to public sector employees. However, this violates one of the fundamental principles of a business - the value addition should be equal to or higher than the wages to be paid and the charge on the capital employed and if not satisfied in any public sector entity, should result into closer or sale off of such a business; something that is true for most public businesses in India.
Businesses are for-profit organizations and their primary aim is to maximize profits. They may have secondary missions, but they won’t last long if they don't make money for their owners. Public organizations, on the other hand, have no interest in profits. They generally provide “public goods and services,” in many forms, and usually for free. Moreover, the environment in which the two work are very different from each other. Private for-profit enterprises draw resources from markets: capital from capital markets; workers from labor markets; raw materials from commodities or product markets. They sell their products or services in a market in competition with other providers. Money from sales is reinvested, or taken as profit. Public organizations however, draw their resources from politics. Government collects taxes, and tax revenue is allocated through a political process to public organizations. These organizations spend the money to deliver public goods and services demanded through a political process. Elected or appointed government officials make these decisions, not markets. As a result, public organizations are suffused by politics and surrounded by influencers: stakeholder groups, other public organizations, the press, political parties, customers/voters/owners, and others. Politics does not play a similar role in the private sector, so public leadership is necessarily different. Narayana Murthy, founder of Infosys, at Indian Institute of Management, Calcutta’s 54th convocation emphasized on ‘minimum government, maximum governance’. Narayana remarked, ‘Jis desh ki sarkaar vyapari, uss desh ki janta bhikhari’ (when a country’s government conducts business, citizens become paupers).
Moving ahead with budget’s disinvestment plans
It is not clear why it took the Narendra Modi administration so long to articulate this plan or make headway on this front even without such a blueprint, as the PM had declared, back in 2014, that the government had no business being in business. Now that the policy is in place, tactful execution will be as critical as dealing with the usual pockets of resistance that would crop up. While stock markets are on a high, the financial capacity of potential bidders may not be optimal, thanks to the pandemic. Among its multiple challenges, the government will need to create confidence in the sale processes, ensure a semblance of fair valuations, sequence the sales so that the economy does not face shocks or create monopolies, and most of all, manage electoral pressures in jurisdictions where these units would be located. A single controversial transaction could scuttle the momentum behind such a plan and India can ill afford it.
The economic survey is an annual document presented by the Ministry of Finance in the Parliament every year just before the Union Budget. The economic survey is prepared under the guidance of chief economic advisor and presented to both the houses of the Parliament. Although the constitution does not bind the government to present the survey, it has become common practice for the government. The economic survey includes details of the Indian economy over the past year, includes the current state of the economy and the prospects of the economy in the short to medium term.
The economic survey 2020-21 was presented by Nirmala Sitharaman, Minister of Finance on 29th Jan’21 during the budget session of the parliament. It was prepared under the guidance of Krishnamurthy Subramanian, the Chief Economic Advisor to the Government of India. Volume I provides details of major macro-economic issues which requires urgent attention of the government. It showcases the challenges faced by the government in policy making and tools for effective policy making. Volume II deals with previous year’s performance of major sectors of the economy and how the pandemic has affected the growth. This year’s survey has been dedicated to the COVID-19 warriors and highlights the V-shape recovery of the economy.
Impact due to COVID and its response
According to the report India’s response was derived from extensive research on epidemiology especially by looking at Spanish flu of 1918 as an example. Key findings included to flatten the pandemic curve as it reduces the spread of the virus as well as gives time for the health and testing infrastructure to be set up. As a result the government decided to implement a 40 day lockdown period to save human lives and enable quicker recovery of the economy. The lockdown resulted in 23.9% contraction in GDP in Q1 but since then the recovery has been a v shaped one with 7.5% decline in Q2. The report argues that even if lockdowns weren’t implemented people would have not gone out thus affecting contact based sectors the most. So even without lockdown the pandemic would have impacted the economy but lockdown ensured safety of human lives and enabled v-shaped recovery. The pandemic impacted both the demand and supply. The government focused on providing the basic necessities where almost 18 crore people were provided with free food. Emergency credit and liquidity measures were announced while the country was facing the threat of the pandemic. During the unlock phase Aatmanirbhar Bharat phase II and III measures were announced focusing on capital expenditure, increasing private participation in numerous sectors, increasing FDI in defence sector, wage subsidy programme etc. In order to avoid loss of productive capacity, a number of structural reforms were announced in order to increase supply in the medium-long term. The reforms mainly focused on agricultural markets, labour laws and redefining MSMEs to help them grow thereby able to create jobs in the primary and secondary sectors. Public investment programmes like the National Infrastructure Pipeline will likely accelerate the recovery.
Inequality, Debt Sustainability & Sovereign Rating
The survey analyses relationship between inequality and economic growth. Past studies on advance economies show little to no impact on inequality due to income per capita, which reflects impact of economic growth. But unlike advance economies, India’s economic growth and inequality converge in terms of their effects on socio-economic indicators. Thus the author argues that the only way to reduce inequality is by economic growth. To alleviate people from below the poverty line or redistribution of wealth is only feasible if the size of the economy grows.
To be able to recover from the pandemic and kick start growth another important question raised was whether the government borrow and spend money or should take a more conservative approach. The survey points out that debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD) i.e. the difference between the interest rate and growth rate. In a developing nation like India where growth rate is more than the interest rate, debt sustainability shouldn’t be a problem. Due to substantial amount of debt to support fiscal expansion, credit rating agencies have rated India poorly. A fifth largest economy has never been rated at the lowest level of the investment grade (BBB-/Baa3) where India is currently rated. The survey questions these ratings and suggest that rating methodology should be made more transparent as it does not give true picture in this case. India has a zero sovereign default history. These ratings may impact the pool of investors who are willing to invest in India and also affect commercial banks as they indulge in international trade.
Healthcare has finally taken the centre stage and COVID 19 has showcased how a health crisis transformed into an economic and social crisis. The survey showed that an increase in public health spending from 1% to 2.5% of GDP can reduce out of pocket spend from 65% to 30% of overall healthcare spending. Further suggested that National Health Mission (NHM) must continue in conjecture with Ayushman Bharat as it played a critical role in increasing access of pre-natal and post-natal care to the poorest. The survey also recommended to set up a healthcare sector regulator to ensure that quality healthcare is provided at reasonable prices in the private sector and several steps to monitor the healthcare providers and health of patients. And as the country moves to become digital healthcare industry should harness telemedicine to the fullest by investing in internet connectivity and related infrastructure.
Banks were provided with relaxation in terms of regulatory forbearance during the financial crisis of 2008. Though intended to be only during the crisis the forbearance was extended for 7 years. Under the forbearance regime banks pretended that their non performing assets were performing by calling them restructured assets. Thus bank took the liberty of window dressing their balance sheets. This led to several unintended effects as banks kept lending to unhealthy firms, lent more to save loans from defaulting and did not keep enough reserves to absorb any shock due to payment defaults. RBI withdrew the forbearance on asset classification effective April 1, 2015 and shortly after this they began their asset quality review to determine the real stock of bad loans. Due to this NPAs went up from 4.62% in 2014-15 to 7.79% in 2015-16 and were as high as 10.41% by December 2017. Given the current COVID crisis regulatory forbearance has again been provided and the survey wants to highlight an important lesson of avoiding recurrence of the same issues that manifested following the global financial crisis. Further it recommends the government and policymakers to lay out a threshold level of economic recovery at which such measures must be withdrawn. Following this an Asset Quality Review (AQR) must also be carried out.
For the first time since the start of the Global Innovation Index in 2007, India joined the top 50 innovative countries in 2020 and ranked first in Central and South Asia. The total gross domestic expenditure on R&D (GERD) stands at 0.65% of the total GDP which is lowest amongst the top ten economies (1.5-3%). The survey encourages the private sector to invest heavily in R&D and innovation. The government contribution of the total GERD is 56% which is almost three times the average of top ten economies. Further only 36% of the patents are held by Indian residents as compared to 62% in the top ten economies. Despite higher tax incentives for creativity and access to venture resources, this condition has prevailed. Continued engagement and commitment to innovation, especially from the private sector, will fulfil India's dream of becoming an innovation leader.
The survey constructs a Bare Necessities Index (BNI) at the rural, urban and all India level. The index consist of 26 parameters to include the 5 dimensions – Water, Sanitisation, Housing, Micro-environment and other facilities (electricity, clean cooking fuel etc.). Based on this index the survey concludes that access to bare necessities in 2018 has increased in all states when compared to 2012. It is highest in states such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura. Access to basic necessities has increased disproportionately more for the poor households both in rural and urban India as well as the disparity between rural and urban has declined. Schemes such as Swachh Bharat Mission, PMAY, JJM, PMUY etc. have contributed to this success and with appropriate strategy can further help in reducing these gaps.
State of Economy and Inflation
Global economic output is estimated to fall by 4.4% in 2020 where advanced economies were hit harder in terms of lives and economic output as compared to emerging market developing economies. India’s GDP contracted by 7.7% in FY2020-21 with 15.7% decline in the first half and modest 0.1% fall in the second half. In the wake of the global pandemic outbreak, fiscal slippage is expected to be reported by the General Government in FY 2020-21, owing to the revenue deficit and higher expenditure requirements. Agricultural sector performed well while contact based sectors, manufacturing, construction were hit the hardest. The survey highlights the v shaped recovery as resurgence in indicators such as power demand, E-way bills, GST collection (crossing the mark of Rs.1 lakh crore consecutively for last three months), steel consumption etc. has been recorded. India also became the fastest country to roll out 10 lakh vaccines in a matter of six days while also emerging as a leading supplier of the vaccine to Brazil and neighbouring countries.
Headline CPI inflation averaged at 6.6% in 2020-21 and stood 4.6% in December 2020 mainly driven by rise in food inflation which increased from 6.7% in 2019-20 to 9.1%. The major driver of inflation has been food and beverages contributing to 59% in 2020-21. Thus steps like banning of export of onions, easing restrictions on import of pulses etc. were taken to stabilise prices of food items. Apart from the short term measures taken the survey recommends medium to long term measures like investment in decentralised cold storage facilities etc. Effective system needs to be developed to reduce wastages, efficient management and timely release of stock. As the pandemic infused economic uncertainties investors turned to gold as a safe heaven. Thus gold prices saw sharp spike compared to other assets.
Monetary Management & Financial Intermediation
The monetary policy remained accommodative in 2020 and the repo rate was cut by 115 bps since March 2020. RBI took conventional as well as unconventional measures like OMOs, LTROs, and Targeted LTRO etc. to infuse and manage liquidity in the economy. Despite this transmission of high reserve money to money supply growth showed impaired liquidity transmission as banks put money back with RBI. Gross NPAs for commercial banks decreased from 8.21% at end of March 2020 to 7.49% at end of September 2020. However this has been observed due to relief provided in asset classification on account of the pandemic. The survey also mentioned the recovery rate of SCBs under the IBC to be over 45 percent.
Agriculture, Food Management, Industry, Infrastructure and Service Sector
Agricultural (and Allied Activities) sector has shown its resilience amid COVID-19 with a growth of 3.4% at constant prices during 2020-21. As a result of the budget announcement on the inclusion of the livestock sector in the Kisan Credit Card in February 2020, 1.5 crores of milk cooperative dairy farmers and milk producer companies were targeted to provide Kisan Credit Cards (KCC) and as of January 2021 around 45000 KCCs have been issued to fishers and fish farmers. Pradhan Mantri Fasal Bima Yojana covers over 5.5 crore farmer applications year on year while under the Pradhan Mantri Garib Kalyan Anna Yojana, 80.96 crore beneficiaries were provided additional food grains.
The strong v shaped recovery was also confirmed through the Index of Industrial Production (IIP) where it has reached the pre COVID levels. As per the Doing Business Report (DBR), 2020, the rank of India in the Ease of Doing Business (EoDB) Index for 2019 has moved upwards to the 63rd position amongst 190 countries from a rank of 77th in 2018. Total FDI equity inflows during FY20 amounted to US$49.98 billion, relative to US$44.37 billion during FY19. FY21 (until September-2020) had a comparable amount of US$30.0 billion with the bulk of the equity inflows coming in the non-manufacturing sector. The survey also focused attention on the Production-Linked Reward (PLI) Scheme launched under Atmanirbhar Bharat by the GoI focusing on the 10 main sectors with the goal of boosting India's manufacturing capability and exports.
India's services business suffered a major setback during the mandatory lockdown of the COVID-19 pandemic. As soon as the first lockdown was declared in March 2020, air passenger traffic, rail freight traffic, port traffic, international tourist arrivals and foreign exchange all contracted sharply. However, there are now signs of a gradual recovery. Despite this FDI inflow into India’s services sector grew by 34% YoY during April-September 2020. The Indian start-up ecosystem has been progressing well amidst the Covid-19 pandemic. India added a record 12 start-ups in the unicorns list last year making the total to 38 unicorns. The survey also highlighted telecom related regulations removed from the IT-BPO sector and consumer protection regulations introduced for e-commerce.
This Union Budget would be announced in the backdrop of the unprecedented pandemic, which has completely changed the economic landscape. This is the first instance when India has seen a decline in GDP numbers since the country began publishing numbers in 1996. The world has already accepted the fact of declining economic performance in every region, and the markets have already factored in the impact of such decline on the fiscal deficit of respective countries. So, a high fiscal deficit would not surprise the Indian Investors. Despite the higher expenditure and lower revenue this year, the government of India is expected to limit the fiscal deficit to 7%. The optimism on tax collection and the government’s aggressive estimates of disinvestments and non-tax collections are the key reasons highlighting that government will try to limit the fiscal deficit. The economic recovery has also surprised pleasantly, and GDP is expected to turn positive in Q3 of 2021, after the massive decline of 23.8% in Q1 of 2021.
As nominal GDP is expected to grow at around 15%, the government is likely to expect a surge in tax collections. However, expenditure will continue to remain high. The government will try to support the economic recovery by increasing public expenditure, boosting demand, and supporting industries that generate high employment. There is a very high cost that the government will incur to support nationwide COVID-19 vaccine programme and build supporting healthcare infrastructure.
At the same time, the government will try to control the fiscal deficit as much as possible, as increased government borrowing will have a crowding-out effect on the private sector due to high real interest rates. So, the government might project an improvement in of 150-200 bps in fiscal deficit for FY2022 as compared to FY2021. So, the fiscal management of the government can high rely on privatization and off-balance-sheet borrowings.
The Covid-19 pandemic has caused significant disruptions to the business and livelihood of common man, so the focus of Union Budget would be to soothe and support the economy with a special focus on the common man. Government via budget would try to focus on investments that directly help in job creation and therefore infrastructure, construction and significant incentives for high employment generating sectors (like textile, affordable housing, MSME, etc.) are key areas, which may get priority focus. The current account is also expected to be back in deficit in FY22 as growth returns and imports pick up and global trade normalizes.
Key Sectors to look out for
The government will focus on developing infrastructure (Roads, Water and Affordable housing). Such infrastructure would give economy earning/employment stimulus. The government can also extend PLI schemes to spur manufacturing. Some initiatives can be taken to support the urban poor especially from the disruptions in the MSME sector. So all in all, Real Estate, Construction, Infrastructure, and Railways are some key sectors which may become the focal point of the upcoming budget.
FY21 was very disappointing in terms of disinvestment as the government only collected INR161 bn through disinvestment as against an ambitious target of INR2.1 trn set by the government. Some of the high profile disinvestment which was supposed to happen this year did not happen. So disinvestment in Life Corporation of India, Air India, BPCL will be pushed for FY22 as these could not happen this year. This implies that the disinvestment target in the upcoming budget could revolve around INR1.6 trn.
This budget would be really important from the perspective of our country’s sovereign ratings. Most of the rating agencies are expected to revisit their assessment of India in Q1. Most of the rating agencies rate India a notch above junk, Fitch and Moody’s have both assigned a “negative” outlook for India. The next key step which will determine whether rating agencies will upgrade or downgrade the outlook will be fiscal dynamics as presented in the upcoming Union Budget.
The broad themes to watch for are as follows:
Overall government is expected to have a greater reliance on assets sale to keep spending at elevated levels while still managing to consolidate in FY22. The proper trade-off between ambition and credibility, as it related to long term fiscal consolidation path, will be an important macro determinant for rating agencies. The nominal GDP is expected to achieve significant acceleration, and to support it the further government will improve its outlays in different sectors.
Once again, talks for the creation of a bad bank are back in India as commercial banks set to witness a spike in NPAs, or bad loans, in the wake of the contraction in the economy as a result of the Covid-19 pandemic. Currently, loans in which the borrower fails to pay principal and/or interest charges within 90 days are classified as NPAs and provisioning is made accordingly.
What is a Bad Bank?
Bad Bank is a financial institution that takes over the non-performing assets and other illiquid assets of banks so that the banks are left with clean books. Such a mechanism helps a bank segregate its good assets from bad ones, making it easier for it to raise capital by issuing equity or debt or both. The segregation of toxic assets helps generate confidence among potential investors who can then examine the financial health of the lender with greater clarity. Further, by transferring sour loans to a bad bank, lenders can prioritize financing businesses, while letting a specialized institution such as Asset Reconstruction Company (ARC) focus on maximizing loan recovery, which is generally sponsored by the government.
Where did the idea of bad bank come from?
Originally, the idea was first proposed in the 1980s by the US-based Mellon bank. In 1988 it resorted to the creation of a bad bank i.e., the Grant Street National Bank which was dissolved in 1995 upon serving its purpose.
In India, the Government set up the Industrial Reconstruction Corporation of India (IRCI) in April 1971, under the Indian Companies Act mainly to look after special problems of sick units’ and provide assistance for their speedy reconstruction and rehabilitation, if necessary, by undertaking the management of the units and developing infrastructure facilities like those of transport, marketing etc. In 1984, GOI passed an act converting the Industrial Reconstruction Corporation of India (IRCI) into the Industrial Reconstruction Bank of India (IRBI) which failed. All bad loans were kept aside in one bank and nothing came out of it. The problem with this type of mechanism was that assets were transferred at book value, which basically moved it from under one government pocket (Public Sector Banks) to another government pocket (IRBI).
According to Bloomberg Quint, the government created a Stressed Asset Stabilization Fund in 2004 when IDBI was converting to a bank. The SASF basically structured as a bad bank and helped IDBI swap funds of about Rs. 9,000 Crore.
Further to that, after the 2008 crisis, various banks from all over the world like Bank of America, Citigroup, Swedbank, etc. took on this idea and are one of the renowned banks today. A number of countries like Belgium, Ireland, Indonesia, Germany and others have set up bad banks in response to the financial crises over time. But in India, a bad bank has not been set up; rather, private asset reconstruction companies (ARCs) have been buying NPAs from various banks—and 29 ARCs are in the business of buying bad assets but the model has not yielded desired results. ARCs act merely as recovery agents because they lack the bandwidth to reconstruct any company under stress which is sold as going concern. The efficacy of the ARC model is under question. The CVC, some time ago, submitted a report to the government after examining cases above Rs 50 crore that were sold to ARCs between 2013-14 and 2017-18 by PSBs. The report mentions that, in at least 48 cases, assets were sold to ARCs below the realizable value of the security. Besides the accounts which were sold as going concern, the value of stocks and equipment were not factored in while fixing the reserve price. Setting up a bad bank, undoubtedly, is a way forward in such conditions.
How serious is the NPA issue in the wake of the pandemic?
The RBI noted in its recent Financial Stability Report that the gross NPAs of the banking sector are expected to shoot up to 14.8% of advances by September 2021, from 7.5% in September 2020. Among bank groups, the NPA ratio of PSU banks, which was 9.7% in September 2020, may increase to 16.2% by September 2021 under the baseline scenario.
The K V Kamath Committee, which helped the RBI with designing a one-time restructuring scheme, also noted that corporate sector debt worth Rs 15.52 lakh crore has come under stress after Covid-19 hit India, while another Rs 22.20 lakh crore was already under stress before the pandemic.
The panel led by Kamath, a veteran banker, has said companies in sectors such as retail trade, wholesale trade, roads and textiles are facing stress. Sectors that have been under stress pre-COVID include NBFCs, power, steel, real estate and construction.
Banks and other financial institutions are the key drivers of economic growth, as they are the formal channels of credit. As things stand, lenders, particularly the state-owned ones, are saddled with massive bad loans. This has made them risk-averse and eroded their capacity to lend to help spur economic recovery from the shock of the covid-19 pandemic that has roiled the world. Banks will find it tough and exorbitantly expensive to raise capital from the market if the asset-quality trajectory remains uncertain, delaying and even jeopardizing, economic growth.
Dilemma of Public Vs. Private Bad Bank
If majority stakes of a bad bank are with the government then it would render the bad bank with issues of governance and capitalization as Public Sector Banks.
If majority stakes are with private companies then it could invite criticism of Favoritism and Corruption if the loans are not priced appropriately when traded to a bad bank.
What has been the stand of the RBI about resolving stressed loans?
Viral Acharya, when he was the RBI Deputy Governor, had said it would be better to limit the objective of these asset management companies to the orderly resolution of stressed assets, followed by a graceful exit. He suggested two models to solve the problem of stressed assets in consideration with the above dilemma-
First what kind of loans will be taken over? Will only those loans that have turned stressed due to the economic distress stemming from the COVID-19 pandemic be included? Or will loans extended to firms in sectors like power and real estate, which had soured even before the pandemic had hit, also be brought into its ambit? Considering that banks have in the past been reluctant to decide on the extent of haircut they were willing to take, how will the prices at which these loans are transferred to the bad bank be determined? Who will absorb the losses? And will the new entity be professionally managed, operating at an arm’s length from the political dispensation? Or will political considerations influence decision making?
What has been the stand of the Government for setting up a bad bank?
To the extent that a bad bank will take sour loans off the balance sheets of banks, it is a good idea. However, the Centre isn’t smitten by the idea as yet. After all, there exist several private asset reconstruction firms that buy bad loans at a discount. The government has significantly capitalized state-owned banks in recent years and pursued consolidation in the PSU banking space. In the last three financial years, the government has infused equity of Rs 2.65 lakh crore into state-owned banks. Also, the Bankruptcy Code, though not perfect, has helped in higher recoveries. There is also the question of a moral hazard that a government-funded bad bank can create by allowing reckless lending to continue. There is also the fear that it ends up as another case of throwing good money after bad.
Will a bad bank solve the problem of NPAs?
Despite a series of measures by the RBI for better recognition and provisioning against NPAs, as well as massive doses of capitalization of public sector banks by the government, the problem of NPAs continues in the banking sector, especially among the weaker banks. Having a Bad Bank will complement other measures taken by RBI & government to clean up banking sector. In the coming months, as and when the COVID-related stress pans out, proponents of the concept feel that a professionally-run bad bank, funded by the private lenders and supported the government, can be an effective mechanism to deal with NPAs. Many other countries had set up institutional mechanisms successfully such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system in the wake of 2008 financial crisis.
Banks and other financial institutions are the key drivers of economic growth. However, many borrowers may find it difficult to service their loans, requiring lenders to set aside capital to cover those losses. A bad bank can free them up to start lending. However, adequate measures need to be put in place so as to overcome the pitfalls of bad bank
The use of government spending and taxation to influence the economy of a country is termed as Fiscal Policy. Whenever the government decides on what goods and services to purchase, on the transfer payments to distribute, or what taxes need to be collected, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular set of groups, for example, an income tax cut raises the disposable income of an individual. However, the general focus of discussions on fiscal policy deal with the effect of changes in the government budget on the overall economy. Although changes in taxes or spending that do not affect government revenue may be termed as fiscal policy and may have an impact on the aggregate level of output by changing the incentives that firms or individuals face, the term “fiscal policy” is usually used to describe the effect on the aggregate economy of the overall levels of spending and taxation, and more particularly, the disparity between them. At a macroeconomic level, changes in fiscal policy can have a major impact on:
• Aggregate demand
• Savings and investment
• Income distribution
• The distribution of resources and money supply
• The business cycles
• Tax rates
In the globalized economy, fiscal policy also has an impact on exchange rate and the trade balance. During fiscal expansion, the rise in interest rates due to government borrowing attracts foreign capital and investment. In their attempt to get more Indian currency to invest, foreigners bid up the price of the rupee, causing an exchange-rate appreciation in the short run. This appreciation makes imported goods cheaper in India and exports more expensive abroad, leading to a decline in the merchandise trade balance. As a result, imports increase and exports decline, and foreign investors acquire ownership of Indian assets (including government debt). However, in the long run, consistent government deficits and the accumulation of external debt can lead foreigners to see Indian assets as risky and can cause a deprecation of the exchange rate from a subsequent fall in future investments.
Fiscal policy also alters the burden of future taxes. During an expansionary fiscal policy, the government adds to its stock of debt. Since it will have to pay interest on this debt (or repay it) in future, the expansion today puts an additional burden on future taxpayers. Just as the government can use progressive taxation to transfer income between different income classes, it can run budget surpluses or deficits in order to transfer income between different generations as well.
Does Fiscal Policy Actually Work?
In the past, several countries have introduced packages of ‘fiscal stimulus’, by increasing the government spending or lowering taxes in order to boost demand and bring their economies out of recession. As a result, one could expect a certain degree of agreement within the economists on the effectiveness of fiscal policy. But nothing could be farther from the truth.
Ethan Ilzetzki and colleagues conducted a study on government spending and GDP of 20 high-income countries and 24 developing countries. Through this study, the team could derive estimates of the fiscal multiplier – a dollar increase in GDP caused by a one dollar increase in government spending, far more accurately than previous studies. The results showed that in high-income countries, an increase in government spending of 1% of GDP causes an immediate increase in GDP of 0.4% - a fiscal multiplier of 0.4. This implies a significant degree of ‘crowding out’ of private investment cause by the fiscal expansion. This means that, government fiscal activity is to some degree, discouraging private sector investments. On the other hand, in developing countries, the team found a fiscal multiplier of – 0.2. This means that fiscal economic activity fully crowds out private economic activity, indicating a decline in GDP in response to increase in government expenditure. This means that expansionary fiscal policy has a negative effect on GDP of developing countries.
Several other studies also show how response of Central Banks affect the implications of a fiscal expansion. In countries where Central banks are devoted to maintain a stable exchange rate, respond by lowering interest rates in response to an increase in government expenditure during the two years following a fiscal stimulus. This reinforces the fiscal stimulus and allows for the large fiscal multipliers. On the other hand, central banks which have an inflation target in mind, tend to increase interest rates. This is aimed to counteract the inflationary pressures caused by the fiscal expansion and increased aggregate demand. This however offsets the stimulative impact of fiscal policy and leads to the negligible effects of fiscal stimulus for countries with such a monetary policy. For policy-makers, these results indicate that the interaction between fiscal and monetary policy is a crucial determinant of the effects of fiscal stimulus.
Economists also note that the ability of fiscal policy to affect the output levels through aggregate demand dies off over time. The higher aggregate demand as a result of an expansionist policy, eventually translates only in higher prices and does not have an effect on output at all. This happens as the level of output in the long run, is determined not by demand but by the supply of factors of production i.e., capital, labor, and technology. These factors of production provide a “natural rate” of output around which business cycles and macroeconomic policies can cause only temporary fluctuations. Any policy measure to keep output above its natural rate by boosting aggregate demand policies will only lead to accelerating inflation. This gets accentuated with the “crowding out” of public credit as private firms do not invest in labor and technology to boost output. Not just this, expansionary fiscal policy can also alter the natural rate, and, ironically, lead to the long-run effects of fiscal expansion being opposite of the short-run effects. Expansionary policies will lead to higher output today, but will lower the natural rate of output below what it would have been in the future. Similarly, contractionary fiscal policy, though lowering the output level in the short run, will lead to higher output in the future.
However, fiscal policies are more often not guided by economic principles. Policy makers are often driven by votes which leads them to being enthusiastic about expansionary policies during recessions which are not matched effectively by contractionary policies during boom, primarily so as to not lose votes. Moreover, they can showcase the benefits of expansionary fiscal policy to their voters immediately, whereas postpone its costs (higher future taxes and economic growth) to the future.
Thus, the greatest obstacle, of using fiscal measures as powerful policy tools are not economical, but political.
A Special Purpose Acquisition Company or SPAC is a company solely formed with the goal of raising capital through an Initial Public Offering (IPO) and later use the capital raised to acquire and merge with an existing private company. These type of companies do not have any commercial operations of their own and are also known as “blank check companies”.
The founders of a SPAC company are generally experts in some or other industry and have a deep understanding of business. As these are a type of Shell Company the management is the key selling point for raising capital for these companies. SPAC may contact an investment bank to handle the IPO where the valuation focuses on the management’s history since there is no performance history of the company. The capital structure may include retail investors, institutional investors as well as founders share. Once the money is raised all the fund proceeds are held in an interest bearing trust account until the company identifies an acquisition target. There are two possibilities from here – first being that the management team finds and completes the acquisition within a specified time period (usually 18 to 24 months) or if no acquisition is made before the predetermined date, the SPAC is dissolved and the proceeds from the IPO are returned to the respective investors. In case the management needs additional funds for acquisition they may arrange for committed debt or equity financing, such as private investment in public equity. After this if the business combination is approved by the shareholders (not necessary) and the conditions specified in the acquisition agreement are satisfied, the SPAC and the target business will combine into a publically traded operating company. Here the ticker of the SPAC is changed on the exchange after the merger.
Comparison with the traditional IPO process
Technically the only business of a SPAC company is to acquire a private company and help them to go public. So the question raises that why would companies go via this path when they can opt for going through an IPO process themselves. Well there are various reasons why companies may opt for this process. Traditional IPO is a very extensive process which involves a lot of back and forth between the legal authorities, regulators and public authorities. This takes time and may hamper the firm’s objective of raising capital smoothly and efficiently. Private companies also go through a lot of public scrutiny while going through the IPO process and involves a lot of roadshows trying to get the investors interested in the company. Thus need to generate demand for the shares of the company for a successful IPO. This all involves a lot of uncertainty and companies like WeWork and Uber found this the hard way. Comparing this to SPAC, the IPO is already been done and it removes the financial uncertainties of IPO failures as well. Going through this process also reduces the time for the company to go public and reduces the public and regulators’ scrutiny. While it has benefits there are downsides to going public through SPAC as well. The investors who raised the capital may or may not be interested in the company after the acquisition and thus very difficult to get long term investors on-board. Secondly multiple sources have mentioned that SPAC is generally more expensive as compared to an IPO. The cost can go as high as three to four times you pay for an IPO and additional to this the founders might also get 20 percent of shares of the target company at a very cheap rate as compared to the price charged to the investors. Though with increased competition the underwriter fees has come down significantly in recent times. Further the amount of due diligence done on the target company is significantly less than what the Securities and Exchange Commission (in case of US) mandates for a regular IPO making investors wary about investing in such stocks.
Rise of SPAC
SPACs or similar entities have existed since decades now. In the 1990s these companies focused on technology and healthcare industry while it gained popularity in the oil and gas industry in the mid-2010s when the low commodity prices drove investors to management teams with experience on finding good mineral based companies. The number of SPAC IPOs and the capital raised via them has steadily increased since 2013 and 2020 has seen a sharp rise in SPAC IPOs.
Future of SPAC in India and regulatory Issues
SPAC have emerged as a promising means to raise capital and can help in public funding in offshore markets as well. This might particularly suite the Indian start-ups where the retail investors still have shown a very conservative approach. These also do not depend primarily on the private investments which might decline or dry up in the future. Though this brings huge opportunity for new businesses, Indian laws also need to be able to facilitate overseas funding or through domestic SPAC IPOs.
Some of the Indian acquisitions by SPAC are –
With last quarter of FY 2020 battered with the supply-side shock due to COVID-19 and the first three quarters of FY 2020 being stressed due to both, the supply and the demand side shocks, thanks to the Covid induced lockdowns, Budget 2021 will be one of the most important and discussed India budget. Experts and the general population, both are expecting the government to take actions along with the sectors like Healthcare, Infrastructure, welfare and incentive to industries and individuals for investment and growth. Before looking into the expectations and speculations for the new budget, let's look at the major highlights of the Union Budget 2020.
The Union Budget of 2020 was the first full budget of NDA 2.0 government, and with a massive mandate that the ruling coalition gained in the general election 2019, many big bang reforms were expected from the government, and depending upon whom you ask, the ₹ 30 lakh crore budget was either well-balanced or poorly drafted. Some of the major highlights of the same were:
As expected, the proportion of revenue from corporate tax went down, due to the lower corporate taxes announced in H2 of 2020. The proportion of GST collection was also lower than the previous year, which is expected to happen this year as well. This has led to the Central government defaulting on the promise of compensating the states for the shortfall in GST collection. In addition to that, the government’s liabilities on pension and subsidies have been increasing, the Finance Minister will have to keep an eye on that.
Now, as conspicuous as it may be, it is important to reiterate that just a few weeks after the budget was announced, COVID-19 and the lockdowns struck and then the government had to make fresh allotments for MGNREGA, plans of Krishi Rail and Krishi Udaan halted, more distribution of food grains was made and earnings of a significant proportion of the population was jeopardized and only a few companies declared dividends. On top of that, fresh direct cash transfer stressed healthcare sector and extra expenditure on welfare schemes, the Fiscal Deficit of the country went up to ₹ 9.14 lakh crore, of about 115% of the annual target for the financial year 2021. Add to that the expected GDP contraction of around 8-9% in addition to far lower than earlier expected GST collection has put the government is a very tight spot of balancing fiscal prudence with providing impetus to growth and employment. Also, the government is staring at increased bills of welfare program, the cost of COVID-19 vaccination and higher expenditure on infrastructure and health.
Given such precarious state of affairs, everyone in the country, individuals and businesses have their own set of expectations from the government in the upcoming budget. Following some of the expectations and speculations:
Nevertheless, with improving economic activities, and lower cases of COVID-19 and the possible advent of vaccination in the country in early 2021, we would be keeping a watch on the development leading up to the budget and the budget itself with hopeful enthusiasm.
Indian Oil & Gas industry is huge and contributes to 5.2% of global oil demands. India is in the top 5 in the world in terms of refining capacity and India is top 3 in terms of demand growth. Indian Oil Industry is import-dependent as around 85% of consumes oil is imported and around 55% of consumes gas is imported. Indian O&G contributes to 25% of the total Indian Import bill.
This is the situation industry was in when the coronavirus pandemic wreaked havoc around the world. In addition to human life loss, pandemic also causes economic loss to different industries around the world. Oil and Gas was one of the most severely impacted industries. As most of the countries were exercising lockdown to contain the virus, the movement of goods, services, and people completely dried up. As everyone was locked in their homes, the demand for Oil & Gas dried up, and the prices fell drastically. It was estimated that the traffic across the Golden Gate Bridge fell by 71% as compared to a year ago (source: Bridge Spokesperson in Wall Street Journal), while the global aviation industry reported the number of seats for sale was only 1/3 (in May) of those in January. The outcome was drastic that due to the crisis the future contract for May delivery for a barrel of WTI dropped to negative numbers for the first time in history, which means that as holding cost is too high, traders were paying people to take the crude off their hands. Covid pandemic coupled with a price war between Russia and Saudi Arabia severely crashed the oil prices. It became increasingly difficult to continue operations as there was a shortage of workforce as employees were affected by the coronavirus and it was very difficult to follow government guidelines such as social distancing. Many factors impacted the demand for petroleum products, a few of them are stated below.
As the restrictions have been lifted and the economy is slowly recovering, the demand for Oil & Gas is picking up, but the road to recovery will be hard for Oil & Gas Companies. Industry experts believe that it will take some time for demand to reach pre-covid levels. Also, most of India’s crude oil production comes from aging wells that have become less productive over time. India’s crude oil output fell to 32,173 TMT in 2019-20 as against 34,203 TMT a year back, hitting the lowest production level in 18 years The long lead time to begin production from discovered wells coupled with the lack of new oil discoveries has led to a steady decline in oil production in India. The aging of oil fields and a production drop of 15.5% from fields run by private players, 2% from fields under ONGC, and nearly 6% from fields with Oil India led to the decline in overall production. Going forward, the government has to encourage and help the companies in oil exploration so that the industry can attain long term growth. As crude price average is expected to be under control, upstream companies should focus on optimization of technical and overhead costs and they should focus on large-scale digitization to enhance operational efficiency. Midstream companies should also focus on digitization to be future-ready. Oil marketing companies (Downstream) should focus on building supply chain resilience. They should focus on digitalization and optimization of the supply chain. As downstream companies directly interact with end customers, they should invest in creating a contactless experience for customers and it will become the norm post-pandemic. To recover and grow in the long term post-pandemic Oil & Gas companies should revisit their long-term strategy and focus on seeking cost optimization opportunities.
David Tweedie, the Former Chairman of the International Accounting Standard Board once commented on International Accounting Standard 7 that, “One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.”
Indian AS 116 is nothing but the realization of that dream in the Indian sub-continent in the year 2019 or IFRS 16 internationally in the year 2016. Before we get into the depth of what exactly Sir David meant or the nuances of Ind AS 116. Let us try and understand the Lease Agreement, the historical procedure (pre Ind AS 116 i.e. Ind AS 17) for Accounting and ultimately the draw back of the then system which led to the present system.
The Lease Agreement and the historical regime
As per Ind AS 19, “A lease is a transaction whereby an agreement is entered into by the lessor with the lessee for the right to use an asset by the lessee in return for a payment or series of payments for an agreed period of time”
From the definition above we can identify the following important terminologies:
Let us take an example: Assume Person A (Lessee) runs a business to manufacture Automobile parts in India. He is interested in venturing into Additive Manufacturing and for the same requires a 3d printer (Asset). He contacts Person B (Lesser)owner of the 3d Printer. They enter into the agreement wherein A can use the printer given by B for monthly rental of Rs 1 Lakh (Payment). This is a typical example of a lease agreement.
Types of Lease:
Finance Lease: In this type of agreement the risk and return of the asset is completely transferred to the Lessee. The title of the Asset might or might not be transferred. This agreement also enables lessee to purchase the asset from lessor before the agreement ends. The asset under consideration is recorded as an Asset in the financial statement of the lessee. The future obligation to pay as liability. A depreciation is booked on the Asset and a charge on P&L for the lease payments to the lessor.
Operating Lease: In this type of agreement the lessee gets all the benefits of the usage of asset. But the repair and maintenance are incurred by the lessor. The asset is not recorded neither in the books of the Lessor or the Lessee. The timely payment to lessor such as rent is booked as an expense in the books of Lessee. Ind AS 19 defines Operating Lease as on which is not Financial lease.
The Problem: The biggest problem in the above methodology is the comparison between Business. Let us assume two business which are in the same line of business i.e. Ride hailing. One of them follows the Finance Lease model whereas the other one follows the operating lease model. Despite having a similar revenue mix the Financial Statements will appear very different. The reason being the Off-Budget financing that is there in the case of Operating Lease the visibility of which is not there to general public. This makes values of Assets and Debts not comparable and in a sense unrealistic as well.
We will get into the details of how the two will be different with the help of Case of Archies Limited in the end.
IND AS 116: Proposal
The biggest proposal of the IND AS 116 is that the Operating Lease needs to be treated same as the Financial Lease in the books of the lessee. What this essentially means is that in terms of accounting treatment the financial and operating lease will be same. Hence patching the issues of not being comparable and Off-budget financing.
Ind AS 116 also lays down a model to identify whether an agreement falls under the jurisdiction of Lease rules or not.
Apart from the above model which helps us in identifying whether a contract is a lease-based contract or not. There are few exemptions given as well (I.e. no need to book it in the accounts):
Explicit or Implicit Disclosure of the Asset
By explicit disclosure we mean that the agreement clearly states that XYZ asset given to the Lessor to the Lessee. For example: 100 HP Printers capable of Metal printing given to A by B. Here the asset can be directly identified.
By implicit disclosure we mean that the Asset is not directly identifiable but the condition of the Lessee makes it identifiable. For example: A will give a 3d printer to B. But there is only one printer that is there with B post the deal. Here, although the asset is not explicitly identified, the circumstances make it so.
One thing that needs to be kept in mind is that the right of substitution should not be there. Let’s say the lessee owns 100 cars and agreement just says “A Car” in the agreement. This allows lessee to substitute one car for another as Asset is also not explicitly or implicitly identifiable. This also constitutes to agreement not being a lease contract.
Controls the usage of Asset and Accrues all the benefits
An agreement is considered as a lease. If the control over the usage of the asset is with the lessee. Let us understand with the help of an example. Suppose A gives 3d printer to B, but lays down the condition that it should only be used for designing prototypes. The agreement won’t amount to lease because of the control by lessor. If the purpose was not defined then it would have been a lease. Similarly, let’s say if the end benefits of the asset are not accruable to the lessee. For example: All the Goods produced by the machine is taken back by the lessor. Then the agreement won’t be a lease contract.
The companies are required to incorporate the Ind AS 116 from FY 2019-20 onwards (Modified Retrospective) or with a retrospective effect i.e. covering FY 2018-19 as well (Full Retrospective).
Impact on the Financial Statements: Archies Limited
As you must have implied by now, the immediate impact of the adopting the Ind AS 116 is that the Assets and Labilities of the company will increase. The cost which was earlier identified as Lease Expense, will now be divided into Finance Cost and Depreciation. Hence, changing ratios like Gearing Ratios, Solvency Ratios and operational measure like EBITDA.
The Liability or Right to use asset is computed as: Sum of Present Value of all Future Lease payments
Let us look at the few figures and ratios of the said company:
As we can see from the above table. The EBITDA of the company grew by 189% while the Gross Profit was declining from 61% to 50% (because of other reasons). The sales were also down due to the impact of Covid. Hence, the change is directly attributable to the Ind AS 116 adoption. Other notable changes include increase in debt by 464%. Note that since the EV of the company was fairly similar (increase by 18%), due to a huge change in the Debt the Market Cap of the company took a hit. Apart from these ratios like Working capital as a percentage of Assets and Asset turnover ratio decreased. Simply because of the increase in the base of the concerned parameter.
In Nutshell, the adoption of Ind AS 116 patches the loop hole of Off budget financing and presents a fairer picture of the whole business. It also enables cross comparison between two business with different policy for leases. The Financial impact of the Ind AS 116 can be summarized with the help of following table.
Data Source: Annual Report Archies Limited, Refinitiv
The Pharmaceutical industry is a component of the bigger healthcare sector of a country and is majorly related to medications. It deals with various aspects related to medications like their research and development, manufacturing and their marketing. These different aspects are interrelated to each other’s and comprises of different players like drug makers, drug marketers and also entities like biotechnology corporations.
The Global Pharma Industry is around $1.2 Trillion in Size (According to Global Use of Medicines report from the IQVIA Institute for Human Data Science). Whereas Indian Market Size is roughly around $17.50 Billion (Domestic Market Size).
The core objective of the industry is to make available the drugs that provide safety from infections, maintain health, and also help cure diseases. Since, the industry has a direct impact on the global population, it comes under the regulatory ambit of various organisations like World Health Organisation, US Food and Drug Administration and Medicines and Healthcare Products Regulatory Agency. The regulations are in the area of drug safety, their pricing and quality and also extend to patenting of drugs produced.
The Past and the Present
Through the course of last ten years, the industry has seen a lot of progress. There is more emphasis on research, especially in the domain of bio-science. Continuous improvement in technology along with improved infrastructure has helped arresting the growth of various major infections like HIV and different forms of cancer.
Some of the major players in the industry globally are Johnson & Johnson, Novartis, Pfizer, Sanofi, GlaxoSmithKline, etc. Certain Biotech companies like Gilead Sciences, Amgen Inc, Celgene Corporations have also made a name for themselves.
Components of the Industry
The pharma industry is very similar to other industries but yet very different. It has raw materials manufacturers, finished goods producers, Research & Development entities, marketing companies and consumers. But the industry has a lot more regulations and require more capital than other industries.
Aging Population - The average human life span has improved globally with the course of time. With increased longevity, come infections and diseases and this has prompted more research on aging population to ensure proper health and avoid infections.
Changing lifestyles – The people have a very hectic schedules nowadays, and consequently have unhealthy eating habits, no time to exercise and have a proper sleep. It has caused problems like high obesity, poor digestion, and various other issues. This has opened a big door of opportunity for the industry to produce drugs and supplements to mitigate the impact of these problems.
Increased income – On average, the middle class has been growing in number in both the developing and developed nations. People now have relatively high disposable income and also have started to become more health conscious, with expectations of better healthcare solutions.
There have been various challenges for the industry like political uncertainty, pricing pressures, higher pressures on payers to reduce costs, consolidation, less approvals by USFDA, strict regulations. To tackle these, the industry has put some emphasis on some structural changes like inorganic capability building, leveraging technologies, foraying into unexplored fields of science. IQVIA, a healthcare consulting firm forecasted in its January 2019 report, that the global pharmaceutical industry will exceed US$ 1.5 trillion by 2023, with a CAGR of somewhere between 3%-6%. India in this market is the biggest supplier of generic drugs globally. It meets 50% of the global demand for various vaccines, 40% of generic demand in US and 25% of all medicines in UK. It is anticipated to grow at a CAGR of 22.4% over the five years ending in 2020.
Talking in terms of Indian market, the export growth is expected to improve from 2019 to 2024 as the various industry players have substantially invested in R&D to improve their offerings. The expenditure has seen a rise with a CAGR of roughly about 20%. Certain regulations like more stringent measures by USFDA for the maintenance of facility, cleanliness and enhanced manufacturing systems are a cause of concern for the pharma players. Things like rising per capita income, more penetration in healthcare and increasing incidents of chronic diseases, Ayushman Bharat would give an impetus to the industry. Another positive for the Indian industry comes in the form of Bulk Drugs, whose exports are likely to grow on the back of disruption in the Chinese supply Chain like the shutdown of factories due to regulations pertaining to pollution, explosions and API quality issues.
Some of the things which will define the sector in the times ahead include:
Despite representing nearly 18% of the world Population the size of Pharma Industry is a mere 1.5%. This shows the kind of untapped market that exists in India. This figure maybe an understatement because of availability of Ayurvedic Medicines which is hard to take into account if we talk about the remote sections of the society. Apart from it, a very low Income per capita which a lot of analyst predicts will be go up in the near future is a positive sign in this domain. Nevertheless, there are various challenges that the sector faces like Price Control which leads to various MNC’s preferring neighboring countries from where high earning populace get themselves treated. Trying to remove the price cap from locally sourced API is a good move but its trickle down effects will depend on whether the locally sourced APIs are comparable in quality to those of foreign market and the costing of these APIs (Given the price sensitive market that India is).