Budget 2009-10: Experts' analysis and opinions

TAKAHARI OGAWA, ANALYST, STANDARD AND POOR'S RATING AGENCY

Ogawa said the size of the country's fiscal deficit was within the expected boundary, after India announced its fiscal deficit would widen as it outlined increased spending. However the lack of details about fiscal consolidation and privatisation was disappointing, Ogawa told Reuters in an interview.

SEBASTIEN BARBE, HEAD OF EM RESEARCH AND STRATEGY, CALYON, HONG KONG

"The government was elected on a pro-growth and pro-poor programme so I don't think they are going to make a big move in terms of reducing the fiscal deficit in the short term.Beyond the short term outlook for the fiscal deficit what could be of interest is whether or not the government suggests some sort of precise and detailed roadmap to come back to a more controlled fiscal deficit.

If they commit themselves to reduce the fiscal deficit in the next, say, 3 years to something closer to 3.5-4 percent of GDP, the market is likely not to be too harsh on the government. A large fiscal deficit is already priced in.If they just announce a large fiscal deficit without a committment to a control in fiscal performance, there is a risk of a sovereign downgrade. But if they take strong commitments, I am not sure there will be a downgrade."

S. SRINIVASA RAGHAVAN, TREASURY HEAD, IDBI GILTS, MUMBAI:

"The budget is not up to the expectations and disappointing, too. They are saying that the fiscal deficit is manageable, but we have to wait and see how they are going to do that."The federal borrowing for the fiscal year at more than 4.5 trillion rupees, coupled with the state governments' share is going to be a huge burden for the market. Bond prices have come down already and we can expect some more falls."

JIGAR SHAH, SENIOR VICE-PRESIDENT AT KIM ENG SECURITIES IN MUMBAI

"The budget is good if we view it against the prevailing economic scenario, in India as well as globally. The budget is directed towards increasing demand, by leaving key tax rates unchanged. It was silent as to policy actions like (how to) increase foreign investment and stake sales in government units. That aspect isdisappointing.

"KIRAN MAZUMDAR-SHAW, CHAIRMAN AND MANAGING DIRECTOR, BIOCON LTD.

"It's not a bold budget. It's not such a great budget which will give a fillip to the industry. I was expecting many bolder reforms would be announced. There should have been much larger outlay for infrastructure and power. I am also disappointed that the budget had nothing substantial for the healthcare sector.

"DEEPAK JASANI, HEAD OF RETAIL RESEARCH, HDFC SECURITIES, MUMBAI:

"There is a mismatch between market expectations and what was delivered. There were hopes the government would be bolder, but it has only gone for spending route and expecting things to take care of themselves."On most counts, there are a lot of general statements of intent, without any specific targets or timelines.

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI:

"The budget is more on the populist side and seems to address immediate rather than longer-term problems. Both the expenditure overrun and relief on the direct tax front, especially on personal income taxes, are ahead of our expectations.

"RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:

"The real concern emerging from the budget is that it has not given confidence as to how the government will go about the fiscal consolidation process, after hiking the fiscal deficit target."While the thrust on agriculture, infrastructure, etcetera augurs well from a long-term growth perspective, the fiscal profligacy is quite obvious in the near term and hence the markets have also reacted negatively.

"SHUBHADA RAO, CHIEF ECONOMIST, YES BANK (YESBANK.NS : 136 -6.8), MUMBAI:

"The budget is clearly focused on maintaining the growth drivers, that is, the rural economy and infrastructure, which is a strong positive for retail segments. Overall concerns do remain on higher expenditure as that would translate into higher fiscal deficit.

"HARISH GALIPELLI, HEAD OF RESEARCH, KARVY COMTRADE, HYDERABAD:

"By pushing banks to lend aggressively to farmers, we can expect an increase in the productivity of agricultural produce. With incentives for exporters, export-oriented commodities like cotton and spices may rule firm.

"KRISHNA BIR CHAUDHARY, PRESIDENT OF BHARATIYA KRISHK SAMAJ, NEW DELHI:

"The announced higher allocation for the irrigation sector is too little as 60 percent of the country's farm land is still rain fed. We expected more.

"MARKET REACTION:

• The BSE Sensex (^BSESN : 14103.03 -810.02) tumbled as much as 5 percent as budget unfolds on concerns over how government will fund ballooning deficit.
• The partially convertible rupee falls nearly 1 percent to 48.33/35, versus 47.88 before the budget speech began and compared with Friday's close of 47.89/91. It traded later at 48.30/32.
• Yield on benchmark 10-year bond spikes 16 basis point to 6.99 percent. Most traded 2014 bond rises to 6.48 percent on the government's higher borrowing plan from 6.40 percent.

BACKGROUND:

• India could see growth of around 7 percent this year and more in coming years if it makes sweeping reforms including removal of subsidies and speeds infrastructure development, a government report said last Thursday.
• Bonds have jumped this year to factor in a massive increase in government borrowing. The market had priced in expectations that the deficit will swell to between 6.25 percent and 6.5 percent of GDP.
• Last week India unexpectedly raised gasoline and diesel prices by as much as 10 percent, passing onto consumers some of the recent rise in global oil prices and easing some of the pressures on the budget from subsidies.
• India fiscal deficit widened to 6.2 percent in 2008-09 as the government unleashed stimulus spending to insulate the economy against the global downturn.
• If the government fails to present a plan to bring the deficit back under control in subsequent years, the country's credit rating could come under pressure.
• India's shoddy infrastructure is considered by many foreign investors as the Achilles' heel of the economy that prevents the sort of double-digit growth seen in China.
• The current fiscal year of 2009/10 runs until the end of next March.

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Budget 2009-10: Key Points

OTHER KEY POINTS:

• Infrastructure spending- allocations for highways, urban renewal to rise sharply.
• Energy sector- to develop long distance natural gas pipelines for a national grid; to set up panel to review domestic fuel prices.
• Agriculture spending- to provide additional 10 billion rupees over interim budget for more irrigation; to offer direct subsidies to farmers.
• Government asset sales- aims to raise 11.2 bln rupees from stake sales, 350 billion rupees from 3G telecom spectrum auction.
• Growth- 2008/09 GDP growth seen at 6.7 pct; government aims to return economy to high growth path of 9 pct/yr at the earliest.

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Budget hikes spending, deficit 6.8 pct/GDP

The new government said it will hike spending to spur growth, pushing the 2009/10 fiscal deficit to a much higher than expected 6.8 percent of GDP, slamming local stocks and pushing bond yields higher.Financial markets had been expecting the fiscal deficit in the 2009/10 budget unveiled on Monday to rise to as high as 6.5 percent of GDP, from a previous government target of 5.5 percent.The government's gross market borrowing is expected to rise to 4.51 trillion rupees, versus 3.95 trillion rupees in a Reuters poll.

Finance Minister Pranab Mukherjee pledged the government would return to fiscal responsibility targets "at the earliest". He also vowed to return the country to a higher growth rate of 9 percent a year as soon as possible, from an estimated 6.7 percent in 2008/09.Total spending in the 2009/10 budget will rise to 10.2 trillion rupees, up 36 percent from 2008/09.India's BBB-minus sovereign rating, placed on negative outlook in February, does not face any significant rating pressure, Standard & Poor's analyst Takahari Ogawa said after the budget was released.

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Budget 2009-10: Taxes

• Service tax levied on law firm
• Custom duty on gold re-imposed
• Customs duty to be reduced on drugs for heart treatment
• No new tax on edible oil imports
• 4 per cent excise duty on cotton products restored
• Customs duty on bio-diesel reduced
• Life saving devices on heart contidion exempted from custom duty
• Small business exempt from advance tax
• To maintain overall customs and excise duty structure
• Tax holiday to natural gas extended
• Tax slab raised
• MAT hiked to 15 per cent of book profit
• Commodity transaction tax abolished
• New pension scheme
• Tax holiday for exporters extended untill 2012
• Personal income tax exemption hiked by Rs 10,000
• Abolish fringe benefit tax
• Tax holiday extended for textile units
• Goods and services tax from April 1, 2010
• Share of direct taxes has increased to 56 per cent in 2008-09
• Federal Tax/GDP ratio is 11.5 per cent
• No surcharge of 10 per cent on personal income tax
• Increase in exemption slab for senior citizen
• No change in corporate taxes
• Hike in IT exemption for women to Rs 1,90,000
• Govt committed to tax reforms
• Increase automation in direct tax collection
• New tax code in 45 days
• Centralised processing center at Bengalooru to streamline taxation
• Income tax forms should be user friendly
• Tax system should be such that it shold encourage voluntary compliance
• Saral form 2 will be introduced

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Will you let PC algorithms decide what stock you buy?

On vacation in Turkey, I am picked up at the airport by a minibus. It’s past midnight, pitch-black, the driver is speeding around corners. Only one headlight is working. And I have my doubts about the brakes. In my head I’m planning the letter of complaint to the tour company. And then the driver’s cell phone rings, he picks it up and answers it, he has only one hand on the steering wheel.

Now I’m mentally compiling the list of songs to be played at my funeral. That’s rather how I feel when people talk about the latest fashion among investment banks and hedge funds: high-frequency algorithmic trading. On top of an already dangerously influential and morally suspect financial minefield is now being added the unthinking power of the machine.

The idea is straightforward: Computers take information – primarily "real-time" share prices – and try to predict the next twitch in the stock market. Using an algorithmic formula, the computers can buy and sell stocks within fractions of seconds, with the bank or fund making a tiny profit on the blip of price change of each share. There’s nothing new in using all publicly available information to help you trade; what’s novel is the quantity of data available, the lightning speed at which it is analyzed and the short time that positions are held.

You will hear people talking about "latency," which means the delay between a trading signal being given and the trade being made. Low latency – high speed – is what banks and funds are looking for. Yes, we really are talking about shaving off the milliseconds that it takes light to travel along an optical cable.So, is trading faster than any human can react truly worrisome?

The answers that come back from high-frequency proponents, also rather too quickly, are "No, we are adding liquidity to the market" or "It’s perfectly safe and it speeds up price discovery." In other words, the traders say, the practice makes it easier for stocks to be bought and sold quickly across exchanges, and it more efficiently sets the value of shares. Those responses disturb me.

Whenever the reply to a complex question is a stock and unconsidered one, it makes me worry all the more. Leaving aside the question of whether or not liquidity is necessarily a great idea (perhaps not being able to get out of a trade might make people think twice before entering it), or whether there is such a thing as a price that must be discovered (just watch the price of unpopular goods fall in your local supermarket – that’s plenty fast enough for me), l want to address the question of whether high-frequency algorithm trading will distort the underlying markets and perhaps the economy.

It has been said that the October 1987 stock market crash was caused in part by something called dynamic portfolio insurance, another approach based on algorithms. Dynamic portfolio insurance is a way of protecting your portfolio of shares so that if the market falls you can limit your losses to an amount you stipulate in advance. As the market falls, you sell some shares.

By the time the market falls by a certain amount, you will have closed all your positions so that you can lose no more money.It’s a nice idea, and to do it properly requires some knowledge of option theory as developed by the economists Fischer Black of Goldman Sachs, Myron S. Scholes of Stanford and Robert C. Merton of Harvard. You type into some formula the current stock price, and this tells you how many shares to hold.

The market falls and you type the new price into the formula, which tells you how many to sell.By 1987, however, the problem was the sheer number of people following the strategy and the market share that they collectively controlled. If a fall in the market leads to people selling according to some formula, and if there are enough of these people following the same algorithm, then it will lead to a further fall in the market, and a further wave of selling, and so on – until the Standard & Poor’s 500 index loses over 20 percent of its value in single day: Oct. 19, Black Monday.

Dynamic portfolio insurance caused the very thing it was designed to protect against.This is the sort of feedback that occurs between a popular strategy and the underlying market, with a long-lasting effect on the broader economy. A rise in price begets a rise. (Think bubbles.) And a fall begets a fall. (Think crashes.) Volatility rises and the market is destabilized. All that’s needed is for a large number of people to be following the same type of strategy.

And if we’ve learned only one lesson from the recent financial crisis it is that people do like to copy each other when they see a profitable idea.Such feedback is not necessarily dangerous. Take for example what happens with convertible bonds – bonds that can be converted into stocks at the option of the holder. Here a hedge fund buys the bond and then hedges some market risk by selling the stock itself short.

As the price of the stock rises, the relevant formula tells the fund to sell. When the stock falls the formula tells it to buy – the exact opposite of what happens with portfolio insurance. To the outside world – if not necessarily to the hedge fund with the convertible bonds – this mix is usually seen as a good thing. Thus the problem with the sudden popularity of high-frequency trading is that it may increasingly destabilize the market.

Hedge funds won’t necessarily care whether the increased volatility causes stocks to rise or fall, as long as they can get in and out quickly with a profit. But the rest of the economy will care.Buying stocks used to be about long-term value, doing your research and finding the company that you thought had good prospects. Maybe it had a product that you liked the look of, or perhaps a solid management team. Increasingly such real value is becoming irrelevant. The contest is now between the machines – and they’re playing games with real businesses and real people.

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Budget 2009-10: Highlights

• Budget speech completed. Finance Bill-II 2009 introduced.
• Customs duty on bio-diesel reduced.
• Silver to cost more.
• Tax to be levied on Law Firms.
• Textile units to receive tax holiday.
• LCD TVs to cost less.
• Custom duty on LCD TVs cut from 10% to 5%.
• Set-Top Boxes to cost more.
• Customs duty of 5% on set-top boxes.
• To extend tax holiday for commercial production of mineral oil and natural gas.
• Enhance budgetary support by Rs 40,000 cr.
• Fringe Benefit Tax abolished.
• Commodity Transaction Tax abolished.
• Personal income tax exemption hiked by Rs 10,000.
• No surcharge of 10% on personal income tax.
• Centralised processing center at Bengalooru to streamline taxation.
• No change in corporate tax.Increase in exemption slab for senior citizens by Rs 15,000.
• Fiscal deficit at 6.8% of GDP.
• Proposes Rs 500 cr for rehabilation of displaced persons of northern and eastern areas of Sri Lanka.
• Aila Relief proposed at Rs 1,000 crore.Increased allocation for higher education.
• New IITs to be set up. Rs 2,113 cr for IITs and NITs.
• Rs 25 cr each for AMU campuses in Murshidabad and Mallapuram.
• Defence outlay goes up.
• One lakh dwelling units for paramilitary forces personnel to be constructed.
• Allowances to para-military forces at par with defence forces.
• One rank, one pension for ex-servicemen.
• Allocation for Commonwealth Games to be raised to Rs 3472 crore.
• Online job exchange to be started with private partnership.
• Unique ID plan to roll out in 12-18 months.
• Top people from private sector to be given responsibility of vital national projects.
• Interest subsidy for home loans up to Rs 1 lakh.
• All BPL families to be bought under one smart card program.
• 50% of all rural women to be brought into self-help group programmes.
• Rural mega clusters in Bengal and Rajasthan.
• To add handloom clusters in West Bengal and Tamil Nadu.
• 75% hike in irrigation projects.
• Rural Housing: Allocation to Indira Awaas Yojna hiked by 63% to Rs 8,883 cr.
• Rs 7000 crores for rural electrification scheme.
• Rs 31,100 crore allocation for NREGA.
• NREGA gave employment opportunities to more than 4.479 cr households.
• Rs 100 cr one-time grant to expand banks in non-banking areas.
• Banks, insurance to stay with Govt.
• Banking network to be expanded.
• Expert panel to look into petroleum product pricing.
• Domestic oil prices must be in sync with global prices.
• 'Aam Admi' is the focus of all our programmes and schemes: PranabTax system should be such that it shold encourage voluntary compliance.
• Income Tax forms to be made user-friendly.
• Saral-II forms to simplify taxation process.
• Export Credit Guarantee scheme extended till March 2010.
• Stimulus package to print media extended till December 31.
• Farmers loan interest to come down to 6%.
• Interest subvention scheme for farm loans to be manitained.
• Additional budget allocation for farmers.
• IIFCL will refinance 60% of commercial bank loans in PPP.
• IIFCL to look at infrastructure needs.
• Mumbai flood management allocation hiked to Rs 500 cr.
• 87% rise in urban renewal mission.
• Housing allocation hiked.
• Fiscal stimulus at 3.5% of GDP.
• Allocation for NHAI up 23%Trade in goods and services doubled in 2008.
• Job creation hit due to economic slowdown: Pranab.
• Govt took 3 stimulus packages so far.
• Two worst quarters of the global economic crisis is now behind us: Pranab.
• One budget can not solve all problems: Pranab.
• Foreign capital inflow is important.
• Increased focus on growth and encourage nation's development.
• Sustain growth rate of 9% for a longer period.
• Farm sector growth at 4%.
• Union Finance Minsiter begins his speech.

This is Pranab Mukherjee's 4th budget. Cabinet approves Union Budget.

Budget allocates Rs.39,000 crore for rural jobs scheme

• The government Monday hiked the allocation for its flagship rural job scheme by 144 percent to Rs.39,000 crores.
• "I am allocating Rs.39,000 crores for NREGA (National Rural Employment Guarantee Act). This is a hike of 144 percent," Finance Minster Pranab Mukherjee said while presenting the budget for fiscal 2009-10 in the Lok Sabha.
• "NREGA is a magnificent success. The government is committed to providing a wage of Rs.100 a day to rural households in convergence with other schemes for rural areas. One hundred and fifteen pilot districts have been identified for these convergence schemes. The details will be given by the minister for rural development," Mukherjee added.
• The finance minister said the government would soon publicise a draft food security (guarantee) bill and seek comments from everybody before finalising the bill.
• In its election manifesto earlier this year, the Congress had promised 25 kg of rice or wheat a month at Rs.3 per kg to families below the poverty line.

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Increased allocations growth-oriented, says industry body

• The All India Association of Industries (AIAI) has welcomed the hikes in allocations for infrastructure, agriculture and small and medium enterprises (SMEs) for exports in the fiscal 2009-10 budget announced Monday, and termed the move as "growth-oriented".
• According to AIAI president Vijay Kalantri, the increased allocation of Rs.5,000 crore for railways, 23 percent for national highways, higher allocation for gas grid, Rs.7,000 crore for rural electrification and 87 percent increase in the Jawaharlal Nehru National Urban Renewal Mission would generate employment and serve as a growth stimulus.
• "The increase in allocation of 75 percent towards irrigation sector will boost the agro-industries sector," Kalantri said in a statement after Finance Minister Pranab Mukherjee presented the union budget for 2009-10 in the Lok Sabha Monday."
• AIAI also welcomes the hike in allocation to Market Development Scheme and the Rs.4,000 crore special fund to be operated by banks for SMEs to revive from the recessionary trends," he added.

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India Inc welcomes Budget with reservations

India Inc on Monday welcomed the focus on reviving economic growth to 9 per cent as also the indications for bold tax reforms, but expressed regret that the Minimum Alternate Tax was raised and Security Transaction Tax was let to continue. "Finance Minister Pranab Mukherjee's efforts to revive the economy back to nine per cent (growth) is in the right direction," ICICI Bank MD and CEO Chanda Kochhar said today.

"I am happy on behalf of the whole industry that Fringe Benefit Tax has been abolished, but I am a little bit unhappy about MAT," top industrialist Rahul Bajaj said. The MAT rate was hiked to 15 per cent from 10 per cent. Kochhar felt that the Securities Transaction Tax too should have caught the government's attention. "Health care sector has been ignored. We had been expecting a boost for the health care infrastructure, but nothing has been said.

Budget was mute. We are disappointed," Shivinder Mohan Singh of Fortis said.The stock market tanked 700 points mid-way during Mukherjee's Budget speech, but recovered partially at 1315 hrs. The industry also welcomed restoration of seven year tax break on natural gas production, saying it will help attract foreign bidders for NELP-VIII."This was always there. It is not a new benefit. We are very happy about the clarification as it ends the ambiguity," said P M S Prasad, President and CEO (Oil & Gas), RIL.

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Budget 2009-10 backs infrastructure, farmers

1. Government on Monday outlined measures to speed infrastructure development and unveiled increased spending for farmers and the poor in its first budget since Prime Minister Manmohan Singh's government was reelected by a resounding margin in May.
2. Finance Minister Pranab Mukherjee, sticking to the theme of "inclusive growth" espoused by the Congress party-led government, unveiled breaks for exporters hard-hit by the global downturn and direct subsidies for farmers. He also urged a return to fiscal responsibility targets as soon as possible.
3. "The first challenge is to return the GDP growth rate of 9 percent per annum at the earliest," Mukherjee said.
4. "The second challenge is to deepen and broaden the agenda for inclusive development." Bond yields rose rose after the announcement of additional spending, while stocks were down by 1.37 per cent.
5. The first budget of Singh's new administration is seen as a roadmap for how he will govern for the next five years after his Congress party-led coalition was reelected by an unexpectedly decisive margin.
6. Mukherjee called on states to remove bottlenecks for infrastructure projects, and outlined plans for more flexible financing for infrastructure and development of long-distance gas pipelines.
7. Unconstrained by its previous alliance with leftist parties, Singh's new government has a freer hand to implement economic liberalisation measures to drive expansion but has also promised "inclusive growth" to support social programmes and rural development.
8. At the same time India is hobbled by a fiscal deficit that ballooned to 6.2 per cent in the financial year that ended in March, with the bond market pricing in expectations that the figure could creep higher this year to as much as 6.5 per cent. Including off-balance sheet items like subsidies for fuel and food, as well as state-level shortfalls, country's overall fiscal deficit for the year that ended in March was about 10 per cent of GDP.
9. That compares with less than 3 percent of GDP for China and more than 12 per cent of GDP for the United States in the latest fiscal years.
10. Country's economy grew at 6.7 per cent in the most recent fiscal year, held back by the global downturn, after expanding at least 9 per cent for three straight years.
11. The finance ministry said on Thursday that growth could rise to 7 per cent this year -- towards the high end of the range of private forecasts -- and subsequently increase to 8.5 to 9 per cent if the government adopts sweeping reforms and speeds infrastructure development.
12. With the developed world mired in recession, big emerging economies led by China, which is on track for 8 per cent growth this year, and India account for a rising share of global output and are expected to help drive global recovery.
13. Both economies have been fuelled by stimulus spending to spur domestic demand.The run-up to annual budget announcement, always subject to fierce jockeying by ministries, industries and other interest groups, was especially frenzied this year given the ruling coalition's decisive electoral win.
14. Anticipation that the government would unleash sweeping market-oriented reforms sent Indian stocks surging 17 per cent on the first trading day after the election result in May. But that has led market watchers to warn that expectations for the administration's first budget may be unrealistically high.
15. Stocks jumped by nearly half in the April-June quarter.
16. Last week, the government unexpectedly raised fuel prices by as much as 10 per cent, passing part of the recent surge in global oil prices on to consumers. Friday's railways budget, however, included improved services and fare cuts for the poor.

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Budget 2009-10: IT exemption limit increased, corporate tax rate unchanged

With a view to providing interim relief to small and marginal taxpayers and senior citizens, the budget 2009-10 has increased theBudgetpersonal income tax exemption limit by Rs 15,000 from Rs 2.25 lakh to Rs 2.40 lakh for senior citizens. Similarly it has aslo raised the exemption limit by Rs 10,000 from Rs 1.80 lakh to Rs 1.90 lakh for women tax payers and by Rs 10,000 from Rs 1.50 lakh to Rs 1.60 lakh for all other categories of individual taxpayers.

Further, it has also increased the deduction under section 80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with severe disability to Rs 1 lakh from the present limit of Rs 75,000.In the past, surcharges on direct taxes have generally been levied to meet the revenue needs arising from natural calamities.

The Government has set up the National Calamity Contingency Fund to build up resources to meet emergency situations. As a corollary, surcharge on direct taxes should be removed. However, this has to be balanced with the revenue needs of the Government. Therefore, the budget has phased out the surcharge on various direct taxes by eliminating the surcharge of 10 per cent on personal income tax. There is no change in corporate taxation.

Deduction in respect of export profits is available under sections 10A and 10B of the Income-tax Act. The deduction under these sections would not be available beyond the financial year 2009-2010. In order to tide over the slowdown in exports, I propose to extend the sun-set clauses for these tax holidays by one more year i.e. for the financial year 2010-11.

The budget has aslo abolished the Fringe Benefit Tax that wa sintroduced in the Finance Act, 2005 on the value of certain fringe benefits provided by employers to their employees.The budget has also extended the scope of the current provision of weighted deduction of 150% on expenditure incurred on in-house R&D to all manufacturing businesses except for a small negative list.

The budget has extended investment-linked tax incentives to the businesses of setting up and operating ‘cold chain’, warehousing facilities for storing agricultural produce and the business of laying and operating cross country natural gas or crude or petroleum oil pipeline network for distribution on common carrier principle.

Under this method, all capital expenditure, other than expenditure on land, goodwill and financial instruments will be fully allowable as deduction.Further, the period allowed to carry forward the tax credit under Minimum Alternate Tax (MAT) has been extended from seven years to ten years. It has also exempted the income of the NPS Trust from income tax and any dividend paid to this Trust from Dividend Distribution Tax.

Similarly, all purchase and sale of equity shares and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax. Commodity Transaction Tax (CTT)introduced in The Finance Act, 2008 to be levied on taxable commodities transactions entered in a recognized association has been abolished.

To facilitate the business operations of all small taxpayers and reduce their compliance burden, the budget has proposed to expand the scope of presumptive taxation to all small businesses with a turnover upto Rs.40 lakh. All such taxpayers will have the option to declare their income from business at the rate of 8 per cent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining books of accounts.

As a procedural simplification, they can also pay their entire tax liability from business at the time of filing their return by exempting them from paying advance tax. This new scheme will come into effect from the financial year 2010-11.It has extended the tax holiday under section 80-IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the commercial production or refining of mineral oil, also to natural gas.

This tax benefit will be available to undertakings in respect of profits derived from the commercial production of mineral oil and natural gas from oil and gas blocks which are awarded under the New Exploration Licensing Policy-VIII round of bidding. Further, it has retrospectively amend the provisions of the said section to provide that “undertaking” for the purposes of section 80-IB(9) will mean all blocks awarded in any single contract.

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'Budget makes no difference to us'

More than half the respondents of a pre-Budget survey think this annual exercise doesn't impact their daily lives. Even as Pranab Mukherjee rises to present the Union Budget in Parliament at 11 am on Monday, a nationwide survey reveals that most Indian households think this annual exercise has no significant effect on their daily lives.

Adding to this, a majority (60 per cent) of the 5,468 households surveyed, covering different income groups, said the Budget document did not make much sense to them and a quarter of the respondents derided the relevance of the exercise because they believed most policy decisions were taken outside the Budget anyway. The survey, conducted by UTVi-CVoter to gauge the expectations of ordinary citizens from the Budget, found that the majority wanted the Budget to be a less secretive document and easier to understand.

The survey also found that almost half the respondents did not believe that their lives were getting better and as much as 68 per cent felt the taxes they paid were too high and should be reduced to leave more money in people's hands to meet rising day-to-day expenditure. Respondents felt a reduction in personal tax levels would make consumer goods, health insurance, automotives and certain food items like dairy products, tea and coffee cheaper, leading to positive impacts on the cost and quality of living.

In 2008-09, when the global economic crisis started impacting India, 48 per cent of the respondents revealed that their expenditure had gone up and incomes were static while around 20 per cent experienced a surge in expenditure and declining income. The survey revealed that nearly 75 per cent of the respondents felt an income of Rs 50,000 a month is enough for a family of four with nearly a third saying incomes should be made tax-free.

The survey also found that the quality of life of around 65 per cent of Indian households has deteriorated in the past one year because of rising prices, especially of food articles. The inflation rate has remained below 3 per cent since December 2008 and entered negative territory three weeks ago. Besides rising prices of food, prices of other items like cooking gas, local transport, airfares, education, fuel prices, property rentals, healthcare and even expensive domestic help have significantly increased the cost of living for the average Indian household.

As far as the future outlook on the quality of life is concerned, public opinion is divided with 38 per cent saying the quality of life will be static, another 38 per cent predicting an improvement, with the rest expecting a deterioration in the next year.

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Pranab Mukherjee, Finance Minister again present Budget 2009-10

• He's the first finance minister to present Budgets on either side of an election and the first to do so after a quarter-century gap.
• When finance minister Pranab Mukherjee rises in the Lok Sabha on Monday to present the Union Budget for 2009-10, he would have earned a unique distinction.
• No other finance minister in independent India has presented an interim Budget before the elections and then followed that up with a regular Budget for the same year after being voted back to power.
• His prime minister, Manmohan Singh (finance minister from 1991 to 1996), presented the Interim Budget for 1996-97 before the polls, but the Congress lost the general elections held in April-May 1996.
• Palaniappan Chidambaram became the finance minister under the United Front government and presented the regular Budget in July 1996. Yashwant Sinha faced a similar fate.
• As finance minister in the Chandra Shekhar government, he presented the Interim Budget for 1991-92, but his party lost the elections, paving the way for the P V Narasimha Rao government.
• Jaswant Singh also presented the Interim Budget for 2004-05, but the National Democratic Alliance did not return to power after the elections.
• It was Chidambaram, this time under the United Progressive Alliance, who presented the regular Budget for 2004-05.
• There have been nine more Interim Budgets since independence. However, none of these was presented before the elections.
• In fact, the timing of the elections was such that there was no need for an interim Budget before the country went to the polls.
• After the formation of the new government in each of these cases, the finance minister first presented an interim Budget because he needed more time to prepare a regular Budget a few weeks later.
• Mukherjee's other distinction on Monday will be that no other finance minister has presented two Budgets with as large a gap between them as 25 years.
• His last three Budgets were presented between 1982 and 1984.
• Apart from the tinkering with tax rates through exemptions and concessions and placing greater reliance on indirect taxes to raise resources (see table), those Budgets will also be remembered for the economic policy mindset that prevailed during the 1980s.
• His first Budget referred to the government's rationale for seeking recourse to an SDR 5 billion loan from the International Monetary Fund under its extended fund facility.
• The Indira Gandhi government was under attack for seeking the IMF loan that its opponents feared would jeopardise India's economic sovereignty.
• In a bid to assuage such sentiments, Mukherjee said in his Budget speech that the loan 'will help us implement our own policies, which have been sanctioned and approved by our people and Parliament'.
• In his third Budget in 1984, Mukherjee referred to the IMF loan again. But this time he talked about the government's decision to return the last tranche of the loan.
• In a triumphant tone, Mukherjee said, "Belying the prophecies of doom by many a self-styled Cassandra, the economy has emerged stronger as a result of the adjustment effort mounted by us.
• "None of the dire consequences that we were being warned about has occurred. We have not cut subsidies. We have not cut wages. We have not compromised on planning. We have not been trapped in a debt crisis...We have come out of it with our heads high."
• Corporate India will remember Mukherjee's first Budget for a different reason.
• In a bid to attract investments from Indians living abroad, Mukherjee allowed non-resident Indians to buy shares of companies quoted on the stock exchanges subject to specified limits, among many other incentives.
• This policy change led to the controversial takeover bid by London-based Swraj Paul of the Caparo group on DCM and Escorts in 1983.
• The bids finally did not succeed, but India Inc can hardly forget how Mukherjee's first Budget shook its leaders out of their complacence.
• Mukherjee had also extended the scheme for investment allowance for another five years till 1987.
• Investment allowance permitted companies to claim deduction for tax purposes on their capital expenditure according to prescribed rates.
• This was abolished in April 1990. The big question he is likely to answer on Monday is whether investment allowance will be reintroduced in some form.

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Headlines

Corporate News Headline

• JSW Steel announced that its production rose by 45% to 1.4 MT in the first quarter of this fiscal year following robust demand in sectors such as Automobile, Construction and White Goods. (BS)
• DLF has raised around Rs. 10 bn through the sale of land parcels across four cities in the past 4-5 weeks and is currently in the process of closing more such deals worth another Rs. 5 bn in the coming weeks. (ET)
• SBI has offered a loan of up to USD 1 bn to Bharti Airtel to partly fund the Indian telecom firm's plans to buy a stake in South Africa's MTN. (ET)

Economic and Political Headline

• In the Railway Budget for 2009-10, the Indian Railways (one of the largest profit-making industries in the country) has proposed to invest Rs. 407.45 bn in the current fiscal, up from Rs. 367.73 bn in the previous financial year. The Budget did not increase the passenger fares and freight tariffs.(BS)
• Six banks in Illinois and one in Texas were seized by the US regulators as the deepening financial crisis pushed the toll of failed US lenders this year to 52, the highest since 1992. (Bloomberg)
• The UK service industries from law firms to consultancies grew to 51.6 in June for the second month, suggesting that Britain may be on it way to emerging from the recession. (Bloomberg)

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STATE BANK OF INDIA PROJECTS

• The country's largest lender, State Bank of India, has told the government that it would earn a minimum profit of Rs 11,000 crore in the current fiscal, 21 per cent more that what it achieved in the previous fiscal.
• In its statement of intent submitted to the government recently, SBI indicated that the bank would post a minimum net profit of Rs 11,000 crore in the current fiscal, sources said.
• The bank has given the estimate of its likely earnings, sources said, adding that depending on the pace of economic recovery the bottom line could improve significantly.
• SBI's net profit increased 36 per cent to Rs 9,121 crore during 2008-09 against Rs 6,729.1 crore in the previous fiscal despite the global financial meltdown hitting the Indian economy.
• The economic growth during 2008-09 slipped to 6.7 per cent from over nine per cent in the previous three years. However, the expected profit numbers for the current fiscal could not be officially confirmed from SBI.
• According to a filing with stock exchanges, the bank will announce its earnings for the its first quarter (April-June) of the current fiscal on July 30, 2009.
• After announcing 2008-09 numbers in May, SBI Chairman O P Bhatt had said advances and deposits were likely to grow by 25 per cent each during the current fiscal.

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ICICI Bank net zooms 21% in Q1 to Rs 878 cr

Extreme cost-cutting and treasury profits enabled the country’s largest private lender, ICICI Bank, beat analyst estimates and post a 21% rise in net profit in the first quarter of FY10 (Apr-Mar), the bank said on Saturday. Net profit stood at Rs 878 cr for the quarter-ended June ‘09 against Rs 728 cr in the year-earlier quarter.

The average net profit forecast by various banking analysts was around Rs 820cr.Besides profits from trading in government securities and equity, the bank was helped by a write-back of provisions made on credit derivatives as sentiment improved on Indian paper. Profits rose even as the bank continued to shrink its balance sheet, avoiding high-cost deposits and unsecured advances.

One reason for the higher profit was the Rs 367-cr savings in operating expenses during the quarter with overall operating expenses dropping 19.22% to Rs 1546 from Rs 1913 cr in the corresponding quarter of the previous fiscal. “Instead of balance sheet size, we will focus on bringing down unsecured personal loans. We will however grow home, car and commercial vehicle loans on the retail side and working capital and infrastructure loans on the corporate side,” said Chanda Kochhar, MD & CEO, ICICI Bank.

The bank’s advances declined by 9.2% while deposits came down by 10.3%.With the reduction in outstanding loans, net interest income, which is the difference between income from loan and interest paid on deposit, dropped 5% to Rs 1985.28 cr. However, this decline was more than made up by the 35.86% rise in other income to Rs 2089.88 cr. Of this, treasury income was Rs 714 crore compared with a loss of Rs 594 crore in the year-ago quarter.

Despite slowdown in M&A and capital market activity, the bank reported a flat fee income of Rs 1,319 crore. Ms Kochhar said the bank would cut costs further and look at increasing productivity from new branches.Provisioning rose by 67% to Rs 1323.65 cr but this was due to a one-time restructuring exercise, she added. In a conference call with analysts, NS Kannan, CFO, said that except life insurance none of the bank’s subsidiaries would require capital infusion during the current fiscal. ICICI’s life insurance subsidiary, ICICI Prudential, is expected to break even towards the end of the next fiscal.

“Even though net interest income was slightly lower and provision coverage declined to 51%, we see these as minor negatives. Our main expectations were regarding execution of the bank’s present strategy, which continues to be commendable,” said Vaibhav Agrawal, vice-president, research (banking) Angel Broking. Fall in depositsMore branches, lower operating expenses and ratio of low- cost deposits improving to 30.4% are quite favorable.

We believe by 2010, the bank will be very well positioned to benefit from the improving economic environment,” said Vaibhav Agrawal, vice-president , research (banking) Angel Broking. On Friday, the ICICI Bank scrip closed down 1% at Rs 766.85 on BSE.The net interest margin was maintained at 2.4%. The decrease in net interest income was mainly due to a decrease in advances by 11.6%.

Advances dropped to Rs 1,98,101 cr from Rs 2,24,145.9 cr in the corresponding quarter and Rs 2,18,310.8 cr in the first quarter. Advances on retail loans fell to 47% against 55% in Q1 FY09 as the bank looks at running down its unsecured loans.Ms Kochhar said that corporate and international advances rose both in absolute and percentage terms to 40% from 35% a year ago.

Deposits fell to Rs 2,10,236 crore from Rs 2,34,460 cr in the year-ago quarter and Rs 2,18,348 crore in the preceding quarter. Ms Kochhar said that savings accounts grew by Rs 3,500 cr from the previous quarter while current accounts dropped by Rs 2000 cr. She added that the bank had taken high costs deposits in the third quarter of the previous fiscal which it will allow to run down when they mature in the third quarter of the current fiscal. Current account and savings accounts ratio improved to 30.4% from 27.6% last year and 28.7% in the preceding quarter. Capital adequacy ratio stood at 17.38% against 13.42% last year.

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Ispat Industries incurs loss of Rs 214.9 cr in Q1

• Iron and steel producer Ispat Industries Ltd, promoted by Vinod Mittal, on Saturday announced a net loss of Rs 214.92 crore in the first quarter ended June 30, 2009.
• It had earned a net profit of Rs 28.73 crore in the same period last fiscal, Ispat Industries said in a filing with the Bombay Stock Exchange.
• Total income of the Kolkata-based company decreased to Rs 1,399.68 crore for the quarter under review from Rs 2,875.78 in the same period previous fiscal.
• The company manufactures direct reduced iron, hot rolled coils, pig iron/hot metal, cold rolled/galvanized coils/sheets and colour coated sheets.

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Pharma, mfg, telecom sectors see highest salary hikes for FY10

1. Pharmaceuticals, manufacturing and telecom sectors are witnessing the highest increase of up to 11 per cent in salaries for FY 2009-10, while IT and financial services got the least hikes.
2. With the economic downturn impacting the earnings of companies, they were restructuring their salary structures and focusing more on performance and also cutting down on the increments for the current fiscal, experts said.
3. As per a mid-year survey on 'Performance & Reward Trends' by Hewitt Associates, pharma sector saw the highest salary hike of 11.1 per cent for FY 2009-10, followed by manufacturing (10.8 per cent), telecom (9.5 per cent) and FMCG (9.3 per cent).
4. However, retail sector has been impacted by the downturn and the salary hikes for the current fiscal might not be as expected by the industry, Thiruvengadam said.
5. "Firms have been found to implement metrics to determine return on investment on human resources.
6. Investment in proprietary knowledge and technological upgrade is continuing, albeit slower than during boom times.
7. "Smart firms have turned inward, consolidating operations, rationalising requirements and optimising resources to ride the slowdown," Deloitte Senior Director (Management Consultancy Services) P Thiruvengadam said.
8. "In the wake of the economic downturn and the current situation that the Indian economy is witnessing the IT, ITeS sectors will be impacted," Thiruvengadam added.
9. The Hewitt survey revealed companies across industries were strongly differentiating rewards on basis of performance but majority of them were not considering any layoffs or severe salary cuts in the current fiscal.
10. The sectors to witness least increase in pay packages for the current fiscal are IT (2.8 per cent), ITeS (4.4 per cent) and Financial Servicesspace (5.2 per cent), the survey stated.
11. "In IT & ITeS sector, overall salary increases have been kept under control and most companies have reported a stable or marginally reduced pay cost structure in relation to total costs.
12. It reflects the response of a growth economy managing a short to medium term slowdown, while keeping an eye on long term growth," Thiruvengadam added.
13. Interestingly, layoffs have been generally more prevalent in sectors which hired numbers in the last few years like in the IT, ITeS, and retail sector recently, he added.
14. The Deloitte survey 'Engaging employees in recessionary times' found that there was an overall decrease in attrition rates.
15. Around 23 per cent of firms surveyed reported attrition figures of less than five per cent and 44 per cent of companies reported figures between five and 10 per cent.
16. "During these unprecedented times when firms across the world considered options such as mass layoffs and salary cuts, India Inc also considered same measures but with maturity," Hewitt's Performance and Rewards Consulting practice leader in India Sandeep Chaudhary said.

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TATA's ASEAN strategic business hub possibly in Thailand

The TATA Group is actively considering using Thailand as a strategic marketing hub for promoting its products in the ASEAN region, revealed that country's Industry Minister, Chanchai Chairungruang, who is currently on a six-day visit to India. Interacting with media after meeting with Indian businessmen here, Chairungruang said TATA Motors (TATAMOTORS.BO : 369.45 +7.45), one of India's best known automobile manufacturers, is looking to expand its export market in ASEAN countries, and plans included introducing the TATA Motor's truck range, an eco-car and possibly the TATA Nano (the world's most economically priced passenger car).

A TATA Motors, Thailand, representative said talks for the launch of the Nano were still at a very preliminary stage, but acknowledged that the project could form part of the Thailand-India Free Trade Agreement (FTA) expanded negotiations that are to take place later in the year. For TATA Motors to think of Thailand as a future investment base does not come as a surprise, as the country has evolved into the largest vehicle producer in South East Asia since constructing its first automotive plant in 1961.

Today, Thailand's automotive products are exported to 130 countries worldwide. The country is also the world's largest producer of one-ton pick-up trucks, the seventh largest automotive exporter and the 14th largest automotive producer overall. TATA Motors appears interested in bidding for an eco-car project, as the Board of Investment of Thailand (BOI) and the Thai Ministry of Finance is offering the maximum incentives to manufacturers of eco-cars.

Under the new incentives program, the BOI will offer projects with a minimum investment value of five billion Baht (approximately 144 million USD), a corporate income tax holiday of eight years, regardless of location, and duty-free importation of machinery. On its part, the Thai Finance Ministry will allow eco-car manufacturers to pay a reduced excise tax of 17 percent on cars with engines smaller than 1300 cc for petrol-powered cars and 1400 cc for diesel powered cars.

This is significant in that the excise tax currently levied on standard passenger cars in Thailand ranges between 30 to 40 percent, and if reduced for eco-cars, it would be the equivalent of 2000 USD on the car's retail price. The finance ministry is also offering a three-year exemption of import duties on auto parts used to make vehicles E85 ready and which cannot be produced in Thailand.

Cars using E85 will have their excise taxes reduced to 25 to 35 percent depending on the size of the engine. Excise tax on petrol in this category of car will also be reduced from 3.6850 Baht per liter to 2.5795 Baht per liter.

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Amul beats recession: turnover of Rs. 6700cr

Gujarat Co-operative Milk Marketing Federation Limited (Amul) has once again proved that efficiency of co-operatives can successfully counter the recessionary trends of the economy thereby ensuring consistent livelihood to the farmer producer and offering value for money products to its consumers. For the third consecutive year, it has posted a double-digit growth turnover reaching Rs. 6700 crores.
The unduplicated turnover of the dairy co-operatives of Gujarat would be approximately Rs. 10000 crores. Not resting on the laurels of the past, instead, learning that the foundations of successful organization are rooted in the process of systematic long term planning, GCMMF has chalked out a mission 2020, a long term plan which envisages that dairy co-operatives turnover will reach Rs.27000 crores by the year 2020.
This plan is backed up by relevant strategies in co-operative working, increasing productivity of milk cattle, higher processing infrastructure to handle the peak milk procurement of 195 lac ltrs per day. Special emphasis will also be given to capture liquid milk market of major metro cities. This remarkable performance from Amul has come at a time when the International dairy markets are reeling under the impact of world-wide recession and slump in global demand. Pandemic economic turmoil has taken its toll, as international prices of all major dairy products have declined drastically in recent months.
However, with its sharp focus on domestic Indian market, Amul has successfully insulated Indian farmers from all the turbulence in global dairy trade. Amul is leading the dairy co-operative sector towards a pivotal role in alleviating the adverse impact of economic slowdown in India. This co-operative has helped to appropriately diversify the rural economy, thereby shielding rural India from the worst impact of the current economic crisis.

It is already providing the best employment option for displaced workers from urban manufacturing sector, who after losing their jobs due to recession, have started reverse migration from cities back to villages. These displaced workers can sell milk to their village dairy co-operative society and thus generate regular income for themselves and their families.

Amul has helped to provide a safety net to the most vulnerable and marginalized section of our population, which otherwise suffers the worst consequences of any economic crises. Revenue inflow from dairy co-operatives led by Amul has contributed towards strengthening rural purchasing power, helping growth in rural economy to offset any slowdown in urban economy.
In an effort to interface directly with consumers and enhance visibility of brand 'Amul', GCMMF has expanded its network of Amul Parlors to more than 4000 parlors across various towns and cities of India. This includes 50 Amul Parlors in major railway stations and more than 50 special Amul Ice-cream scooping parlors.

GCMMF amply demonstrated its commitment towards sustainable ecological development of our nation, as its farmer members celebrated our 61st year of independence by planting 52.74 lakh saplings across 21 districts of Gujarat, on August 15, 2008. During the last two years, members of GCMMF have planted more than 71.65 lakh trees, demonstrating their resolve to preserve and improve our natural environment.

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TARP Repay : what does it mean for the banks?

Tense negotiations over the value of warrants held by the Treasury Department could prevent some of the biggest U.S. banks from fully shaking off government ownership after they repay billions of dollars in bailout funds in coming days. Some big banks, including JPMorgan Chase & Co, are wrangling with officials over the warrants they want to buy back from Treasury, which the government owns in addition to the banks' preferred stock.

The banks argue they should get a discount on the warrants because they did not want the money in the first place. The issue puts Treasury in the tough position of wanting to give the banks a fair deal while not shortchanging taxpayers, who financed the industry rescue plan at a time when the sector was extremely shaky. The standoff means the warrants may remain in government hands for a while longer -- leaving the banks ensnared within a Treasury Department tentacle.

"There would be a huge political issue with pricing the warrants below what the market would pay," said Douglas Elliott, a former JPMorgan investment banker now with the Brookings Institution, a Washington think tank. Jamie Dimon, chief executive of JPMorgan -- which has taken $25 billion in federal funds and has chafed under the government's influence -- said earlier this week that the United States should cancel 50 percent of the warrants "out of fairness." Dimon has said the largest banks were strong-armed into taking bailout funds last October and should not continue to be punished.

The Federal Reserve will name next week the first batch of big banks given the green light to repay funds from the $700 billion Troubled Asset Relief Program. Repayment involves buying back the preferred stock the banks issued to the government, as well as the warrants. The warrants come with a total price tag of almost $4 billion for eight of the largest U.S. banks seen as contenders to soon repay the TARP funds, some estimates show, with JPMorgan's warrants making up $1.5 billion of that total.

Once the banks bought back their preferred stock they would be free of many of the restrictions attached to TARP money, including limits on executive pay, according to legislative language recently approved by Congress. But until the banks bought back the warrants, the government would still have an interest in them. It would be "a very realistic scenario" that some banks could repay TARP for the preferred stock while still negotiating warrant buybacks, said Scott Talbott, an executive with the Financial Services Roundtable. "Until the warrants are repurchased, the government still has an ownership stake in the banks," Talbott said, raising concerns that the rules of the rescue program could be changed again.

A FAIR DEAL

Valuing the government-held warrants is an inexact science because there is no directly comparable market price. Fed Chairman Ben Bernanke on Wednesday highlighted the challenge, telling lawmakers that banks would have the option of buying back their own warrants before Treasury could publicly auction them. That means banks could negotiate with Treasury on the price because a market price is not clear, resulting in low-ball offers from banks.

But Bernanke said the government has a responsibility to honor its obligation to taxpayers. "The point of the warrants was that as things turned around and got better, that the public would share in some of that gain, and I would say that TARP has been pretty successful in terms of stabilizing the banks," Bernanke said. Herb Allison, the nominee to head the financial bailout program, told lawmakers on Thursday that Treasury is looking at valuation and will announce its policy "before too long."

The issue of fair valuation has already resulted in one dust-up. Old National Bancorp, a small bank based in Evansville, Indiana, recently bought back its warrants for $1.2 million, when other estimates had indicated the warrants were worth as much as five times that amount. Since then, lawmakers have urged Treasury to make deals that get taxpayers maximum value for their investments.

Linus Wilson, a finance professor at the University of Louisiana at Lafayette, said the banks got a "massive subsidy" through the capital infusions, which were good deals at the time, whether they asked for the money or not. The private negotiation process tends to reward banks that low-ball the value of their warrants, Wilson said, but public scrutiny for fair prices could balance that concern. "Treasury should be taking a very hard line in these negotiations," Wilson said.

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LIC Mutual fund: Nomura to take 35% stake

Japan's Nomura is set to take a 35 percent stake in LIC Mutual Fund, the Business Standard reported on Wednesday, citing sources. The board of the mutual funds parent, state-owned Life Insurance Corp (LIC), has already approved to induct Nomura as a strategic partner and has formed a four-member committee to decide the valuations and conditions, the newspaper said, "We are in the middle of the process. Therefore we cannot give you a time line," LIC's managing director, Thomas Mathew, was quoted as saying in the paper. LIC Mutual Fund is expected to be valued at about 15 billion rupees ($320 million) or 6 percent of its assets under management, the paper said, citing an unnamed industry expert.

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Indian rupee to appreciate by 10% in a year

India’s rupee, which posted its best month on record in May, is set to rally 10 percent to 43 per dollar by mid-2010 as fund inflows from abroad pick up and lower oil prices improve the nation’s trade balance, Calyon said.
The rupee may outperform many Asian currencies as Prime Minister Manmohan Singh includes “some significant pro-market reforms” in his second term, helping attract investment, Sebastien Barbe, Calyon’s Hong Kong-based currency strategist, wrote in a research note today. The central bank may also favor a stronger rupee to combat inflation, which policy makers anticipate will accelerate later this year, he wrote.
“With risk appetite coming back gradually, and against the post-election backdrop, we believe the rupee should benefit from the oil-induced improvement in the trade balance,” wrote Barbe at the investment-banking unit of France’s Credit Agricole SA.
Calyon had earlier forecast the rupee will reach 43 by the end of 2010, and cited the “surprisingly good outcome from the elections” and a global rebound in risk appetite as the reasons for its revision. The median estimate in a survey of six analysts is for the rupee to trade at 47.50 by mid-2010.
The rupee surged 6.4 percent in May, the biggest monthly gain since at least 1973, on optimism Singh will revive stalled reforms as a resounding victory for his Congress party-led coalition eliminated the need to enlist the support of Communists to retain power.
Overseas Investment
The currency traded at 47.085 a dollar as of 12:14 p.m. in Mumbai, up 0.2 percent from yesterday and little changed on the week, according to data compiled . The price of crude oil in New York was recently $69.40 a barrel, less than half the record $147.27 set in July last year. India may allow greater overseas investment, sell stakes in state-run companies and inject more capital into lenders to stoke economic growth, President Pratibha Devisingh Patil told lawmakers yesterday, as she unveiled Singh’s agenda to a joint session of parliament in New Delhi.
The Bombay Stock Exchange Sensitive Index jumped 28 percent last month, its best performance in 17 years, as overseas investors bought $4.3 billion more of the nation’s shares than they sold. That’s the most they’ve added to their holdings in a month since October 2007. “Should the new administration deliver on reforms, there could be further portfolio inflows,” Barbe wrote. The rupee may still “correct” back to 48 in the short term as the rebound in stocks may have overpriced the speed at which the likely policy changes will be implemented, according to Calyon.
Faster Growth
Stimulus spending, low borrowing costs and an easing global recession will help accelerate economic growth in the fiscal year that starts April 2010, Barbe wrote. Gross domestic product may increase 7 percent, after expanding 6 percent in the current year, he said. The Reserve Bank of India may reduce its benchmark interest rate no more than a quarter-percentage point as it approaches the end of its rate-cutting cycle before the wholesale price index starts to rise, Barbe wrote. Inflation was below 1 percent in each of the 12 weeks through May 23, the latest data show.
Policy makers have slashed the overnight lending rate, or repurchase rate, six times since mid-October to 4.75 percent, the lowest level since it was introduced in 2000. The difference between one- and five-year swap rates will narrow as the return of inflation and prospects of monetary tightening push up the short end of the curve, according to Barbe. Rates at the longer end may also increase, albeit at a slower pace as Singh “eventually shows a stronger commitment” to rein in the fiscal deficit, Barbe wrote.
The spread may narrow to between 1 and 1.2 percentage points toward the final months of this year, from 2.16 percentage points today, according to Calyon. The gap reached a record-high 2.3 points on May 28.

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Dabhol project : news update

The beleagured Ratnagiri power project, formerly Dabhol Power Project, will achieve the full load of 1,850 mw by March next year from the present level of 900 mw. The project is expected to generate well over 13,000 million units annually once it achieves full load. The Ratnagiri Gas and power Pvt Ltd (RGPPL) is also in the midst of signing contractual service agreement and rehabilitation agreement with GE for maintenance and rehabilitation of machines. GE, which was dillydallying over entering into such an agreement, has finally given its consent and this also resulted in the renewal of insurance by the national insurance companies.
NTPC chairman and managing director and RGPPL managing director AK Ahuja told reporters on Friday that the gas supply agreement with Reliance Industries gas from KG D6 field, which was approved by RGPPL board on May 8, is expected to be signed shortly. Financial restructuring under the aegis of the centre is already agreed by all stakeholders in March 2009 though it is subject to the approval of the Central Electricity Regulatory Commission. RGPPL has also approached the CERC for a rise in Dabhol project tariff to Rs 4.44 and the order is awaited for the same.
Ahuja said as the major issues have been resolved RGPPL will be in a position to achieve full load of 1,850 mw by March next year. Moreover, Sharma informed that NTPC, which has an installed capacity of 30,144 mw, will achieve its capacity addition target of 22,430 mw by end of the 11th Five Year Plan. The installed capacity will rise to 50,000 mw by 2011-12 and the company plans to increase it 75,000 mw by 2016-17. NTPC aims to add 3,300 mw in the current fiscal itself.
Of the 22,430 mw, 2,740 mw capacity has already been commissioned, projects with capacity of 17,930 mw are under construction and 1,760 mw under bidding stage. Sharma informed that against its requirement of Rs 17,700 crore, NTPC has already organised Rs 22,000 crore from the public sector banks, the state-run Power finance Corporation and the Life Insurance Corporation.

FDI in Insurance : increase in the limit

A day after the government announced its intent on allowing foreign direct investment (FDI) in insurance, the industry is upbeat. All companies with a foreign partner, whose shareholding is currently curbed at 26 per cent, have showed interest in increasing it to 49 per cent. "We are contributing capital even today in the insurance companies," a senior AIG (American International Group) official said.

In its home country, AIG is facing financial problems but said it will look at increasing stake in Tata-AIG Life and Tata-AIG General Insurance companies once the FDI norms are relaxed. "AIG will consider increasing its stake subject to the agreement between both the partners. We will review the situation at that stage (when the insurance bill is passed)," he said. "Standard Life will be increasing stake to 49 per cent," said Paresh Parasnis, principal officer and executive director of HDFC Standard Life.

"The first MoU that was signed between the promoters provided for that. Another agreement signed over a year-ago said that the valuation arrived would be at a fair value basis." But he's not jumping the gun. "We will have to wait and see as to what the new provisions provide for. Will the foreign promoter be allowed to increase stake through FDI or through a combination of FDI and foreign institutional investment (FII)," he said.

"It does not depend on whether the foreign promoters are willing to increase their stake but whether they are capable of increasing their stake," said US Roy, CEO and MD, SBI. "The situation will differ from promoter to promoter. BNP Paribas has so far not indicated anything. It will be decided by the shareholders.""There is also a need to augment resources in the banking and insurance sectors in order to permit them to serve the needs of society better," President Prathibha Patil said on Thursday.

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Infrastructure spending to double to 9% of GDP

The government is planning a raft of new measures to pitchfork investment in infrastructure to about 9 per cent of gross domestic product (GDP) over the next five years double the current level of 4.5 per cent. The measures would include steps to make it attractive for banks to lend to long gestation infrastructure projects, develop a deeper bond market powered with tax breaks and incentivise insurance companies park funds in infrastructure firms by investing in debt instruments.
An estimated investment of $500 billion (Rs 23 lakh crore) is required to upgrade roads, highways, ports and airports in the next five years, about 10 times the current level. A senior government official, who did not wish to be identified, told Hindustan Times that the objective was to hit the 9 per cent figure by 2014."The objective is to ensure that banks lend at a stable rate for infrastructure projects," said the official.

"There is an urgent need to ensure a stable lending regime for infrastcuture projects at about 12 per cent. The average effective rate of lending is currently at around 14 per cent," said Vinayak Chatterjee, Chairman, Feedback Ventures, an infrastructure consulting firm. The government is also planning to put in place an effective monitoring mechanism with stringent penal and regulatory powers to ensure timely execution of projects.

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Bernanke's big deal for India

The massive liquidity infusion by the Federal Reserve, say its critics, has left the US economy awash with cash. So much so that when economic activity revives, the Fed won’t be able to mop up the surplus liquidity quickly enough and the US will have very high inflation, which it will dutifully export to the rest of the world. How true is this view? Let’s just say the jury is still out on this one.

Research by Michael R Rosenberg, a former head of fixed-income and foreign-exchange research at Merrill Lynch and Deutsche Bank, helps to put the challenge before Federal Reserve chairman Ben Bernanke in perspective. In an analysis on financial conditions for financial-information provider Bloomberg, Rosenberg has broken down the US investment-grade credit spread — the difference in yields on Aaa-rated and Baa-rated bonds — into two parts.

The first component, which he calls the “liquidity-risk premium”, is the excess yield demanded by investors to hold between Aaa-rated corporate bonds rather than US treasuries. The second component, which corresponds with what Rosenberg terms as the “default-risk premium”, is the additional reward investors want in order to hold Baa-rated bonds instead of those that are adjudged to be Aaa.

The liquidity-risk premium in the US hit a low of 62 basis points in June 2007. Then, as the mortgage crisis began unfolding, the premium started to climb up, hitting a high of almost 300 basis points in mid-March this year. After the Fed began buying treasuries directly from the government — a policy known as “quantitative easing” — the liquidity risk premium fell steadily.

It stands at 200 basis points now. By historical standards, liquidity in the US bond markets is still fetching a substantial premium. But the rate at which the Aaa-treasury spread is falling does seem to indicate that return to ‘normal’ premiums for liquidity may not be far.This does bolster a case for the Fed to start drawing up an exit plan.

However, one must also consider the default-risk premium, which is where the story gets interesting because the excess yields that investors are currently demanding for holding Baa bonds — rather than Aaa bonds — is still at an elevated level and trending lower painfully slowly.Bernanke has a vexing problem. If he withdraws liquidity too soon, the default-risk premium — which is currently at 217 basis points, compared with the average of just 85 basis points between 2004 and 2007 — could once again start rising toward the post-Lehman high of 350 basis points. And that might throw the US economy into the vortex of a deep depression.

But if Bernanke prints a few more trillion dollars in crisp new dollar bills to force down the default-risk premium, then there’s a good chance that he’ll end up proving his critics right.One of the staunchest critics of Fed’s policies is investor Jim Rogers, who sounded deeply pessimistic about both US bonds and currency in an interview he gave me in Mumbai this week.

“I can’t understand why I am one of the few people who see this. Either I’m nuts, or they’re nuts,” said the chairman of Singapore-based Rogers Holdings. “You have huge amount of money being printed at a time when the supplies of everything are under duress — the inventories of food are the lowest they’ve been in decades; nobody can get to open a mine. This is the perfect scenario for higher prices and long-term inflation.”

Bernanke doesn’t buy this argument. In his testimony to the House Budget Committee this week, the Fed chairman said that he foresaw inflation to remain low. “The slack in resource utilisation remains sizeable, and notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued,” he said.

“As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.”What makes this debate very relevant to us in India is that we need to import both commodities and capital from the rest of the world.

We would be hurt if oil went back up above $100 a barrel; we would suffer a great deal more from a premature withdrawal of US liquidity, especially if that were to lead to yet another spike in investors’ perception of default risk in the world’s biggest economy.It’s instructive to see how the liquidity-risk premium shot up in India following the collapse of Lehman Brothers and the attendant jump in the default risk in the United States.

The spread between Aaa-rated corporate bonds and Indian government bonds tripled to 420 basis points in just about a month. The liquidity shock has since then eased considerably: the Aaa spread is down to a little more than 200 basis points. But unlike in the US, the liquidity-risk premium in India has stopped falling. Domestic liquidity may get squeezed if finance minister Pranab Mukherjee decides to use the budget to ramp up government spending in a big way.

As Nobel-winning economist Paul Krugman has been pointing out, the risk that Obama administration’s big-spending ways will “crowd out” the private sector is minimal. Obama’s fiscal expansion is simply allowing excess household savings to get absorbed in the absence of private credit demand even at near-zero interest rates.Our situation is different.

“With every percentage-point increase in the fiscal deficit, maintaining adequate liquidity in the system becomes that much more difficult,” RBI governor Duvvuri Subbarao said at the Economic Times Financial Management Seminar last month.Bernanke’s final choice will matter tremendously for equity investors in the Indian market.

If the Fed chairman elects to ignore the inflation risk, the commodity producers that make up almost 30% of the sensex ought to continue to do well. But if Bernanke moves in quickly to withdraw liquidity, the worsening US unemployment outlook and the consequent increase in the default-risk premium may stamp out the worldwide equity rally.

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India's growth : An inclusive agenda

The 2009 elections have attracted world-wide attention for the maturity displayed by the Indian electorate to give a decisive mandate to the UPA government. India clearly trusts the economist PM to lead as the economy faces the slowdown caused by the most severe global economic crisis since the 1930s. The PM and the finance minister have both stressed the importance of boosting the economy as their immediate priority.

The Indian economy has indeed been deeply hurt from the crisis with the GDP growth rate slowing down to 5.8% during the second half of 2008-09 compared to 9% achieved in the previous year. Even though a 6.7% growth recorded in full 2008-09 would put the Indian economy among the best performing, yet the damage has been extensive especially on SMEs, workers in the unorganised sector and other vulnerable groups.

Exports have declined for seven months in a row especially in labour-intensive sectors such as handicrafts, apparel, gems and jewellery, resulting in job losses. The previous government did take a number of steps including easing the monetary policy and fiscal steps such as subsidised home loans and incentives for exporters of labour-intensive goods.

While these steps were in the right direction and were helpful, they need to be supplemented by many others to revive the growth momentum. The focus has to be on generation of additional demand to make up for the loss in the export markets and private investment activity.

Responses of most of the governments in the region have been on similar lines, although varying in terms of their relative magnitudes with the Chinese government’s fiscal package amounting to $586 billion (at 13% of GDP) being the most ambitious. The methods of distribution of fiscal impulses have varied, with most governments focusing on infrastructure investment while some have distributed cash among people (as in Japan).

In India’s case a stimulus package of the order of $50 billion (roughly 5% of GDP) spread over two financial years would be desirable. It would go a long way in reviving demand and restoring the growth sentiment. Additional spending of such a large sum also provides an opportunity to enhance the inclusiveness of resulting growth.

The package should target the weaker sections of society to make the growth process more inclusive by paying special emphasis, for instance, on development of rural infrastructure such as rural roads and housing, primary and secondary education, health and sanitation. These would have high pay-offs in terms of growth and inclusiveness while having low import content.

A part of the package could be an adjustment fund for assisting the affected SMEs and workers. The national rural employment guarantee scheme should be extended to urban areas where most of the affected workers are likely to be found. With a much higher propensity to consume, a rural and pro-poor focus in the fiscal stimulus package would generate demand rapidly. Sceptics would be concerned about the effects of such a large package on the fiscal balance and hence on inflation, keeping in mind the already stretched fiscal deficit in the current year.

However, this is an exceptional year requiring an exceptional response. Most governments around the world are running huge fiscal deficits to revive demand. Furthermore, there is little risk of inflationary expectations in the present scenario of declining demand with inflation in India going down to under 1%. The other steps the government could take include expediting the infrastructure projects.

The national highway development programme could be expedited to make up for the lost time. Mr Kamal Nath, in his new role as the minister for surface transport, may push the highway construction with his customary zeal. The release of the sixth pay commission arrears to government employees could be frontloaded to get purchasing power in the market fast.

The Indian exporters need to be assisted by a cheap rupee policy especially when excess capacities are lurking on the horizon all around the country. However, as in 2007, rising FII inflows have begun to put upward pressure on rupee’s exchange rate. An 8% appreciation of rupee over a past few weeks puts a heavy adjustment burden on exporters while cheaper imports will further burden an already stretched current account deficit.

Having witnessed the ill effects of the volatility caused by the FII inflows, India should take steps to moderate their inflows. Fortunately FDI inflows to India are growing robustly and should be relied upon for augmenting reserves, if at all.To conclude, the time has come for taking bold steps to revive the growth momentum of the economy. India should seize the moment and inject a substantial stimulus while enhancing the inclusiveness of the growth process.

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Tata Steel sales volume up 18 pc in May

1. Tata Steel on Saturday said its sales volume surged by 18 per cent to 4.69 lakh tonnes in May on the back of robust demand from auto and construction sectors.
2. In the corresponding month last year, the company's sales stood at 3.97 lakh tonnes, the steel major said in a statement.
3. During the month under review, Tata Steel saw its saleable steel production surging by 23 per cent to 5.01 lakh tonnes as against 4.08 lakh tonnes.
4. The sale of long products, mainly used in construction industry, increased by 34 per cent while that of flat items, used by auto and consumer durable sectors, increased by nine per cent, over the year-ago period.
5. Tata Steel's crude steel output for the month went up by 17 per cent to 4.86 lakh tonnes from 4.16 lakh tonnes, while hot metal production rose by 19 per cent to 5.28 lakh tonnes from 4.43 lakh tonnes.
6. The company claimed that one of its steel melting shops in Jamshedpur achieved best-ever May production at 2.18 lakh tonnes. Also, a merchant mill recorded best-ever May production of 30,710 tonnes over 28,505 tonnes the same period last year.
7. The output of its hot strip mill and new bar mill also registered an impressive growth over May 2008, it said.

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Sebi bars eight entities for rigging in RTS Power

Market regulator Sebi on Friday barred eight entities, including six individuals and two firms, from dealing in the stock market tillfurther notice, for allegedly rigging the share price of RTS Power Corporation. Those barred are Mukesk G Konde, Ashok Narayan Waje, Nitesh Ashok Jadhav, Hetal Patel, Rajesh Patel, Chetan Shah, Om Associated and Bhavani Trading Company.

Of these, Hetal Patel, Om Associated and Bhavani Trading Company figure on the list of entities banned by Sebi for their alleged involvement in the manipulation of the Pyramid Saimira stock.Earlier this year, Networth Stock Broking, Geojit Financial Secs, Dawnay Day AV, and Tata Securities had complained to Sebi that Mr Konde, Mr Waje and Mr Jadhav had placed ‘buy’ orders in RTS Power and then disappeared without making any payment.

After consultation with Sebi, BSE had withheld the payout, amounting to Rs 9.85 crore, to the sellers of the block of RTS shares, that were bought by Mr Konde, Mr Waje and Mr Jadhav. It was suspected that the fake buy orders were placed with an aim to provide an exit to the sellers, who were part of the fraud.

However, the decision of BSE was challenged by Ms Hetal Patel — one of the sellere — before the SAT. SAT, in turn, directed BSE that Rs 3.44 crore should be deposited in a fixed deposit with a nationalised bank, till such time the appeal is finally disposed of by the Tribunal body.

"I find that Mr Konde, Mr Jadhav, Mr Waje and Ms Hetal Patel and Rajesh Patel prima facie colluded to misuse the stock exchange mechanism to profitably exit from their positions in the RTS scrip on February 11, 2009," Sebi whole-time member KM Abraham said in his order.

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Private equity players set to infuse $8 bn

Venture capitalists and private equity players are now working overtime when it comes to new investments. Due diligence is taking moretime than before.Anywhere between $5 to $ 8 billion is waiting to be pumped into the Indian market in the form of private equity. Slowdown-free sectors like healthcare and education are hot picks, besides those catering to domestic consumption.

"Right now, we are evaluating proposals in diagnostics, logistics and energy saving," says Srini Raju, co-founder of Peepul Capital. His fund has a war chest of $220 million of which $150 million has been invested in telecom and manufacturing companies.The global slowdown and rupee appreciation has led to a shift of focus from exportoriented firms to ones meeting local demands. "Even foreign VC funds are keen to invest in local industries," says Srini Vudayagiri, long time private equity and angel investor.

So much so that even micro finance related ventures is finding favour with foreign funds. And with the new government coming into power, there is renewed interest in infrastructure projects as well. Retail and other consumption driven industries having a strong focus on tier II and tier III markets are also being favoured by private equity players.In technology, VCs/PE players are looking at those companies which derive revenues from alternate markets instead of just America.

"They are looking at a balanced play portfolio with multiple engines of growth," says Sameer Mehta of Atlas Advisory. Venture capitalists are now stringent on exit strategy. "Exit scenarios are more definitely spelt out in the term sheets than ever before. The documentation covers scenarios like what if the IPO doesn't happen within the stipulated time period. Earlier, such issues were relegated to the periphery," says Vudayagiri.

Fluctuating rupee has also forced many investors especially foreign funds to protect their dollar value and that is now clearly spelt out in term sheets. While private equity funds are normally known to take the company to the IPO stage, managers are exploring other exit options like selling stake to growth stage funds.

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Maximise returns from long term investment

“Every investor is a long-term investor until the stock market tanks,’’ says Amar Pandit, certified financial planner (CFP) with My Financial Advisor, a wealth management firm. “You get to know his mental make up only by how he reacts to the market fall. If he stops or discontinues his regular investments, it becomes clear that he doesn’t have the stomach for risk. Also, he can’t think of his investments in the long term,’’ adds Pandit.

Financial experts have many such stories identify the so-called long-term investor from others. This is because most of them aver that planning investments with a long-term perspective is vital to one’s financial well being. Though one often comes across well meaning advice about long-term planning, people often fail to stick to it—especially when it comes to equity investments.

“It is not that equity is the only long-term investment. When one invests in real estate, public provident fund or employee’s provident fund, one knows they are long-term commitments. For example, PPF is a 15-year account and EPF can be of 30 years, depending on one’s working life. In all these, people have long-term view,’’ says Pandit.“They wouldn’t quit these investments based on short-term trends, either due to emotional reasons or because they can’t be easily liquidated.

However, when it comes to equity—an instrument only meant for long-term investors—people take decisions based on short-term trends in the market,’’ he adds.However, advisors add that one shouldn’t conclude that people haven’t realised the importance of a long-term investment perspective.

“People who have been investing for some time in the market realise the importance of long-term commitment.For example, when the market was down, the impression was created that most people would discontinue their SIPs, but it was not the case,’’ says D Sundararajan, investment consultant, Trendy Investments, an investment advisory firm.

“Most seasoned investors continued with their investment programme, as they perhaps realised that it was beneficial to buy stocks when the market was down,’’ he adds. In short, if you haven’t taken a long-term view of your financial needs and planned your investments accordingly, you are very unlikely to achieve your goals. “When we talk about a life goal like retirement or child’s education, we are talking about at least 10-15 years ahead.

If you don’t include the possible return over that period or the impact of inflation on your corpus, you wouldn’t get a realistic picture,’’ says a wealth manager in private sector bank. “In such a scenario, a person will have to face unpleasant surprises in the last moment, when he wouldn’t be in a position to take remedial actions,’’ he adds.

Having a long-term perspective will also come handy when you reallocate assets in your portfolio to mitigate the volatility in a certain segment. Sundararajan offers an example of how having a long-term perspective could help prune the portfolio in times of uncertainties.

“When the stock market was down, we decided to include gold in the portfolio of many clients. We took this decision on the basis of our view that the stock market may take a long term to recover because of the uncertainties in the global economy and gold would add the much needed stability to the portfolio,’’ he says.

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