Shailesh J. Mehta School of Management Indian Institute of Technology, Bombay
Finsight The Fortnightly Newsletter
Issue: July 22, 2012
Inside this Issue
Putting growth on track
News of last 2 weeks
The Economic Times
Check your Fin Quotient
MoneyControl.com Financial Express Business Standard BusinessLine Investopedia.com
F I N S I G H T
Putting growth on track There's nothing investors, domestic or foreign, hate more than the lack of a clear business environment. And over the past several months, this lack of clarity has been one of the biggest problems plaguing economic policymaking in the country. The zooming current account deficit has led to the rupee weakening to record lows. The delayed monsoon and uncertain political climate has added to the woes of Indian Inc which was already reeling under the impact of the higher interest rates and decreasing global demand. Now, with Presidential elections over and Manmohan Singh at the helm of the Finance Ministry, India Inc expects multitude of long delayed reforms to revive the economy and restore the investors' confidence in India's growth story. PM has rightfully acknowledged that the solutions to India's problem are internal. During a press conference he said: “I think the events of the last couple of days convince me more than ever before that there are no international solutions to the problems of a country of India's size, of India's diversity. So it is obligatory on us…. to restore the momentum of growth that this country is capable of and which this country needs”.
Following are some of the reforms that can cure the ailing Indian economy The reforms will have to be kicked off with a increase in prices of diesel, if not
decontrolling its altogether. This will help the government narrow its fuel subsidy burden to a large extent. With the international crude oil prices falling, it is the right time for the government to act on fuel prices. The government has to devise measures that will attract long-term foreign direct
investments, not foreign investor inflows that are short term in nature. Quick implementation of the goods and services tax and a more radical direct taxes
code. Creation of a single agricultural market in India by abolishing all inter-state barriers
to movement A radical reshaping of the Centre-state fiscal relationship, with more resources and
policy-making powers being shifted to the states More flexible labour laws. No need to rush into a hire and fire policy, but we can
begin by allowing industry to make more temporary hires and contractual employees Complete abolition and detoxification of inspector-raj and unnecessary
regulation that only increases corruption
Putting growth on track
Transparent land acquisition, mining and environment laws – laws that won't
make land and other costs prohibitive even while safeguarding the interests of farmers and the poor. Each state must be free to make its own modifications of such laws.
A strong push to urbanisation, including large investments in public services, and especially public transport financed by higher taxation of private vehicles.
A robust and radical disinvestment and privatisation programme to raise resources
for investment in infrastructure and pay for subsidies to the poor. Allowing domestic pension and provident funds to invest in stocks. This will make
up for any shortfall in FII investments. Last, we could do with a more liberalised foreign direct investment regime in sectors
like insurance, banking, telecom, media, aviation, and retailing, among other sectors.
We need to liberalise long-term direct investment in Indian projects first; portfolio investments are not a priority. We need hard money, not hot money. India can escape the worst effects of the coming global slowdown if it fixes its internal problems rather than focusing on enticing foreigners to invest here.
News of last 2 weeks India's inflation dips in June...April's figure revised India's provisional inflation rate, as measured by the wholesale price index, slowed to 7.25% in June from 7.55% in the previous month. However, with monsoon already playing truant, an increase in inflationary expectations may stoke food prices further.
wholesale venture The government is mulling a significant rule change that will allow retailers to source goods freely from their group wholesale ventures, even as the Delhi High Court has admitted a public interest litigation that alleges sales by BhartiWalmart to Bharti Retail violate the restriction on FDI in multi-brand retail. India allows 100% FDI in wholesale cash and carry, but multibrand retailing is not open to foreign investments
The inflation data holds significance ahead of the quarterly monetary policy review by the central bank on 31 July at a time when investment and industrial activity have significantly weakened. The April inflation rate has also been revised upward to 7.5% from the provisional figure of 7.23%
Cabinet Committee on Economic Affairs approved 10.82 Per Cent Disinvestment in SAIL Cabinet Committee on Economic Affairs on 20 July 2012 approved 10.82 per cent disinvestment in Steel Authority of India (SAIL). The divestment will help the government to raise about 4000 crore rupees. The government holds 85.82 per cent stake in SAIL. The government in annual budget 2012-13 set the disinvestment target at 30000 crore rupees
Monsoon turns below average for week ended July 19 India's monsoon rains turned below average for the week ended on Thursday after turning above average in the previous week for the first time in the four-month season. Total rainfall from June 1 to July 18 was 22% below average, fanning concerns about a possible drought this year instead of average rainfall expected by the Government at the start of the season FDI in multi-brand retail: Government mulls free sourcing from
Union government is also eyeing to partially offload its share in PSUs like Hindustan Aeronautics, BHEL, National Aluminium Company (Nalco), Hindustan Copper and Oil India in the fiscal year 2012-13
News of last 2 weeks continued... Rangarajan for early action on diesel decontrol, FDI Admitting that the days of 'big-bang' reforms are over, Rangarajan, who is Chairman of the Prime Minister's Economic Advisory Council (PMEAC) said that the government should take early action on decontrol of diesel prices and move ahead with its proposal to allow foreign investment in multi-brand retail.
do away with regulatory forbearance for restructured assets, banks should refrain from converting debt into equity, seek higher sacrifice from corporates and insist on promoters guarantee even if restructuring is on account of external factors VCs invest in 100 deals worth $363 million during first half of 2012 According to a study by Venture Intelligence, while the volume of investments has kept pace, the value of the investments has come down as compared to the same period last year (which had witnessed 103 deals worth $520 million).
Rangarajan said decontrol of diesel prices was necessary to contain fiscal deficit to 5.1% of GDP, which had ballooned to 5.76% in 2011-12 fisal. Index of Industrial Production (IIP) recorded 2.4% growth in May 2012 as against 6.2% in May 2011 IIP recorded 2.4% growth in May 2012 as against the market expectations of 1.7% growth. The April IIP was revised lower to -0.9% from earlier estimate of 0.1%. The slight growth in IIP was attributed to growth registered in the electricity and consumer durables sector. Reserve Bank of India plans to tighten the debt restructuring norms A RBI working group on restructuring of loans suggested that the RBI should
IT & IT-Enabled Services companies closed 33 deals worth about $86.4 million, attracted 60% of the investments in volume terms (versus 53% in Q2'11) and 47% in value terms (the same as in the year ago period). Online Services, which attracted 21 investments worth about $61 million during Q2'12, accounted for 64% of the IT & ITES pie by volume and 70% by value.
News of last 2 weeks continued... Presidential poll votes countingon 22nd July; Pranab Mukherjee's victory almost certain UPA candidate Pranab Mukherjee is virtually set to become the 14th President of India tomorrow when the counting and declaration of results of the July 19 poll takes place. Mukherjee's romp home to victory has been ensured after Mamata Banerjeeled TMC announced its support to him. Other than all the UPA allies, parties such as SP and BSP as well as the Left are supporting the former Finance Minister.Congress-led UPA has claimed Mukherjee will win around 70 per cent of the votes in the direct contest with P A Sangma, the former Lok Sabha Speaker who is backed by some opposition parties Asian Development Bank adds rupee & Renminbi to its currency list ADB's Board of Directors approved the inclusion of rupee and renminbi in their Trade Finance Program, which so far had the dollar, euro and yen.â€?This move will encourage the use of regional currencies in trade and reduce reliance on the US dollar as a settlement currency, which is in short supply in many countries," said Steven Beck, Head of ADB's Trade Finance Program SEBI permitted MCX Stock Exchange (MCX-SX) to operate as a Full-fledged Stock Exchange SEBI on 10 July 2012 permitted MCX Stock Exchange (MCX-SX) to operate as
a full-fledged stock exchange thereby ending nearly fouryear-long wait of the bourse.
With the grant of the permission MCX-SX will from hereon be able to offer additional asset classes such as equity and equity F&O (Futures and Options), interest rate futures and wholesale debt segments. So far the market regulator had been renewing MCX-SX's licence for oneyear periods only Govt seeks help from Nomura, Citi, CII and others for creating new IIP Earlier this year, the former finance minister Pranab Mukherjee admitted to being baffled after industrial growth in January was revised to a meagre 1.1% rather than the 6.8% announced earlier as the production of sugar had been wrongly estimated. In order to prevent such embarrassments - India is part of the G20 and its economic data is now globally followed- the government has turned to the private sector, roping in economists from financial majors Nomura and Citi as well as industry bodies such as CII and FICCI to help create a new index.
Markets After opening weak during the beginning of the week ended 20th July, the market gained in the following two days post Mrs Mamata Banerjee's support to Mr. Pranab Mukherjees candidature for the Presidents post. That perhaps gave a hope that the government would be successful in taking on board its most belligerent allies on most pending reforms. Then the cabinet passed a slew of reforms beginning with import duty on power equipments, hiving off the excess land of VSNL and many others. The political uncertainty following Sharad Pawar expressing his displeasure with the government and offering to tender his resignation caused the market to ignore the governments renewed vigor on reforms on Friday. Overall for the week, the nifty fell 22 points to close at 5205 and Sensex fell by 120 points to close at 17158 on Friday, 20th July
The previous week ended 13th July saw extremely disappointing quarter earnings numbers and the future guidance by Infosys which provided enough fuel for the mayhem for an otherwise directionless market. Subsequently excellent numbers by TCS and the government's aggressive move to consider the GAAR by appointing constitution of an expert committee on anti-avoidance tax proposal viz. the General Anti-Avoidance Rules (GAAR) to undertake stakeholder consultations and finalize the guidelines for GAAR failed to bring back the cheer. The market corrected in four of the last five trading days of the week ended 13th July and fell 89.70 points during the week to close at 5227.25 on 13th July. Key Highlights: ď‚&#x; Infosys, TCS Q1 earnings fare against e a c h o t h e r : I n f o s y s a n d Ta t a Consultancy Services announced their first quarter earnings on Thursday and it's been a tale of contrasts. Infosys missed estimates once again and cut full year US dollar revenue growth forecast.
On the other hand TCS reported betterthan-expected earnings. ď‚&#x; While Infosys's June quarter net profit rose 33 percent as expected, market leader Tata Consultancy Services exceeded forecasts by posting a 38 percent annual jump in quarterly profit.
Markets continued... Key Highlights: Infosys said it sees revenue in dollar terms rising 5 percent to $7.34 billion in the fiscal year to March 2013, down from its April estimate of 8-10 percent growth while TCS expects to beat the industry export revenue growth forecast of 11-14 percent for this fiscal year set by trade body Nasscom HDFC Bank Q1 net profit jumps 30% YoY: HDFC Bank, India's No.3 lender, beat forecasts with a 30.6 percent rise in quarterly profit, led by stronger loan
growth, better fee income and higher net interest margins. RIL's Q1 net dips 21%: Reliance Industries ' (RIL's) net profit for the June quarter fell 21% to Rs 4470 crore on dwindling margins in its refining and petrochemicals businesses. Sales, however rose 13.4% to Rs 94926 crore, YoY due to higher petchem and refining volumes Maruti Suzuki Manesar plant closed for third day, standoff losses at Rs 210 cr so far
Forex Market: The rupee fell on Friday, snapping three successive weeks of gains, as risk aversion pummeled global risk assets such as the euro, though buying of the local unit ahead of an auction of debt limits to foreign investors kept losses in check. The partially convertible rupee closed at 55.32/33 per dollar, as per the SBI closing rate. Commodities: Gold rose for the first time this week as
more Americans than forecast filed firsttime claims for unemploymentinsurance payments, increasing pressure on the Federal Reserve to loosen monetary policy. Gold futures for August delivery gained 0.6 percent to settle at $1,580.40 an ounce at 1:39 p.m. on the Comex in New York. Oil advanced to the highest level in eight
weeks on rising concern that faltering stability in the Middle East will disrupt supplies from a region responsible for about one-third of world production.Crude for August delivery increased $2.63, or 2.9 percent, to $92.50 a barrel at 1:55 p.m. on the New York Mercantile Exchange after climbing to $92.94, the highest intraday level since May 22.
Markets continued... Global Markets: US Market pulled back Friday following three days of gains on renewed worries about Europe. Bank stocks led the way lower after a region of Spain asked Madrid for financial aid to help repay its debt. That stoked fears about Europe's economic crisis and prompted traders to cash in recent gains The Dow Jones industrial average ended down 120.79 points, or 0.93%, at 12,822.57. The S&P 500 Index closed down 13.85 points, or 1.01%, at 1,362.66. The Nasdaq Composite Index finished down 40.60 points, or 1.37%, at 2,925.30. But for the week, the Dow and Nasdaq were up slightly. Investors in Europe rushed to take profits, following four-month highs hit earlier in the week, on news of that bailout request in Spain. European shares eased off four-month highs and Spain's borrowing costs climbed back above their seven percent pain threshold on Friday, despite the expected approval of a bank bailout plan later in the day. Expectations for week ahead A lot many policy measures would be presented in the cabinet in the days ahead. So expect a volatile week ahead when the July series gets expired. The earnings season has so far been disappointing barring the Reliance Q1FY13 earnings which beat analyst's expectation after a very long time. The fresh concerns from the euro zone especially the Spanish banking crisis would chiefly remain an overhang. So expect the nifty to trade with marginal negative bias in the next week. The resolution of the issue between the ruling congress government and its major ally RCP would be a positive, but the further deteriorating Spanish banking crisis is a major concern. The days ahead would be crucial as the government tries to introduce lot of pending reforms in the cabinet. Earnings negatives, growth slowdown in India, China and elsewhere and the expected quantitative easing seems to be priced in now. The week ahead is expected to be extremely volatile due to July expiry, but the trade might be negatively biased.
Knowledge Section ď‚&#x; Quantitative Easing : A government
monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. ď‚&#x; Operation Twist : The name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds. "Operation Twist"
describes a monetary process where the Fed buys and sells short-term and long-term bonds depending on their objective. For example, in September 2011, the Fed performed Operation Twist in an attempt to lower long-term interest rates. In this operation, the Fed sold short-term Treasury bonds and bought long-term Treasury bonds, which pressured the long-term bond yields downward.
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