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MUMBAI: First, the bad news. There will be no immediate cut in home loan rates. Corporates may have to pay a little more for short-term money. So will investors borrowing to punt in IPOs. Chances are short-term rates in the money market will harden a little.
But there’s good news for software firms and other exporters hit by the rising rupee. They will have far greater flexibility to cover currency risk on anticipated overseas orders. Also, for the first time, corporates have been allowed to write currency options—a tool that firms with smart treasury operations and right risk appetite can use to protect margins. Moreover, banks will have to explain to home loan takers the rationale behind any rate hike. There could even be a new law on fair lending practices to discipline banks.
However, these are tricky times for banks, bond houses and financial markets. There could be more surprises in store as the Reserve Bank of India (RBI) battles with spiralling money supply. On Tuesday, they got the first dose of monetary tightening as RBI governor Yaga Venugopal Reddy hiked the cash reserve ratio (CRR) of banks by 50 basis points to 7.5%. This will be effective from November 10.
CRR is a slice of customer deposits that banks set aside as cash. Since they earn no interest on the money, a CRR hike is like a tax on banks. More significantly, the measure helps to drain out excess liquidity from the banking system. Tuesday’s hike will lower liquidity (and money supply) by Rs 16,000 crore. This, coupled with the customary cash demand during the Diwali season, may cause some tightening in the money market.
Mr Reddy perhaps feels that more foreign money will flow into stocks and other sectors, particularly after the US Federal Reserve lowers interest rates. The CRR hike is thus a pre-emptive policy step before the domestic financial markets are inundated with fresh inflows.
“We want the financial markets to be prepared for unconventional responses from us to meet unanticipated global shocks. We are going through a positive growth phase and we want this good story to continue. We are prepared to take any action...The problems are unprecedented and the type of measures are unconventional,” Mr Reddy told the media after presenting the policy.
But Mr Reddy will have to grapple with a different problem if inflows turn out to be a fraction of what he anticipates. At that point, he may be forced to cut short-term benchmark rates.
NEW DELHI: Finance Minister P Chidambaram on Tuesday said India is facing the problem of enormous capital inflows and indicated the government may take steps to monitor and regulate portfolio investments by foreign entities.
"Today in India, we face a problem of enormous capital flows. This is a completely new situation for us. We welcome capital but we must learn how to manage capital, how to absorb capital," he told captains of industry at the Fortune Global Forum here.
"We need to put in a place approapriate regulations, we have to put in place risk management systems," he added.
India, the world's second-fastest growing major economy, has been foreign institutional investments surge to a record 17 billion dollars this year. In October alone, FIIs have pumped in nearly 8 billion dollars. The flows soared particularly after the US Federal Reserve cut a key interest rate on September 18.
Referring to the subprime mortgage crisis in the US that rattled financial markets worldwide in July and August, Chidambaram said perhaps one of the reasons why the crisis hit the US economy was because regulation fell behind innovation.
"We don't want regulation to fall behind innovation... Regulation and derisking the system have to be one step ahead of innovation and human inventiveness... we cannot afford shocks, (and) to avoid shocks regulations we must stay one step ahead of innovation," he said.
The finance minister also expressed concern over the growing protectionist tendency among some advanced nations in matters related to global trade.
"Although through globalisation of trade in recent years, our exports have grown on an average 20 per cent in a year, but there are some aspects that worry us," he said, adding while tariff barriers were being reduced, non-tariff barriers were being erected.
Chidambaram also said India's investment to GDP ratio has gone up to 35 per cent. With growing workforce and savings, the ratio would increase to 40 per cent in 4-5 years, he added.
The consumer durables sector is expected to grow a healthy 12 per cent in 2007-08, the Federation of Indian Chambers of Commerce and Industry (Ficci) has said.
This is at variance with the steep decline shown by the Index of Industrial Production (IIP) for August and earlier months.
Ficci’s latest consumer durables survey shows that the rural market, which accounts for nearly 70 per cent households, is witnessing a strong annual growth of 25 per cent, even as the urban market is growing 7-10 per cent.
According to Ficci, the sector grew 11.5 per cent in 2006-07 and 8.5 per cent the previous year. The survey implies a sharp rebound in consumer spending, which challenges this year’s performance as captured by the IIP.
According to the IIP data for August, the consumer goods sector grew 0.5 per cent, as against 5.69 per cent in July, and much lower than August 2006. This was the lowest growth the segment had seen till then and came on the back of higher interest rates, which impacted demand, the IIP showed.
The data were contested by consumer goods companies, which said their sales were robust. The industry is expecting good sales in the ongoing festival season.
The Ficci survey, involving representatives of consumer durables industry, allied industry organisations, government agencies and public sector undertakings, revealed the sector was poised for a quantum leap due to technological improvements, falling prices due to competition, aggressive marketing and declining import tariffs.
According to the survey, the fast-growing segments that have led the growth are high-end products like flat-panel televisions (TVs), LCD TVs, plasma TVs, slim CRT TVs, frost-free refrigerators, fully automatic washing machines, split air-conditioners, DVD players, microwave ovens and home theatre systems.
“The findings reflect the changing dynamics of consumer behaviour – luxury goods are now being perceived as necessities with higher disposable incomes being spent on lifestyle products. There is a discernible shift in the consumers’ preference in favour of higher-end, technologically superior branded products, the demand being spurred by increasing consumer awareness and preference for new models,” said the survey report.
New Delhi: Subsidiaries of multinational companies (MNCs) and foreign companies looking to establish business in India would be able to have a chief who is not a resident of the country. The Ministry of Corporate Affairs, which is working on a new company law, is likely to relax the existing requirement where the managing director of an MNC subsidiary must be an India resident. The new law is likely to propose that at least one director on the Board should be a resident. The Ministry is hoped to propose a separate chapter for such companies under the new law on the lines of what has been suggested in the Concept Paper on Company Law. A special chapter, which is being dedicated to foreign companies, suggests various regulations to be followed by such entities, including maintenance of accounts, filing of accounts with Registrar of Companies, cost audit, inspection, investigation, registration of charges, and creating debenture trusts. The proposed provisions will apply not only to companies doing business in India, but also those with a share transfer or share registration office in the country.
Special economic zones (SEZs) are expected to get new concessions related to service tax exemption on more activities. Sources said the commerce department was discussing the proposal with its revenue counterpart. The benefits, if firmed up, will be enjoyed by developers and units in SEZs.
The SEZ rules allow service tax exemption only on a limited set of authorised operations, which are activities carried out inside the zone and approved by the inter-ministerial Board of Approval (BoA) for SEZs. As a result, SEZ developers and units engaged in exports do not get service tax concession on a host of other activities.
For example, an exporter outside a zone is eligible for service tax exemption on port services, but his counterpart in an SEZ is not. Significantly, the annual supplement to the foreign trade policy, released in April this year, provides for service tax exemption to SEZ units. The commerce department is of the view that SEZ developers and units are getting far less service tax concessions than exporters who are out of these zones. Analysts point out that exporters outside SEZs enjoy Cenvat credit against service tax paid on a host of services subscribed to while engaging in export-related activities. In addition, the department of revenue recently permitted service tax exemption on seven services used by exporters. The commerce department hopes this will help the revenue department expedite the process of granting service tax exemption.
Hyderabad: Maharashtra emerges as the top VAT (value added tax) collections state in seven States in the South, Western and Central regions with Rs 14,144.42 crore in the first half of the current financial year as against Rs 12,919.71 crore, showing a growth of 9.48 per cent. Andhra Pradesh, which ranks third in the list after Tamil Nadu, recorded the highest growth of 21.3 per cent by registering collections to the tune of Rs 9,159.62 crore during the period as against Rs 7,551.39 crore in the corresponding period last year.The increase was Rs 1,608.23 crore or 21.30 per cent.
On the other hand, the State fell short of the budget target by about five percentage points. Interestingly, the first half figure for the current fiscal equalled the full year collections of Rs 9,649.27 crore in 2003-04. Andhra Pradesh was among the first States to implement the VAT regime in June 2003, which incidentally marked the advent of Congress Government.Tamil Nadu, a late entrant to the VAT regime, posted the lowest growth rate among the seven States at just 1.56 per cent. It grew from Rs 9,582.72 crore to Rs 9,734.15 crore.Collections in the other four States (with growth rate in brackets) are: Karnataka - Rs 6,405.19 crore (15.12 p.c.); Kerala - Rs 4,264.49 crore (9.33 p.c.); Gujarat - Rs 7,296 crore (18.05 p.c.); and Madhya Pradesh - Rs 2,738.41 crore (11.92 p.c.)
TiE will rope in VC funds and angel investors.
After witnessing a rush of early-stage venture capital (VC) funds and angel investors into the country, the government is taking steps to float a fund to make available seed capital — the earliest stage of funding a business — to entrepreneurs with innovative ideas.
This is part of an effort to have a broad programme to foster innovation and take it to global markets. For this, the government is putting together a framework for setting up an innovation promotion council. The fund’s initial corpus of Rs 75 crore will come from the Ministry of Science and Technology.
According to information, the Centre is expected to engage The Indus Entrepreneurs (TiE), a network of early-stage VC funds and angel investors with associations in the sub-continent, and Indian School of Business (ISB), Hyderabad.
The candidates for funding will be selected by all three. The ISB will be a forum where ideas will be examined and nurtured while TiE will bring in VC and angel funds which can take over once the Department of Science & Technology’s role is over.
AS Rao, adviser, Department of Scientific & Industrial Research (DSIR), said the fund would focus on product innovation and intellectual property-based solutions. “We intend to finalise the framework by March 2008,” he said.
The Centre will fund ideas at the laboratory or the proof-of-concept stage, that is, before the idea goes to the prototype or beta (testing) stage.
“If the idea goes forward, early-stage VC or angel investors will have the confidence to invest further. As and when these people take up positions to guide the company further, the Centre’s role will diminish,” Rao said.
According to industry analysts, the idea seems to have been inspired by the Israel government’s Chief Scientist model, which encompasses incubator and R&D programmes, besides investment grants.
“The aim of the government VC programme in Israel was to establish professionally managed VC funds. It was a $100-million programme to try and create an industry of seed- and early-stage VC funds,” said an early-stage investor.
Israel’s programme offered $8 million to any fund that met the criteria of other funds raised, professional management and focus. The funds had a five-year option to buy out the amount at predetermined conditions. The programme quickly established 10 such funds, of which eight exercised the option and bought out the government.
The government is planning to codify class action as law. A clause to this effect has been included in the new Company Law Bill, which is expected to be tabled in the coming winter session of Parliament.
Once enacted, the provision will empower shareholders to hold companies and their managements responsible for wrong-doing.
Though the principles of class or representative action (and derivative suits) by shareholders against managements have been upheld by various Courts in the past, these are yet to be reflected in law.
Accordingly, the ministry of corporate affairs (MCA) headed by Prem Chand Gupta has circulated a Cabinet note containing the class action clause for inter-ministerial consultation.
“We hope it will be cleared by the Cabinet soon, allowing us to table the Bill in Parliament in the coming session,” an official told Business Standard.
The need to codify class action and derivative suits in Indian law had been recommended by the J J Irani-headed expert committee, which had been tasked with framing a new company law in December 2004. It submitted its report to the MCA on May 31, 2005.
Since then, the ministry has been working on the new law, which aims to update India’s corporate laws and make them globally competitive, transparent and investment-friendly.
Corporate lawyer Naveen Goel said the current law enabled people to file public interest litigation that was limited to the violation of fundamental rights and not for civil claims or torts (the latter being the body of law that governs negligence, intentional interference and other wrongful acts for which civil action can be brought).
“This is the first such instance of a class action provision in Indian corporate law,” he added.
“This will empower consumers and investors, and discourage sharp practices by certain companies. A codified law is always easier to implement and be enforced in a court. Plus, it removes ambiguity and establishes the unequivocal intent of Parliament. Courts in India have always leaned in favour of giving effect to the law as framed by the legislature,” said leading corporate lawyer Ramji Srinivasan.
Class action is common in the developed world, particularly the United States and Europe. In the US, tobacco companies have had to bear massive awards in giant class action suits that held them responsible for misleading smokers about the harmful effects of cigarettes.
Noted lawyer Pavan Duggal said companies will have to start preparing for similar class actions suits in India and set aside funds for meeting any eventualities. “Tobacco, alcohol, drug firms and infotech companies face a high risk for class action,” he said.
Another lawyer said one emerging area for class action suits could be mobile handset companies.
“Some studies claim that there are ill-effects from sustained usage of mobiles. Till now there is nothing firm on this, but a few years later it will become possible to claim damages,” he said.
The Andhra Pradesh Government has decided to infuse around Rs 750 crore to develop infrastructure in 39 special economic zones (SEZs) of the 54 cleared by the Centre.
The State Major Industries Minister, Ms J. Geetha Reddy, said that these investments would be to develop necessary infrastructure such as water supply, connectivity through roads and dedicated power supply. The Chairman and Managing Director of Andhra Pradesh Industrial Infrastructure Corporation (APIIC), Mr B.P. Acharya, said that the State is likely to secure Central Government approval for the ambitious Integrated Petroleum, Chemicals and Petrochemical Investment Region, planned between port cities of Kakinada and Visakhapatnam, along the State''s coast.
If this project comes through, the Central Government may invest about Rs 8,000 to Rs 9,000 crore in this region to support other major projects coming up near by.The State is likely to consider allotment of 10 per cent of land in the special economic zones (SEZs) for small and medium sized companies with discount.The State Information Technology Department had made out a case in favour of IT sector arguing that these companies would find the going tough to acquire land at current competitive market rates.
NEW DELHI: The government is all set to announce the seventh bidding round for exploring about 75-85 oil and gas blocks under the New Exploration Licensing Policy (NELP). The announcement, expected on November 5, would incorporate several changes in terms and conditions to avoid confusions that occurred while implementing production sharing contract (PSC) with RIL for its KG basin gas find.
Sources said the price discovery process on arm’s-length basis would be adopted in the future Nelp contracts only after the approval of the price formula or basis by the government. The price formula (or basis) for future NELP would be structured in such a way that there would be a long range variation in the biddable component.
It is understood that PSC for NELP-VII would include several other recommendations of the empowered group of ministers (EGoM) constituted to resolve gas pricing and allocation issues with reference to RIL’s natural gas find in the D-6 block of the KG basin. “Decisions taken by EGoM are being incorporated for the seventh bidding round under Nelp, which is proposed to be launched later this year,” the petroleum ministry communicated to the Cabinet secretariat.
When contacted, Directorate General of Hydrocarbon DG VK Sibal said: “November 5 has tentatively been fixed for announcing NELP-VII.” He did not comment on the exact number of blocks to be offered in the round as the process of fixing the number was still on.
Sources said the identified blocks for NELP-VII are located in the Rajasthan basin, Cambay basin, Himalayan Foreland and Punjab basin, Ganga basin, Kutch basin, Saurasthra basin, Vindhyan basin, Mumbai Offshore basin, Kerala-Konkan basin, Purnea basin, Bengal basin. Mahanadi basin, Krishna-Godavari basin, South Rewa basin, Palar basin, Assam-Arakan basin, Deccan Syneclise, Cuddapah basin and Andaman basin.
It is likely that some identified blocks would be dropped in this round due to security concerns or other considerations. It is understood that concerns have been raised by the home ministry over some of the prospective areas in Gujarat, Rajasthan, Punjab, Madhya Pradash and Jharkhand.
Pakistan has turned down five items out of the 14 proposed by India for consideration for trade across the Line of Control (LoC). While the country has agreed to consider the nine other items for negotiations, it has not yet responded to India''s request for a date to start the discussions.
The items which have been rejected by Pakistan for LoC trade are leather & leather products, juice, jam & honey, readymade tin packed foods, copper & silver items and fabricated items like ornaments of gold. The products that would be considered for exports across LoC from India are carpet rugs, handicrafts, furniture & wooden items, silk & silk products, paper machie, shawls including Pashmina, Kashmir fruits, dry fruits, Kashmir spices, flowers, Kashmiri saffron and Wazwan, aromatic plants & medicinal plants, fruit-bearing plants and other agricultural items like dhania, moongi, Basmati rice, spices, fresh fruit and black mushroom. Pakistan has been allowing imports of certain essential commodities like halal meat and few categories of live animals, garlic, potato, ginger, tomato, onion, buffalo meat, sheep and goat from India through the Attari-Wagah road route since last year. On October 1, 2007, the two sides decided to go a step further and allow trucks loaded with the identified commodities to go into each other''s territories. Earlier, the trucks were made to unload at the border from where coolies ferried the goods into India and Pakistan.
Commerce ministry is proposing to exempt more services from service tax.
Exporters could soon get another set of sops. The commerce ministry has prepared a Cabinet note for a slew of measures to help exporters, who have been hit by the appreciating rupee.
“We are preparing a Cabinet note to propose various schemes and outlays for exporters, so that exporters from India have a level-playing field. These will largely deal with remission of duties and are based on the principle that no tax should be exported. The Cabinet note encompasses all export sectors,” Commerce Minister Kamal Nath said on the sidelines of a meeting on the plantation sector. Nath added he was hopeful of reaching the export target of $160 billion for 2006-07.
Sources said the commerce ministry had proposed service tax exemption on more services. These include service tax paid to commissioned foreign agents, custom house agents, courier services and for overseas travel. “The finance ministry has in principle agreed to exempt these services,” said a source.
The finance ministry had earlier this month announced inclusion of general insurance, technical testing and analysis, and technical inspection and certification in the list of services eligible for service tax exemption/remission.
This followed a September announcement by the ministry that offered exemption from service tax on port services and transport of goods by road and railway containers from inland container depots to ports of export.
“The new proposals will help sectors like pharmaceuticals and textiles that spend a lot on commissioned agents,” said a trade analyst. According to estimates, service tax paid by the pharmaceutical sector on export-related activities constitutes nearly 5 per cent of the freight-on-board value of consignments.
Sources said the commerce ministry had also proposed an additional 2 per cent interest subvention of 2 percentage points on pre- and post-export credit. The finance ministry had announced a 2 percentage point cut on pre- and post-export credit in July. The average interest rate on such credit is between 8 per cent and 8.5 per cent.
Nath, who met business representatives of tea, coffee, rubber and tobacco sectors today, said sector-specific relief measures for exporters had also been proposed.
“We will see how certain government schemes could be reviewed to take into account the new emerging global competition for the plantation sector, especially from East-Asian countries,” he said.
Nath said a common carbon credit mechanism was being formulated for the plantation sector, which he said could act as an additional source of revenue.
Much before the SEBI crackdown to limit PN exposure to Indian market, the foreign institutional investors slashed their holdings in some of the country''s biggest blue chips by up to 6% over the past three months. The FIIs brought down their shareholding in as many as 15 companies present in the benchmark Sensex, including Ranbaxy Laboratories, Bharti Airtel, Ambuja Cement, Tata Motors and Mahindra & Mahindra, during the July-September quarter, according to an analysis of shareholding pattern in these companies. In the meantime, foreign investors raised their stake in 11 other Sensex companies, including HDFC Bank, ACC, Larsen & Toubro, HDFC and Reliance Industries, by upto 4%. The investment remained unchanged in the State Bank of India. FII shareholding in Ranbaxy Laboratories reduced to 14.88% in the quarter ended September 30, as compared to 20.71% in the corresponding period last year. Telecom major Bharti Airtel witnessed a decline of over 5% in FII holdings during the reviewed quarter to 26% from 31.5% in the previous there months ended June 30. While Ambuja Cement, Tata Motors and Mahindra and Mahindra saw FIIs reducing their holdings by 4.64%, 2.43 per cent and 2.29 per cent, respectively.
NEW DELHI: Gas transportation majors like GAIL and RIL that are laying cross-country gas pipeline infrastructure would be required to meet certain conditions to avail of the 10-year tax holiday. These include making available one-third of the total pipeline infrastructure capacity to another entity for use on common carrier basis. The other entity must not be associates of the assessee.
Companies may also have to fulfil some additional conditions to enjoy the tax benefit under section 80-IA of the Income-Tax Act. The finance ministry has sought the petroleum ministry’s suggestions for including additional conditions as eligibility criteria for the tax benefit, a source said. The Central Board of Direct Taxes (CBDT) has powers to prescribe any other additional conditions, he added.
The tax benefits would be extended to projects that have started operating on or after April 1, 2007. Only companies or a consortium of companies registered in India can avail of the benefit. Such entities would also be required to get downstream regulator’s approval, besides being notified by the petroleum ministry, a source said.
The criterion of 33% sharing under common carrier principle is on lines of the stated policy. Most companies, laying new trunk pipelines, would factor-in the guideline.
In the Budget 2007-08, the government had accorded infrastructure status to the business of laying and operating a cross-country natural gas distribution network. Accordingly, a 100% deduction of profit and gains derived by any undertaking from the business of laying and operating a cross-country natural gas distribution network, including pipelines and storage facilities that are an integral part of such network, for 10 years.
The development is significant in the light of recent gas finds by companies like RIL, Cairn, GSPC and ONGC. Some of these companies are planning to lay and operate pipelines from gas source to various points in the country. RIL is planning to lay about 10,000 km of pipelines across the country to market its KG basin gas in the next 5-7 years.
Similarly, transportation major GAIL is all set to invest Rs 20,000 crore to complete the eight new gas pipelines in two phases, targeting full completion by 2011. The proposed move would almost double the GAIL’s existing trunk pipeline network to about 12,000 km.
NEW DELHI: The Centre is planning to define urban areas by including larger areas to many major cities and towns. A National Urban Commission is also being set up to focus on development of towns and cities by increasing their municipal limits. The move is set to change the rural-urban equation as the states are keen on classifying peri-urban areas as urban areas.
Peri-urban areas are defined as transition zones, or interaction zones, where urban and rural activities are juxtaposed, and landscape features are subject to rapid modifications due to high level of human activities. Peri-urban areas occupy changing spaces on the margins of towns and cities.
If peri-urban areas are reclassified as urban areas, the size of cities and towns would significantly increase. This, in turn, would lead to the inclusion of a substantial number of people into the urban fold.
“The Indian urbanisation scenario is characterised by two significant features: First, there has been a massive growth in the absolute number of people living in urban areas. Second, there has been an increasing concentration of urban population in class 1 towns and cities. Therefore, as mega cities are under severe strain, particularly in terms of making access to infrastructure services to the inhabitants, there is a need to devise a new urbanisation policy,” an urban development ministry official said.
The change will not only force the Centre and the states to significantly alter their economic policies, it would also have an impact on state revenues in the form of stamp duty, house tax and various other collections. The change could also effect a shift in the way corporate India spends its resources.
Despite the report of the National Commission on Urbanisation (1988) and the two successive National Housing Policies within a span of a decade, the government is yet to evolve a National Urbanisation Policy. The officials attribute this delay to constraints like insufficient municipal data with the state governments.
Continued concentration of urban population in large cities and existing city agglomerations and large variations in the spatial patterns of urbanisation across the states and cities are some of the trends of urbanisation in India. India’s population increased about 2.8 times between 1951 and 2001, but the urban population rose about 4.6 times.
NEW DELHI: Industry body FICCI has suggested that India should neither enter into a free trade agreement (FTA) with China, nor grant it ‘market economy status’, at least for the time being.
In a study on “Granting Market Economy Status to China: Views from Corporate India”, FICCI said that the idea of a full-blown free trade agreement with China is much ahead of its time, and India must wait before considering ‘market economy status’ for its eastern neighbour which is characterised by a different operating environment for business and range of subsidies.
According to the industry chamber, the Chinese industry enjoys ‘unfair advantage’ over their Indian counterparts due to an array of tax exemptions by Chinese government and artificially undervalued Chinese currency. Indian industry estimates that the Chinese products could enjoy a price advantage up to 30% over Indian manufactured goods.
On ‘market economy status’, FICCI said that China would need to take effective measures to make its’ pricing and accounting systems more transparent and market-oriented. So far 76 countries have recognised China as a market economy, but its top trading partners such as USA, AEU and Japan, which together account for 48% of China’s total exports, have refused to do so.
Arrival of new stocks to meet the current seasonal demand lead to fall in gold prices on the bullion market, while silver attracted buyers attention and gained moderate ground. Marketmen said stockists are bringing in fresh stocks to meet the festival and marriage season demand.However, increased buying in silver by industrial units and jewellery fabricators remained a boosting factor, they added. A firm trend in global markets, which normally sets the price band in domestic markets, failed to influenced the market which was in a preparatory mood to meet festival demand.At London gold for immediate delivery rose $3.55 at $758.38 an ounce while silver gained 2 cents to $13.65 an ounce. Standard gold and ornaments declined by Rs 10 each to close at Rs 9,865 and Rs 9,715 per 10 gram on reduced buying.
Sovereign, also met with resistance and tumbled by Rs 25 at Rs 7,925 per piece of eight gram. On the other hand, silver ready marched ahead on increased buying and settled higher by Rs 40 at Rs 18,240 per kilo.Silver coins, meanwhile, maintained last closing levels on some support and traded unchanged at Rs 24,300 for buying and Rs 24,400 for selling of 100 pieces.
A booming economy and better tax compliance have enabled the government post a 40 per cent jump in direct tax collection at Rs 1,21,950 crore till October 15 this fiscal against Rs 86,751 crore during the same period last fiscal.
Corporate tax contributed Rs 75,549 crore, up by 40.29 per cent from Rs 53,853 crore during same period in the previous fiscal.Personal income-tax, fringe benefit tax, securities transaction tax and banking cash transaction tax yielded 41.13 per cent more at Rs 46,320 crore against Rs 32,821 crore.
Bullish securities market led to a collection of Rs 3,784 crore through securities transaction tax, up 48.05 per cent against Rs 2,556 crore. Banking Cash Transaction Tax collections were up 20.22 per cent at Rs 284 crore against Rs 236 crore.Fringe Benefit Tax collections recorded a growth of 87.92 per cent at Rs 2,326 crore against Rs 1,238 crore. While tax deducted at source grew by 49 per cent, advance tax collections rose by 30 per cent till September 15.Growth in TDS is a strong indicator of increasing employment, employee compensation and private investments. Growth in advance direct tax collections implies better profitability and improved cash flows in businesses particularly in the core, consumption and financial sectors.
MUMBAI: The Maharashtra government is mulling a plan to levy a duty of Rs 300 per litre of imported liquor, replacing the existing ad valorem rate of 200%.
The move has triggered intense lobbying by multinational liquor companies and the domestic industry to influence the government’s policy. The local spirit lobby wants the duty structure to remain unchanged to ensure a level-playing field.
Multinational companies, supported by the WTO and the Scotch Whisky Association, want the existing structure to be revamped as there are few takers for their brands in Maharashtra. For example, under the present duty structure, Johnnie Walker Black Label is priced at Rs 7,500 or more while it is available at Rs 1,800 in the grey market.
States started taxing imported liquor after the Centre abolished the additional duty after conceding to a WTO demand. When the duty was removed, the Centre asked state governments to levy duty on imported spirits to offset the revenue loss.
Maharashtra levied an ad valorem duty of 200%, about the same rate levied on the domestic spirit. Ad valorem is the rate levied at the time of a transaction.
The All India Distillers’ Association says reduction in duty would deprive the domestic industry of a level-playing field. They want prices of imported spirit in Maharashtra to be in the range that prevailed before the Centre removed additional duty.
The association’s director general, V N Raina told ET: “We want the ad valorem duty structure to continue. For example, levy of Rs 300 on a bottle worth Rs 3,000, cannot be effective. At the same time levying 100% on a Rs 3,000 bottle, also is not fair. A slab rate levying different rates and different category products would provide justice to all.” States such as Sikkim and Andhra Pradesh have already implemented such a duty structure, he added.
The new duty structure has affected multinational companies as their retail prices have gone up by 200%. Sales of high end products are down. Even hotels that are allowed to import duty free foreign spirits, are finding it difficult to sell such products. Multinational companies have also said that while the official figure of scotch whisky sold in India is 100,000 cases, scotch whisky brands sold in the grey market are in the range between 600,000 to 800,000 cases.
However, the distillers’ association thinks an ideal system is the kind of structures put in place in states such as Sikkim and Andhra Pradesh where duty rate is structured in slabs so that high end products are levied a lesser rate while lower segments are taxed appropriately, providing a level-playing field to the domestic industry.
The domestic industry pays huge excise duty to the state, nearly Rs 4,000 crore in Maharashtra, Rs 3,000 crore in UP and Rs 700 crore in Delhi. The excise revenue from liquor industry is the largest revenue source to most states.
NEW DELHI: Finance minister P Chidambaram intervened decisively on Wednesday morning after the sensex and nifty hit the lower circuit in early trading. Mr Chidambaram ruled out a ban on participatory notes (PN) and said that SEBI’s move to impose some restrictions on investments through the PN route was aimed at moderating capital inflows.
Endorsing SEBI’s move to place curbs on PNs, he said the proposals were aimed at moderating capital inflows and were in the interest of investors across all categories.
“Yesterday's SEBI decision is part of the series of steps that have been taken to moderate capital inflows. We are not in favour of banning PNs. We have not banned PNs. We have simply placed a cap on the proportion of money coming through PN notes vis-a-vis the total assets under management and the derivative position,” Mr Chidambaram told media persons.
While inflows had an impact on the rupee, these inflows were also contributing towards a steep and sharp upward movement of the market. Mr Chidambaram’s intervention certainly appears to have worked. It brought in some semblance of normalcy into the market which lost over 1700 points in the opening session, tiggerring circuit breakers.
The BSE benchmark index which had crossed 19000 on Monday, closed down 336 points to 18,716.
The finance minister made it clear that the SEBI consultation paper, with or without some changes, will become a regulation from October 25. The SEBI board is meeting on October 25 to consider this proposal.
“The decisions that have been announced by SEBI are good decisions, good step in the long term interest of the investors, good for the capital markets. They are meant to moderate the capital inflows which were very copious and have an impact. The index has risen 1000 points in just four trading sessions. I want to assure all investors that what has been done was a necessary step and in the interest of everyone, retail, broker, high net-worth individual, institutional investors everyone,” Mr Chidambaram said.
PNs are derivative instruments issued against an underlying security (shares or derivatives). These are issued by foreign portfolio investors registered in India to overseas clients who may not be eligible to invest in the markets here. The holder of PNs gain from the capital appreciation in the underlying shares.
SEBI’s announcement is a part of a series of steps that have been taken to moderate the capital flows into India and the culmination of a long discussion between the market regulator, central bank and the government. The share of PNs as a percentage of total foreign portfolio flows rose from 32% late last year to 51.6% by August, 2007. The outstanding value of PNs with underlying as derivatives is 30% of the total outstanding (Rs 3,53,484 crore) at Rs 1,17,071 crore.
RBI has called for a ban on incremental or fresh issuance of participatory notes (PNs) to overseas investors by foreign institutional investors (FIIs) The RBI proposal is a fallout of the desperate battle that the monetary policy authorities are fighting in the face of unprecedented inflows. In the last week of September alone, RBI had mopped up $12 billion, with FIIs pumping in a net amount of over $5 billion in the last three weeks.
The inflows had major monetary policy consequences since RBI has to sterlise the rupees released as a result of buying up dollars. The move not just aims at controlling these inflows but inflows which were coming from unknown quarters, a source said. The idea is to encourage investors who come through PNs to invest directly.
Hyderabad: First half this fiscal was find to a mixed performance by various departments in the State with some like the Mining Department managing to step up tax collections marginally, while others unable to attain projected targets. The Andhra Pradesh Mining Department registered buoyant growth during the period with the Andhra Pradesh Chief Minister, Dr Y.S. Rajasekhara Reddy, complimenting them for the achievement. For the first six months ended September 30, 2007, the total mineral revenue was Rs 681.77 crore against Rs 680.75 crore in the corresponding period last year. The Chief Minister witnessed that Rs 210.24 crore was reached against the target of Rs 182.25 crore from coal, Rs 53.33 crore from crude oil and gas compared to the target of Rs 63 crore. While sand logged Rs 55.93 crore, Rs 104.41 crore was from non-fuel major minerals and Rs 305 crore from minor minerals. In related development, the Commercial Taxes Department recorded collections of Rs 9,159 crore against Rs 9,678 crore, which was just about 94.63 per cent of that achieved last year.
MUMBAI: RBI-promoted Banking Codes and Standards Board of India has said there was a need to protect consumers from irresponsible predatory lending by banks.
Speaking at the IVth International Forum on Financial Consumer Protection and Education in Budapest, Banking Codes and Standards Board of India chairman Kishori Udeshi said in their keenness to enlarge the loan book, (and thereby improve their NPL ratio statistically) banks give scant attention to borrowers’ capacity to repay.
“This is a world-wide phenomenon, especially when there is excess liquidity sloshing around. Excess liquidity puts downward pressure on lending rates and hence the search of vulnerable sections to lend to who are price takers.”
Slack lending decisions at such times invariably lead to harsh actions against the borrower at the time of recovery. “In India, the Supreme Court has held that if the basic work of selection and assessment (of a client) itself is shoddy, and consumers are lured to take loans, which they may not really need or are beyond their repaying capacity, then banks clearly need to justify their actions for recovery,” she said.
Recovery through agents, as a system, is here to stay and trying to regulate them would in no way attack the problem or provide the solution. While she felt that consumers needed protection against such lenders, she added that regulations of banks or recovery agents will not help bring about responsible lending.
“While Central banks should not retract from the path of deregulation, banks must tread this path with social responsibility. What is needed together with deregulation is tighter on-site supervision and off-site monitoring coupled with stiff exemplary action against errant banks,” she said.
According to Ms Udeshi, if central banks are really serious about their responsibilities of improving access to financial services so that the financial system can serve the community at large, then, any disregard by banks of rules and regulations should be judged by central banks as a reflection on the “fit and proper” criteria of the corporate governance of such banks. “Exemplary action taken by a central bank in this direction may do more for consumer protection than a hundred consumer awareness programmes,” she said.
NEW DELHI: Record high foreign fund inflows into the stock market is a matter of concern for the government, a finance ministry official said on Tuesday even as the Bombay Stock Exchange benchmark index closed above 19,000 points for the second consecutive day.
Surging foreign fund inflows worry the government as a rapidly-appreciating rupee could slow down exports and hurt the economy. The government has already scaled down its export target last week.
“Inflows are high as foreign institutional investors find Indian shares attractive. It is also because of the interest rate differential,” a finance ministry official, who declined to be named, told reporters here.
However, he said the rise in Sensex was not a cause for concern. Finance minister P Chidambaram said last week that the steep rise in market indices surprised and worried him. He said the rupee is not in a comfort zone at the moment and ways must be found to keep a competitive exchange rate.
The Bombay Stock Exchange’s 30-share index Sensex closed almost flat at 19,052, seven points below its previous close. Foreign funds had bought equities for $957 million on Monday, taking the total inflow this month to $4.6 billion.
The government’s worries are likely to get reflected in the monetary policy revision later this month with experts expecting a raise in the reserve requirements of banks aimed at mopping up the excess liquidity in the system.
Exchange rate and export competitiveness are in the focus of policy makers now as inflation appears to be under control at well below 4%, indicating that making imports cheaper by a strong rupee is not the need of the hour.
NEW DELHI: India has emerged as the second most-attractive location after China, ahead of the US and Russia, for global foreign direct investment (FDI) in 2007. According to Unctad’s world investment report, released here on Tuesday, India’s ranking in inward FDI performance index has also improved to 113 in 2006 from 121 in 2005. China is the most preferred investment location, followed by India, the US, the Russian Federation and Brazil, the report said.
The share of India and China in total global FDI outflows has also risen. While both accounted for 10% of total FDI outflows in 2005 in the Asian region, it increased to 25% in 2007. While China’s outflows increased 32% to $16 billion in 2006, Indian outflows witnessed a four-time rise since 2004.
On the increased flow of FDI into India, the report pointed out that while foreign retailers such as Wal-Mart had started to enter the Indian market, a number of US companies such as General Motors and IBM are rapidly expanding their presence in the country. So are several large Japanese MNCs such as Toyota and Nissan. Global FDI inflows soared in 2006 to reach $1,306 billion, showing a growth of 38%.
Commenting on the rising outflow of FDI from the two countries, the report said both China and India are throwing up competition for countries like Hong Kong (China), the Republic of Korea, Singapore and Taiwan as the main sources of FDI in developing Asia.
Interestingly, while India’s outflows have been dominated by privately-owned corporates such as Tata group (Tata-Corus deal), in China FDI outflows are mainly driven by the international expansion of state-owned enterprises due to progressive government policies. Tata Steel acquired Corus Group in early 2007, creating Tata-Corus — the world’s fifth-largest steel maker.
In terms of locational choice for foreign investors, China polled 52% of the respondents in the Unctad survey, followed by India with 41%. The US received support of 36% and Russia 22%, followed by Brazil with 12%. China’s outward FDI stock reached $73 billion in 2006, the sixth-largest in the developing world, according to the report. China’s major chunk of overseas expansion involves considerable investment in other developing and transition economies, the report says.
The emergence of China and India as important sources of FDI, coupled with active M&A activities by investors based in the Asian newly-industrialising economies (NIE), has led to increased FDI flows from Asia to developed countries as well.
India was the fourth-largest recipient of FDI during 2005-06, with China and Hong Kong (China) remaining on top. Singapore was ahead of India at the third position. “India registered a substantial increase in FDI amounting to $17 billion,” the report said. Due to increased investments in India, FDI inflows to south Asia surged 126%, amounting to $22 billion, in 2006.
LONDON: Commerce and Industry Minister Kamal Nath has held extensive discussions here on WTO-related matters with Pascal Lamy, Director General of the trade body.
Nath also met Douglas Alexander, UK Secretary of State for International Development and discussed similar issues. Prior to the meeting with the WTO chief yesterday, Nath had said: "I am hoping for a breakthrough and I am hoping that both the European Union and the USA will be able to prevail upon each other."
To a question on pinning the responsibility, the commerce minister had said: "It lies historically in the way global trade has been structured. That needs to be corrected in terms of both industrial goods and agriculture." Asked whether there was going to be a deal, he said: "We do not agree to perpetuating the structural flaws in agriculture. If they want to call that a deal, well, I can't comment on that."
Developing countries led by India are insisting that rich nations, including the US cut farm subsidies which have led to global trade distortions against the purported goal of the WTO to lay the rules for a level-playing field. On the other hand, America is pressing the developing countries to slash industrial duties.
During his four-day bilateral visit which concluded last night, Kamal Nath also held discussions with UK Minister for Business Enterprise and Regulatory Reform John Hutton.
He also called on Alistair Darling, Chancellor of the Exchequer and met with Lord Digby Jones, Minister for Trade and Investment.
Kolkata: There is a gush in the number of investment proposals got by West Bengal during the first half of 2007 (January-June period), compared to the sameperiod of 2006. According to the quarterly review (July-September 2007) of Investment, Industry and Trade released by the State Directorate of Industries, West Bengal got 12.7 per cent of the country''s total investment proposals via Industrial Entrepreneur Memorandum (IEMs) during the six-month period. During January-June, some 127 IEMs were issued for establishing projects in the State involving an investment of Rs 49,128 crore, and also ensuring additional employment to 77,071 persons. The key IEMs were in areas such as sponge iron, coal washery, CPP-Sinter plant of Jail Balaji Industries at Durgapur in Burdwan district entailing a total investment of Rs 22,267 crore, power generation project of Bharat Aluminium Co Ltd in Ranigunj (Rs 4,400 crore), pig iron sinter coke project of Rashmi Metallicks at Kharagpur (Rs 820 crore), and hot metal and pig iron project of Shyam Steel (Rs 620 crore).
MUMBAI: The deluge of forex inflows, particularly in the last three months, has emerged as a major challenge for RBI. The central bank had to engage in a tightrope walk to maintain exchange rates at desired levels and to manage liquidity generated through inflows.
India has attracted inflows worth over $35 billion from all sources, including portfolio inflow, FDI and external commercial borrowings since early July this year. Of this, RBI has mopped up over $30 billion. These inflows need to be converted into rupee funds to use them in local markets. But it could also generate excess rupee funds in the system and put inflationary pressure on the economy. The central bank, which is also the country’s monetary authority, then intervenes in the market and mops up the excess inflows with the aim of maintaining the level of the currency at the desirable levels (too much inflows increase dollar supplies and hence weakens the currency, which, in turn, upsets the exporters’ sentiments).
Of late given the strong inflows, despite mopping up huge inflows, the dollar is still weakening against the rupee. RBI has a choice of instruments to intervene in the currency markets to achieve its objectives.
The most popular method has been through the sale of bonds and mop-up of excess funds. But with RBI’s stock of bonds almost exhausted, the government has floated special bonds under its market stabilisation scheme (MSS) that will help RBI manage liquidity. In a scenario marked by strong inflows, the central bank hikes the reserve requirements so that banks keep aside a higher amount of deposits they mobilise as reserves with the central bank and in the process restricts the money supply. The central bank also hikes benchmark policy rates (repo rates) in an attempt to tighten money supply.
But, of late, there seems to have been a change in the central bank’s intervention strategy, considering that each instrument has its own limitations. RBI has been treading a path rarely used by it. Treasury managers say that the central bank has been, of late, intervening in the forward market and managing the rupee. It is reported to have bought dollars in the spot market and sold it at a future date. This helps RBI reduce supply of rupee funds without hurting the value of the rupee.
According to forex consultant AV Rajwade, intervening through the forward market does not add to money supply immediately. As far as influencing exchange rates in the spot market, when banks sell dollars in the forward market, they make the initial purchase in the spot market and then enter into a swap deal.
Theoretically speaking, this kind of an activity should help in influencing rates in the spot market. In the current context, it is felt that the other alternative before the central bank was to have either intervened to a greater extent in the spot market itself or to have gone in for a hike in cash reserve ratio, instead of taking the MSS route, given the huge difference in costs involved.
From the liquidity perspective, such an intervention helps control the funds floating in the banking system. According to Standard Chartered Bank MD and head, corporate sales, global markets, Hemant Mishr: “The central bank could progressively use other direct or indirect tools to contain inflows-related over-valuation of the rupee. As indicated by the finance minister P Chidambaram, the rupee has crossed the comfort zone. Any credible action by RBI would be taken seriously by market players.”
Treasury managers say that RBI’s intervention in the forward market is reflected in the contingent liabilities and, hence, does not immediately reflect in the books of RBI. However, it needs to be noted that the intervention of RBI in the forward market is capped. The central bank has a major advantage in intervening through the forward market because it has the option of rolling over the forward contracts.
In terms of options, experts feel that the central bank could examine imposing capital controls, where the quality of flows could be an important criteria. Dual exchange rates or the Tobin tax are the other options.
The central bank should have policies in place by which players bringing in funds into the country should not be allowed to take funds out of the country easily, explained a senior treasury official.
NEW DELHI: In a move that may set the ball rolling for a significant dose of financial sector reform in the coming months, the finance ministry has said that Indian banks should be enabled to take advantage of bank holding company (BHC) or financial holding company (FHC) structure before April 2009. Use of a BHC or FHC structure helps banks to gain flexibility in raising funds, infusing foreign equity, expanding business and diversify into related segments without having to involve their flagship companies directly in all these activities.
“All considered, while the intermediate holding company structure should be supported with legal structure etc, for the present, there has to be a roadmap for moving to the BHC/FHC structure by private and public sector banks before the banking sector is opened up in April 2009. The latter is an international commitment. Necessary consultations among the various stakeholders must commence as early as possible,” says a note circulated by the capital markets division of the finance ministry.
While intermediate holding company (IHC) structure — approved recently for ICICI by the Foreign Investment Promotion Board (FIPB) after considerable debate since it involved foreign investment in insurance — is considered the solution for the time being, the ministry feels a roadmap for moving to the BHC/FHC structure should be laid down now so that banks are prepared to take on competition. The banking sector is to be thrown open for increased competition from foreign banks in April 2009 and the flexibility of a holding company structure would be a key enabling provision, the finance ministry feels.
As of now, various segments of the financial sector are governed by different regulations, curbing flexibility in raising funds and diversification. Various countries, including the US, allow banks to set up holding companies and enabling provisions as well as a regulatory mechanism have been provided for such operators. Finance ministry officials feel the transition to 2009 provides an opportunity for further reforms in the financial sector over the next 15-18 months.
The proposed move will have a wide-ranging impact since many Indian financial sector companies are engaged in various segments including banking, insurance, housing finance, merchant banking and advisory services.
“In the interim, it is expected that with permitting an intermediate holding structure which really does not appeal to RBI, the IHC could be subjected to such tight regulation that the advantages expected by banks in moving to such a structure could well be minimal. Nevertheless, the fact that the debate itself will trigger a move towards reforms in the financial sector and creation of proper structures in hopefully 15 to 18 months down the line should be viewed as a positive sign,” says the note.
When ICICI sought to infuse foreign equity in an IHC recently, FIPB initially declined to clear the proposal fearing the IHC structure proposed would lead to breach of the sectoral FDI cap set for insurance. After ICICI explained its case in detail to finance minister P Chidambaram and FIPB, the proposal was cleared. Subsequently, RBI circulated a draft discussion paper on holding companies that generated significant interest.
CHENNAI: Prime Minister’s chief economic advisor C Rangarajan does not see lower rise in prices leading to softening of interest rates, even as he believes that the economy would grow at 8.5 to 9%.
In an informal chat with reporters in Chennai on Sunday, Mr Rangarajan, chairman of the Economic Advisory Council to the PM, said while wholesale inflation has slowed down, retail prices are still high. Inflation had slowed to 3.26% in the last week of September, close to a two-year low, according to latest government data.
However, this does not mean RBI would lower interest rates, Mr Rangarajan said. RBI would have to consider other factors as well. For example, it has been sucking out liquidity from the market using tools such as market stabilisation scheme, on the back of huge foreign inflows. “To reduce interest rate or cash reserve ratio (CRR) would be inconsistent. You cannot suck out liquidity, and at the same time reduce interest rates,” he said. RBI is to review monetary policy on October 30.
Mr Rangarajan was in Chennai to participate in a function to felicitate K Raghavendra Rao, MD, Orchid Chemicals & Pharmaceuticals, on his getting doctorate from Sastra University. Mr Rao was Mr Rangarajan’s student at IIM Ahmedabad in the late seventies.
Responding to reporters’ questions on the sidelines, Mr Rangarajan said he expected the country’s economic growth to continue. Asked if there were signs of a slowdown, he said even if it slows down, it would still grow at 8.5 to 9%.
Industrial production has picked up. According to the latest government figures, manufacturing output went up 10.4% in August from a year earlier. Agriculture is also doing well, Mr Rangarajan added.
Observers say the National Rural Employment Guarantee Act (NREGA), a legislation that guarantees 100 days of employment a year on minimum wages to anyone registered under it, is weaning labourers away from agriculture, and farm hands are harder to find. But that’s not a big concern, Mr Rangarajan said. The solution is to pay more wages. “If you pay more, they would come to you rather than going to NREGA,” he said.
MUMBAI: The Sixth Pay Commission and populist election spending pose major risks for India, says Lehman Brothers in its Global Weekly Economic Monitor dated October 12.
Progress on the fiscal front has been one of India’s recent hallmarks. The state and central budget deficit narrowed from a peak of 9.9 per cent of gross domestic product in 2001-02 (Apr-Mar) to an estimated 5.7 per cent in 2007-08, the largest improvement in the past quarter-century. The improvement has been driven by fiscal reforms and robust economic growth. But in FY09, despite strong revenue growth, we expect the fiscal deficit to rise to 6 per cent of GDP on populist spending ahead of elections, the report says.
Moreover, if the outcome of the Sixth Pay Commission is anything like that of its predecessor, the deficit could be larger still in FY10, the investment bank says.
SUMMER OF ‘09
In India, an impending election is nearly always a trigger for populist fiscal spending. Most of the past peaks in the expenditure cycles have occurred close to national elections. The upcoming election, which must be held no later than May 2009, will likely be no different. The government looks set to focus on increased education, health and rural spending. Already, news reports suggest that the party has sought to extend the national rural employment guarantee scheme to all districts, at a projected annual cost of $4.6 billion. A number of other schemes likely to be introduced include the Aam Aadmi Bima Yojana (insurance for rural landless workers), Health Insurance Scheme for Below Poverty Line Workers, National Old Age Pension and the National Policy for Farmers, Lehman says in its report.
The government is also granting more subsidies. From this month, sugar mills will receive subsided loans and many export-oriented sectors reeling from the pressure of an appreciating rupee have recently received extended export credit, service tax exemption and other tax breaks. The government estimates that revenue foregone as a result of export-related concessions was close to $14 billion in FY07 and looks set to grow in FY08.
Off-balance sheet government subsidies are also likely to rise. Domestic fuel prices have remained unchanged despite the surge in the international price of oil – and India imports most of its oil. With elections round the corner, the probability of a fuel price hike looks slim; the government will compensate the loss-making oil marketing companies through the issuance of oil bonds worth Rs 235 billion, much lower than the estimated total loss of Rs 540 billion in FY08 from under-recoveries due to subsidised selling of fuel products, the report adds.
COMMISSIONED TO PAY?
The Sixth Pay Commission poses a more medium term, but serious, risk to the fiscal outlook. The SPC, an administrative mechanism set up by the government, recommends an increase in pay of central government employees only once a decade, the investment bank says.
India has had five pay commissions so far and the last one – the Fifth Pay Commission in 1997 – had a devastating effect on India’s fiscal finances. The fault lay not with the FPC. The FPC had recommended large pay hikes, but also advised that the hikes should be linked to downsizing of pay scales and the workforce, abolishing vacant posts and adopting a performance-linked pay structure. The government in power at the time accepted the recommendation related to pay hikes, but ignored the implementation of the other politically sensitive recommendations.
This had twin effects. First, it resulted in a massive one-shot 30 per cent increase in salary for all the central government employees. Second, it impelled state governments to implement similar hikes. The net result was a sharp rise in the share of general government wages and salaries from 5 per cent of GDP in FY96 to 6.4 per cent in FY00, a doubling of pension payments from 1 per cent to 2 per cent of GDP and a sharp surge in the fiscal deficit from 6.5 per cent to 9.5 per cent of GDP during the same period. Some states were unable to meet these commitments and had to borrow to pay salaries.
The jury is still out on the SPC, which will submit its report in April 2008. If the SPC recommends similar hikes as the FPC – and they are implemented – the total wage and pension bill of the combined central and state governments could increase from 5.8 per cent of GDP in FY08 to 7.6 per cent by FY12. The impact is likely to be spread over 2-3 years as the hikes will be effective FY09 for central government employees and FY10 for state government employees and a number of salary arrears will be cleared only in a phased manner. In this scenario, we estimate that the total general government fiscal deficit could surge to about 7.5 per cent of GDP by FY12.
We expect pre-election spending to widen the consolidated fiscal deficit in FY09 to 6 per cent of GDP, but our base case is that this deterioration will be temporary and that robust GDP growth and further fiscal reforms will narrow the deficit to 5.2 per cent of GDP by FY12, Lehman says in its report.
However, the SPC poses a major risk to our base line. India cannot afford the serious fiscal slippage that would reverse many of the positive dynamics that have been helping to raise the economy’s potential growth rate. It could reduce the much-needed public financing for infrastructure investment and crowd out private investment as higher budget deficits push up interest rates. It could also raise the risk premium perceived by foreign investors, thereby slowing the much-needed FDI. The SPC will be an important test of the government’s resolve to adhere to fiscal prudence, the report concludes.
