ISSUEVOLUMECover Story….A Responsible Act: Union Budget 2013-14Open Forum…Feds QE: Time to cut back?Outlook….RupeeInfocus….Admissions open! New Banking GuidelinesStats Watch….Railway Budget: Key FigureNews…..News on Emerging MarketsInvesteursChroniclesMarch 2013, Volume: 65
Figure FactsForexForward Rates against INR as on 1st March, 2013Spot Rate 1 mth 3 mth 6 mthUS Dollar 54.95 55.35 56.04 56.97Euro 71.58 72.12 73.06 74.33Sterling 82.58 83.16 84.18 85.55Yen 59.15 59.59 60.36 61.42SwissFranc58.48 58.92 59.70 60.76Source: Hindu BusinessLineLibor RatesLibor % 1 mth 3 mth 6 mth 12 mthUS 0.20 0.28 0.45 0.75Euro 0.05 0.12 0.23 0.43Sterling 0.49 0.50 0.60 0.92Yen 0.12 0.16 0.26 0.45Swiss Franc -0.001 0.02 0.09 0.26Forward Cover1 mth 3 mth 6 mthUS 8.86% 8.04% 7.45%Euro 9.18% 8.39% 7.79%Sterling 8.55% 7.86% 7.29%Yen 9.05% 8.30% 7.78%Swiss Franc 9.15% 8.46% 7.91%As on 1st March 2013 Source: Hindu BusinessLineCommoditiesCommodities Unit (1000kg)Aluminum 106050Copper 420500Zinc 110000As on 1st March 2013Call Rates as on 1st March 2013-→6.50%-7.90%Data from 17thFebruary to 1stMarch 2013Sensex Nifty19501.0818918.525,898.205,719.70Gold (10 gm) Silver (1 Kg)30173297235621853706Crude Oil ($/barrel) Dollar/INR117.40110.4054.2954.48
Railway Budget Key Figure RupeeUnion Budget of India for 2013-14 was presented by the Finance Minister, Mr. P.Chidambaram.India plans to narrow the gap to 4.8 percent of gross domestic product in the year throughMarch 2014 from an estimated 5.2 percent.For the fiscal year starting in April, India proposesto raise spending by funding it with higher revenues in a budget aimed at reviving growth.The2014 shortfall is likely to be 5 percent due to “optimistic” revenue assumptions, whilespending hasn’t been reined in.Investors had expected a closer check on spending and weredisappointed as the government sought to increase taxes on certain individuals andcompanies.Government proposing about Rs 17,000 crore higher net borrowing target in the Budget,which was more than street expectations, hit market sentiment to a great extent. This in turnhit the rupee. Especially, banks stocks were badly hit on concerns of tighter liquiditysituation.The union budget for 2013-14 is likely to be negative for the Indian rupee, at least inshort-term. Rupee weakened to its lowest level in the month as increase in spending despitekeeping fiscal deficit targets in place made investors cautious and away from Indian rupee.Globally, strengthening of the dollar against a basket of major currencies also put pressure onrupee.Three month forecast for USD/INR is 55 with risks of further depreciation beyond 55 in thenear-term.The economy correction process is not short and easy. It is long and painful as growth issacrificed for long term fiscal consolidation. To its credit, Indiahas started traversing the roadto the long and painful path of economic correction and that is wholly positive for markets.Lower fiscal deficit and lower inflation will bring down interest rates in the economy leading tolower bond yields.Equities will start doing well as the economy is seen, as being on the mendwhile a good equity market will bring in capital flows leading to a stronger INR in long term.It is expected that USD/ INR will reach 53 and 52 in next 6 and 12 months respectively.Stats Watch Outlook-RupeeImpossible trinityAlso known as the Trilemma it is a situation in internationaleconomics which states that it is impossible to have all three of thefollowing at the same time:• A fixed exchange rate• Free capital movement (absence of capital controls)• An independent monetary policyGloss
Cover StoryAn experience of presenting eight union budgets has attributed an envious insight to Mr. P.Chidambaram; clearly reflected in the balanced and cautious budget presented byhim for 2013-14.To his credit, the finance minister has rightfully addressed many of the immediate economic priorities of the country rather than excessively focusing on the election roundthe corner. It is refreshing to see that the finance minister intends to win next general election not by adopting populist measures but through sound economic policies foraccelerating GDP growth and taming inflation through fiscal consolidation.Key DeliverablesThe key deliverable in this Budget was evidence of fiscal discipline, captured in a single number that is the fiscal deficit. Mr. Chidambaram has delivered for this year andpromised to stay on course for next year.Total government spending has risen by only 9.7 per cent, in a year when nominal GDP growth (i.e. real plus inflation) will be 12 percent or more. Plan expenditure has been slashed from the originally budgeted figure of Rs 5.21 lakh crore to Rs 4.29 lakh crore - a 17.8 per cent squeeze. Defence spending toohas been slashed with major cut down on capital budget (i.e. acquisition of new weaponry). The exercise, aimed at compressing expenditure drastically and reining in fiscalprofligacy, signaled that the priority of the government is to put the economy back on rails. CAD is also a key focus area of the finance minister which has peaked to a recordUS$ 75 billion. The criticality of foreign investment and India’s prerequisite for improving investor friendliness has been well underlined by him.Another key deliverable was the commitment towards infrastructure creation in the country. All the efforts in other directions can be rendered useless by the fragileinfrastructure of the country. The budget announced a mind boggling amount of Rs. 55 lakh crore to be mobilized during 2012-17 for suitable infrastructure build up. TheBudget unveils a series of approaches to this daunting challenge; the major one being allowing firms to claim a 15 per cent deduction on investments of Rs 100 crore or morein plant and machinery before March 31, 2015, which they can set off against their profits for computing tax. This is aimed at kick-starting investments by incentivizingcorporates to set up new units or expand capacities within the next two years. Others being an infrastructure debt fund, rural infrastructure development fund, multilateraldevelopment banks, new ports, new industrial corridors, a special dispensation for roads network in the north-eastern region, revving up the India Infrastructure FinanceCorporation and so on.A noteworthy achievement of the budget was the clarity and stability provided to the tax structure. Direct and indirect tax regime was largely untouched, except for thejustifiable 10 per cent surcharge on tax on earnings of Rs 1 crore and above.Other policies in respect of meeting specific economic objectives - raising the savings rate which has been dropping, the offering of more incentives for housing loans, theattempts to plug loopholes, domestic and overseas, are welcome moves as well.On the inflation front, Chidambarams implicit promise is that he will conquer the high inflation that has dogged the economy for three years. The big electoral danger earlierwas a credit downgrade by rating agencies.This would have meant an outflow of billions of dollars, causing the exchange rate to crash to maybe `60 to the dollar and inducinga big jump in prices of imported items. That would have sent inflation soaring to 15%. His Budget now staves off any possibility of a ratings downgrade. Dollars should flow inand not out.A Responsible Act: Union Budget 2013-14
All in all, the Budget for 2013-14 needed to address three major concerns -it had to provide some concrete support for the ruling coalitions election platform. Second, given thesize of the current account deficit, at least in the short run it had to find ways to attract larger and more stable capital inflows. In this context, the views of the rating agencies areimportant and, given their emphasis on the fiscal situation, a credible reduction in the fiscal deficit was one - though not the only - way of achieving this. Third, the adversegrowth-inflation combination that the economy is currently dealing with requires some structural solutions - for example, with respect to food and infrastructure constraints - tobe implemented with high priority. Given the global and domestic macroeconomic conditions in which this year’s budget was presented, the budget was able to achieve abalancing act. In doing so, each of the concerns were partially addressed but not completely overlooked.DisquietsGoing forward for FY14, the budget arithmetic is based on nominal GDP growth of 13.4 per cent, total receipts of 23.4 per cent and expenditures up 16.4 per cent — all of whichappear to be optimistic. The secret to the projected lower fiscal deficit of 4.8 per cent of GDP in 2013-14 lies in some optimistic revenue assumptions.Starting with revenues, the budget has estimated a 19.1 per cent increase in gross tax collections (corporate 16.9 per cent, income 20.5 per cent, excise 14.9 per cent, customs13.6 per cent and services 35.8 per cent). The 19.1 per cent growth postulated for tax revenue should be considered achievable, given that this year will see growth of 17.8 percent, but it is worth noting that service tax revenue is expected to increase by 35.8 per cent - helped no doubt by the amnesty scheme. Of course, revenue could surprise on theupside - excise revenue this year has grown by more than 18 per cent, when manufacturing growth has been less than two per cent and inflation in manufactured goods has beenlow; indeed, excise growth for next year is budgeted at only 14.8 per cent! Nevertheless, question marks hover over non-tax revenue, since growth under this head is postulatedat 32.8 per cent. Further, the overall revenue estimates are dependent on (1) A Rs 558 billion divestment target and (2) Telecom revenues pegged at Rs 400 billion.These are dependent on market conditions.As regards expenditure, the budget has estimated a 16.4 per cent rise in expenditures led by a 29.4 per cent rise in plan expenditure and a 10.8 per cent rise in non-planexpenditure. Key points to note (1) A 10.3 per cent contraction in the subsidy bill. This appears conservative as of the total outlay of Rs 650 billion on fuel subsidies; arrears forFY13 stand at Rs 500 billion. (2) Similar to FY13, plan expenditure could once again get the axe if the govt is to adhere to its fiscal targets.ConclusionThe stock markets immediate negative response, driven by higher corporate taxes and perhaps by the size of the gross borrowing programme which has upset bond markets(and therefore hit bank stocks), is not a pointer to the quality of the Budget. Among other things, the gross borrowing figure has within it a buy-back programme for shorter-tenure debt; net market loans and short-term borrowings will in fact be two per cent lower than in the current year. So while the bond market too has responded negatively, thiswill hopefully be a temporary phenomenon.Another concern of the market regarding tax implications of investing through Mauritius has been eased by the finance ministrytoday eased investor fears over tax residency certificates (TRCs) of those investing from Mauritius, which resulted the BSE Sensex to bounce back from three months low onFriday (2nd March 2013).The Finance Minister, P. Chidambaram, presenting his eighth Budget, has made the best of a bad situation and presented a very carefully directed Budget that doesn’t rock theboat. Having said that, equally true is the fact that a budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth.However the fact that fiscal consolidation is back on track and the Government has managed to put a leash on its expenditures is something that needs to be commended.
BUDGET IMPACT ON SECTORS Positive NegativeAutomobile SectorMeasure: Rs 14,883 crore allocated to Jawaharlal Nehru National Urban Renewal Mission (JNNURM) for purchase of 10,000 buses under the city modernisation scheme. TheExcise duty on Sports Utility Vehicle (SUVs) hiked from 27% to 30%. The Tax Concession on spare parts of environment friendly vehicles extended till Mar 15Impact: This is a Positive move for the heavy commercial vehicle industry, which is currently under severe stress on account of declining sales. The Increase in the Excise duty inSUV segment will impact the encouraging sales of the automobile sector. Extension of tax concession on spare parts of eco-friendly cars is only marginally positive for Mahindra &Mahindra that manufactures electronic car – REVA.InfrastructureMeasure: Setting up of a regulatory authority for roads, target of 3000 km of project award in first half of FY14, encouraging IDFs, credit enhancement by IIFCLImpact: A regulatory body would ensure timely clearances, fund allocation for the projects and the companies may now expect faster arbitration. In addition, encouragingInfrastructure Debt funds would provide a scheme for takeout financing. This would mean that banks could exit projects after some of time and in turn lend to other projects.Besides, credit enhancement by IIFCL would provide access to low cost funds for the infrastructure companies.TextileMeasure- Removal of excise duty on cotton and manmade sector (spun yarn) at the yarn, fabric and garment stages. incentivise Apparel Parks by proposing the Ministry ofTextiles to provide an additional grant of up to Rs10 crore to each Park.Impact- Garment-manufacturing companies would save close to 2% of their sales, which would directly translate into earnings for the companies. Pressure on pricing of garmentswill be lower and garments companies may cut prices which will boost demand in the coming quarters. As per the estimates the demand in the entire value chain may go up by 3-4%, thereby increasing prospects of enhanced earnings.HospitalityMeasure: The Budget has proposed to levy service tax on all air-conditioned restaurants.Impact: The restaurants business has been doing fairly well in the last three to four years. With the imposition of service tax, the company would pass on the increase in servicetax by increasing prices of food items which may lead to lower footfalls. This would impact the companys revenues in the coming quarters.CementMeasure: Awarding of 3,000 km of road projects in first half of FY14, Boost to Housing segment by giving tax deductions and allocating funds and no increase in excise dutyImpact: The Sector was witnessing dwindling demand and the move will help assured sufficient off-take of cement by giving fillip to the infrastructure and housing sector. Anadditional deduction of interest up to 1.00 lacs apart from 1.5 lacs to home loan buyers will provide a boost to construction activity. Overall positive for cement industry inspite ofthe fact the increase in freight rates by 5.8% in railway budget.Power SectorMeasure: Upward revision of the import duty from 15 to 4% on steam coal imports, exemption of levy of custom duty on imported fuel for power plant and concessional CVD ofone percent to steam coal for a period of 2 years till March 31st, 2014. Permitting power companies to tap External Commercial Borrowing (ECB) route to part re-finance rupeedebt on power plants and increasing power sectors tax-free bonds limit to Rs 10,000 crore from Rs 5,000 crore. To reduce the overall debt cost withholding tax on ECB to 5%from 20% for three yearsImpact: The move would go a long way in incentivising the power sector and benefitting the end consumer.
Indonesia: February inflation surge ‘one shot increase’Bank Indonesia (BI) says that the inflation in February reflected temporary abberationsonly and cited benign core inflation during the month. Monthly inflation rose to 0.75percent in February, the Central Statistics Agency (BPS) reported. The figure took year-on-year inflation to 5.31 percent; close to the central bank’s limit of 5.5 percent.Thailand economic recovery picks pace in fourth quarterThailands economic growth exceeded expectations in the last three months of 2012 as itcontinued to recover from the previous years devastating floods.Gross domestic productsurged 18.9% in the October-December period, from a year earlier. Most analysts hadforecast a figure close to 15%. Compared with the previous quarter, the economy grew by3.6%.Philippines: 2014 budget deficit set at 2% of GDPThe Development Budget Coordination Committee (DBCC) on Thursday (28th Feb) saidthat it is committed to keep the budget deficit to 2 percent of the country’s gross domesticproduct (GDP) in 2014. It clarified that while the budget deficit program has increasednominally over the last three years, the Aquino administration nonetheless expects thecountry’s debt burden to decrease by an average of 1.2 percentage points a year. This willbring the outstanding debt-to-GDP ratio down from 50.9 percent in 2011 to 46.2 percent in2014.South Africa: January trade deficit at recordSouth Africas trade deficit widened to a record in January as imports ofmachinery, electrical appliances and mineral products soared, the SouthAfrican Revenue Service said.The trade gap expanded to R24.53bn in January,from R2.7bn in December, more than double analysts forecasts.Brazil: Tax Breaks for Telecom CompaniesThe federal government of Brazil has announced plans to allowtelecommunications companies tax breaks provided they make additionalinfrastructure investments totaling R$16 billion to R$18 billion before 2016.However in order to qualify for the waivers, the telecom firms will have to meetcertain criteria.The proposal will exempt any companies wishing to extend theservice of 3G and develop 4G networks from the PIS (Social IntegrationProgram), COFINS (Contribution for the Financing of Social Security) and IPI(Industrial Products) taxes.Chile: Unemployment hits six-year low in ChileUnemployment dropped to its lowest rate in six years during the November toJanuary period, according to data released by the National Institute of Statistics(INE). Unemployment sat at 6 percent for the three-month period, falling 0.1percent from the previous quarter and 0.6 percent from the same period lastyear.The statistics agency attributed the dwindling figures from the lastquarter to the southern hemisphere’s summer season, which boosted jobs infarming, hotels and restaurantsEmerging Markets
InFocusAdmissions open! New Banking GuidelinesOn 22nd February, the RBI issued the final guidelines for licensing of new private sector bankswherein entities both from private and public sector shall be eligible to set up a bank through awholly-owned non-operative financial holding company (NOFHC). The new set of licences comesafter over a decade, as previous licences were issued in 2001-02 when two new banks, namelyKotak Mahindra and Yes Bank got licences. The Market has welcomed the new guidelines as abalanced approach on RBI’s part to allow a broader set of entities in the banking sector, besidesensuring maximum prudential norms to avoid any systemic risks.Following this, a host of entitiessuch as large business houses, brokerages, NBFCs and state run entities are likely to apply forbanking licences. The norms may not have discriminated against any particular category, but itsstringent conditions would most likely keep non-serious players out of the fray. A business group,which is keen on applying for a license should have a minimum paid up equity capital of Rs 500crore. At the start of banking operations, NOFHC through which the business house would carry outbanking business, should hold a minimum of 40 per cent of the equity capital of the bank with alock-in period of five years. Later, it has to be brought down to 15 percent within 12 year from thatonwards. Secondly, guidelines requirenew banks to open at least 25 per cent of branches inunbanked rural centers .Many believe, for a new banking entity, it will be stumbling block as thebrick and mortar model especially in rural areas take time to turn profitable. Given that financialinclusion should be the core of their strategy, aspirants for new bank licences will have to beprepared for a long haul before they hit the profitability highway. The new norms do not give anyrelaxation on capital adequacy, SLR and cash reserve ratio CRR. Given that the new banks would becompeting with existing ones, garnering deposits would not be easy for them either. In line withexisting domestic norms, the new bank should also achieve priority sector lending target of 40%.Interestingly, most of the existing banks are failing to meet the target. Such stringent norms wouldsurely discourage many from applying for a licence Furtheranalysts say quasi public sector NBFCslike PFC, REC and IDFC have been created with a “special purpose” and if they convert into a bank,then the purpose is defeated. Besides, infrastructure lending is very different from the kind oflending banks undertake.Given that no more than four to five licences would be issued in thisround, analysts believe RBI may show a bias towards large corporates with good track record incorporate governance and deep pockets.Open ForumFeds QE: Time to cut back?What really spooked the markets last fortnight was the apparent rethink bythe high-powered US Federal Open Market Committee (FOMC) on the costsand benefits of the third round of quantitative easing (QE3). The minutesreleased on February 20 of the FOMCs monetary policy meeting held onJanuary 29-30 showed that many committee members were in favour ofending, or at least tapering, the bond-buyback programme earlier than themarkets expected. The US central banks massive bond-purchase scheme,through which it purchases $85 billion of bonds from the open market (andreleases an equivalent amount), is currently open-ended, and was earlierexpected to end only if there was a significant improvement in the labourmarket.Some potential costs of the programme are somewhat obvious. The strategyof increasing base money by a humongous $85 billion a month (it works outto $1 trillion year) could at some point set off an inflationary spiral that couldbe difficult to control, also leading to a sharp build-up in inflationexpectations. This is yet to happen. The market for inflation-indexed bondshas shown some increase in inflation expectations from 2010 but that hasbeen far from a surge.The other risk that hasnt really been discussed much is the threat to financialstability. Low interest rates and abundant liquidity usually lead to a rise inthe issue of dodgy financial securities, and this time is no exception. Junkbond issuance has been rising sharply as has been the supply of payment-in-kind bonds, typically issued by distressed companies who wish to defercoupon payments and pay interest in additional bonds (hence in kind) ratherthan cash.
On the other side of the balance, the benefits of QE seem to have reduced considerably. The first two rounds of QE (late 2008 and second half of 2010) came at a time whendeflation was the big risk and real interest rates threatened to go through the roof. Massive monetary easing helped stabilise real interest rates by both suppressing nominalinterests and pushing up inflation expectations. However, over the last few months, real bond yields have actually moved slightly higher.Then, there is the issue of potential capital losses. Currently, the US Fed earns substantial interest income from its bond holdings and is sitting on unrealised capital gains ofabout $250 billion. But capital gains could quickly turn into losses if the interest rate cycle reverses, especially since the composition of the central banks bond portfolio hasshifted towards higher duration (more interest rate sensitive bonds). The more the Fed buys bonds, the larger is the expected amount of capital losses. The Feds paid-up capitalis $50 billion and there could come a point where growing capital losses could lead to technical bankruptcy. The ramifications of a technically bankrupt central bank are yet tobe known.What does all this mean for the future of QE and the markets? The stance the Fed takes depends on Chairman Ben Bernanke (and other heavyweights like Janet Yellens) viewson the subject. In his testimony last week to the US Congress, Bernanke recognised the costs of continuing with QE but suggested that the benefits still outweighed the costs.Thus, an abrupt end to QE is unlikely but some reduction in the size of the programme is possible. Emerging markets will have to adjust to a situation in which the flow ofliquidity into their asset markets whenever global investors get into a risk-on mode reduces going forward .This is particularly critical for India given the size of its currentaccount deficit and the growing reliance on short-term liquidity-driven flows to fund this. When the markets begin to price in expectations of a cut or halt in the liquidityprogramme, the rupee could see depreciation pressures build up.On a slightly different note, bad news is at least temporarily good news for the euro. The impasse over the Italian elections has managed to shed a good four big figures from theeuro-dollar and has, in the process, reduced the overvaluation in the European common currency. The flip side is the fact that Italys failure to either continue with agovernment led by a hard-nosed technocrat or vote into power a coalition that would be on the side of continued internal reforms is a reminder of two things. First, Europesproblems are far from over and second, the internal constituency for fiscal consolidation is at best weak.The recent riots in Spain was primarily about corruption charges against the ruling party and prime minister Rajoy but there was a strong undercurrent of resentment againstthe severe austerity measures that Rajoy demanded.The promise that European Central Bank President Mario Draghi made of doing whatever it takes to ensure the euros survival might have prevented an implosion in the region.It has, however, not made the road ahead for Europes peripheral economies any less rocky. The prospect of deterioration in Italys fiscal situation and worse-than-anticipatedfiscal prints from Spain could rock the continents boat yet again and lead to another wave of anxiety. With Germanys election around the corner and continuing gridlock overthe US fiscal deficit, the search for a safe haven is likely to continue.Source: Business StandardOpen Forum
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