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February 16, 2017

In this issue: 1. Budget 2017 for Infrastructure Sector 2. Budget 2017 for Rural India 3. Budget 2017 for Farmers 4. BITCOINS – The new age of coins! 5. Win Some, Lose Some! 6. China In 2017

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From the Editor’s desk:

Ajay Satish

Pratibha Prasad

The February edition of SOFIA Times is here. In this issue, we have covered various aspects of Union Budget 2017 presented on 1st February by the Finance Minister Mr. Arun Jaitley. This issue throws light on effects of union budget on three sectors: Infrastructure, Farmers and Rural areas. The Budget was unique as it dropped the distinction between planned and unplanned expenditure for the first time. This time the emphasis was on growth and employment generation to sustain and drive Gross Domestic Product (GDP) growth. With several proposals laid out in budget, the government showed that it is all geared up to play a crucial role with clear action plans. This issue also discusses the Repo Rate changes by RBI on various sectors. Also, we have guest articles on Bitcoins and the growth secrets of China. Happy Reading!

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Budget 2017 for Infrastructure Sector By: Shreya Biyani

Notwithstanding demonetization, the on-going fiscal year is the one where a number of game changing initiatives were agreed upon like GST and Bankruptcy code bill. Our Finance minister Mr. Arun Jaitley presented his 4th Union Budget on 1st February 2017, a month before the usual budget date. For the first time after about nine decades the current government has merged the Railway Budget with the Union Budget, with the highest ever outlay for railways. Major attention has been given to infrastructure sector, agriculture and rural sector.

Highlights of Budget: Just like earlier budgets which focused on substantial outlay for infrastructure sector, one of the key priorities this year also was infrastructure investment and development backed with several policy announcements. The total fund allocated to infrastructure development 2017-18 stands at Rs. 3,96,135 crores. With the merging of Railway Budget with the Union Budget, the market was looking forward for key announcements to address long standing needs of the sector. Railway decided to focus on four major areas being passenger safety, capital and development works, cleanliness and finance and accounting reforms for which a total of Rs. 1,31,000 crores is allocated which includes Rs.55,000 crore which will be provided by government.

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 Withdrawal of service tax on railway tickets booked through IRCTC website  Railway coaches to be fitted with bio-toilets by 2019. Solid waste management plant are in progress  Setting up of Rashtriya Rail Sanrakshan Kosh (RRSK), a railway safety fund with Rs. 1 lakh crore for a five year safety upgrade which will include expert international assistance. Also unmanned level crossing will be eliminated by 2020  Railway related companies like Ircon, IRCTC to be listed on stock exchanges 

Railway lines of 3500 kilometres will be commissioned in 2017-18 also special trains for tourism and pilgrimage.

 Railway will set up joint ventures with 9 state government for 70 projects for the construction and development of infrastructure  Development of stations to make them differently abled friendly and setting up of solar power 

Private participation investment in construction and operation will be increased by introduction of new Metro Rail Act

 To strengthen the Energy Sector the government has proposed for setting up strategic Crude oil Reserves  Allocation to incentive schemes like M-SIPS and EDF is increased to make India a global hub for electronics manufacturing  Airports in Tier 2 cities to be taken up for operation and maintenance in PPP mode The railway stocks fell by 6% after the announcement while the companies in infrastructure sector showed positive signals. However the budget is a stepping stone towards transforming the Indian Railways by making it safer and cleaner. Additionally a push on digital economy and development of related infrastructure will open up ways for efficient and better ways of governance and management across sectors. 4


Budget 2017 for rural India By: Abhinav Khanna

This year’s budget has proposed various initiatives to improve the standard of living of people in rural India. Improving the life of people in rural areas has always been the major agenda for the Modi government and therefore the budget has indeed devoted major chunk for the rural development . The total budget allocation for the fiscal year 2017-18 in rural economy is Rs 1,87,200 Crore which is an increase of 24% in comparison to the last year. A few policy measures that are undertaken are: Mission Antyodaya will be undertaken to bring one crore households out of poverty and to make 50,000 gram panchayats poverty free by 2019, the 150th birth anniversary of Gandhi. Also the budget provision of Rs 38,500 Crore under MGNREGA in 2016-17 has been increased to Rs 48,000 Crore in 2017-18 which is the highest ever allocation so far. As another positive indicator of women empowerment , the participation of women in MGNREGA has increased to 55% from less than 48% last year and this year marks the initiation of Mahila Shakti Kendras in villages. In an attempt to improve the standard of living of people living in rural areas , the government has adopted several measures to solve the problems for the rural poor at the grass root level . The budget promises an investment of Rs 23000 Crore for Pradhan Mantri Awaas Yojna to provide affordable housing to more than 100,000 homeless and those living in kutcha houses , 100% village electrification by 2018 , an amount of Rs 27000 Crore for Pradhan Mantri Gram 5


Sadak Yojana which aims to increase the pace of projects related to construction and infrastructure in rural areas .The budget has also increased the allocation for Deendayal Antyodaya Yojana to Rs 4500 Crore which will increase the skill development and livelihood opportunities for people in rural areas. For imparting new skills to the people in rural areas, mason training will be provided to 5 lakh persons by 2022. Also open defecation villages will be given priority for piped water supply. However there have been several critiques to the policy frameworks adopted .The budget indicates little interest regarding the health and social security of the people. An allocation of Rs 9000 Crore for higher insurance coverage indicates the pro poor policy since it seems to be on the side of insurance companies rather than that of the rural people. Also the move towards the digitalization of villages may not prove to be successful as extremely less percentage of people has bank accounts, smartphones and adopting a new technology would be extremely difficult for old, uneducated rural poor. So before implementing the technology, people should be educated regarding the same. More focus should have been given on the tertiary industries which provide financial security and employment to rural women and people engaged in making traditional handicrafts. The budget could have emphasized on the direct market linkages to the consumer to remove the hindrance caused by a middlemen and allotment of full profits to the people. The renewable energy sector such as wind and solar energy could have been brought into the picture which would be beneficial not only for the people living in villages but would also have given an opportunity to the startup companies to innovate and help in building a cleaner, greener society .

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2017 budget for farmers By: Abhinav Khanna

Budget 2017 deployed a large chunk of funds in the agricultural sector. Higher agricultural credit, higher allocation for irrigation , a crop insurance scheme and increased allocation for MGNREGA to dig farm ponds were among some of the measures that were announced on February 1, 2017. Ten measures implemented in agriculture sector: 1. Target for agricultural credit in 2017-18 has been fixed at a record level of Rs. 10 lakh crore. 2. To ensure seamless flow of credit to the small and marginal farmers , government to support NABARD for computerization and integration of all 63000 functional primary agriculture credit societies with the core banking system of district central cooperative banks. This will be done in three years at an estimated cost of Rs 1900 crores. 3. Coverage under Fasal Bima Yojna scheme will be increased from 30% of cropped area in 2016-17 to 40% in 2017-18 and 50% in 2018-19 for which a budget provision of Rs 9000 crore has been made. 4. New mini labs in Krishi Vigyan Kendras will be set up and government will ensure 100% coverage of 648 KVKs in the country for soil sample testing. 5. The Long term irrigation fund already set up in NABARD to be augmented by 100% to take the total corpus of this fund to Rs 40000 crore. 6. Dedicated micro irrigation fund in NABARD to achieve per drop more crop with an initial corpus of Rs 5000 crore.

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7. To enable farmers to get better prices for their produce in the market ,steps such as coverage of National Agricultural Market (e-NAM) from 250 markets to 585 APMCs and assistance of up to Rs 75 lakh to every e-NAM market were taken . 8. A model law on contract farming to be prepared and circulated among the states for adoption. 9. Dairy processing and infrastructure development fund to be set up in NABARD with a corpus of Rs 2000 crore which will be increased to Rs 8000 crore over three years. 10.The budget has proposed various initiatives that promise to improve farmers’ incomes and productivity. The move to double long term irrigation fund to Rs 40,000 crore will help increase area under irrigation and improve efficiency of irrigation. The de-notification of fruits and vegetables from agricultural produce market committee ,if it happens, will be beneficial for farmers as they will get good rate for their produce and supply chain will be reduced leading to fall in post harvest losses. NABARD proposal to set up a dairy processing and infrastructure development fund would create additional processing capacity of 5 crore litre milk per day and will give Rs 50,000 crore per annum extra income to farmers in the country in the years ahead. However some of the shortcomings that were observed were: Organic farming did not get any attention in the budget, no expansion of specific projects for irrigation were made during the budget, large benefit was given to the class of rural landlords through announcements of higher loan allocation and online trading of farm produce rather than poor, landless farmers .Also the problem of economic viability of farming is the rising prices of fertilizers , pesticides and seeds and stagnating output prices as maximum selling price is not rising . Further protectionist barriers for Indian farmers are much lower now and and there is little increase in expenditure for agriculture.

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BITCOINS – The new age of coins! By: Alisha Kamat

With digitization resounding in the background, and cashless economy arriving this New Year for India, it has become imperative to move away from the traditional form of currency notes and switch to more digital modes. Bitcoins live up to the challenge. Being called as the largest in kind in terms of total market value, it is the first decentralized digital currency. Bitcoins first came into existence around 2008 and was released as an open source software in 2009 by unidentified groups of programmers by the name of Satoshi Nakamoto. They are nothing but simple digital coins which can be sent through the internet. Their advantage being that they can be transferred directly from person to person via the internet, without having to go through banks or any clearing houses. Thus the fee of transfer is much lower. They can be used hassle free in every country. The associated account has no risk of being frozen like bank accounts. They are also devoid of any pre-requisites or arbitrary limits. There are no costs and it is extremely easy to set up. Also there are no chargebacks. How it works: Several currency exchanges exist, where bitcoins can be exchanged for dollars, euros etc. Bitcoins are kept in digital wallets on mobile devices or computers. Public and Private keys are issued to manage bitcoin balances. Sending and receiving bitcoins on the internet is extremely easy and anything can be purchased with the help of these ‘coins’. The individuals looking after the bitcoin network are called miners. They get rewarded newly generated bitcoins for every successfully verified transaction. After the completion of a transaction, they get recorded in a public ledger called a Blockchain. 9


What really makes the Bitcoin market attractive is its ease of use and its investment value rather than as a medium of currency exchange. The Bitcoin Price index (BPI) reached an all-time high on 5th January 2017 crossing the USD 1,100 barrier. It has become a major safe haven of asset following the uncertainty in the current economy. The past one month trend shows the dizzying rise of the currency which has resulted from continued growth throughout 2016.

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While the currency does exhibit some major advantages, it also covers its share of disadvantages. The Bitcoin showed heavy volatility in 2009 and lost 75% of its value when it plummeted from its previous BPI high of USD 1,165.89 in 2013. It is also vulnerable to hacking and theft as the whole system is purely internet based. But analysts believe that the volatility will ease as the volumes grow and thefts can be monitored as the currency is likely to come under the control of regulatory bodies as per speculations. With the current rise in demand and the pre-set finite limit of 21 million bitcoins circulation, probability of appreciation of the currency seems high at least in the near future. The millennials who don’t follow traditional gold hoarding as a valuable investment are certainly looking at Bitcoins as an attractive alternative for value investing.

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Win Some, Lose Some..!! -By Rohit Mahagaonkar

Well, it may seem to suggest you that the above idiom I’m talking about is for traders in stock market or among gamblers who bet on sporting events. But this time it’s for the famously “ailing Real estate sector”. The apex bank in its sixth bi-monthly policy review for the year on last Wednesday (Feb 8) kept the repo rate at 6.25%, for the second time in a row. The last time RBI reduced the repo rate was on October 4 last year, bringing it down by 0.25%. Realtors are disappointed with the Reserve Bank of India's decision to keep the policy rate unchanged; claiming a rate cut would have forced banks to lower lending rates further. “With controlled inflation and the government showing fiscal prudence, one expected the Monetary Policy Committee to have cut the policy rate by minimum of 25bps”, feels Shishir Baijal, Chairman & Managing Director, Knight Frank India. This would have offered banks leeway to further lower lending interest rate to increase capital expenditure and spur growth in employment and sentiment prevailing in the economy. All these factors would have given substantial impetus to the beleaguered real estate sector. The real estate sector needed some boost in terms of lower borrowing costs especially when remonetisation may lead to higher borrowing costs. While recent demonetisation has brought in the necessary liquidity into the banks, lowering the repo rate Some of the industry participants had mixed reaction to RBI's status quo move: Anshuman Magazine, Chairman, India and South East Asia, CBRE - The decision comes as a surprise. While the recent demonetisation drive would have helped ease borrowing costs. This would have provided an added thrust to the government’s initiatives for affordable housing and fuelled demand. Sachin 11


Sandhir, Global Managing Director – Emerging Business, RICS - Nevertheless, considering that home loan rates are the lowest that they have been in six years, the status quo. Banks are flush with cash due to demonetisation in repo rates will not hurt the real estate sector and industry participants feel we might see more banks bringing down lending rate further in the near future.

The recent Knight Frank report says demonetisation has cost realty sector around Rs 22,000 cr. With sales looking up in the first half of 2016 and the third quarter beginning on a positive note, the expectation was sales would increase by 4% in the second half. Figures are number of units sold across Mumbai, NCR, Pune, Bengaluru, Chennai, Hyderabad, Kolkata and Ahmedabad Demonetisat ion pulled down last quarter sales across all cities. Despite one third of the fourth quarter being the festive season, sales fell by 40%. Both industry and the government lost money. Revenue loss in the fourth quarter hit both the state exchequer and the real estate industry. Average units sold in Q4 2014 & Q4 2015: 73,769 Units sold in Q4 2016: 40,936 with 45% Fall in sales. State government notional Loss on stamp duty Rs1,200 cr. Notional Revenue loss to real estate industry Rs 22,600 cr. Though Union Budget 2017-18 addressed some of the key realty issues, Property as investment will lose edge due to capping of tax break. Borrowers claiming unlimited tax benefits on interest payment towards home loans for a rented out 12


second property will have their tax deduction capped from 1 April 2018. By paring down this major tax sop for second home buyers, the Budget has diluted the potential of property as an investment. “It can bring down property prices significantly. But it can also demotivate investors who can invest in property and rent it to those less privileged,â€? says Vaibhav Sankla, Managing Director, H&R Block India. Amidst of the above losses, there are and were some major wins also. Initiatives taken in 2016 impacted positively on realty sector. Some of the prominent were, Real estate Regulatory Act, 2016 to bring greater accountability, set disclosure norms to protect the interest of all stakeholders and also ensure speedy execution of property disputes. The Benami Transactions (Prohibition) Amendment Act, 2016 lays down stringent rules and penalties associated with dealings related to "benami" transactions. It establishes a regulatory mechanism to deal with disputes arising with such transactions and levying penalties as needed to increase the institution investor participation. Change in arbitration norms for construction companies specified release of 75% of the amount against margin free guarantees in cases where arbitral awards have been given but contested which should improve the cash flow position of large developers who have significant exposure in infrastructure and government contracts and eventually help in the speedy execution of large infrastructure projects. The Union Budget 2017 has proposed several positive measures to strengthen the edifice of the Indian real estate sector for instance; the facilitation of capital gains taxation norms has triggered a wave of happiness in realtors and property buyers alike. Hope the year ahead brings charm to this ailing sector and recover faster‌.

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CHINA IN 2017 -By Chirag Borkar

Per me the outlook for china this year appears to have increased trade friction with the United States, with tariffs raised on specific product categories (such as steel and some agricultural goods), and, while I don’t expect acrossthe-board disruptions, a few highprofile companies will be forced to choose between accommodating the demands of the Chinese or US government. But if globally we continue with something recognizably close to current trade arrangements, how will China fare this year? And, most important for a country that regards economic growth as of paramount importance (the centrepiece of China’s 13th five-year plan remains to double GDP and household income in the decade to 2020), can 2016’s GDP growth in the ballpark of 6.5 percent be replicated? Replicating 2016 growth will be Difficult Growth is unlikely to come from exports due lack of growing market and any attempt of depreciation in currency will be offset by rising wages. Like previous years the private sector investment particularly in the property sector will accelerate growth this year. The real interest rates being lower, will stimulate the technology services like cloud computing, robotics. The government is continuing its heaving spending in infrastructure projects like urban transit, intercity rail 5g services. This will add to the current Chinese debt, which may reach 300% of GDP. In the steel sector, a reduction of 45 million tons of capacity still left an excess of several hundred million tons. At the time of writing, steel production is actually up for 2016 (as are steel prices) on growing demand from the construction and automotive sectors. There have been mergers between huge steel companies but these aren’t leading to any higher productivity. New goals for capacity reduction will be set and met this year, just as they were in 2016—on paper. A slowdown in construction could see steel demand drop and actual overcapacity grow. Steel

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prices could fall back quickly, pushing the cash flow of many producers—whose balance sheets last year improved enough to stave off bankruptcy. Chinese lawmakers and regulators were active in 2016, with multiple new laws affecting businesses. Take one example: the Anti-Unfair Competition Law, which overlaps with the Anti-Monopoly Law, had significant changes proposed in 2016 to prohibit the “abuse of a relative advantageous position.” The law means employers become liable for bribes and inducements offered by their employees, even if they didn’t know bribes were being offered. Enterprises that publish content online in China may need to meet new local ownership requirements and understand the review and monitoring obligations that ensure content is deemed acceptable by the government. The law is creating lots of uncertainty and uncertainty in any situation is bad. Where has the money gone? This year will see a continuation of the great “game of chicken” between those in government trying to manage down China’s exchange rate and investors who want to diversify and protect the US dollar value of at least part of their asset base. China’s government is constantly looking to shut down leakage points, but is often challenged by its own conflicting objectives. Well over $100 billion has left China this year for international acquisitions by Chinese businesses, with many acquirers paying over the odds to get their money out of the country. As a further step, the Ministry of Commerce and the National Development and Reform Commission announced plans in late November to implement stricter controls on any overseas investment above $10 billion, on state-owned enterprises (SOEs) that invest more than $1 billion in real estate, and on any companies investing more than $1 billion in noncore businesses. This makes transactions harder, but not insurmountably harder for private industrial investors as most transactions are below $10 billion and in their core businesses. Every year Chinese citizens are being allowed to convert $50000 from renminbi to foreign currency people used this heavily in 2016 and the amount of flows that this would create means there might be severe restrictions imposed on it. Per me Chinese forex reserves will continue to fall despite best regulatory efforts. Liaoning earned the dubious honour among Chinese provinces of reporting that its economy shrank in 2016. It is a heavily SOE (state owned enterprise) 15


dependent region. Not one of China’s leading Internet companies is based in the province, and private investment fell more than 50 percent year on year in the first half of 2016. Rising coal and steel prices in 2016 may have temporarily hidden similar problems in other parts of the country. Last year saw multiple initiatives announced by Premier Li Keqiang, calling for the northeast to become a hub of entrepreneurial innovation and tourist-service-based consumption. Despite this, I expect more vocal complaints from local citizens who see little prospect of improvement in the quality of their lives, and some smaller cities may have so exhausted their supply of assets to sell that they de facto become bankrupt. With an expectation that everything is subject to change when it comes to geopolitics, I expect the priorities of the Chinese government to largely domestic. We might also since incremental policy change, largely on the same levers that worked for the government in 2016. Provided the consumer spending increases in the 2nd half of 2017 the debt ridden infrastructure sector stands to improve.

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Sofiatimes 16feb2017  

In this issue: 1. Budget 2017 for Infrastructure Sector 2. Budget 2017 for Rural India 3. Budget 2017 for Farmers 4. BITCOINS – The new age...

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