Economy Update

High frequency indicators signal a continuing lag that has characterized 1QFY20. IIP (Index
of Industrial Production) growth slowed to 3.1% in May 2019 from 4.3% in April 2019.
PMI (Purchasing Managers' Index) manufacturing fell to 52.1 and PMI services contracted
to 49.6 in June 2019. Demand related information available on critical sectors such as
automobiles, cement and transport and communication also confirm this continuing
slowdown.
In terms of policy responses, the central bank has reduced the repo rate in three steps of 25
basis points each, translating into a cumulative reduction of 75 basis points during the
calendar year 2019. However, the transmission to lending rates has been limited and so far,
demand has not responded adequately to overcome the on-going slowdown. In this context,
fiscal policy initiatives are of paramount importance.
After the interim budget for FY20 which was presented at the end of January 2019, the final
FY20 budget was recently presented. In the interim budget, there were some measures to
augment disposable income such as the Kisan Samman Nidhi (PM-KISAN) which was meant
to supplement the income of the farmers through direct support. The scope of the scheme was
extended later. The overall size of the budget provision for PM-KISAN amounts to
INR75,000 crores. Another scheme relates to housing for all. The budget allocated
INR25,853 crores for Pradhan Mantri Awas Yojana (PMAY). Together, these amount to
close to 0.5% of GDP.
GDP’s demand components indicate a weakness in both the domestic and external segments.
The growth prospects of the global economy remain tepid.
The contribution of India’s net exports to GDP growth has been negative for the last two
years as growth in imports was larger than that in exports. India has also appeared
prominently in the US’s tariff war radar. The prospects of strengthening export growth
remain weak. In the short to medium term, India will have to rely largely on domestic
demand.
Accelerating domestic investment demand can prospectively be the most effective route to
uplift India’s growth rate. The budget has focused relatively more on the medium-term by
indicating that the government aims to push the economy to the size of US$5 trillion by
FY25. The year was specified clearly in the Economic Survey whereas the budget indicated
that this target would be reached in the next few years.
The direct contribution of the central government in the augmentation of the investment rate
is quite limited. Both in FY19 and FY20, center’s capital expenditure relative to GDP is
estimated to be 1.6% which is about 5% of the aggregate investment. Investment through the
central public-sector enterprises (CPSEs) is estimated to be 2.4% of GDP in FY19 but is
projected to fall to 2.1% in FY20. At 4.0% of GDP, the combined contribution of central
government and CPSEs is only about 12% of the present investment rate at just above 31%.
The medium-term challenge is to increase it by more than 6% points of GDP.
In this endeavour, the state governments including the state-level public enterprises and the
private sector will have to participate in a substantial way. A number of growth initiatives
have been announced by the central government in the budget including sovereign borrowing
from external sources and taking up PPPs in the infrastructure sector in a big way. The PPP
mode has so far had only limited success. The sovereign external borrowing route is subject
to significant exchange rate risk. Prominent policymakers have cautioned against its use in
any major way. If the central government is to succeed in expediting reaching the target of
US$5 trillion by FY25, it will have to increase its investment directly through the budget or
through the CPSEs*. Unless the center’s investment push is large enough, the chances of
private investment getting crowded in may be limited.

Sectoral Update
Infrastructure
Investments in residential market have continued to fall at an alarming and steeping rate over
the last two years due to a slowdown in the sector reported by FICCI. The first six months of
2019 saw just about nine deals in the residential segment and the value of investment in the
residential segment has also continued to drop since the second half of 2016.
SBI and NIIF have signed a Memorandum of Understanding (MoU), to make equity
investments, project funding, bond financing, renewable energy support and take-out finance
for operating assets. The tie up aims to fill the gap at a time when the availability of equity
and debt financing for infrastructure has moderated.
The Railway Ministry will execute 491 projects in seven north-eastern states at a cost
of ₹6.48 lakh crore. By 2021-22 fiscal, all the railway lines in the seven north-eastern states
would be electrified.

ENERGY
IOC-Adani Gas JV to invest Rs9,600 crore in city gas projects by rolling out infrastructure
for retailing CNG to automobiles and piped natural gas to household kitchens in 10 cities for
which they recently won licences.
Foreign investors pumped $1.02 bn equity in India’s clean energy space in FY19.The
international equity investment in the India’s clean energy sector was $283 million in 2016,
$532 million in 2017 and $1.02 billion in 2018.
India considers plan to spin off GAIL's gas pipeline transmission business into a separate
unit. The plan to carve the pipelines business into a fully-owned unit will bring greater
transparency between the two businesses and may allow the government to sell shares at a
later date. GAIL owns two-third of India’s operating gas transmission network, and the
pipelines operation accounts for close to 40% of its earnings.

Banking
Unclaimed deposits in the banking system have witnessed a jump of 26.8 per cent to ₹14,578
crore in 2018. The unclaimed deposits rose to ₹11,494 crore in 2017 from ₹8,928 crore in
2016. State Bank of India (SBI) alone had an unclaimed deposit of₹2,156.33 crore at the end
of 2018. The number of fraud incidence in public sector banks have declined to 739 in 2018-
19.
India's state-owned banks had classified ₹1.50 trillion worth of loans as "wilful defaults" in 2018-19,
with the biggest lender State Bank of India accounting for nearly a third.

Banks have reported a massive 73% increase in incidents of fraud worth ₹71,543 crore in
FY19, Reserve Bank of India reported. In FY18, the banks had reported frauds worth ₹41,167
crore.
Allahabad Bank reports ₹1775 core fraud by Bhushan Power & Steel. Allahabad Bank has
already made provisioning of ₹900.20 crore against exposure of the bank in Bhushan Power
and Steel. PNB also reported a fraud worth ₹3805.15 crore by Bhushan Power and Steel.

MANUFACTURING
India will continue to be a net importer of steel for at least the next two years as high-grade
products from South Korea and Japan flow in tax free amid worries of hike in supplies from
China.
With leases on over 30 iron ore mines expiring in March 2020, domestic steel makers may
face disruption in production. These mines account for 50-55% of Odisha’s production and
10% of other states’ output. In FY19, India produced 207 million tonne of iron ore, 65-70%
of which was by merchant miners and the rest by captive steelmakers.
Tata Chemicals Ltd plans to set up a factory to make lithium-ion cells as it seeks to capitalize
on the emerging electric vehicle (EV) industry in India.
Automobile manufacturers in the country slashed production by 11% in April-June period
this fiscal over the year-ago period amid the industry facing the worst slowdown with sales
declining month after month. Vehicle sales across all categories declined by 12.35% to
60,85,406 units in the April-June period against 69,42,742 units in the same period of last
year.
India’s first hostile takeover of Mindtree by L&T
L&T has been eyeing on mindtree since a long time. For L&T, this acquisition represented a
strategic move towards expansion but for Mindtree, the rug was being pulled from under its
feet. But this all started in February when L&T decided to buy VG Siddhartha’s and his
coffee enterprise’s 20.32 % shares in Mindtree for Rs.3369crores. The engineering giants
signed a deal to buy all of Siddartha and his coffee enterprise's shares in March. This
supposed stake acquisition from Mr Siddhartha was the start to a series of unfortunate events
for Mindtree Ltd. Later L&T announced in their press release that they intended to buy 15%
of Mindtree shares from the market through their broker .
However, from the beginning Mindtree founders Rostow Ravanan, Krishnakumar Natarajan,
NS Parthasarathy and Subroto Bagchi were against the takeover and terming it "hostile".
Bagchi resigned his position as to collaborate with other co-founders in resisting the takeover
in March.
In the final stage of takeover L&T came up with their offer of buying 31% of the company
through an open offer which was kept open from June 17 to June 28, 2019 for Rs.4,988.82
crore
During the open offer almost all the large institutional investors in Mindtree have sold their
stakes to L&T in the open offer. These include foreign portfolio investor Singapore-based
Nalanda Capital (10.61%) stake , UTI Mutual Fund (2.97%), Amansa Holdings Pvt. Ltd.
(2.77%), Arohi Asset Management(2.74%), Franklin Templeton Asset Management (India)
Pvt. Ltd(1.06%), Alternative Investment Fund(1.49%) . These led to giving L&T control of
60% share of voting rights in Mindtree
According to reports, L&T has gained over 60 percent share in Mindree and has been
categorized as promoter and closer to its intention to acquire 66.32 percent in the company.
Since, the acquisition mindtree has been doing rounds to undergo a leadership haul under
L&T as three of its founders have resigned. L&T has started its hunt to fill in the positions at
the IT services firms with names of at least three external candidates and one internal
candidates.
L&T has also planned to nurture the unique culture of Mindtree and has decided to setup a
council that will help in the exchange of best practices.

Mindtree’s Defence
The founders and their family had put together had only 13.32 percent, which was not enough
to fend off any takeovers. And hence the promoters explored many interesting defence tactics
to prevent the hostile takeover between February and March . These included attempts to
highlight dissimilar work cultures , finding a white knight or patron to buy Siddhartha’s
shares and buyback of shares. A strategy of dividend announcements was also adopted
including a recommendation for special dividends as a possible ‘poison pill’ defence to win
over shareholders and make the acquisition of the IT firm unattractive for L&T.
 Market Performance
INDICATORS 1st July 2019 31st July 2019 % Change
BSE Sensex 39686.5 37481.12 -0.059
BSE Mid Cap 14888.98 13643.38 -0.091
BSE Small Cap 14282.61 12629.18 -0.131
BSE Auto 18124.53 15472.03 -0.171
BSE BANKEX 35214.72 32689.44 -0.077
BSE Energy 4669.89 4256.16 -0.097
BSE FMCG 11364.48 11062.33 -0.027
BSE Health Care 13029.99 12704.38 -0.026
BSE IT 15654.76 15733.49 0.005
BSE Oil & Gas 14552.8 13236.95 -0.099
BSE Power 2116.81 1966.31 -0.077
BSE Metal 11099.19 9685.46 -0.146
BSE Realty 2258.46 2067.13 -0.093
BSE Telecom 988.43 912.98 -0.083
BSE Gold (22 Karat)
BSE Exchange Rate
68.86 68.83 0.000
(USDINR)