The Markets Lose Steam And Wait For Fresh Cues
Quite predictably, the celebrations in the stock markets following the BJP’s victory in the state of Maharashtra petered out on Tuesday
On Episode 443 of The Core Report, financial journalist Govindraj Ethiraj talks to chartered accountant Anand Bathiya, President of the Bombay Chartered Accountants' Society (BCAS). We also feature an excerpt from an interview with Axis Bank Chief Economist Neelkanth Mishra from the recent episode of our show “How India’s Economy Works” hosted by Puja Mehra.
(00:00) The Take
(06:07) The markets lose steam and wait for fresh cues
(08:01) Wall Street hits fresh high on Monday
(08:38) Oil prices cool off on reports of potential Israel-Hezbollah ceasefire
(11:50) What does India’s new PAN card promise?
(18:57) Is China geared internally for its upcoming tariff wars with the United States?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Wednesday, the 27th of November and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
The passing of Shashi Ruia, who founded the Essar Group along with younger brother Ravi Ruia, in the late 1960s brings back memories of Essar’s shadow corporate battle with Reliance Industries in the 1990s.
At the time, the late 1990s, both Reliance Industries & Essar Group were racing to build the first major private sector refinery projects in Jamnagar on the west coast of Gujarat.
Reliance’s refinery was commissioned by early 2000, at the time also the world’s largest grassroots refinery.
Essar’s project was delayed, among other reasons, by a cyclone which hit the west coast of India and Gujarat in mid 1998.
Essar’s refinery project was hit badly and suffered a series of delays, leading to financing challenges.
It finally started off in 2006 with a capacity of 7.5 million tonnes per annum. In some ways, the group’s fortunes had already begun to dip.
Interestingly, the same cyclone had much less impact on Reliance’s refinery construction efforts.
Reliance was able to pick up the pieces so to speak and resume construction for what was commissioned as a 27 million tonne refinery in early 2000 with the company saying it took just 36 months to build it.
In the late 1990s, Essar was housed in Maker IV, in Nariman Point in south Mumbai.
If Maker IV sounds familiar, that is because it is.
This is where Reliance founder Dhirubhai Ambani once sat and his son Mukesh Ambani still inhabits and is still the HQ for Reliance Industries.
While Reliance was going from textiles to petrochemicals to energy along with finance, Essar was going from shipping to oil exploration to to steel, mining, power and also finance and banking.
Arguably, the opportunities were many as sectors like oil and gas were opening up for the first time and many ambitious entrepreneurs and business houses were jumping in.
And yet, there was rivalry shaping up between Reliance and Essar as both began treading into each other’s zones.
The word territory would not be fair, but they were clearly stepping on each other's toes, in the elevators going up Maker IV if nowhere else.
Essar subsequently moved out to its own building next to Mumbai's race course.
The challenge was not so much the market opportunity but access to finance at the time the companies desired it.
Both companies were raising debt and equity from banks, financial institutions and the public and there was bound to be some friction, more likely when it came to debt since the lenders were only a handful.
All this at a time when policies involving the private sector role in oil and gas were still evolving, including the distribution of refinery products like petrol and diesel.
Essar never really recovered from its cyclonic encounter and its steel business, predominantly located in Hazira, also in Gujarat, started accumulating debt.
Eventually, the Ruias sold Essar Oil in 2016 as a stressed asset to Rosneft, a Russian integrated energy giant, something like the Russian equivalent of an ONGC and an IOC for around $13 billion.
Strangely, Rosneft had no other presence in India before or after, at least in plant and machinery that I could see and the deal itself had heavy political overtones.
Essar Steel was meanwhile sold to Arcelor and Nippon Steel in 2019, bringing down the curtains on that too.
The Essar Group continues to exist today, growing in areas outside India and in smaller ventures in India including green energy transportation but it is a much reduced version of the giant it was looking set to become in the early 2000s.
Arguably again, after Essar's momentary rise to become a challenger to Reliance as India’s largest energy conglomerate, the field has been wide open for almost a decade or more.
Till the arrival of the Adanis.
The Adanis came from ports, once again in Gujarat and then have moved onto energy, infrastructure, cement and construction, including airport assets and real estate.
Reliance and the Adanis don’t seem to be overlapping much right now, except perhaps in news media which both own.
The avoiding of overlap may not be accidental and more because of careful design.
Many overseas fund managers I meet often ask if businesses who go up against Reliance then or Adani today would survive.
The answer with Reliance is quite simple because the answer is there to see. Whether it was natural or other misfortunes, most of Reliance’s key rivals have melted away or imploded over the years.
In the case of Adani, it would seem that there are areas like airport contracts or the mega Dharavi slum redevelopment project in north central Mumbai where potential rivals seem to take a step back, at least that’s how it appears from outside.
There is nothing that suggests the Adanis and Ambanis, the two largest conglomerates in adjacent businesses in energy, are faced off against each other.
Nothing publicly at least.
But this is a niggling concern for most investors, how competitive and open are Indian markets really ?
Will they have to cherry pick sectors where the Adanis and Ambanis are playing or is it fine to invest in companies ranged against them ?
In oil and gas, the companies that stood firm and fought back Reliance in many ways are the state owned enterprises, like Indian Oil and Bharat Petroleum or ONGC.
That should suggest that some parts of the competitive economy are ticking fine.
Would that extend to private enterprises in other sectors as well ?
The answer to that is still awaiting clarity.
Top Stories
The markets lose steam and wait for fresh cues.
Wall Street hits fresh high on Monday
Oil prices cool off on reports of potential Israel-Hezbollah ceasefire
What does India’s new PAN card promise ?
Is China geared internally for its upcoming tariff wars with the United States?
Markets & Wall Street
Quite predictably, the celebrations in the stock markets following the BJP’s victory in the state of Maharashtra petered out on Tuesday.
The victory, while useful politically, does not really mean much economically given the many headwinds in the economy including slowing corporate earnings and continued perception of heightened valuations.
A further reminder, most full year GDP growth estimates are being scaled back partially, the point being that the growth that one thought there would, including thanks to public spending, has slowed for now.
Meanwhile, the benchmark indices ended their two-day winning streak, closing Tuesday's session in the negative.
The BSE Sensex shed 105.79 points or 0.13 per cent to settle at 80,004.06.
Similarly, the NSE Nifty50 settled 27.40 points or 0.11 percent lower at 24,194.50. Both indices started strong and then fell back following selling pressure.
Adani Group stocks were battered again, losing upto 7 per cent after rating agencíes Fitch and Moody's downgraded the outlook on several Group companies to 'Negative'.
Adani Green and the flagship firm Adani Enterprises were worst hit, Business Standard said.
Moody's Ratings cut its outlook on seven Adani entities to "negative" from "stable" on the day, citing the U.S. indictment of chairman Gautam Adani and seven others on alleged bribery and fraud.
TotalEnergies said it halted its investments in the group on Monday and ratings agency Fitch put some of the conglomerate's bonds on watch for a possible downgrade.
According to Reuters, Adani Group's 10 listed companies have lost about $34 billion in market value in four sessions, including Tuesday, since the U.S. indictment.
The group has denied the allegations, terming them "baseless".
Like in the past, the markets as a whole have not been affected by the Adani debacle and investors usually tend to compartmentalise Adani stocks even sentimentally.
Meanwhile on Wall Street, it was another day of records on Monday.
The Dow Jones Industrial Average, S&P 500 and small-cap focused Russell 2000 hit new records on Monday as investors bet President-elect Donald Trump’s choice for Treasury secretary, Scott Bessent, would help guide the economy without sparking inflation, CNBC reported.
The blue-chip Dow rose 440.06 points, or 0.99%, to 44,736.57. The broad S&P 500 gained 0.3% to end at 5,987.37.
Tuesday may be choppy after Donald Trump said he would impose tariffs on Canada and Mexico for their porous borders which aided illegal immigration.
Meanwhile, oil prices have slipped below $74 a barrel as talks of a ceasefire between Israel and Lebanon’s Hezbollah appear likely, according to Bloomberg quoting the Israel ambassador to the United States.
Crude is also jumpy ahead of the Thanksgiving holiday and an OPEC meeting this weekend, when the cartel will decide whether to add extra barrels to the market. Traders and analysts surveyed by Bloomberg last week anticipate OPEC will pause its scheduled January production hike.
Trump Tariff War & The India Angle
US President-elect Donald Trump has announced heavy tariffs on key trading partners—Mexico, Canada, and China— thus rattling global markets.
While Indian markets have remained unaffected for now, New Delhi has reasons to monitor the developments closely, given Trump’s past remarks on the “trade imbalance” with India, Business Standard reported.
“On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25 per cent Tariff on ALL products coming into the United States, and its ridiculous Open Borders,” Trump declared.
Trump also criticised China for failing to curb the flow of illicit drugs into the US via Mexico.
“Until such time as they stop, we will be charging China an additional 10 per cent tariff, above any additional tariffs, on all of their many products coming into the United States of America,” he added.
Trump has long supported tariffs as a key element of his ‘America First’ trade policy, which aims to strengthen domestic industries.
There is technically nothing new in Trump’s proposals except the additional tariffs on Mexico and Canada because he has been talking of a 10% tariff on all countries and 60% or more on China.
But the highlighting of the immigration problem and linking it to trade has come as a bit of a surprise perhaps and.
There is an India angle and it is going to get trickier, something we have discussed here and that came up in my conversation with Mukesh Aghi, CEO of the US-India Strategic Partnership Forum.
According to him, India will have to do something to stop those who are trying to migrate illegally into the US, the numbers of which are quite high now.
Since October 2020, US Customs and Border Protection (CPB) officials have detained nearly 170,000 Indian migrants attempting unauthorised crossings at both the northern and southern land borders, a BBC report says, adding that as of 2022, an estimated 725,000 undocumented Indian immigrants were in the US, making them the third-largest group after those from Mexico and El Salvador, according to new data from the Pew Research Center. Unauthorised immigrants in all make up 3% of US’s total population and 22% of the foreign-born population.
By any stretch, these are very large numbers and also interestingly are mostly not very poor or disadvantaged, rather relatively well off Indians from different parts of the country who pay hundreds of thousands of dollars to agents to get them through.
A New PAN Card
The Government has said it is implementing a PAN 2.0, a technology-driven revamp of the ubiquitous blue permanent account number cards which have become identity markers for various services.
The Government says the objective is to modernize the processes associated with Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) services, making taxpayer registration quicker, smarter, and more secure.
The new PAN will also have a QR-code feature on all new and existing PAN cards, as well as establish a central portal and mandatory PAN data vault system for entities leveraging PAN data. This initiative is driven by the need for enhanced data protection and cybersecurity measures.
To understand from a tax perspective, how this could change or help taxpayers, I reached out to Chartered Accountant Anand Bathiya, President, Bombay Chartered Accountants' Society (BCAS):
INTERVIEW TRANSCRIPT
Anand Bathiya: Income tax coordination and the income tax connectivity with the taxpayers predominantly hinges on the permanent account number, or the PAN, as is commonly known by all of us. And there's one more number, TAN, which is predominantly in relation to corporates or businesses who have to have their withholding taxes or TDS deducted, but predominantly PAN is the number. And then you have TAN, through which the income tax department kind of communicates or associates the taxpayers with.
Govindraj Ethiraj: Right. And how do you see these three different numbers in terms of either the simplicity or the complexity of dealing with the department?
Anand Bathiya: These numbers have been there since some time, and the framework underlying the numbers, something that has been built over time. There was a day when we were doing physical, there was a register with the income tax department where PAN numbers would be noted down. And from that environment, we moved to having digital and then these credit card-like PAN cards.
And in between, one would recollect that there was a Aadhaar link, which was also required for PANs to file certain kinds of returns. The underlying framework has been changing and retrofitted as time goes. And I think the PAN 2.0 is more in terms of revamping it completely rather than trying to retrofit it, which has been something that we have built over time. The idea is now to change it and get the basics right, build upon a new technology framework so that it is much more scalable to contemporary needs.
Govindraj Ethiraj: So where do you see it helping the most and where would you like to see it helping the most or play a more constructive role? I'm talking about the PAN card or the TAN card itself.
Anand Bathiya: Let's say for example, 98% of the PAN cards are for individuals. And in India, we could have Akshay Shah, maybe hundreds of them. And today you would have various different PAN cards with the name Akshay Shah with no ability to identify or pinpoint whether it is Akshay Shah A, B, C, or D.
Though there is maybe a father's name or maybe some address as well. But there are situations where there could be no specific unique number associated with a unique taxpayer. We have also seen situations where a single person would have perhaps multiple PAN cards.
Or sometimes if you are a domestic resident, you have a PAN card. When you become an NRI, there's a different PAN card. When you come back and return back to India, you get a third PAN card.
So because of all of these nuances, sometimes in the corporate world, you have merger acquisitions and PAN cards, you know, kind of get fungible. So there was no real ability to kind of say that, look, this is one PAN number for one individual. And that is the authenticity which was lacking.
And with this new framework, when one is going to attach and make it a very, very unique thing, the authenticity of the data, the correlation of data, and also the ease of making applications in terms of having a very, very online way of applying for PAN and getting it digitally will be enabled through this new PAN 2.0 platform, as is being promised.
Govindraj Ethiraj: So you're saying that at one level, therefore, this is a massive deduplication exercise, which it would appear then that the Aadhaar linking effort has not really solved, would that be correct?
Anand Bathiya: So Aadhaar linking was for a certain set of return filers. Even today, not all PAN card holders are filing returns. A large number of PAN cards today would still be not linked to their Aadhaars.
Also, the corporates and various different associations of person trust, all of that, NRIs don't even have a requirement to have Aadhaar. So that kind of overall hypothesis of making sure that we have everyone on the same platform authenticated is clearly missing, as we see right now. Deduplication is one of that.
But even things like, you know, if a person has demised, there's really no mechanism as to how the income tax department would know whether that PAN card still exists or the person exists or not. But the idea is that clean up the database and make sure that there is real-time, accurate data, which is authentic in nature.
Govindraj Ethiraj: So looking beyond PAN cards, any broader areas that you feel the department could be working on to make interaction with taxpayers more efficient, friendly, and more constructive going forward.
Anand Bathiya: Right now, we are not yet clear in terms of what will be the various integrations that these PAN 2.0 platform can do. But if you are looking at, let's say, also having an interrelation with the TIN or the GST kind of number, or there can be use cases to enable the corporate identification number or the EPFO, which is the employee provident fund number. Once you have that kind of a single source number, I mean, it's kind of a business Aadhaar or a corporate Aadhaar that PAN can be leveraged.
And, you know, we have seen what kind of change Aadhaar could have created in terms of individuals, which is what PAN has the potential in 2.0 to kind of create for taxpayers and businesses. And things like the AIS, which is also the annual income statement where there is aggregation of data through different sources through a PAN card, the potential of AIS can be across multiple different data sources once it is all integrated through PAN 2.0. So possibilities can be multifold. But the key advantage why I see that, you know, this was really triggered is to just make sure that the technology backbone and architecture is more contemporary than the things that we have, you know, bolt-on additions that we have been doing on the technology platform over the last many years.
Govindraj Ethiraj: Anand, thank you so much for joining me.
Anand Bathiya: Thank you, Govind. Pleasure.
The China Syndrome
How will China manage this transition into the Donald Trump administration with potentially high tariffs.
How well is China geared internally to tackle this new world and where does its own economy stand? Remember, it has been overbuilt and overproduced.
My colleague Puja Mehra caught up with Axis Bank Chief Economist Neelkanth Mishra on her podcast How India’s Economy Works to understand the new China drivers.
Here is an excerpt.
INTERVIEW EXCERPT
Puja Mehra: Since you bring up China, so the other shock that we keep hearing of is the China shock, the excess capacity and lack of consumption in the Chinese economy. How will that interact with everything that Donald Trump is being sort of talking about? How do those two forces interact?
Neelkanth Mishra: Let's take a step back on China. So China, a very large part of their growth in the last 15-20 years was driven by urban infrastructure and real estate. Now, the fact is that beyond a point is not so much more than urban infrastructure that can be built without usage going up and all that.
And real estate clearly, I think they've understood it has overbuilt. This has created certain imbalances. So for example, pension assets in China as a percentage of GDP are among the lowest in the world.
They're much below even that of India, despite having a population which is 12 years older. The median age is 12 years higher in China than it is in India. And yet pension assets that represent GDP are smaller than India.
The savings have been locked up in real estate. So if you're a 50-year-old or a 55-year-old and you're about to sort of retire in 5-10 years, so you don't have that much of pension assets, but you do have two houses or one house. Now, the worry is because this whole cycle is turning down and the population is shrinking and at least the real estate cycle, I think the sales are down by 50-60%.
The decline in real estate prices seems to have slowed a bit in the last couple of months because of all the monetary and fiscal measures that have been taken. But it is very unlikely that that will drive a lot of new investment and also provide comfort to people who are actually sitting on houses as their retirement savings. And therefore, domestic consumption is going to be very challenging.
There are other theories. There's a book called Invisible China, which talks about a very large part of the Chinese economy, which cannot really upskill itself. You know, high school enrolment rates in China till 20 years back were only 46%, 25 years back.
And so a large number of people who were very capable or who were moved into industry and they did low-end manufacturing are actually incapable of moving on to the services economy and they're not trained to do that. And so there is a very large segment of the population which is actually getting left behind and they're kind of not even capable of upskilling and participating in the new economy. So consumption in China is likely to remain a concern for a while.
Recently, because they have given these stimulus measures that you can upgrade your car, you can upgrade your AC, upgrade your fridge, there's some recycling happening. But beyond that, I think it's going to be very challenging. So China, when they started moving credit away from real estate into industrial capacity, loans to industry were growing at 5, 7, 8% for nearly a decade, quite a while.
And then around the time that real estate lending slowed down, of course, overall credit growth had to be maintained. So they pushed it up to industry. So industry credit started to expand at 25-30% a year.
Over the last 3-4 months, what we are noticing is that even there now there is no demand for credit because people keep talking about how export growth is so important. It is. In China, in the last 5 years, nearly 40-50% of incremental GDP has actually come from growth in net exports.
But the world cannot take any more. And therefore, even high-quality solar panel manufacturers, high-quality battery manufacturers, high-quality electric vehicle manufacturers, they're all struggling with profitability and generating operating cash flow. So there is so much overcapacity in those sectors that even they cannot add capacity.
So overall credit growth is actually slowing down because now real estate cannot take any more credit and industry does not want any more credit even though it is made available. So therefore, China's biggest challenge right now is deflation. If you look at their CPI excluding pork and vegetables, they're already in deflation.
And the one thing about pork and vegetables prices like vegetable prices in India is that they tend to be very volatile. Their soya and corn imports are rising very sharply, which means that in 6 months, pork supply will improve and then pork prices will come down as well. So they are struggling with handling deflation.
Now, in this current environment, it's going to be very difficult for them to slow down exports because domestic demand is not there. The local governments can't build a lot of infrastructure. The real estate cycle is down.
So what do they do? This is, of course, far more detrimental to say the Europeans, where Volkswagen is shutting down factories and there are several serious challenges emerging, I think in Southeast Asia, in Latin America, and India. I think the counterfactual is where the problem is, meaning that because you were never that good at capital intensive manufacturing anyway, it does not affect us directly.
But it is definitely shutting the door, certain avenues of growth that we could have relied on because of this incredibly low cost of manufacturing and the incredibly low prices that China is selling. And this is all coming out of systematic financial repression. So in China, the system is that in a very large set of people don't have options.
They don't have property rights. Outside the urban areas, there are no property rights. And you have very few avenues for saving.
All of that goes into fixed deposits. The state gets a lot of low cost capital. The state is very asset rich.
People are asset poor. The assets that they held, real estate, is no longer that valuable. So the state can keep financing this and keep bearing losses on this.
But this repression means that a lot of growth avenues in other markets are getting closed. So this is something that, again, we need to be wary of. This will create different types of stresses.
It is already creating stresses in some parts of the Indian economy. And I think it's going to create a lot of distaste for Chinese exports in the rest of the world as well. Everyone is raising import barriers.
