Sunday 28 October 2007

Asphyxiating the hot economy!!!

First of all it has been a long time I’ve posted a blog, so might seem like a rusty touch, but the reason is just compelling enough to shrug off the rust & state what needs to be stated. The reason mentioned above is about the Indian economy & the Indian Capital Market; both of them are in such a booming stage that one cannot afford to miss it. That boom did not compel me to write on it but the recent peccadillo that the Finance Minister of India Mr. P. Chidambaram & our good old watchdog SEBI chief Mr. M. Damodaran created was the driving force for me.

Just a brief idea of that: there was an issue created out of nowhere that the Indian capital market was getting excessively high amount of dollar ($) flow that needs to be controlled. The solution for that so called fault was to make it compulsory for the FII (Foreign Institutional Investors) along with the Hedge Funds to register themselves with SEBI or get regulated from either India or the country of their origin; also to limit the Press Notes that were issued by these FIIs to the extent of 40% of their investments. Now the astonishing thing about this regulation is not the inexplicability of the clause but the reasons given by the persons responsible for it. The Finance Minister said that this was to control the flow of the capital that is flowing into Indian capital markets while at the same time the SEBI chief said that it was about disclosing the names & amount of anonymous investors into the market & to facilitate SEBI to keep a track of the money & it’s quality coming in. These two reasons are totally irrelevant to each other. The former one is about monetary policy of the country while the latter one speaks of mere the regulatory aspect of the capital markets.

If the former reason is held to be dominant then it is absolutely ridiculous one. The countries all over the world especially the emerging economies dream of such capital inflow into the system but our Finance Minister fears of it. While Chinese economy has been growing by more than average 10% p.a. for last decade our RBI (Reserve Bank of India) is afraid of the 9% growth we had for last 3 years & feel that our economy is overheating. The same tone seems to be voiced by the Finance Minister. If Chinese economy can do that & our economy can’t, then it just shows the incompetency of our monetary policy makers to manage things.

If the latter reason is taken to be true then first of all it seems to be too late for SEBI to check for the quality of the money coming in when the Sensex is already at the level of 19000. Also many analysts believe that there is no compliance problem with the FIIs & their issuance of P-Notes. Just they would need to get registered with SEBI which would not be too much of a problem. The real problem is with the Hedge Funds that are investing in India. The very fundamental of the working of the Hedge Funds is that they are totally independent of any regulations & perform under total freedom. The requirement asked by SEBI of the regulation of the fund will hurt them the most. Either they need to get regulated by SEBI or they need to pull out of Indian market. According to many analysts the amount each investor putting in would not be more than $10000 for each funds. Now is this unregulated amount too much for SEBI to handle? Then there is question of the competency level of SEBI officials also.

The fact is that the fundamentals of the Indian market are going to change with growth they are posting & with the prospects that are clearly visible. One of these fundamentals is the funds that are going to flow in & out of the market & Ministry of Finance & SEBI are just going to have to live with it & not make an attempt to fix things that don’t need fixing. Many analysts believe that all this fiasco is not going to reduce any flow of dollars coming in, instead they will only increase given the probable Fed rate cut in the offing on 30th Oct 2007 & yours truly is one of them.

Friday 2 March 2007

Review - Union Budget 2007-08

The much talked about union budget 07-08 for India was delivered yesterday 28-02-07. As expressed in the Indian Express this budget is just politically correct. Many execs believe that people will easily forget this budget within a few days, as there are very few changes in the overall condition for a common man. Due to many reasons including current levels of inflation, this budget was supposed to remove the fallacies in the economy including taxation reforms, viz. double taxation, removing futile exemptions. So on the front of public and corporate expectation this budget was a failure.

For your own referral here are some of the niceties of the budget, courtesy CNBC-TV-18 and moneycontrol.com.


Direct taxes: -

  • Tax exemption limit extended by Rs. 10000/- reducing tax liability of an individual by Rs. 1000/- irrespective of age or sex. Pittance!
  • Adding education cess of 1% on all sorts of tax liabilities, which will be spent on development of secondary education, making total cess 3%. Taking away the pittance, too!
  • PAN will be compulsory and the sole identification number for capital market transactions. Lesser but compulsory complications!
  • Tax exemption under section 80D is extended to Rs. 15000/- for normal individual and for senior citizen it’s Rs. 20000/-, little relief!
  • Tax concessions under section 80IB for construction are scrapped which were beneficial for the buying of houses of area till 1000 sq. ft. in metros and 1500 sq. ft. in secondary cities. Unaffordable houses for middle class in cities.
  • Cash transaction tax exemption raised from Rs. 25000/- a day to Rs. 50000/-. Still a pain… you know where!
  • Investments in liquid/money market funds are taxed higher under Dividend Distribution Tax. Rose from 20% to 25%. DDT for companies’ declared dividend also rose from 12.5% to 15%. Absolutely uncalled for and baffling!
  • ESOPs are now under FBT, rates fro which are not determined. Wasn’t FM supposed to clarify or even scrap FBT?
  • The 10% surcharge has been removed for Corporates whose taxable income is less than Rs 1 crore. Expected to benefit SMEs!
  • 11.22% MAT is now applicable to IT industry also. Wasn’t IT supposed to enjoy the tax holidays till 2009?


Indirect taxes: -

  • Biggest story is the Excise duty on cement. For the companies that sell cement below Rs. 190/- a bag excise is reduced to Rs. 300/- from current Rs. 400/- a tonne, while for those that sell cement above Rs. 190/- a bag, it will be Rs. 600/- a tonne. Attempt is to bring cement prices below Rs. 190/- but unlikely to be taken by cement companies as welcome change!

Service Tax

  • Service tax exemption for tech business incubators. Little relief!
  • Drug testing clinical trials exempt from service tax. Big boost for research!
  • Service tax on rental of property for commercial use. What’s the idea? Hitting business profit! Adding problem to already overblown real estate bubble!
  • Service tax on works' contract service. Extending service tax net!

Excise

  • Excise duty on pan masala without tobacco cut to 40%. Minor change!
  • Excise duty on pan masala without tobacco cut to 40%. Minor change!
  • Non-electric water filters fully exempt from excise. Save power!
  • Umbrella, footwear excise duty cut to 8% vs. 16%. Get ready for monsoon!
  • Bio diesel, food processing exempted from excise duty. Fuel alternatives and cheaper food products!
  • SSI excise exemption raised to Rs. 15 mn vs. Rs. 10 mn. Benefit for Small Scale Industries!
  • Excise on plywood cut to 8% from 16%. Supply support!
  • Petrol, diesel ad valorem excise duty cut to 6% vs 8%. Expected and delivered!

Customs duty

  • General customs duty on medical equipment 5%. Caring for health at last!
  • Customs duty on animal feed cut to 20% vs. 30%. Be happy if you’re a dog or a cat! Can poor be fed with dog or cat food if the grains and pulses become more expensive?
  • Customs duty on watch dials, umbrella cut to 5% vs. 12.5%. Care for time! Again Monsoon will hurt!
  • Coking coal exempt from customs duty. Not a great solution for fuel alternative!
  • Customs duty on cut, polished gems cut to 3% from 5%. Boost for Gems business!
  • Customs duty on PFY cut to 7.5% from 10%. Little change!
  • Crude, refined edible oils to be exempt from customs duty. Supply support!
  • Customs duty on steel cut to 12% vs. 20%. The Tata effect!
  • Customs duty on drip irrigation cut to 5% vs 7.5%. Caring for Agriculture! Supply support!
  • Customs duty on polyester fibre yarn cut to 7.5% vs. 10%. Boost for textile industry!
  • To cut peak rate for non-farm products to 10% vs. 12.5%. Supply support!

The explanation for such a budget would be that our FM stuck to his promise of making budget a non event. But at what point of time and at what cost? At this point economy is poised between high growth and high inflation. FM says that the inflation can be controlled with 3 points, viz. Money supply (this part is well taken care of by RBI with 4 increases in Repo rate and CRR each), Fiscal policy and Supply crunch. FM proposed few measures on fiscal side but they are all on mid term level, nothing to control inflation in short term! Agricultural sector is offered with many benefits to check on the supply side in course of 1/2 seasons, but it seems inflation would not have mattered after 1/2 seasons anyway. So nothing on offer for controlling the inflation!

On the other hand what seems is that in effect FM might add to the current level of inflation. Cement industry is in no mood of lowering the prices. Construction companies are out of tax haven, so the cost of construction goes up, in effect the prices of houses will increase by 15-20% in opinion of some builders. Interest rates for housing loans are already touching 13%. 4% short of pathetic socialistic rates of 17%. So it’s now impossible for middle class to buy a house. It was costing already Rs. 25 lakh for 500 sq. ft. now it will cost Rs. 30 lakh. Where the sense in the prices is and what calculations did the FM make to come up with these arrangements in budget.

There were many tax reforms expected to clear the regressive methods of double taxation like the DDT, which is over and after a company pays corporate tax. Instead what we get is increase in DDT. Thank god he didn’t decide to take the service tax to 15% i.e. to the level of global GST. He was supposed to bring down the duties to the level of SAFTA which did not happen at all. I believe that might have taken care of supply side in short term. He could have reduced the double taxes which should have been phased out after the introduction of VAT. He could have thrown light on Capital gains tax which still is a huge conundrum for many Corporates also. Thank god he did not tinker with STT. He just banned Wheat and Rice from MCX futures trading. That surely will come back once the inflation comes down. He should have shifted the tax slabs by at least Rs. 50000/- on higher side (optimistically Rs. 100000/-). That would have taken care of the pinch of the prices common man feels. He should have increased the tax rebate for housing loans under section 24 to Rs. 200000/- which went nowhere.

The FM has tried to be Robin Hood but in the end he has just become a marauder who’ll end up taking the money away from each and everyone. The budget is typical congress style which used to be from year 1947 to1991; it means lot of scope for MPs, MLAs and bureaucrats to launder money under many schemes announced by central government. It is all right for advanced polities to make budget a non event but for polity like India when poised at such a delicate manoeuvre which could make or break the backbone of our economy, to make the best opportunity into a non event is the most pathetic decisions ever taken by Mr. P. Chidambaram. This was 10th time he was presenting budget and he too had an opportunity to go into Indian history like our respected PM did in 1991, but he decided otherwise.

There seriously is lapse in the performance of FM in this budget which could have simplified many things that were begging for it. On a scale of expectation FM’s attempt should be rated -3 on a scale of 0 to 10. I know this sounds as ridiculous as this budget itself!

Wednesday 14 February 2007

Inflation in India Growth Story

The events started unfolding from last Friday February 9, 2007 when Indian government came up with weekly inflation numbers. It came out to be whopping 6.58% over the same week last year. This is highest for last two years. At the same time Standard and Poor’s (S&P) upgraded India to Investment grade. The estimated GDP growth for financial year 2006-07 is also upgraded to 9.2%. So we are posting a nominal growth of about 16% and this all in spite of the Repo rate being increased to 7.5%, Reverse Repo rate to 6% & CRR (Cash Reserve Ratio) to 6% (on February 13, 2007).

All these numbers give a clear indication that the economy is overheating. There is excessive demand for loans, particularly corporate loans and home loans. But the banks are coming under liquidity pressure as there are not enough Fixed Deposits to balance these loans. The government is trying to curb this boom but obviously it is having no effect as far as slowdown is considered.

Let us see why the corrective measures are not working even though they are all short term measures. Ostensibly this inflation is due to commodity prices going up including essential commodities like wheat-paddy and pulses, probably because of erratic monsoon we had last two years and also the commodity trading in cash and derivatives in MCX (Multi Commodity Exchange). So government is taking all the corrective measures looking at this sector. But what prima facie seems to be the truth, is not necessarily the whole truth. There is huge share of services in pushing the inflation up so high. The service sector forms 52% of total GDP of India. Increase in prices of services is going to have greater impact on the prices. The services are highly intangible. There is no pricing commission working for keeping the prices of services down. Adding to that our respected Finance Minister Mr. P. Chidambaram has brought plethora of services under the Service Tax. This helped the service sector to increase their prices further. This is to such an extent when a service was tax-free it was Rs. 100/- but now after taking it under 12.5% Service Tax it is quoted at Rs. 150/- inclusive of taxes. So inflation is about 30% in sevices.

They can afford to increase the prices so high because of our IT generation who are earning hefty amounts and have lost a sense of prices they are paying. Same is the case of real estate. The builders and brokers here are asking for Rs. 5000/- per sq. feet like asking for a glass of water. There is no pricing commission working over real estate also. Clearly the prices have gone way beyond sense in the metros and there no way other than facing a pricing meltdown, the way it happened in California, US. And adding to that in today’s scenario a person earning above Rs. 2.5 lakh p.a. is taxed at 33.66%. In this situation a person earning Rs. 3 lakh p.a. cannot give a proper shelter and feed a family of 4 properly in a metro.

The growth story is all right, but when it stops making sense in prices you should open your mouth and say, “it’s ridiculous!” and this is not all with the economy. The government has decided to let the rupee appreciate to curb the inflation. But this rupee appreciation is directly going to affect the export oriented businesses on profit margins. Also we are carrying a hefty 4+% of GDP current account deficit and about 2% of GDP fiscal deficit. With export hurting and imports getting cheaper, this gap will further widen and eventually it will make India an unattractive investment destination. So while making short term corrective actions we have to take into account long term implications of it. If we let this economy overheat, it eventually will end up in recession (even though it will be a short one). And if we have a recession in a period of 5 years since 2002-03 then again it will show a weak character of economy and lack of control of government over the economy. And all this when highly respected economists like our Prime Minister Mr. Man Mohan Singh, our Finance Minister Mr. P. Chidambaram and our RBI Governor Mr. Y. V. Reddy in the top spots. If they are not in the position to keep a check on it, then it is sure that our economy will never be in our control.

So, along with the current short term measures some long term measures are also necessary to avoid occurrence of such events in future. But now some serious thoughts have to be put in and some drastic measures are to be taken. If US economy can manage a soft landing after overheating then we have every reason to believe that we can, too.

Monday 12 February 2007

Tuesday 16 January 2007

HDI and India

HDI i.e. Human Development Index is said to be the indicator of the standard of living in a country. The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrollment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income). Internationally it is accepted that this is not a comprehensive representative of the total quality of the life in a country. It does not, for example, include important indicators such as inequality and difficult to measure indicators like respect for human rights and political freedoms.

As mentioned above if you consider two factors, inequality and education together then the point arises of depth of the education available in a country. This particularly will be true in case of India. Let us first see the calculated parts of HDI as Life expectancy at birth ranked 121 with 63.6 years. Adult literacy rate for age 15 years and older ranked 107 with 61%. GDP per capita PPP US$3139 ranked 114. Gives HDI value 0.611 and overall rank combining all the factors above is 127. But this does not by any means take into consideration the level of skills and the depth of education available in the country.

After due consideration it seems necessary to reformulate the calculation of HDI with added weightage to the inequality of society, as almost unanimously we have accepted the capitalism as part of our global society and on the same principle the facilities of education available within the country. It seems highly plausible that there will be considerable shuffle in the current HDI listings. This surely will give India a little higher level than rank 127. It seems more important especially with the emergence of India as a global outsourcing hub with specialization in IT and financial services and educational institutes like IIMs and IITs with a global recognition. Indian human resource is one of the most sought after entities in the world. This chasm of global demand and HDI rank 127 has to be filled. No definition can be eternal; it has to evolve with time. And now is about time we pay attention to HDI rankings.

With emergence of the powers like BRIC (Brazil, Russia, India and China) countries, many such definitions need to be looked into. Let us kick start the mission with HDI.

Courtesy http://hdr.undp.org/hdr2006/statistics/countries/country_fact_sheets/cty_fs_IND.html

Saturday 13 January 2007

Indian cricket and Dada

At last Sourav Ganguly (dada) is getting the chance to come back to the highest earning cricket team in the world. Well that is the best I can praise this team. The money they make is by no means an indicator of their performance. This team just reminds me of the state of business in India for so many years till the Indian economy opened up since 1991. You keep protecting an ill performing organization for any amount of time, there is no scope for such an organization improving. Applying the same principle to this cricket team you should have shut down this business a long ago.

The point most difficult to understand is that how can such a pathetically performing team can earn the most by such a huge margin over the second best Australian team. There are so many sponsors running behind to put their money on. Real Madrid lost a lot of sponsors since they started the current stint of ill-performance. Applying the logic Indians never started performing, still the money started pouring in this absolute waste of time – cricket. (I’ll elaborate on this opinion of mine in some other blog, bear with me!)

There was the time when John Wright retired as coach to Indian team, when dada was leading the side. Then came the nuisance called Greg Chappell. The first thing he did with a well performing, rather the best performing team for a long time is that he chopped and changed around it. They say in US, “if it ain’t broken, don’t fix it.” That’s what he did. He tried to better the best. There were ill performing players including the ‘Prince of Calcutta’ himself, but the problem was not limited to him only. Rather he was solution to many other problems and undoubtedly he was the best motivator on the field. Instead of locating all the problems together Chappell pinpointed and played the politics with dada. There was a time when Sachin and dada together had made 16 opening partnerships of more than hundred runs, better than any other pair in the world. With the entry of the crap called Sehwag this stint was terminated. (I can never accept Sehwag as a batsman, just does not fit in definition.) Now as the crap is out of team I hope the sense prevails and sachin and dada come back with their previous form.

Another point I feel for dada is that he seems to be more matured and avoiding all the controversies altogether. If he just keeps doing it, there is a good chance that he would be leading the side, in the light of his motivational qualities and experience. May god bless dada. Amen!