Thursday, February 28, 2013

India's Budget bets on Growth

Who will be the PM?

For a man, whom many see as Congress’s possible Prime Ministerial candidate next year, finance minister Palaniappan Chidambaram’s 8th budget was without what markets call the wow factor – nothing to perk up business, nothing much to make the middle class voters happier.
However, as in any pre-election year budgets, Chidambaram’s budget will try to spend its way out of the mess the Indian economy is in, by splurging on an all time record budget of Rs 16.65 lakh crore, a 16.5 per cent increase over the current year’s spending. In dollar terms India’s budget spend of $ 314 billion equals one and a half times’the entire economy of neighbouring Pakistan.
India is expected to grow by 5 per cent this fiscal year, far lower than the 8-9 per cent GDP growth it posted for most of the last ten years. GDP figures released today for the October-December 2012 quarter were a dismal 4.5 per cent, putting pressure on the government to opt for aq tough budget which aims to grow the economy “out of the trough”. Chidambaram in his budget speech, underlined his plan as one of “unhesitatingly embrac(ing) growth as the highest goal” to manage what he termed as “challenged” Indian economy.
India's Rich will have to pay more tax
New taxes including a `Super Rich’ surcharge on individuals earning more than Rs 1 crore ($185,000) a year and firms earning more than Rs 10 crore ($1.85 million), applied in token deference to an idea floated by Left-wing economist Joseph Stiglitz and nearer home by India’s leading philanthropist Azim Premji, and higher revenues churned out by an economy which the government hopes will grow at a faster pace of over 6 per cent are expected to fund the splurge. As also a record borrowing plan which hopes to raise Rs 5.42 lakh crore from the market.
There were however prudent cues to satisfy global credit rating agencies such as Moody’s and Standard & Poor, who had been threatening to downgrade the slowing down Indian economy beset with widening fiscal deficit, widening trade deficit and falling rupee.
India wants more butter now
Subsidies will be pared from Rs 2.31 lakh crore next year from the bloated subsidy bill of Rs 2.57 lakh crore which the government ran up this year, a compression of 10 per cent on what many see as populist spending on subsidising auto-fuels, food and fertilisers. The main axe will be felled on oil subsidies which is being reduced 26.8 per cent. Even the government’s borrowing plan has been kept `modest’ with an increase of about 4 per cent over amount borrowed this year.
Spending on non-economic activities such as defence will be kept down. For the first time in years, increase in defence spending was kept at just 5 per cent. Defence spending went up to Rs 2.03 lakh crore or $ 38 billion (for comparisons, a fifth of Pakistan's economy), from the Rs.1.93 lakh crore outlay for 2012-13.  
However, the lack of any specific spark in the budget and higher taxes on corporates and MNCs left Chidambaram's cheer-boys in India Inc, not so happy, which they made clear in interviews on television channels.  Bombay Stock market's Sensex fell 1.52 per cent or by 290 points. Markets seemed to have been spooked by the finance minister’s clarificatory amendment introduced as part of the budget, that residency would not be enough to get the benefit of double tax avoidance treaties with tax havens like Mauritius to avoid paying tax in India. Businesses and investors in India would also have to prove that beneficiaries of the investment funds were residents of the tax havens. (Something he said would be addressed the very next day, leading to a modest claw-back in the BSE )
Sensex went down after the budget
India’s leading commodity market, MCX, too reacted negatively to a 0.1 per cent Commodity Transaction Tax, re-introduced after being brought in and rolled back 4 years back, on non-farm products. The metals index went down by 0.3 per cent. Interestingly, perhaps fearing calls for a similar roll-back, the finance ministry has however not budgeted for any tax earnings from this score.
Bringing in more taxes home, is very much part of Chidambaram’s growth plan with revenues expected to grow by 19 per cent, with services tax being most buoyant, growing at 35.7 per cent, possibly on the back of a tax amnesty announced for those evading service tax. 
The government is also betting on more disinvestment earnings. Against this year’s Rs 24,000 crore expected to be realised from disinvestment, the government hopes to earn a a specific rs 55,814 crore from share sales this year, including possibly from selling the government’s rump stake in Hindustan Zinc Ltd. Similarly the government has set an ambitious target of raising Rs 40,000 crore from telecom spectrum auctions and one time spectrum fee despite spectrum auctions having been a flop this year. 
Road Eastwards
To spur investment, the Harvard educated, right-wing finance minister announced that plan spending on large public investments on highways, railways, ports, airports, power transmission lines etc., will be raised to Rs 55.5 lakh crore from Rs 42.91 lakh crore spent this year, an increase of some 29 per cent on actual spending. Firms investing more than Rs 100 crore would get 15 per cent extra tax benefits, infrastructure debt funds would be encouraged to fund ambitious long term plans and the World Bank and ADB roped in to help build an expressway linking India’s North east with Myanmar and thence on to Thailand, Malaysia and Singapore, India’s big markets in the Asean. 
Two new industrial corridors or expressways with industrial zones on either sides, one linking Bangalore with Chennai and another Bangalore with Mumbai, and new mega ports at Sagar in West Bengal and Andhra Pradesh were also among projects with which Chidambaram hopes to spur growth.
The bet will however be on growth and if that does not come about then Chidambaram’s gamble of higher revenue earnings could well fall by the way and the man who gave dream budgets to India Inc., some years back could well be the man who scripted a nightmare for the country’s economy already overburdened by high inflation, slack demand and rising debt.

Monday, February 25, 2013

Will Chidambaram Manage to Clean up the Economy?

When P. Chidambaram took over as finance minister of India for the third time on July 31, last year, he inherited a slowing economy, high inflation rates and an acute state of policy paralysis.
Though the Harvard educated, right-wing minister has kicked in a few reforms – liberalising foreign investment rules in a retail and aviation, bringing out new bank licensing norms, cut oil subsidies, and generally tried to stem the rot by getting cabinet to clear long delayed projects, the story remains the same – India’s economy is still in a mess and perhaps in some respects in a worse mess.
India grew at 6.5 per cent in 2011-12, the last year that Pranab Mukherjee ran North Block. In the current fiscal, under Chidambaram’s watch, the economy is expected to grow at 5 per cent, a straight growth slowdown of 1.5 per cent.
The fiscal deficit, or the gap between what the government spends and earns,  which Chidambaram has bravely tried to rein in by pruning not only wasteful subsidies but also defence spending, is still going to be 5.3 per cent of GDP. When that figure is coupled with state government deficit, the actual deficit of the government sector would amount to a high of 8-9 per cent of India’s economy. To put it in perspective, India’s fiscal deficit is three fourth’s the size of Pakistan’s entire economy.
This obviously means, that despite pressures from party colleagues, Chidambaram will have to be cautious about spending splurges and better at garnering revenues – which stand at a tad below 18 per cent of GDP (with taxes contributing to just half of the earnings) compared to 35 per cent for Brazil, 38 per cent for Russia, 39 per cent for the UK and 28 per cent for the US, not to speak of the 40 per cent of GDP which the Germans manage to collect. Of course, part of India’s dismal tax collection ability comes from the fact that a mere 2.5 per cent of its population pays taxes. The rest simply say they don’t earn enough to cough up any money. But then this is a year which runs up to a General elections, next year, and most of Chidambaram’s colleagues still suffer from a hangover of Socialism inherited from Indira Gandhi’s rule. Checking populist spending will be one tough task – especially when India showcases it’s `Right to Food’ bill which could sap up more money in subsidies from the budget than any other. 
Chidambaram will certainly have to work harder to earn more. One way would be to fast track the Goods and Services Tax. Another to  cut out various exemptions which corporates’ enjoy, roll back some of the excise and service tax cuts given to industry in the post-global meltdown period. A surcharge on the incomes of the `super rich’ is considered highly likely as is a commodities transaction tax on the lines of the securities transaction tax, to partly generate taxes and partly regulate a wildly oscillating commodities market.
This year, sales of shares in state run lumbering giants like  NTPC and Oil India, could not earn the government its targeted Rs 30,000 crore. But Chidambaram will probably bank on an improving stock market to try earn more from aggressive sales of PSU stocks. Similarly, poor appetite for a badly managed auction of radio-waves fetched India less than Rs 10,000, a fourth of its targets. North Block in conjunction with Sanchar Bhawan, home to the telecom department, will certainly try again.
NTPC Power Plant

Last year, the country’s current account deficit or the difference between the dollars, Euros and Yens we earn or which flows in by way of investment or debt and dollars, Euros or Yens we spend on importing oil, gold, jet aircraft and power plants, bloated to 4.2 per cent of GDP. The Reserve bank of India, tasked with managing our foreign exchange reserves, considers this to be alarmingly higher than what is prudent, which pundits at the central bank say should be 2.5 per cent of GDP.
This year that current account deficit figure is likely to be 5.2 per cent, far bigger than what Mukherjee had left the country saddled with. To put it in perspective, in 1991, when India ran into its worst foreign exchange crisis forcing the country to pledge gold to pay off impending debt closures, India’s CAD was 3 per cent of GDP. India’s rising import bill and weak exports has seen the rupee value falling from about Rs 44 to the dollar in April 2011 to over Rs 53 to the dollar as of today.
No wonder that earlier this week, Moody’s rating service warned that India’s widening current account deficit and the spurt in its external debt meant the country risked a downgrading of its credit rating  outlook.
Last year, under Mukherjee’s watch, India had received a similar threat from Standard & Poor’s  which had announced there was a one-in-three chance of a sovereign rating downgrade to junk status, leading to much consternation at North Block. Given that India’s total debt to GDP runs at a high ratio of 70 per cent, similar to the United Kingdom’s whose rating was cut today by Moody’s, India needs to perk up and try attract more dollar and Euro inflows.
This should mean more sops for foreign investors, more easing of rules for debt inflows, perhaps Sovereign status for rupee denominated bonds to be issued by public sector companies (but paid for in dollar or Euros) and certainly more concentrated attempts at encouraging value-added exports.
Not to speak of steps to stall the import of more gold, the single biggest item of import after oil and to check import of cheap telecom and power gear by posing higher taxes on them or by encouraging local manufacture of substitutes. India had last month raised import duty on gold and platinum to 6 per cent from a previous 4 per cent in a bid to break the country’s huge appetite for imports of gold. However, what the Reserve Bank and finance ministry would like to see would be a scheme to monetise India’s estimated 20,000 tonnes of gold reserves worth around $ 1.16 trillion, stashed away in household hoards.
One way out, could be gold banks, suggested by the RBI, to collect household gold against bonds, whose value went up or down with the value of bullion.  The gold so gathered could be on lent to jewellers, reducing imports.
India's Gold Obsession

Chidambaram will also have to be mindful of the savings rate which has been falling like never before, putting at doubt India’s ability to reach the professed goal of 9 per cent GDP growth. The RBI estimates household savings have plummeted to 7.8 per cent this year from 12.2 per cent in 2009-10. North Block, many aver, will certainly be looking at ways of encouraging middle class Indians to save more by giving larger tax breaks for pension and insurance products and to buy houses. Some say total exemptions for the `aam admi’ could well go up to a princely sum of Rs 3 lakh.
But then, how much the scion of the Rajah's of Chidambaram will risk and how much he will bow to popular sentiments will be something which will be revealed in just a couple of days.

Friday, February 8, 2013

Reforms & Dismal GDP Forecasts

Amul ad poking fun at the Sensex

India’s dismal early forecast for 2012-2013 financial year’s economic growth, at a decade low of 5 per cent, should have meant glum faces at North Block, home to the country’s finance ministry.

However, strangely, not too many of the Mandarins who work in that cavernous red stand-stone Raj-era building seem too worried, rather they seemed perversely pleased. Probably, because the figures could actually come in handy for finance minister P.Chidambaram and his economist boss, Dr Manmohan Singh, when the duo argue for tough reform measures with cabinet colleagues and Congress party leaders, who ahead of crucial general elections early next year, want to see more populist measures and less of belt-tightening reforms.

Data released by the Central Statistical Organisation places growth forecasts far below an earlier 5.5 per cent prediction by the Reserve Bank and an optimistic 5.7-5.9 per cent target set by the finance minister P.Chidambaram and far average growth rate of 8-9 per cent, achieved through the last decade.
Singh-Chidambaram duo

The Singh-Chidambaram duo will have the advantage of this gloomy picture to force reluctant colleagues into agreeing to slash oil subsidies and fat defence budgets as well as steering opening up of the economy to more foreign investment and cutting red tape in doing business. 

The schism within the cabinet had often spilled out in the open in the last few months, with tough decisions like subsidy cuts being pushed on the backburner several times at cabinet meets, before being finally accepted. Spats over auctioning gas blocks between petroleum and defence ministries and opening up coal mines between steel and environment ministries still remain unresolved despite the Prime Minister chairing meets to sort out such rows.

No wonder Indian industry has been talking of policy paralysis.

To make things tougher for the Congress leadership, BJP’s poster boy and almost certain prime ministerial nominee Narendra Modi, has begun selling the `Gujarat development model’ with slogans like “minimum government and maximum governance” and "inculcate skill, scale and speed to compete with China”.  

Singh and Chidambaram desperately need now to show that they do have a `Delhi  development model’ up their sleeves and that too speedily!
Narendra Modi sells Gujarat Model

Yesterday’s data forecast said farm sector could grow by just 1.8 per cent in 2012-2013, compared with 3.86 per cent in the previous year, while manufacturing could slow down to 1.9 per cent from 2.7. This is the slowest pace of growth for the manufacturing in the past 14 years. Even the services sector which for the better part of the last decade grew in double digits, could grow by 8.6 per cent.

In the first half (April to September) of the financial year, the economy grew at 5.4 per cent, today’s data indicates that the economy may have grown by just 4.2 per cent in the quarter ending December 31, 2012 and may grow by 5 per cent in the current January to march quarter.

This data points to the desperate need to bring in reforms to boost infrastructure and manufacturing growth. Industry chamber Ficci has already flagged: “Quicker implementation of the National Manufacturing Policy, speedier decision making under the aegis of the Cabinet Committee on Investments, ushering in the Goods and Services Tax regime, passage of the insurance and pension bills in the next session of the Parliament and bringing greater competition in the coal mining sector” as ways to get ahead.

The industry wish-list more or less tallies with Chidambaram’s reforms-to-be-taken-up list, with additions like less largesse on populist subsidies and tax reforms which help Indian firms stand up better to foreign competition.

Finance Ministry officials want to redraw duty structure so that domestic capital goods, electrical gear, telecom industries and even steel which have been facing import pressure can again revive.

Proposals in the offing would place higher duties on imports in these sectors, while reducing duties on raw materials such as iron ore, coal as well as components which go into making electrical or telecom gear and having a tax structure which encourages domestic telecom and electric equipment.

India had drawn up a tax structure which imposed high duties on finished cars imported into the country, less taxes on semi-finished cars and far lower taxes on cars which were at least 70 per cent indigenous. A similar structure is being looked at for the telecom equipment industry.

However, what industry captains really want is ground level reforms such as setting up a coal regulator. India has long been debating setting up an independent coal regulator as besides the single monopoly coal producer – Coal India – a large number of firms have been given captive coal blocks and some have been allowed to trade surplus production.
Amul ad on Coal scam

The government is also expected to step up the gas and put up some 54 coal mines up for auction to a limited field of buyers –iron and steel factories and cement and electricity plants - over the next four months. The auctions, speeded up by allegations of scams in earlier allotment of mines, are expected to yield precious revenues to state government coffers and much needed coal to fire coal-burning furnaces and power plants.  

The Government has cut base prices for another round of telecom auctions, which should bring in some more money into government coffers and at the same time give telecom firms more radio-waves to base future mobile connection sales. India has about 935 million mobile connections for 1.2 billion people, and unless better connectivity and services can be ushered in, growth may soon flatten-out after slowing down to just 2.25 per cent on a year-on-year basis.

Officials say Prime Minister Singh is also pushing them to clean up a Direct Tax Code, which could jiggle tax rates, while enlarging the tax base. The DTC is expected to simplify tax laws, lead to less legal disputes over taxes and ultimately bring better compliance. Industry says any tax reform measure always helps business grow and bring more of the `parallel’ economy over-ground, with more businesses declaring their tax liability. 

However, two reform measures promised to industry at large and foreign investors in particular could remain in doldrums unless the government does a better job at floor management inside the parliament.

In the last parliament session, the government was unable to go ahead with voting on the insurance bill as no agreement could be reached in back-room parleys with opposition and supporting parties on a clause which seeks to raise FDI to 49 per cent.

Officially the debate will be shifted to the next session of Parliament. The BJP had earlier agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.

Linked to this is the fate of the pension regulator bill, which gives teeth to the regulator and allows foreign investments into pension funds. The FDI limit in pensions is linked to the limit in insurance firms. It could be taken up separate from the insurance bill and passed, allowing foreign pension funds to buy up to 26 per cent stake in Indian pensions for starters, but a final call on this could depend on how the voting numbers stack up in the coming Parliament session.

Monday, February 4, 2013

The Story Behind New Banking Licences

Safeuarding Prudential Banking

As the Reserve Bank gets ready to announce guidelines for new banking licences within the next fortnight, the fine print in those very guidelines have become a bone of contention between the country’s central banker, charged with safeguarding prudential banking norms, and the Finance Ministry, which wants new banks to pep up the economy.

The Reserve Bank is adamant that it wants guidelines framed to keep out large corporate houses and real estate Moghuls from cornering these licences, as their business interests may clash with prudential norms needed to run banks they want to float. The finance ministry is just as adamant that rules should not keep corporate houses out, but rather rules should set up Chinese walls between owners and banking operations, so that owners can turn in profits but not subvert banking norms.

Unfortunately for North Block, the chairman of the prime minister’s economic advisory council, C.Rangarajan, a former RBI chief himself, has thrown his weight behind the central bank’s point of view.

A string of disastrous bank collapses in the 1960s, had seen the Indira Gandhi led Congress government nationalizing most large banks. There were accusations of widespread abuse of public funds by bank owners who often siphoned off monies to run risky businesses, whose failure jeopardised the entire banking and financial industry. The central banker points to this history and lack of any evidence that Indian business houses will be willing to change their ways for its unwillingness to grant bank licences to corporates.

RBI’s allergy towards real estate Moghuls like DLF being allowed to run banks stems from similar considerations, buttressed by examples of the mortgage crisis faced by American banks. The fear obviously is that realty firms allowed to own banks would use them to fund development and sale of risky realty projects, which in turn could promote a property bubble.

Finance Ministry officials argue that powers of supervision which the RBI was seeking including powers to supercede entire bank boards, if they were suspects in wholesale frauds, have been given through a banking amendment act passed by Parliament in the last Parliament session and the central bank has consequently no excuses in not agreeing to allow corporates entry into the banking sector.

One way out of the imbroglio, which is being suggested by officials trying to work out a mediation, is that the rules do not specifically prohibit large corporates from applying for licences, but preferences are built into the guidelines which would continue the current system where private banks are allowed as `graduates’ from among merchant bankers and financial firms which had grown large enough to qualify as banks.

The problem with continuation of the earlier system is that those whom the RBI granted licences last time round they were given out, included some merchant bankers who proved to be damp squibs at best and horror stories at worst – these included -- Centurion Bank and Bank of Punjab – which had to be merged and later acquired by HDFC Bank as well as scam-hit Global Trust Bank which had to be ultimately taken over by Oriental Bank of Commerce.