November 9 2019
GS Paper II
SC verdict on Ayodhya today
A constitution bench led by the Chief Justice of India Ranjan Gogoi will deliver the judgement in the cross appeals filed by the Hindu and Muslim sides challenging the three-way partition of the disputed 2.77 acres of the Ramjanmabhoomi –Babri Masjid land among Ram Lalla, the Nirmohi Akhara and the Sunni Waqf Board in September.
We already know the Ayodhya dispute as we have dealt in brief on the news analysis for October 17, 2019. It started with Hindu groups saying that the Babri Masjid, which stood on the site and was brought down on December 6, 1992, that was built after demolishing an ancient temple that stood at the birthplace of Lord Ram.
The case was heard for 40 working days and the Chief Justice of India (CJI) was firm to finish the hearing of the title suit on October 17, 2019. Supreme Court ruling for the 134-year-old disputed Ramjanmabhoomi- Ayodhya was given at 10:30 AM today. The five-judge bench comprising of the outgoing Chief Justice Rajan Gogoi and justices SA Bobde, DY Chandrachud, Ashok Bhushan and S Abdul Nazeer are to prounce the ruling. CJI of India retires on November 17, 2019 for Justice SA Bobde to take over as the next CJI India on November 18, 2019.
The judgement reads, “Hindus will get the entire disputed 2.77 acres in Ayodhya, SC has ruled 9 years after the Allahabad HC ruling. Muslims will get alternative land either in the surplus 67 acres acquired by central govt. around the disputed structure or at another prominent place.”
The judgement must be a welcome to end the communal riots and fatalities the disputed land had caused to; it is nobody’s win or loss. It is the Nation’s win.
GS Paper III
Thumbs down (Editorial); Rupee, stock fall after Moody’s changes outlook to negative, Moody’s downgrades outlook for oil PSUs, financial institutions; SEBI pulls up PSUs on public holding
The Credit rating agency Moody’s predictable reaction to the turbulence in the economy has shown a revision of the outlook on its sovereign rating for India from stable to negative. Moody’s ratings are still a notch higher than that of Standard and Poor’s and the current change in the rating may be a blow to the earlier optimism it had on India’s growth and economy.
What is credit rating?
A credit rating is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
Moody’s Investors Service:
- Aka Moody’s, is the bond credit rating business of Moody’s Corporation.
- Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities.
- Moody’s, along with Standard & Poor’s and Fitch Group, is considered one of the Big Three credit rating agencies.
What does the credit rating agency do?
- The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default.
- Moody’s Investors Service rates debt securities in several bond market segments-including government, municipal and corporate bonds; managed investments such as money market funds and fixed-income funds; financial institutions including banks and non-bank finance companies; and asset classes in structured finance.
- In Moody’s Investors Service’s ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.
- Founded by John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings.
In 1975, the company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission.
Moody’s Investors Service became a separate company in 2000. Moody’s Corporation was established as a holding company.
A positive or negative outlook respectively signals that the credit rating in the medium- to long-term might be raised or lowered, while a stable outlook indicates that the rating most probably will stay at the same level.
Moody’s credit ratings- Investment Grade
|Ratings||Long-term ratings||Short-term ratings|
|A1||Rated as upper medium grade and low-credit risk||Prime-1 Best ability to repay short-term debt|
|A2||Rated as upper medium grade and low-credit risk||Prime-1/Prime-2 Best ability or high ability to repay short term debt|
|A3||Rated as upper medium grade and low-credit risk||Prime-1/Prime-2 Best ability or high ability to repay short term debt|
|Baa1||Rated as medium grade, with some speculative elements and moderate credit risk.||Prime-2 High ability to repay short term debt|
|Baa2||Rated as medium grade, with some speculative elements and moderate credit risk.||Prime-2/Prime-3 High ability or acceptable ability to repay short term debt|
|Baa3||Rated as medium grade, with some speculative elements and moderate credit risk.||Prime-3 Acceptable ability to repay short term debt|
The author briefs about the ongoing issues in the Indian economic stability:
- The growth slowdown and its effects on the fiscal deficits and the borrowings are the main worries.
- The tax revenue growth is nowhere near the budgeted levels.
- The slowdown extending into the third quarter, it is clear that the tax revenue will fall short by a wide margin.
- There has been much pressure on the government to spend more to leg up to the economy.
- The recent tax concessions for the corporates amounting to a whopping Rs 1.45 lakh crore.
- The current trends are quite ascertaining that the government will nevertheless miss the fiscal deficit target of 3.3% of the GDP as per the Budget 2019.
According to Moody’s predictions, the deficit will slip to 3.7% of GDP this fiscal- FY 20.
The ratings have a definitive impact on the investor sentiment and confidence as opposed to the external debt to GDP of just 20%.
Moody’s downgraded the ratings outlook for top oil PSUs- Indian Oil Corporation Limited (IOCL), Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL), Oil and Natural Gas Corporation Limited (ONGC), Oil India Limited (OIL), etc. and other IT majors Infosys, Tata Consultancy Services from ‘stable’ to ‘negative’. This happened after it changed the outlook on India’s Baa2 sovereign rating to ‘negative’ from ‘stable’.
The government-aided/ PSUs in oil sector expects a helping hand from the government, as the down-rating of the sovereign from Baa3 to Baa2 will result in a downgrading of the respective Baa2 ratings of the companies.
The spillover effects from downgrading the sovereign rating will result in downgrading the A3 ratings of Infosys and TCS, as their ratings are constrained to not more than 2 notches higher than the sovereign rating.
Financial institutions like SBI, HDFC Bank, EXIM India, IRFC and Hero Fincorp, HUDCO are the 6 institutions that saw a major meltdown in the outlook to ‘negative’.
The Union Budget 2019 proposed to increase the minimum public holding in all the listed entities to 35% from the current 25% limit. The capital market regulator had mandated the 25% minimum public shareholding norm back in 2010; 45 out of the 91 listed PSUs are not compliant with the mandated norms.
According to the Securities and Exchange Board of India (SEBI), there is Rs 25,000 crore worth of public issues/ shares (Public issue or public offering refers to the issue of shares or convertible securities in the primary(public) market by the company’s promoters, so as to attract new investors for a subscription. It refers to those issues of stocks on a public market, rather than being privately funded by the companies’ own promoters, that in reality might not be enough capital for the business to start-up, produce or continue progressing) in the pipeline but due to lack of confidence that is causing a deterrence in launching the initial public offer (IPO). There must be a protracted resource mobilization, confidence-building and government disinvestments of PSUs in the remaining quarter of the FY20 to bring about a slight amelioration in the capital market.
Only if the liquidity in the market is increased and the public shareholding increased in the public listings will there be a prospective reduction of the financial burden on the government due to inefficient PSUs and to improve public finances. It introduces competition and market discipline and helps to depoliticize non-essential services.
The Moody’s downgrading of the country’s outlook to negative and affirmation of the sovereign rating of India at Baa2, gave the rupee and the equities markets noxious downturn. The rupee has now fallen 47 paisa against the dollar this week. The weak opening of the currency market also slipped into the equities, with benchmark indices losing nearly 1% each.
The economists at the Reserve Bank of India point out to the present slowdown to be cyclical rather than structural and with the various measures the Finance Ministry is taking up, a shallow recovery is expected in early 2020.
Though the bank credit growth demand has seen a pick-up for the second successive fortnight till the 15 day period ending October 25, 2019 with the commercial banks extending heavy loans in the fortnight that overhauled the previous fortnight by 0.5% and stood at 0.7%; it still stands at single digits- 8.9% compared to the previous year’s same period that stood at 14.6%.
The downgrade in the sovereign outlook was followed by the downgrade in the outlook of a number of private and public sector companies, though India’s current rating Baa2 is standing still;; however, the agency warns of a change if the current growth becomes recurring.
Some quick measures the government can do to overcome the economic slowdown are as below:
- The short-term and long-term reforms must be taken to get past the slow growth of the economy.
- Give auto sector incentives to invest and shift to electric vehicles.
- Incentives to auto sector employees to upskill on electric vehicles.
- Change GST collection to quarterly for companies below Rs 1 crore.
- Reduce GST slab rates.
- Adopt the Direct Tax Code, cut income tax for the bottom slab.
- Improve credit flow to both consumer and industry.
- Reduce real interest rates by 135 basis points as the cost of capital has to come down.
- Change the credit culture in public sector banks.
- Government Disinvestment to promote liquidity in the public market.
- Stimulus should drive investment, upskilling for displaced employees
- Factor market reforms, including bringing the cost of land down
- Boost the growth by improving the income levels of the working population.