86 i chronicle


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Cover Story Why we need to curb the menace of black economy
Outlook Commodity Outlook 2014
Stats HSBC India Purchasing Manager Index
Emerging Country Emerging Countries Outlook 2014
In Focus Is free water supply bad economics?

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86 i chronicle

  1. 1. Investeurs Chronicle January 2014, Volume: 86
  2. 2. Cover Story If one had to choose a problem that needed fixing in 2014, I would pick the cash economy, in black, that lies outside the banking system. It distorts everything, from wages and prices to taxes and profits. It hurts and destroys the moral fibre of the economy. It creates and preserves vested interests while widening the gap between the rich and the poor. Total black money outflow from India was nearly $343 billion (nearly Rs. 21 lakh crore at dollar/rupee value at 62) during 2002-2011, according to a report by Global Financial Integrity (GFI), a Washington-based research and advocacy organization. This puts India as the fifty largest exporter of illicit money, the report adds. In 2011 alone, India suffered black money outflow of $84.93 billion (nearly Rs. 5 lakh crore), placing it at the third place. Crime, corruption and tax evasion drained $946.7 billion (nearly Rs. 57 lakh crore) from the developing world in 2011, up more than 13.7 per cent from 2010. Anonymous shell companies, tax haven secrecy, and trade-based money laundering techniques drained nearly a trillion dollars from the world's poorest in 2011, at a time when rich and poor nations alike are struggling to spur economic growth. The challenge is tough and the motivation to curb it is low, but the more it thrives, the more it pushes us back into the dark ages, as a country, as an economy and as a society. Hiding from the taxman is an old story. In 1974, the maximum tax rate with surcharges was an alarming 97.5%. Tax evasion was rampant. In the mid-1980s, tax rates were brought down to 50%. In 1997, in what was hailed as a dream budget, the rates where rationalised to three slabs of 10%, 20% and 30%. However, the culture of tax evasion is deep-seated. Several high-income earners are audacious tax evaders, who have not been brought to book. Bringing down the tax rates further and ensuring compliance are the first steps to reining in the black economy and preventing it from expanding. This will remain the toughest step till the elections are fought with cash and unaccounted for money. The challenges for the investor are many. The cash economy distorts asset prices severely. The steady rise in prices of land, property and real estate comes from the uninterrupted inflow of cash. A market that sees liquidity and demand is unlikely to witness a correction in prices. This lulls the retail investor into believing that real estate as an asset class has low risk, high return, and low probability of fall in value. It also sets the price of this commonly sought asset beyond the reach of the common man. Why we need to curb the menace of black economy
  3. 3. Cover Story Besides, the steady increase in price creates the harmful conversion of 'white' money into 'black'. Rent seekers step in, killing the competitive market, where demand and supply determine prices. Land is acquired by vested interests; the mafia operates in coercing unwilling sellers, big money moves into construction, and soon the asset class funnels and funds several activities of the black economy. Genuine economic activity that requires land and real estate suffers and reforms become tough to undertake due to entrenched vested interests. The same is true of gold as an asset class. It attracts a high level of cash, raising its price. The common investor joins the bandwagon as the prices move up steadily and steeply. As the cash economy expands to buy more and more gold, it hurts the nation and currency by importing gold to meet its needs. India has a current account deficit primarily because it imports oil. We meet this deficit partly from technology and services exports, and partly from capital inflow through FII and FDI investments. The black economy worsens these problems. It imports gold which, in turn, increases the deficit. Gold purchased for hoarding is actually a capital investment, an outflow of capital that we cannot afford when we have a large import bill to pay. The cash economy splurges on expensive fuel guzzling cars and personal vehicles, another pet spend of the rich. This increases the import bill for oil, and also hurts the country more because petrol products are subsidised. The hoarders of black money get away with it by paying less than the market price for fuel, while using precious foreign exchange to buy and stash away gold. The distortion does not end here. A good amount of black money also returns to India through various tax havens disguised as FII flow. A global round trip is possible through clever tax structures, and the country's need for dollars to pay for imports and meet the deficits means we implicitly encourage this flow. It is the audacious rich, draped in designer brands, driving expensive cars into luxury high-rise homes, embellished with expensive fixtures. The image of the evader is the smug face with expensive shades and confident swagger. The danger to the society is that some of these robbers become icons for the young. The aspirations of the youth are tuned to becoming ostentatious consumers of the good things in life, the means be damned. The good, old innovation is no longer the basis for building a successful empire. Acquiring assets through promises of mutual favour, building businesses by destroying competition and making profits by evading taxes are all par for the course. If we have converted ourselves from an economy, which had the highest potential for enterprise, to one of crony capitalism, we have to blame the society's approval of ill-gotten wealth. The black economy hurts the common man even more by denying money for important needs. Since a good part of the hidden wealth has moved into gold, real estate and consumption, the money for nation-building is less. The money for augmenting supply in agriculture and industry is not available. The government runs a deficit since its income runs so short of its needs. The banking system is smaller than it should be. The capital markets that can channelise money into projects remain stunted. Inflation, unemployment and inequality are high, while capital investment and incomes are low. Vested interests are not destroyed easily. They hold up reforms and change. Only a crisis or war decimates them. In a country with a large population of youth, there are two possible outcomes. Either the moral corruption entrenches itself as youth join the black economy, or there is a rise in revolt and protest. Source: Economic Times
  4. 4. The year 2013 has seen a lot of unpredictability in the commodity market. The concerns over world economic growth, geopolitical instabilities, divergent monetary policies by the developed and the developing nations as also currency fluctuations all of which combined to take a heavy toll in terms of demand slowdown, price volatility, subdued investor interest and project delays in some cases. In 2013, only a handful of commodities managed to log in gains, including cocoa, soybean meal, orange juice, RBOB gasoline and Brent. In 2014, Fed tapering will not be a big concern as US and global macroeconomic scenario is improving. Silver and crude oil may outperform in 2014 as they were under performers in 2013 and demand may boost from the industrial sector. Base Metals demand may pick from second quarter of 2014, copper, aluminium and nickel may be the out-performers in 2014. But Gold may have to bear the brunt of tapering decision by Fed, a bigger downside is expected in gold in first quarter, but later on its demand will grow further. On agriculture commodities front, India has enough stocks of wheat, but paddy crop was affected by flood and drought in many parts. There is a marginal gap in demand and production of pulses. Sugar decontrol and bailout package will boost sugar production & industry sentiments. We can see a ray of hope for commodity market after 2014 General Election, if a stable government is formed in the centre. HSBC India Purchasing Manager IndexStats Outlook-Commodities Gloss Clearing House An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer.
  5. 5. Emerging Economies Outlook~2014 Emerging market accounts for more than 80% of the world’s population and half of the world’s economy, yet there is huge difference in these economies. Given the uncertainties of a big election year, going bearish on emerging markets may have become the consensus call. Five large emerging-market countries — India, Brazil, Indonesia, Turkey and South Africa -all go to the polls in 2014. But strategists at Bank of America Merrill Lynch expect “a modest rebound” for emerging markets. “Following flat lined growth since 2007, the emerging markets should prove resilient in 2014, with modest growth recovery and rising productivity. Emerging market GDP is expected to rise 4.9 percent in 2014 with modest returns of 2.9 percent, 0.7 percent and 0.3 percent for local debt, emerging market foreign exchange and external sovereign debt Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. Moreover, several major emerging economies were hit hard after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflows. These countries all have large current account deficits - the broadest measure of the trade gap - which means that they rely on external financing. Emerging economies will grow faster in 2014 – closer to 5% yoy for several reasons. Brisker recovery in advanced economies will boost imports from emerging markets. The Fed’s exit from QE will be slow, keeping interest rates low. Policy reforms in China will attenuate the risk of a hard landing. And, with many emerging markets still urbanizing and industrializing, their rising middle classes will consume more goods and services. Still, some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks. The better-performing emerging markets are those with fewer macroeconomic policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the Gulf oil-exporting countries. In sum, the global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anemic in most advanced economies, and emerging-market fragility including China’s uncertain efforts at economic rebalancing could become a drag on global growth in subsequent years. The medium term slowdown in the growth trend of emerging and developing markets is more dramatic. As China, India, Brazil, and others mature from rapid, investment-intensive ‘catch-up’ growth to a more balanced growth model, the structural ‘speed limits’ of their economies are likely to decline, reducing emerging market growth from 4.3 percent, on average per year, from 2014-2019 to 3.2 percent from 2020-2025.
  6. 6. In FocusForex Is free water supply bad economics? Arvind Kejriwal, the newly elected Chief Minister of Delhi has announced 666 liters of free water per day (or 20 kilolitres of water a month) to every household connected with a metre. Is this move economically viable for the Delhi Jal Board (DJB)? Is it necessary to provide free water supply to every household? Since Delhi does not have any reliable perennial water source, where will the water come from? Water is increasingly becoming an economic good worldwide because of its storage and distribution costs. Rainwater is harvested in dams and reservoirs to be supplied for various purposes. At the same time, groundwater is exploited at an alarming rate; it also involves huge drilling and electricity costs. The cost of management and distribution of water for urban households is massive. This free scheme reportedly is going to cost about Rs 160 crore per annum at current prices for the DJB and is expected to increase manifold for a variety of reasons. How is DJB to manage this cost? According to one estimate, the DJB’s net cash revenue surplus increased from Rs 40.56 crore in 2007-08 to Rs 233.57 crore during 2013-14. The financial condition of DJB will now run into a mess. Delhi does not have the luxury of a perennial surface source of water. It needs water from the neighbouring State of Haryana which is guaranteed. Besides, the groundwater stock is precarious in the State. Owing to the increased scarcity of water, the present supply of water even in posh areas is only about 509 litres per household per day, below the promise made by this new government. Further, this scheme pronounces that if a household consumes more than 20 kilo litres of water, it will have to pay for the entire water consumed with 10 per cent additional charges. How will this work? Who will monitor this? Will it not encourage consumers to tamper meters? If the increased rates for the non-subsidised consumers pay for the subsidy to others, there will be no subsidy burden for the service provider as a whole. But if the increased rates lead to a decline in consumption by the non-subsidised consumers, there would be a decline in revenue. This in turn would hurt the economic health of the service provider. It is in dealing with such a situation that the AAP would reveal whether its water initiative is a one-off election related measure or part of a larger and more nuanced understanding of the role of subsidies. Data from 23rd December 2013 to 3rd January 2014 Sensex Nifty 21,101 .03 20,851 .33 6284.5 0 6211.1 5 Gold (10 gm) Silver (1 Kg) 30225 30490 43670 45500 Crude Oil ($/barrel) Dollar/INR 111.56 106.89 61.99 62.41
  7. 7. About Investeurs Consulting Private Limited For a good business, finance is as crucial as vision, management and product. Intuitively then Business Finance plays a vital role in the business prosperity. We, at Investeurs Consulting Pvt. Ltd understand and appreciate the vitality of this discipline and the responsibility that comes with it. As Business Finance Consultants we realize that finance is an enabler that contributes significantly towards realizing your business goals. We bring to the table 18 years of vast and vivid exposure to different businesses, a profound understanding of business and financial dynamics and excellent relationship with banks/ financial institutions. Domestic Trade Finance: Negotiation of Inland Letter of Credit International Trade Finance: Buyers’ Credit and Suppliers’ Credit Capital Investment: Project Funding and Term Loan Working Capital Management Factoring Private Equity Rating Assistance Team Chronicle Akanksha Srivastava akanksha@investeurs.com Nidhi Gogia nidhi@investeurs.com Harpreet Kaur harpreet@investeurs.com Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided. Investeurs Consulting Pvt. Limited S-26, 27, 28, 3rdFloor,Veera Tower, Green Park Ext. New Delhi-110016, www.investeurs.com