Bad loans cannot be dismissed as legacy issue; better attend to it

Indian Finance Minister Arun Jaitley , reviewed, November 23, the level of non-performing assets or bad loans of the state-owned banks which account for over 70 per cent of the Indian banking business.

                                      North Block housing FM office  

After the meeting , he tweeted that the level of bad loans of the  Indian banks is “unacceptable”. At his press conference,  the Finance Ministry beat boys and girls were rather careful in crafting questions even when they wanted to ask some real tough ones. Having been a beat boy myself in different ministries, I know their problems. Simply put, if they act “too smart” either in asking questions or in writing story, they would not get one.  The editor is  not going to listen. He/she would like those on the beats to be “cultivating “ ministers and secretaries and not offending them. Anyways, let me not distract and return to the basic issue of bad loans.

This meeting of the FM with the banks was quite well publicized through the official tweets and agency reports.  Some market analysts and TV anchors were discussing whether any major announcement could be expected. Well, bankers had a review meeting with PM Modi some months ago following which “Indradhanush” (Rainbow) package was announced . That had . included recapitalization of Rs 70,000 crore in four years, giving autonomy to banks and political leaders keeping off. It is a different thing that given the gravity of the problem, much more capital infusion is required in the banks where majority stake is held by the government.  

So, in any case, you cannot expect packages every time the FM reviews functioning of the banks owned by the government. In a rather dismissive way, Jaitley talked about generalities like the Bankruptcy bill in the pipeline and how it would help the defaulters exit from the messy companies promoted by them. The sector specific problems in steel and power were also discussed and I am sure, bankers would or rather should have given their real take on the issue.

The FM is right when he says that some of the problems are legacies being attended to by this government.  This government of PM Modi is now about 18-month old and I am sure, the FM would not like to leave this legacy for the next government whoever forms it. So, the best way is to attend to the problem as it exists today and not always blame the legacy. After all, it is because of this legacy issue that Mr Modi swept the elections and the Congress punished. Sure, the country would  not like to be left with at least this kind of a legacy.    

Global firm CLSA has estimated that about 15 per cent of advances by the Indian banks are under stress. Now that is huge and surely, not sustainable and as Jaitley says “unacceptable”. Assuming that some such estimates would have exaggerated the figure, let us take the  RBI figures. It  had put this stressed assets (NPA plus restructured assets) at 11.05 per cent of gross advances as in  March,2015.

According to CLSA, the Indian government is not giving the kind of urgency which is required to address the issue. On the face of it, that may appear so and who knows CLSA may be right. But what gives me hope is a report in Business Standard how Vijay Mallaya , the poster boy of yester years, is trying to work out a deal with the banks to pay them back Rs 7,000 crore . The change of heart in Mallaya, who is believed to be ‘ willful defaulter’ ( legally or otherwise), has come about after Central Bureau of Investigation started  building  pressure on him and his firms including the grounded Kingfisher Airlines.

Maybe, what Finance Ministry and RBI cannot do, CBI can do it, at least with the willful defaulters and there are plenty of them. 

      

Pic courtesy: GOI

Concept Paper on GST

The Goods and Services Tax (GST) is billed as the game changer in India's taxation regime. But, the concept is yet to be understood; what is it is and how it is going work. Here is a pretty good concept paper prepared by the Finance Ministry. 

Concept Note on GST 

1.Introduction 
The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014, seeks to amend the Constitution of India to facilitate the introduction of Goods and Services Tax (GST) in the country. The proposed amendments in the Constitution will confer powers both to the Parliament and the State legislatures to make laws for levying GST on the supply of goods and services on the same transaction.

2. Rationale behind moving towards GST:
2.1 Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas./p>

2.2 This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry. Firstly, there is no uniformity of tax rates and structure across States. Secondly, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.

2.3 The introduction of GST would mark a clear departure from the scheme of distribution of fiscal powers envisaged in the Constitution. The proposed dual GST envisages taxation of the same taxable event, i.e., supply of goods and services, simultaneously by both the Centre and the States. Therefore, both Centre and States will be empowered to levy GST across the value chain from the stage of manufacture to consumption. The credit of GST paid on inputs at every stage of value addition would be available for the discharge of GST liability on the output, thereby ensuring GST is charged only on the component of value addition at each stage. This would ensure that there is no ‘tax on tax’ in the country.

2.4 GST will simplify and harmonise the indirect tax regime in the country. It is expected to reduce cost of production and inflation in the economy, thereby making the Indian trade and industry more competitive, domestically as well as internationally. It is also expected that introduction of GST will foster a common or seamless Indian market and contribute significantly to the growth of the economy.

2.5 Further, GST will broaden the tax base, and result in better tax compliance due to a robust IT infrastructure. Due to the seamless transfer of input tax credit from one stage to another in the chain of value addition, there is an in-built mechanism in the design of GST that would incentivize tax compliance by traders.

3. Salient features of proposed GST:

3.1 Dual GST: Both Centre and States will simultaneously levy GST across the value chain. Tax will be levied on every supply of goods and services. Centre would levy and collect Central Goods and Services Tax (CGST), and States would levy and collect the State Goods and Services Tax (SGST) on all transactions within a State. The input tax credit of CGST would be available for discharging the CGST liability on the output at each stage. Similarly, the credit of SGST paid on inputs would be allowed for paying the SGST on output. No cross utilization of credit would be permitted.

3.2 Inter-State Transactions and the IGST Mechanism: The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supply of goods and services. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The inter-State seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

3.3 Destination-Based Consumption Tax: GST will be a destination-based tax. This implies that all SGST collected will ordinarily accrue to the State where the consumer of the goods or services sold resides.

3.4 Central Taxes to be subsumed:

• i. Central Excise Duty
• ii. Additional Excise Duty
• iii. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
• iv. Service Tax
• v. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
• vi. Special Additional Duty of Customs-4% (SAD)
• vii. Cesses and surcharges in so far as they relate to supply of goods and services.

3.5 State Taxes to be subsumed:

• i. VAT/Sales Tax
• ii. Central Sales Tax (levied by the Centre and collected by the States)
• iii. Entertainment Tax
• iv. Octroi and Entry Tax (all forms)
• v. Purchase Tax
• vi. Luxury Tax
• vii. Taxes on lottery, betting and gambling
• viii. State cesses and surcharges in so far as they relate to supply of goods and services.

3.6 All goods and services, except alcoholic liquor for human consumption, will be brought under the purview of GST.

• i. Petroleum and petroleum products have been constitutionally included as ‘goods’ under GST. However, it has also been provided that petroleum and petroleum products shall not be subject to the levy of GST till notified at a future date on the recommendation of the GST Council. The present taxes levied by the States and the Centre on petroleum and petroleum products, viz. Sales Tax/VAT and CST by the States, and excise duty the Centre, will continue to be levied in the interim period.
• ii. Taxes on tobacco and tobacco products imposed by the Centre shall continue to be levied over and above GST.
• iii. In case of alcoholic liquor for human consumption, States would continue to levy the taxes presently being levied, i.e., State Excise Duty and Sales Tax/VAT.

3.7 GST Council: In the GST regime, a Goods and Services Tax Council is being created under the Constitution. The GST Council will be a joint forum of the Centre and the States. This Council would function under the Chairmanship of the Union Finance Minister and will have Minister in charge of Finance/Taxation or Minister nominated by each of the States & UTs with Legislatures, as members. The Council will make recommendations to the Union and the States on important issues like tax rates, exemption list, threshold limits, etc. The recommendations made by this Council will act as benchmark or guidance to Union as well as State Governments. One-half of the total number of Members of the Council will constitute the quorum of GST council. Every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:-

• i. The vote of the Central Government shall have a weightage of one-third of the total votes cast, and
• ii. The votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting..

This is to protect the interests of each State and the Centre when the Council takes a decision and is in the spirit of co-operative federalism.

3.8 Floor rates of GST with band: GST rates will be uniform across the country. However, to give fiscal autonomy to the States and the Centre, there will a provision of a tax band over and above the rate of the floor rates of CGST, SGST and IGST. Initially, the rates of CGST, SGST and IGST are expected to be closely aligned to the Revenue Neutral Rates (RNR) of the Centre and the States.

3.9 Goods and Services Tax Network (GSTN): A not-for-profit, Non-Government Company called Goods and Services Tax Network (GSTN), jointly set up by the Central and State Governments will provide shared IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders.

3.10 GST Compensation: Due to a shift from origin based to destination based indirect tax structure, some States might face drop in revenue in the initial years. To help the States in this transition phase, the Centre has committed to compensate all their losses for a period of 5 years. Accordingly, clause 19 has been inserted in the Constitution (122nd) Amendment Bill, 2014 to provide for compensation to States by law, on the recommendation of the Goods and Services Tax Council, for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

4. Salient features of the Constitution (122nd) Amendment Bill, 2014: The salient features of the GST Bill as introduced in the Lok Sabha are as follows:-

• i. subsuming of various Central indirect taxes and levies such as Central Excise Duty, Additional Excise Duties, Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, Special Additional Duty of Customs, and Central Surcharges and Cesses so far as they relate to the supply of goods and services;
• ii. subsuming of State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the Centre and collected by the States), Octroi and Entry tax, Purchase Tax, Luxury tax, Taxes on lottery, betting and gambling; and State cesses and surcharges in so far as they relate to supply of goods and services;
• iii. dispensing with the concept of ‘declared goods of special importance’ under the Constitution;
• iv. levy of Integrated Goods and Services Tax on inter-State transactions of goods and services;
• v. levy of an additional tax on supply of goods, not exceeding one per cent. in the course of inter-State trade or commerce to be collected by the Government of India for a period of two years, and assigned to the States from where the supply originates;
• vi. conferring simultaneous power upon Parliament and the State Legislatures to make laws governing goods and services tax;
• vii. coverage of all goods and services, except alcoholic liquor for human consumption, for the levy of goods and services tax. In case of petroleum and petroleum products, it has been provided that these goods shall not be subject to the levy of Goods and Services Tax till a date notified on the recommendation of the Goods and Services Tax Council.
• viii. compensation to the States for loss of revenue arising on account of implementation of the Goods and Services Tax for a period which may extend to five years;
• ix. creation of Goods and Services Tax Council to examine issues relating to goods and services tax and make recommendations to the Union and the States on parameters like rates, exemption list and threshold limits. The Council shall function under the Chairmanship of the Union Finance Minister and will have the Union Minister of State in charge of Revenue or Finance as member, along with the Minister in-charge of Finance or Taxation or any other Minister nominated by each State Government. It is further provided that every decision of the Council shall be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting in accordance with the following principles:—
• a. the vote of the Central Government shall have a weightage of one-third of the total votes cast, and
• b. the votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast in that meeting.
• x. levy of an additional non-vatable tax on supply of goods of not more than 1% in the course of inter-State trade or commerce, for a period not exceeding 2 years, or such other period as the GST Council may recommend, to protect the interests of the producing/manufacturing States. This additional tax on supply of goods will be levied and collected by the Government of India, over and above the IGST levied under the proposed Article 269A (1). This tax shall be assigned to the States from where such supplies originate.

Paris terror attacks to create deep wounds for global economy; Indian tourism to get hit

The deadly terror attack in Paris will have a shattering impact on the global economy with major impact feared on the travel related sectors such as airlines, hotels, restaurants, city transport. It is also a very bad news for the oil and gas as the travel and tourism are the major triggers for the fuel demand, be it for cars, local transport or jet fuel.

Understandably, the maximum impact would be felt on major economies across Europe which are already  battling slowdown. The ripple effect would also be seen on major trading partners of the European Union- the US, China, India and Japan.

These attacks, the worst and the most brazen since the World War II on France have shaken the citizen confidence.  It is the citizen who is the core of the political and economic system and when the core is attacked and shaken, rest of the pieces of the block fall wide apart.

For the world leaders who are grouped into different nomenclature like G 20 and G 8 etc, it will be terrorism again that is going to be the top priority.  The fact that the terrorists could strike at Paris twice in a year shows how vulnerable a state can be even when the French intelligence  is considered to be among the best.  That means , these suicide squads are capable of breaking any barrier.

India gets bulk of its foreign tourist traffic  from western Europe for its winter season, which has just about begun.  States like Rajasthan, Delhi, Goa, Kerala attract a good number of tourists. These attacks in France will definitely have bruising  impact on the tourism sectors in these Indian states.

So, along with the commodities like metals, the tourism industry would come under pressure, ironically at a time when the aviation sector in India along with the rest of the world was showing a promise riding on the back of cheap jet fuel resulting in a sharp reduction in their operating costs. Several of the carriers in India like Spice, Jet have reported better results while the Initial Public Offering of the most profitable carrier Indigo has been a great hit on listing.  Hotels too would get a hit .  

How the world rallies around this terror attack would also make a difference. The key would be how countries in the Middle East respond.  France is wounded badly but the wounds are hurting all and would have a huge economic cost.  

Pic courtesy: GOI 

India to use London’s financial prowess for raising infra resources

Contrary to apprehensions that PM Narendra Modi would have lost sheen  after defeat of his party BJP in politically Bihar elections, he looked on top of the situation in UK. His important UK quotes from investors’ perspective are:

On Fast tracking FDI proposals:  India has decided to set up a Fast Track Mechanism for clearing investment proposals from UK since it is among the top FDI source nations.   

On Fund raising : India will make good use of London as a financial centre for raising funds for meeting its infrastructure requirements. India will raise Railway Rupee Bonds in London for funding Indian Railways.   

On commitment to open up : We will open new doors in the services sector. We will collaborate more – here and in India - in defence equipment and technology. We will work together on renewable and nuclear energy. 

For India, a target of 175 GW of additional capacity in renewable energy by 2022 and reduction in emission intensity of 33-35 % by 2030 are just two of the steps of a comprehensive strategy. 

Pic: PIB

Few choices for investors in Samvat 2072(Hindu year beginning Diwali);Equity least preferred

                           Dalal Street lit up for Diwali

For the  Indian stock market , the Hindu calendar Samvat is a landmark event . The new year Samvat 2072 begins today as the country celebrates Diwali , the most important festival for the Hindus . For the business, trade and industry it is an auspicious day as they begin the new year with hope for prosperity , worshipping the Goddess Lakshmi seeking her blessings.

As the economy hopes for better year ahead, on  review, the Samvat 2071 has been rather disappointing with the benchmark losing the most in the last four years , after 2011 when it had nosedived by 18 per cent. Surely, investors lost money in the previous Samvat . So, it is no surprise for the diehard bulls telling investors to stay invested and pump in more money in equity as an asset class. They have been giving examples of how people made a rich bounty of 49 per cent in Maruti Suzuki, 28.7 per cent in Lupin, 17.6 per cent in HDFC Bank and 16.3 per cent in Infosys in the last 12 months.  

They conveniently remain silent on the fact that for every Maruti Suzuki, there is a Vedanta where investors lost a huge 63.7 per cent. For every Lupin, there is a Tata Steel where poor investors lost 52.5 per cent. For every HDFC Bank , there is a Hindalco where the losses were  as much as 46.8 per cent  and likewise there was a painful wealth erosion of over 41 per cent in GAIL and ONGC, as per the data compiled by the Business Standard newspaper.

It was such an annoying thing to hear Chief Investment Officer of a leading asset management firm on CNBC TV 18  say that the investors should not bother what to buy or whether to buy or not, they should simply ask: How much to buy and when to buy, painting such a rosy scenario.

Within 20 minutes, the same guy was speaking on another TV channel . Here he was very particular and said “no, no” as long as investors know what stocks they are buying , there is no problem, they will make money.  At one place, he says investors can go and just buy anything and then he goes to another channel and says, no quality of the stock matters: God save asset under his management. No wonder, the Indian Mutual Funds, supposed to be managed by professional managers have not really performed well and won confidence of the retail investors.

Anyhow, if you ask me how the Samvat 2072 is going to perform?  There are several people who believe it is going to be better than the year gone bye.  Well, you can argue on a relative basis, yes. But then, the stock market cannot be expected to be operating in isolation. As long as there is a vibrant economy, the Sensex would show vibrancy. But if the economy remains subdued, the market cannot beat the trend and be ahead of it always.

At the moment, the economic growth does not seem to be creating much of a confidence thanks to a bad global demand, low consumer confidence in the domestic market, heavy debt on the corporates and Narendra Modi government facing a hostile political environment in Parliament, where it enjoys majority only in the lower house.

Ironically, there are not many choices for the investors – Gold and property also remain subdued while returns on bank fixed deposits are declining. But in such a situation, the investors would generally prefer safety over returns. My sense is, retail investors would generally remain absent for the next few months . In fact, they are difficult to return. And then, this protracted threat  : Will Fed Reserve  raise rate or not? Anyways, investors have few choices- equity is not the preferred one .  

Pic courtesy: BSE 

Modi- Cameron talks to focus on India,UK forging ties in Defence

PM Modi is beginning his 3-day UK visit from November 12. UK is the 3rd largest source of foreign investment in India. In turn, India too  is the 3rd largest source of FDI (in terms of the number of projects) in UK.

This is what PM Modi said about his Britain visit: “Another area of importance for bilateral cooperation is defence. We have traditionally been cooperating extensively on defence and security issues and this visit will build on strong ties. Defence manufacturing will be a prime focus in my talks”. He will meet PM David Cameron among others. 

UK remains a preferred choice for Indian students. 

Pic: Courtesy Facebook page of David Cameron

Modi can be anything but lame duck as Opposition wants him to be

                  PM Modi chairing a review meeting for various infrastructure sectors

   With a crushing defeat in hand from bitterly fought Bihar elections , Prime Minister Narendra Modi would be in UK for three days beginning November 12. His pre-planned programme includes some flashy events that so far had gone pretty well in all his foreign tours. But this time around, he would be on a foreign soil when his popularity at home has taken a beating, if not plunge.

The good thing is that the  setback to the Prime Minister’s BJP has come about when his government at the Centre has three and half years more to go. So, even though he has lost some early wickets , he has enough time to build his innings and win the match. He has to either win or lose, there are no draws in political innings.

But the trouble is that the wicket is not playing easy. He has dearth of talent in his Council of Ministers , which he is expected to shuffle sooner than later, and his opponents have tasted the blood and would go for a kill to ensure that Modi becomes a lame duck PM.

Well, Modi can be anything but a lame duck. He has survived such adversities as Gujarat Chief Minister. Then, what is that one can expect from him in the coming weeks:

As he has done it just on the eve of his departure for UK, as many as 15 sectors including defence, civil aviation, manufacturing, e-commerce, construction and broadcasting have been liberalised for foreign investors. Caps have been relaxed and more automatic windows have been opened for the entry.

The PM Modi is also reviewing progress of rather tardy implementation of the infrastructure projects, which are now considered key to reviving the economic growth. Even as the government gets some consolation that India has been acknowledged as the bright spot by the likes of the IMF and the World Bank and it has upgraded its ranking in the ease of doing business, a host of sectors remain in stress.

Importantly, these sectors include the crucial agriculture which is a source of employment for over half the Indian population of 1.3 billion. The rural demand is  subdued while the industries like telecom, real estate, steel, power, roads, construction are in heavy debt with promoters finding it difficult to service the loan. To expect the private sectors to revive growth and investment in these sectors would be naive. Either the government brings in resources or funds come from abroad. These are the only alternatives which Modi and his FM Arun Jaitley know it too well.

The trouble is the government has resource constraints while the foreign investment is drying, especially in the capital market through the foreign institutional investors. As per the latest RBI data, India attracted total foreign investment of USD 73.56 billion in 2014-15, riding on the Modi wave. Of this , USD 40.93 billion were in the form of portfolio investment while the rest were FDI.  The situation is just the reverse this year. In the first half of the fiscal year (April-September), India’s total foreign investment is just about USD 8.29 billion resulting from negative USD 8.78 billion in the capital market  and positive FDI of USD  17.07 billion.

 In the comparable half year (fiscal) in 2014-15, the FDI was USD 15.79 billion and portfolio USD  22.20 billion. So, a huge fall in portfolio has to be made up. That is what is required also to bring about a current account and the consequent foreign exchange  stability, which cannot depend only on falling crude oil.

 In any case, there are both political and economic compulsions for PM Modi to stay focussed on his economic agenda, for he cannot afford any more Bihar.

   

RBI Governor Rajan on GST, ease of doing business, macro picture, exchange rate and tolerance debate

In a TV programme (NDTV), RBI Governor Raghuram Rajan, one of the most well respected central bankers in the world,  made certain observations about Indian economy including  a sharp fall in exports, inflation, public sector investment , slow private investment, exchange rate and political discourse affecting economic agenda.

On the exchange rate: Governor Rajan is not much bothered about Indian rupee losing exchange rate competitiveness vis-à-vis currencies of some of the competing emerging markets. There is no point seeing depreciation of the domestic currency and then importing inflation. In the end , it plays out. So, he does not favour any effort by the central bank to devalue rupee.

On macro picture: There is a pick up in public investment in road building and hope that the same would pick up in the railways. Private firms in certain sectors  are witnessing slow investment as they reel under heavy debt. One thing that has to be kept in mind is deficient Monsoon rains which have led to subdued rural demand.

Still in certain  sectors like  automobile, there are signs of revival (the latest sales volume saw  22 per cent  annual increase).  In the banking, certain structural reforms like grant of licence to new banks like Bandhan Bank, IDFC Bank and payment banks would trigger economic activity and generate jobs.

On ease of doing business: “RBI is working on some of the things we can fix directly. We are truly convinced we need to have business environment easier”.

E-commerce and start-ups: It is an ideal opportunity for India where because of high cost of  land and commercial estate, the brick and mortar is becoming an expensive.

On much delayed Goods and Services Tax (GST): While the government is  trying hard, passage of GST Bill by Parliament would send a strong signal in the world and “ buy us enormous protection against any volatility”.  

Bihar polls out of way, PM Modi, FM Jaitley back to economic agenda

  

So, finally elections in eastern Indian state of Bihar, one of the most bitter polls , are over with exit pollsters giving victory to a coalition of national and regional parties ranged against PM Narendra Modi’s BJP.  While the counting of ballots will take place on Sunday, it looked as though Prime Minister and his ministers returned back to some serious economic agenda at the Centre.

The Union Cabinet approved a USD 65 billion (Rs 4.3 lakh crore ) package for the broke state owned power utilities . This rescue package will clean the balance sheets of these utilities with the respective states taking the load of the debt with the help from the Centre. The idea is to completely restore health of these utilities by 2019 and ensure that India gets 24X7 power supply, of course with market related user charges.

In yet another major reform in the power sector, which has been the trouble spot for the government owned banks with high exposure to the electricity firms, the government is working on a plan to allow the generating firms to   divert coal supply from state monopoly Coal India  to  efficient units.  This would help power generating companies  saving  of Rs 20,000 crore (about USD three billion ).

Finance Minister Arun Jaitley, who was also actively involved in Bihar polls, got back to work with top financial sector regulators including Governor of the Reserve Bank of India Raghuram Rajan, who has been giving his piece of mind to the fringe elements of the ruling party.

The meeting of the Financial Stability and Development Council (FSDC) under chairmanship of the Finance Minister  reviewed the state of Indian economy, noting high volatility in the financial markets is one of the most prominent risks confronting the Emerging Market Economies (EMEs). Though  India appears to be much better placed  on the back of improvement in its macro-economic fundamentals and large forex reserves, there was a need to in full preparedness for managing any external sector vulnerabilities.. 

The issue of rising bank NPAs and stress in the corporate sector balance sheet stress along with their impact on the bond market was also discussed.  

Whatever is outcome of Bihar polls, the economic decision making is going to get some speed in the coming days and weeks.

Pic: PIB

Discoms reforms on way- loan recast with higher user charges; to be big positive for investors

Just as one of the most bitter fought elections are about to conclude in the eastern and politically important state of Bihar, the Central government of Prime Minister Narendra Modi is all set to unveil a set of reforms which if implemented can really electrify the investor confidence.

Going by what Finance Minister Arun Jaitley has said  : the  Modi Government is going ahead with taking up reforms in the debt –ridden or almost bankrupt state-owned power utilities which provide the last mile connectivity in the electricity supply chain.

The Union Cabinet is expected to approve a recast of huge debt of these utilities , amounting to over USD 65-70 billion with a rider that they will have to raise the user charges and different political parties ruling in different states would not indulge in  “bad economics”.  As long as the electioneering does not end in Bihar, this kind of reforms where the user charges might have to be revised would have damaged the prospects of the PM Modi’s BJP.  His prestige is at stake in Bihar elections.

We have a situation in India where there is no shortage of generation, but the discoms are not able to lift the power and sell as they are broke. In the process, they have adversely impacted the balance sheets of the banks by adding to their stressed assets. The power sector is the most troublesome area for the banks' assets. 

FM Jaitley said: “ In the next couple of days, we are likely to announce some major policy decisions in that regard to take the sector out of stress.The big problem area for us is the power sector. I think that is an infrastructure issue which we are going to be addressing literally in the next couple of days, if not in the next couple of hours itself. We have almost finalised an approach in that direction. 

Pic courtesy: Jaitley's FB page 

India seeks investment, tech in Railways

Indian Railways' annual passenger load is equivalent to the world's population , but the travel is far from pleasant. So, it needs money to upgrade. A commercial way of approach is underway.  

In pursuit of investment and technology, India's Railway Minister Suresh Prabhu toured UK. Prabhu who is rated quite well in the PM Modi's Cabinet is seen with  the Chancellor of the Duchy of Lancaster and Minister in charge of Cabinet Affairs, UK,  Oliver Letwin and the Member of Parliament for Reading West, Alok Sharma, in London

India launching gold schemes for investors with an eye on checking imports

With an objective to check import of gold, the Indian government is launching four gold related investment schemes with different features.Indian society is obsessed with gold. No wonder India is the world's largest consumer of the yellow metal. The schemes will open on November 5, 2015

Gold Monetisation Scheme (GMS), 2015

The GMS will replace the existing Gold Deposit Scheme, 1999. However, the deposits outstanding under the Gold Deposit Scheme will be allowed to run till maturity unless the depositors prematurely withdraw them.

 Resident Indians (Individuals, HUF, Trusts including Mutual Funds/Exchange Traded Funds registered under SEBI (Mutual Fund) Regulations and Companies) can make deposits under the scheme. The minimum deposit at any one time shall be raw gold (bars, coins, jewellery excluding stones and other metals) equivalent to 30 grams of gold of 995 fineness. There is no maximum limit for deposit under the scheme.

 The gold will be accepted at the Collection and Purity Testing Centres (CPTC) certified by Bureau of Indian Standards (BIS) and notified by the Central Government under the Scheme. The deposit certificates will be issued by banks in equivalence of 995 fineness of gold. The principal and interest of the deposit under the scheme will be denominated in gold. The designated banks will accept gold deposits under the Short Term (1-3 years) Bank Deposit (STBD) as well as Medium (5-7 years) and Long (12-15 years) Term Government Deposit Schemes. While the former will be accepted by banks on their own account, the latter will be on behalf of the Government of India. There will be provision for premature withdrawal subject to a minimum lock-in period and penalty to be determined by individual banks.

Interest on deposits under the scheme will start accruing from the date of conversion of gold deposited into tradable gold bars after refinement or 30 days after the receipt of gold at the CPTC or the bank’s designated branch, as the case may be and whichever is earlier. During the period from the date of receipt of gold by the CPTC or the designated branch, as the case may be, to the date on which interest starts accruing in the deposit, the gold accepted by the CPTC or the designated branch of the bank shall be treated as an item in safe custody held by the designated bank.

The Short Term Bank Deposits will attract applicable Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). However, the stock of gold held by the banks will count towards the general SLR requirement. The opening of Gold Deposit Accounts will be subject to the same rules with regard to customer identification as are applicable to any other deposit account.

The designated banks may sell or lend the gold accepted under STBD to MMTC for minting India Gold Coins (IGC) and to jewellers, or sell it to other designated banks participating in GMS. The gold deposited under MLTGD will be auctioned by MMTC or any other agency authorised by the Central Government and the sale proceeds credited to the Central Government’s account with the Reserve Bank of India. The entities participating in the auction may include the Reserve Bank, MMTC, banks and any other entities notified by the Central Government. Banks may utilise the gold purchased in the auction for purposes indicated above. Designated banks should put in place a suitable risk management mechanism, including appropriate limits, to manage the risk arising from gold price movements in respect of their net exposure to gold. For this purpose, they have been allowed to access the international exchanges, London Bullion Market Association or make use of over-the-counter contracts to hedge exposures to bullion prices subject to the guidelines issued by the Reserve Bank.

Complaints against designated banks regarding any discrepancy in issuance of receipts and deposit certificates, redemption of deposits, payment of interest will be handled first by the bank’s grievance redress process and then by the Reserve Bank’s Banking Ombudsman.

Sovereign Gold Bond Scheme

The Reserve Bank of India, in consultation with Government of India, has decided to issue Sovereign Gold Bonds. Applications for the bond will be accepted from November 05, 2015 to November 20, 2015. The Bonds will be issued on November 26, 2015. The Bonds will be sold through banks and designated post offices as may be notified. The borrowing through issuance of the Bond will form part of market borrowing programme of the Government of India.

Sovereign Gold Bond will be issued by Reserve Bank India on behalf of the Government of India. The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. Minimum permissible investment will be 2 units (i.e. 2 grams of gold).The maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-declaration to this effect will be obtained.

In case of joint holding, the investment limit of 500 grams will be applied to the first applicant only. The Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of  999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).  Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft. The investors will be issued a Stock/Holding Certificate.

 The Bonds are eligible for conversion into de-mat form. The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA. Bonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents. The investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.

Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar Card/PAN or TAN /Passport will be required. The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall also remain same as in the case of physical gold. Bonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI. The Bonds will be eligible for Statutory Liquidity Ratio(SLR). Commission for distribution shall be paid at the rate of 1% of the subscription amount.

Gold Coin/Bullion Scheme

The Indian gold coin is a part of the Gold Monetisation Programme. The coin will be the first  ever national gold coin and will have the National Emblem of Ashok Chakra engraved  on one side . Initially the coins will be available in denominations of 5 and 10 grams. A 20 gram bar/bullion will also be available. Initially, 15,000 coins of 5gm, 20,000 coins of 10 gm and 3,750 Gold bullions will be made available through MMTC outlets. The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy re-cycling.

The Indian Cold coin will be of 24 karat purity & 999 fineness. All coins will be hallmarked as per the BIS standards. These coins will be distributed through designated & recognised MMTC outlets.

Pic courtesy: MMTC

Moody’s stable outlook on Indian banks; uptick in infrastructure part successes

Rating agency Moody’s revising its outlook on India’s banking to “stable” from “negative “ and the four-month fastest clip for the country’s eight infrastructure industries are considered yet another  positives for macro picture.

By that logic, the investors should have batted for the Indian equities irrespective of the fact the global cues led by continuous troubles in China  keep dragging  markets all through Asia, Europe and the US.. But as the seasoned analysts know by now that barring exceptional circumstances, no single  market moves in a contrarian direction. In any case, not many expect the Indian equities to be great themes at least for the next two –three quarters. So, like rest of the markets, shares will stay subdued  in the Indian bourses as well.

Moody’s has given the correct assessment about the bad quality that Indian state owned banks hold , estimated at USD 50 billion . What it has said is that while the assets quality will continue to rot ,  the pace at which the rot continues has slowed. That is what has made Moody’s change its assessment from ‘negative’ to ‘ stable’.

At the cost of sounding negative, the issue is that the Indian banking system remains vulnerable to a huge amount of non-performing assets. One of the reasons for the slow pace of the NPA should also be that the credit growth has also come down tremendously.  Banks are lending far less, or the other way of saying could be there is not much demand for credit. Moody’s assessment should be taken in that perspective as well.  

The headline is that growth of Indian infrastructure industries has reached a four month high in September. But what is the four-month high: Mere 3.2 per cent and how it has come about ?.  Of the eight such sectors only two have done well : fertilizer and electricity. In fact, thanks to a double digit growth in electricity generation that the aggregate figure has shown this improvement. Otherwise, majority of the infra sectors – be it coal, steel, cement, natural gas remain in bad shape. There is hardly any growth….de growth in some of them.    

See table below: 

GROWTH RATES (in %)
Sector	Coal	Crude Oil	Natural Gas	Refinery Products	Fertilizers	Steel	Cement	Electricity	Overall Index
Weight	4.379	5.216	1.708	5.939	1.254	6.684	2.406	10.316	37.903
Sep-14	7.6	-1.1	-5.8	-2.6	-11.6	6.6	3.7	3.9	2.6
Oct-14	16.2	1.0	-4.2	4.2	-7.0	2.3	-1.0	13.2	6.3
Nov-14	14.5	-0.1	-2.9	8.1	-2.8	1.3	11.3	10.2	6.7
Dec-14	7.5	-1.4	-3.5	6.1	-1.6	-2.4	3.8	3.7	2.4
Jan-15	1.7	-2.3	-6.6	4.7	7.1	1.6	0.5	2.7	1.8
Feb-15	11.6	-1.9	-8.1	-1.0	-0.4	-4.4	2.7	5.2	1.4
Mar-15	6.0	1.7	-1.5	-1.3	5.2	-4.4	-4.2	1.7	-0.1
Apr-15	7.9	-2.7	-3.6	-2.9	0.0	0.6	-2.4	-1.1	-0.4
May-15	7.8	0.8	-3.1	7.9	1.3	2.6	2.6	5.5	4.4
Jun-15	6.3	-0.7	-5.9	7.5	5.8	4.9	2.6	0.2	3.0
Jul-15	0.3	-0.4	-4.4	2.9	8.6	-2.6	1.3	3.5	1.1
Aug-15	0.4	5.6	3.7	5.8	12.59	-5.9	5.4	5.6	2.6
Sep-15	1.9	-0.1	0.9	0.5	18.1	-2.5	-1.5	10.8	3.2

 Source: PIB, GOI

On its part, the Indian government is trying its best to retain the investor confidence . Revenue Secretary in the Finance Ministry Hasmukh Adhia has indicated that the promised cut in the corporate tax from 30 per cent to 25 per cent could materialize at earlier date than four years , set earlier by Finance Minister Arun Jaitley.  

Pic courtesy: SBI