DESPACITO – SLOWLY GETTING DESPONDENT

If the Govt had thought that it could have got the market to celebrate and soar with their merger announcements on Friday; well, it gauged the moods completely wrong. The overhang of the slowdown, the further falling sales numbers of the auto sector and another merger news of BPCL into Indian Oil Corporation kept the markets down, really really down.

The merger news has not gone down well, unlike what the Govt had expected. The losers list on the BSE is led by PSU banks – the banks into which the weaker banks are being merged. PNB, Oriental Bank of Commerce, Canara Bank, Indian Bank and Union Bank of India fell around 6-7% and they have crowded the entire list of top losers, jostling each other for the top post.

Fears of integration and lending taking a back seat once again as smooth mergers across all these entities will divert attention from core business – these are issues causing concern. This coming at a time when all industries across the board are suffering a slowdown; it could in fact not been worse timed.

As per the mega merger plan:

• Oriental Bank of Commerce and United Bank will be merged with Punjab National Bank
• Syndicate Bank will be merged with Canara Bank
• Andhra Bank and Corporation Bank will be merged with Union Bank of India
• Indian Bank will be merged with Allahabad Bank
• Bank of India, Central Bank of India, UCO Bank, Bank of Maharashtra, and Punjab and Sindh Bank to remain as it is.

And these four anchor banks – PNB, Canara Bank, United Bank of India and Indian Bank, will not get any material benefits. So this merger might prove to be beneficial in the long term but for now, especially in the background of the slowdown, the near-term risks are big.

Well, there have been many things announced over the last 10 days but there is nothing which has been directed straight at pulling up the sagging growth. There has been no BIG bang money spending measures, nothing fiscal. Yes, the announcement of merger and capitalization will strengthen the banks but it will take time; we will see the impact of this only in FY21, depending on the timeline.

Over and above all this news, the analysts and brokerage houses are more concerned about the upcoming earning season. We are still a month away from Q2FY20 numbers but going by the news coming in everyday about the consumption story slowing down, the fund houses are not too hopeful about the earnings. Thus the sense of despondency is only spreading as the feeling is that the Govt is not doing anything which impacts the man on the street directly.

Merger of the banks is fine but what it needs to do is actually trim its own share in these banks  and increase the public float. To kick start demand, it needs to announce some infra projects or bring in more private sector spending – that’s the only way things will work, it will generate employment, give fillip to manufacturing and give a fillip to demand.

Today there is a sense of hopelessness. The feeling is that the Govt will nothing to directly benefit the people, especially the middle class. The huge teeming middle class is the one who spends maximum money but today they are being taxed the most and while inflation on paper remains low, what they are spending today on day-to-day essentials is much more than what they did even two years ago.

The middle class is now wary of spending and would rather save it. There is demand for new houses but they do not mind postponing it as long as they can. The lure of further rate cuts is keeping this demand from translating into actual buys.

Ditto for the automobile sector – there is now hope that there could be a reduction in either cess or GST. Till that happens, not many are going to buy.

The moods as of now are very jittery and something drastic, not like the 370 but something which affects all the middle class across India needs to be done. The faith which the people had on the Govt is not being translated into actual benefits and that is the crux of this ongoing crisis of confidence.