BUDGET PREVIEW 2011 – Final Part :)

Continuing The Final Part Of The Budget Preview 🙂

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We believe that this year Finance Minister will take a gradual move towards fiscal consolidation by increase in Excise duty. Excise duty forms around 40% of Indirect Tax collections. Excise duty collections were down by 13% in April to December period to close to Rs. 70,000 crore comprising around 66% of Budgeted Estimates of Rs. 1,06,477 crore. The factors that contribute to our belief are; 😀

·Though the growth in corporate sales is not astonishing but profitability has improved to due to various cost control efforts which is quite evident by the corporate tax collection that have shown a growth of 44% in December 2009. Cumulatively Net direct tax collections increased by 8.5 per cent during April- December 2009.

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·India being a consumption story has shown healthy growth in sales of consumer durables. For instance Automobile industry’s sales went up by 32 per cent in December over the same month in 2009. It is believed that a gradual hike in duty will get absorbed without affecting medium term prospects of the industry.

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·Partial rollback would also help the finance ministry effect a calibrated integration of excise duty with the services tax by the end of the next financial year, when the proposal for a Goods and Services Tax is likely to be implemented.

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·Finance Minister had indicated that he would like the fiscal deficit for 2010-11 to be around 5.5 per cent of GDP. The proposal to raise excise duty by two hundred basis points is being endorsed also to help the finance ministry raise more revenue and stick to the projected fiscal deficit target.

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Disinvestment would be the key focal point in the Budget. We believe that the Finance Minister would place high targets from the PSU sale proceeds. The factors that contribute to our belief are:

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·In order to bring Fiscal deficit under control that would subsequently ease upward pressure on interest rates.

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·This will help Investment in social sector projects which promote education, health care and employment & will also help in Capital investment.

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On the Corporate Tax front, we believe that the Finance Minster is unlikely to lower tax to 25% from the current 30% as per Industry demands. The rationale behind our belief is:

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·The direct tax code that proposes corporate tax to be 25% will be implemented in fiscal 2011 – 2012 & Industry have to wait till its implementation as it will replace the existing Income Tax act.

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·Already, government is trying to make up more tax revenue & is unlikely to take step in this direction as it may come as an obstacle in order to control fiscal deficit.

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On deregulation of Petroleum sector, we believe that in order to cut down on subsidies government could provide the road map for partial deregulation of the petroleum sector. The road map may provide OMC’s to review the prices of petrol and diesel on a regular basis however, LPG and kerosene could continue to be administered by the government. Factors that complement to our belief:

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·In view of the commitment of the UPA regime to flagship social security programmes that require huge allocations, Mr. Mukherjee has told Mr. Deora that it would not be possible to provide huge subsidies to the OMCs in future.

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·On the External Economy side, we expect that the Finance Minister may continue to provide certain concessions like interest subsidy and extension of other export oriented schemes. The rationale to our belief:

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·In the recent two months i.e. November & December, merchandise exports registered a positive growth of 18.2% & 9.3% respectively. But in the period of April to December 2009, the exports were still negative to the tune of 20% as compared to the corresponding period.

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·The world economic recovery especially in US & Europe is still questionable & the regions constitute approximately 15% & 21% respectively of our merchandise exports, thus directly affecting the trade.

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·Sectors such as engineering goods, jute, carpets, handicrafts and leather goods are continue to be in bad shape, others such as gems & jewelry drugs, plastics and petroleum products are showing improvement.

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·Concluding, the main point is that it may not be a good time to take back the stimulus so soon that may derail the recovery.

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BUDGET PREVIEW 2011 – Part 1 :)

At last the much talked topic “BUDGET” among AAM ADMI, CORPORATES or INVESTORS that comes to INDIA – is approaching. “The million dollar question is that will 2010 budget be another year to cheer the economy by giving some relief in indirect taxes, personal income tax and by implementing various schemes to induce social & infrastructure sector in order to maintain high trajectory growth”.

Generally, it is seen that the incentives which are given in the period of recession or slow down and moreover, when the government in power is about to complete its tenure, are above from expectations. It is seen that budget in two years usually comes good when the Govt. is in the last year of power & in the first year of the rule as a vote of thanks.The mid three years out of the five year term usually remains tight on the policies.

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For the common man, we expect that Finance Minister may raise the exemption limit in personal income tax & investment limit Under Sec.80C. The reason to our belief:

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1. The rocketing prices of food articles like sugar, pulses and vegetables have been cutting the pockets of a middle class.

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2. By coming out with these measures (above mentioned) the government will lower the tax incidence on the common man & will also help it to put the opposition on backfoot.

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By & large everyone is aware of the level of fiscal deficits globally and many of us know that it is essential to minimize deficits & returning to fiscal consolidation is necessary. The main question is why it is so important. Let’s look at the consequences of high fiscal deficit:

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A risk to high government borrowings leads to more debt servicing that cuts expenditure on various social welfare schemes, if TAX revenues do not matchup. In the current financial year, out of the 4 lakh crore borrowing, more than 50% has gone towards interest payments.

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Secondly, the higher government borrowing from market means less availability of funds to private borrowers. In the current Fiscal year, due to dismal credit growth, we haven’t seen pressure on Interest rates. But going forward we foresee normal credit growth in the next financial year. However as the government borrowing is expected to remain at same level in the next fiscal, pressure on interest rate is expected.

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So, this year the theme of Budget would any way be to maintain economic recovery through investment for building infrastructure rather than funding the expenses/consumption. But at the same time focus will be to bring down the fiscal deficit.

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The catch here is bringing down deficit by cutting expenditure means risk to growth & the other alternative is to increase revenues. While the direct tax collections are encouraging, on the indirect taxes front the government is still struggling to get desired revenues. This is because after September 2008, when the global financial system collapsed, the government came out with stimulus packages to keep up the desired growth pace.

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Excise rates since December 2008 had been progressively cut from 16, 12 and 8 per cent to 10, 8 and 4 per cent respectively depending on the product in question. Service tax was also reduced from 12 to 10 per cent.

RBI’s Monetary Policy Stance – Part 3

Just an extension of our previous blog “RBI, Monetary Projections And Indian Economy”

RBI’s Monetary Policy Stance - Part 3

In this Blog we would touch upon the aspects as that of RBI’s Monetary Policy Stance and few more facts which carries direct or indirect connection with the RBI Policies.

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For example, business confidence index ,industrial recovery status, overall consumption and investment, export-imports status etc;

The True Facts:

So far business confidence has also improved, and demand conditions seem to have picked up, as seen by better order book and increased capital finance requirements.

Industrial recovery seems to be on its way with 5.8% growth in IIP during April-August ’09.

A revival in capital flows, and stronger performance of the core infrastructure sector (4.8% for April-August ’09) seems to be indicating a slight recovery in the economy.

However, there has been a deceleration in growth of private consumption and investment demand, and raw material prices are expected to rise on account of inflationary pressures.

The deficient monsoon could also reduce rural demand.

First quarter earnings of corporates reflect a decline in sales, and non-food credit growth has decelerated, with credit card and consumer durables related credit turning negative.

Exports have continued to decline as external demand dependent services remain sluggish.

The economy is showing some signs of recovery, while a rising CPI has now pushed WPI into the positive territory, mainly on account of higher food prices.

The RBI’s stance will thus have to manage the trade-off inflationary pressures between supporting growth and controlling .

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Monetary Policy Stance

On the basis of the above overall assessment, the stance of monetary policy for the remaining period of 2009-10 will be as follows:

– Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively through policy adjustments to stabilize inflation expectations.

–Monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.

-Maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.

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Stay Tuned for more on the topic.

We would cover Analysis view from the Analyst with respect to the monetary point of view.

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Downward Movement Hits Indian Equities Markets

Downward Movement Hits Indian Equities Markets

Indian equities markets entered into a consolidation zone with analysts terming the downward movement as long expected.

A benchmark index fell 5.44 percent from its last weekly close and ended trade below the 16,000-mark.

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The 30-share sensitive index (Sensex) ended 914.53 points, or 5.44 percent lower, at 15,896.28 points at the weekly close Friday, as opposed to the previous week’s close at 16,810.81 points.

The broader S&P CNX Nifty of the National Stock Exchange (NSE), too slipped, closing at 4,711.7 points, down 5.7 percent from its last weekly close.

However, companies with large-to-medium market capitalization saw greater selling with the BSE midcap index ending 7.36 percent lower and the BSE smallcap index losing 8.01 percent over the last week.

“This consolidation was expected anyways as the valuations were not commensurate with the earnings of corporates. To an extent a correction in valuations was warranted,” said Jagannadham Thunuguntla, equities head of brokerage and capital markets consultancy SMC Capital.

The markets started on a cautious note Monday ahead of the Reserve Bank of India‘s mid-year policy review Tuesday.

The Sensex ended a volatile day at 16,740.50 points — 70.31 points or 0.42 percent lower than Friday’s close.

The Nifty followed a similar trajectory and ended in negative at 4,970.9 points, down 0.52 percent.

Both benchmark indices nosedived Tuesday as the RBI indicated in its policy review that it would start tightening the monetary policy and look at exiting the stimulus measures.

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Data with markets watchdog Securities and Exchange Board of India (SEBI) showed that foreign funds were net sellers during the week, having sold scrips worth $12.8 million.

The top gainers this week on the Sensex were

Tata Motors (up 7.2 percent),
Ranbaxy Labs (up 4.8 percent),
Wipro (up 2.9 percent),
Grasim (up 1.6 percent) and
Hindustan Unilever (up 1 percent).

The top losers were :

DLF (down 18.5 percent),
Reliance Capital (down 14.5 percent),
Reliance Infrastructure (down 14.2 percent),
Hindalco (down 13.9 percent) and
Reliance Power (down 12.9 percent).

“Broadly speaking only about one percent of the quarterly results show a sound top line growth. Profits might have increased, but that is not because of increase in core operations – cost cutting and other income have contributed towards it,” said Thunuguntla.

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RBI Raises Concern over Circular Investment Btw. MFs & Banks.

RBI Raises Concern over Circular Investment Btw. MFs & Banks

As per the latest data released from the Reserve Bank of India, nearly 90% of the funds, which are parked by the banks in mutual funds (MFs) come back into the banks.

The funds come in the form of overnight borrowings through various channels.

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RBI said that the banks parked Rs 66,687 crore in MFs as of September 25, 2009 in debt and liquid schemes.

In turn, the MFs have lent Rs 29,504 crore under the collateralized lending and borrowing obligation (CBLO) platform and Rs 29,328 crore under market repo, respectively.

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CBLO allows non-banks to lend to banks short-term surpluses.

The lending of MF through CBLO and market repo as a percentage of banks’ investment in mutual funds has surged to 88% in September from about 64% in July.

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The objection of RBI came when MFs also subscribe to commercial paper issued by corporates, which is tantamount to lending to corporates by MFs, which is ostensibly from funds raised from banks.

RBI has objected against indirect lending by banks through intermediaries.

In this circular flow, MFs lend to corporates, which the banks themselves hesitate to lend, which exposes banks in a regulatory concern.

However, the more serious is its concern over the circular investment between MFs and banks.

44,000 Crores to be Raised by Indian Firms :)

Indian corporates raised Rs 21,691 crore through the qualified institutional placement (QIP) route during the first half of this fiscal and the funds raised through this route are expected to double in the second half.

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Mr Jagannadham Thunuguntla, the equity head of SMC Capital, said: “As of now, about 48 companies have received requisite resolutions from either shareholders or their boards to raise the funds through QIP route. The total amount proposed to be raised by these companies is about Rs 44,000 crore.”

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He further said: “As there is no requirement for the approval of the Securities and Exchange Board of India (Sebi) for the QIP issuance. These companies are ready to offer their QIP whenever they are confident about the market conditions.”

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“Some of the prominent names of the corporates that would be raising funds through this route include Tech Mahindra, Essar Oil, Hindalco, RCom, Omaxe, Pantaloon Retail, Jet Airways, Ansal, JSW Steel and L&T,” he said.

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It seems that the Indian promoters have regained their confidence and enthusiasm for fund raising, he added.

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It is turning out that corporates are raising funds through QIP route as a last alternative and not as a preference.

Most of the IPOs launched in the last seven to eight months had put up a flop show.

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The bank funds that are another source of funding are not available for most of the corporates.

Depending upon the sector and profile, banks are asking for premium over interest rates and for smaller companies, banks are not offering loans.

So the corporates that are looking for the expansions would opt for the QIP route to raise the funds, Mr Thunuguntla added.

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Railways to Launch Mobile Office on Track:)

The Railways is about to start another innovative experiment designed to woo business travelers.

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The plan is to attach an extra coach on the Bangalore- Chennai- Bangalore Shatabdi Express that will have all the facilities offered by any good business centre.

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Called the ‘mobile office on track’, the coach will have GPS/GPRS connectivity, phones, WiFi connectivity for internet, LCD monitors, projectors, microphones and a satellite radio.

There will even be a small pantry.

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The initiative is to be managed by a private party.

South Western Railway has called for bids for the project, and hopes to have it going in the next three months.

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The reserve price per annum is Rs 3.57 crore, which Anwar Hussain, senior commercial manager of the Bangalore division, says is the amount the Railways would have earned if the AC chair car coach were to run at full capacity.

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The private party that wins the bid can charge for the services offered and will also be allowed to brand the outer panels of the coach with their corporate logo.

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The Bangalore-Chennai route is a particularly good stretch for such an experiment.

Most business travellers between the two cities have abandoned the air route on account of the long distance between Bangalore city and its new international airport.

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The time taken to fly, including the time taken to reach the airport and the airport waiting time, is not very different from the time taken by rail or road.

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Many are now using the road route.

A ‘corporate coach’ on the train route can potentially attract people who now use the road and the few who continue to fly.

If the initiative is successful, the Railways would try to replicate it on other trains and try to get even air travellers to move to trains.

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He is hoping that travel management companies like American Express Travel, Thomas Cook or Sita Travels will take up the project.

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Railways had previously introduced the ‘brand train’ concept that allowed corporates to brand the train in return for offering cleaning and other services inside the train.

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The first of these was the ‘Kurkure Express’.

The scheme was later extended to other trains.

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