Five Fault Lines That Decided Against Rate Cut

Business Economics & Services Team (BEST)


                                              Five  Fault Lines That Decided Against Rate Cut
Despite the heavy pressure exerted on RBI Governor Rajan through multiple channels, it goes  to his credit that he stood the ground and refused to go for a rate cut. BEST has undertaken a quick survey as to what were the reasons for that bold decision, collating opinions from, economists, bankers, policy  experts, business men and common man. The results are as follows.
1. Unabated fiscal deficit.
Many thought that the RBI Governor has sounded alarm bell to the government and others about the precarious fiscal deficit, which is threatening to go beyond control. Already, the projected fiscal deficit for the current financial year has crossed 90% of the allowable limit set. The grandiose programs launched by the government such as Swatch Bharat (clean India), Jan Dhan (financial inclusion), cleaning up of rivers and importantly the report of the next pay commission will  entail huge expenditure in the coming months further straining the fiscal deficit.
2. Increase in  the non-performing assets of the public sector banks is a matter of great concern. There  can be two views on the issue. One, further blocking of the credit to the industry can turn more accounts into non-performing since many of them are held up for want of finance at reasonable rate for implementation. The other view is that many of the projects have gone haywire on account of the mismanagement and there is no guarantee that further infusion will help in achieving a U-turn in the trend. Rather, there is no checks and balance in place to prohibit diversion of funds from project funding to speculative purposes or non productive works. The controversy around sanctioning of a loan in principle to one of the controversial  corporations, heavily steeped into indebtedness, to the extent of one billion dollar from a PSU bank have invited severe criticism.
3. The price level is still overheated though the statistics doled out hid some of the realities on the ground. Food inflation is ruling very high with an unprecedented fluctuations in the prices. For instance, on a year to year basis, almost all food items have shown an upward spiral in prices. A case in point is cauliflower, the price of which used to be hovering around Rs 8to 10 a kg  in this season, is being sold out over Rs 20 in some markets on an average. Daily fluctuations  in prices is also significant. Today, the prices of cauliflower scled to Rs 30 in the Safal outlets, which is a state run retail outlet. The prices charged by the vendors will be several percentage more than this. Equally significant is the steep increase in prices of medicines including life saving ones on account of taking them out from the purview of administered price.
4. Despite heavy cuts in the oil prices, foreign exchange segment seems to be in a stand still. Further, gold import rules were relaxed to bring down the prices during the marriage season. But foreign exchange outgo on account of that is more offsetting the likely gain from the cut in oil prices. This shows that there is a huge pend up demand  for imports  particularly consumer items. Also, with lesser foreign exchange  outgo, rupee should have been stabilized against dollar. But that is not happening. Also, the lackluster performance of the export sector, despite the slow recovery of the US economy and standstill of the EU economies is a matter of concern.
5. Though a a government with a clear mandate has been elected to power, the policy framework seems to be seethed in the old mold. The government has completed already six months in office, a reasonable length of time to show some results in all fronts. But at the ground level,  many of these policy initiatives have yet to show results.
  

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Will Modi Administration Revive Indo-US Nuclear Deal?

Business Economics & Services Team (BEST)


  Will Modi Administration Revive Indo-US Nuclear Deal?

After being caught in the limbo for a long time, India's effort to flag off the Indo-US Nuclear deal signed in 2008 has kicked off new hopes and equal number of concerns. The Modi administration's decision  to revisit  the deal has rekindled the hopes of many who pitch for augmenting India's energy production through the perceived risky route of nuclear reactors. The implementation of the landmark deal was caught up in several complex issues. The foremost among them is the lack of consensus on supplier liability in the event of an accident.
The latest thinking is that the liability has to be shared  between the supplier of the equipment and the operator. Since the private sector participation is not envisaged in the initial stages of Indian nuclear roll out, the Indian government has to assume the role of the operator. Around 30 reactors which are in operation now are owned by the state-run Nuclear Power Corporation of  India (NPCIL). Importantly, the foreign suppliers want to know their liability well before  they take a call on investing in India. That saidi, many US companies are well poised to supply to India equipment, which can fetch them several billion dollars.
India has set a road map for investing US$ 85 billion  in the conceivable future for taking its nuclear production from a low of  4780 MW to 63,000 MW. This quantum jump has to be achieved for ensuring a good cover for achieving the objective of ensuring uninterrupted power supply to manufacturing units dotted across the country.
There is no denial that anything connected with power, be it thermal, hydel or nuclear, will kick off a political debate, especially when the  green lobby is taking strong roots in India. The governmental fiat seldom works in this country, if there is a massive public outcry. With the setting up of the Green Tribunal, the role of the watch dog and oversight committees have become more important. Against this backdrop, what is more important is to create an awareness among the people about the advantages of the nuclear power. The resistance being faced in Kundamkulam in Tamil Nadu was mainly borne out of the fears cast by the Chernobyl. Genuine efforts have to be made to make the people understand the exact nature,impact and the safegueards against the unlikely event of an accident.
Protectiveness should be hallmark of any implementation strategy. An insurance fund has to be created to meet the exigencies and the unlikely accidents. Also, steps should be  taken to minimize the loses on account of accident. The foreign equipment suppliers are keen to know exactly what would be the quantum of their contributions in that insurance fund. Also, the liability will be cast far and wide including on the components suppliers. Should their liability be at par with the original equipment suppliers is another area that has to be decided.
Nuclear Power generation always cannot remain in the precincts of the government. Sometime down the line, the private sector has to be brought into the game. There are some corporations like L&T, which have shown  interest in investing in nuclear power. Having regard to the fact that, it is a highly capital intensive sector, a serious thought has to be given for funding pattern, gestation period of setting up of the plants, the return on investment etc.
Equally significant is the possibility of import of second hand machines. A threshold age should be set for the import of such machines to obviate the possibility of India becoming a dumping ground of such machines. Stringent standards and specifications have to be laid for the import of machines.
Another important factor is the need for importing only the  state-of-the-art technologies and it should be made liable on the supplier to maintain the machine sufficiently for  a long time             

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How Reliable Is Official Statistics in India?

Business Economics & Services Team (BEST)



                                        How Reliable Is Official Statistics in India?
Many people are openly questioning the veracity of official statistics in India. The old idiom - lies, blatant lies and statistics - seems to have come back.  Look at the official statistics that has been put in the public domain yesterday. It says that  GDP growth for July-September 2014 has slowed down to 5.3 % as against 5.7% in April -June quarter. But many newspapers refused to take cognizance that the  growth rate in July-September is marginally better than 5.2% clocked in the same quarter in the previous year.

The perceived slide down in the growth rate is triggered by the lackluster performance of the  manufacturing sector, which contributes roughly 15 % of the GDP. Despite, these pitfalls., the stock market  has witnessed a steady rally mainly due to higher growth expectations on account of the likely cut in interest rates and the prospects of further reforms.
Now let us analyze the economic parameters in the public domain. For the last one moth or so, a lot of stories have been churned out in various newspapers indirectly cajoling the RBI Governor to cut the interest rate and that too a steep cut. The stories  are twisted and colored to serve that ultimate purpose. Let us look at some of these stories. Important among them are the slide down in the rate of growth of  whole sale and consumer indices, which have been played up out of proportion in most of the newspapers. Why it was done? The reason why RBI kept the interest rate unchanged was the enhanced inflationary expectation. One need not dispute the fact that both the parameters -wholesale and consumer indices-have fallen marginally. The rate of growth of inflation has only fallen from a higher base. That does not mean that in absolute terms the inflation has come down. Prices have not fallen for essential items of common man. Prices of almost all food articles are at least 25 to 35 % higher than what they were in the previous year and almost 50% higher than what they were two years back. It is also true for poultry, fruits and other items and in some cases they  are higher than the average increase in the prices of food articles.
The government can hide behind the statistics that they roll out. But the common man is facing the brunt. Some of the sections of the public are partly insulated from the onslaught of this increase. They may be businessmen, traders, salaried people and to a lesser extent the government pensioners, whose compensation is partly linked to   the inflation indices. What about vast majority of people who are not covered by the safety net? They are suffering and their wrath no government can overlook only at their own peril.  

Now, the other factor that is refusing to come into the public domain is the net saving that the government and the oil companies have reaped on account of the steep cut in the oil prices. From close to US $100  per barrel, it is expected to hit  below US$70 billion. The oil prices are decided by a combination of factors like oil futures, which is a function of demand and supply, both expected and current and the geopolitics factors like uneasiness among countries, transport bottlenecks etc. The public should  know the profile of prices at which oil contracts are concluded and other modalities like whether is there any middlemen and who negotiated the prices and a host of connected issues. That is what transparency means and any effort to hide these facts will perpetrate the opaqueness in the system.

Equally  significant is why rupee is still above Rs 60 vis a vis dollar. Rupee could have shored up against the dollar on account of the decline in the foreign exchange outflow triggered by lower oil prices. People who are in the know of things maintain that even if the  oil prices slide below US$50 per barrel, India's import bill will not come down since there is a huge pent up demand for import particularly for gold. Instead of tightening the screw  for gold imports, the government in fact has eased the import regime, which can offset the gains on account of the lower oil prices.
                  

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Will Oil Loose its Shine?

Business Economics & services team (BEST)


                                                Will Oil Loose Its Shine ?
As expected, the OPEC has voted against cutting back oil production to stem the falling prices. Is there any method in the madness? What are the reasons for the roll over of the production target? If one  expects that answers to these questions are simple and straight forward, he or she is living in fool's paradise. Oil economics is mired in complexities, intrigues, double speaks, cut backs and what have you. Earlier, the oil world was divided into two: producers and consumers. Hegemony of producers have led to non producers exploring oil wealth and some of them have succeeded, some partially and the rest failed. When more countries and economies have emerged as oil producers, there was division among them as poor and rich oil producers and newly oil found countriesl. Over the years, a number of sub-groups emerged such as shell gas producers, producers who can meet domestic demand partially and those who have to resort to import in varying degrees for meeting the demand.

Every oil consuming country stands to benefit from the cut in oil prices, which pundits believe are on two counts. One excessive production, which has led to a glut in the market, which exerted a downward pressure on oil prices  and two cutting down the cascading effect cast by increased oil prices on their economies. In the immediate run, it will impact on the prices.
 A slowdown of the manufacturing sector and its consequent impact on the economic growth necessitate only lesser imports of  oil at a time the international prices are ruling very low. The oil price cut has given a reprieve to economies like India, which often face current account deficit on account of mainly heavy oil imports. But, imports of  non-merit  goods like gold, luxury items etc have gone up partially offsetting the benefits accrued under the oil price cut. Also, its beleaguered manufacturing sector is refusing to budge and buck the trend. Ideally, a country like India can reap profits from the price cuts only when its investments picks up. The foreign exchange saved from lower oil rices can be used for   importing capital goods, which go into the manufacturing sector. In the absence of such a shift in import demand, oil price cut may become a zero-sum game
The  grapevine making the round  amidst the deep oil cuts is the arm twisting the US and its axis group in oil production are indulging in to ensure their  hegemony in the oil economy. The Russia-US diplomatic relations, perhaps is at the lowest ebb in the recent times. Ukraine issue has almost isolated Russia from other developed countries. The steadily eroding   Ruble against dollar and the low realization of  Russia from the oil sector on account of  low prices are well-known. There are also unsubstantiated news or mere rumors about  Putin's health, which is also putting great strains on the  Russian economy. if the low prices continue, sooner or later Russia will be hard hit.
It is also true that the US and Saudi Arabia cannot afford to have a low oil price for ever. Shell gas production in the US is expensive and once the oil prices hit the bottom, it will not be economical for the US to mine shell gas. So, they also need a price recovery. Of course, the US and Saudi Arabia  csan wait for some more time unlike the poorer countries like Venezuela, Algeria and Iran etc, who are already reeling under the impact of low prices.
What will be the game plan of the US? They know very well that the price slump can be managed for sometime. In the meantime, great damage will be caused to the smaller oil producing countries. Some of them will put the oil wells on bloc and others may vacate the field at least for a short term. In the meantime, gaining from the low oil prices, economies like China and India will recover. The demand will shoot up several notches above the present level. That time, they will emerge as the winners reminding one about the old adage: "head I win tail you loose".     

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India-US IPR War Awaits Obama, Modi Mediation

Business Economic & services Team (BEST)

              India -US IPR War Awaits  Obama  Modi Mediation

  A lot of debate, informed and ill - informed,  is happening on the India-US stand off in the IPR regime. There are accusations and counter accusations from both countries. Happily, the severest of the criticisms from either side are couched in diplomatic niceties, unlike the bilateral talk between India and Pakistan, where the words and phrases are intimidating and used by both sides to hit each other below the belt.

The latest to join the fray is Intel, with a clear warning that India should protect the trade secrets, ostensibly telling that the findings of their research laboratory situated in Bangalore should be protected from theft either by their own employees or by the regulatory authorities, who can stealthily divulge the secrets when mandatory filings are made. If one wants to read in between the lines, the allegation is very serious. It has two imports. One, the government is soft on those who commit the theft. Instead of sending the thief to bird (jail), they seem to have a field day by not invoking criminal proceedings against them. The second allegation is more sinister and that they openly proclaim that they do not have any faith in the credibility of the the Indian regulatory system, which tends to leak out the research findings, which can be  worth billions of dollars.

Intel is one among the long array of complainants of the IPR regime in India. A few days back, pharmaceutical companies have made similar allegations, followed  by electronics and telecom majors. Thankfully, two important segments, which are happy with Indian IPR regime are food processing and aviation sectors. It seems that they have  informed the USTR their appreciation and satisfaction about India's IPR regime in writing to USTR.
Now let us analyze why all on a sudden the Indian media is agog with stories on IPR, some of them seem to give the impression to the discerning  readers that they  are   outright  plants by vested interests. ( I refrain from telling  that they are planted by the companies themselves). The US companies feel that the forthcoming  visit t of  President Obama will provide an ideal platform for thrashing out the rough edges in the India's IPR regime.

In the given milieu, what  happening is inadequate orchestration of India's concerns on IPRs. There is a real threat from the US by misappropriating India's traditional knowledge and copy rights on certain segments like music, entertainment etc. It is being said that the Bollywood films and music are freely available in the grey market in the US. Also, medicinal properties of Indian herbs and plants, contained in the ancient books of India are used widely by the US companies to evolve new medicines, which are marketed widely.

It is significant to note that  the   assurances that are coming forth from the Indian authorities are vague and are couched in hyperbolas. For instance, the stock answer from the official sources in India against the unilateral decisions imposed by the US is that the issue would be discussed at the Innovation & Creativity Focus Group, set up between the two countries and a decision would be taken only after that . Some of the social activists have expressed the opinion that  the government was buckling under the US pressure and  threatened that any amendments to the IPR Act would have severe backlash.
There is no denial that there will be irritants in a dynamic and growing  trade relationship. These have to be addressed and resolved  in the spirit of give and take. India has a lot of concerns while doing business with the US. The foremost is the visa issues. The second issue is relating to large amount of unclaimed money vested with the US by way of  social security tax imposed on Indians who have short stay in the US. The third issue is the one relating to transfer of state-of-the-art technologies to India. Across the discussion table, these issues have to be discussed along with the US concerns  and agreement arrived.

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.Better Late Than Never-A Critique on Possible Relief to Shell & Voda

Business Economics & Services Team (BEST)


                                             Better Late Than Never-A Critique on Possible Relief to Shell & Voda

The statement of the Attorney General of India, that the Government is unlikely to approach the Supreme Court against the Bombay High Court decision, which has laid down some clarity on the tax on assets that are   transferred  is welcomed widely both in India and abroad. Many term this decision, if followed up in letter and spirit, can be a major incentive for attracting foreign direct investment (FDI). The benefits of this decision will flow to many other multinational corporations like IBM, Nokia etc.
The pertinent point is whether the public is sufficiently aware of the merits and demerits of the case. I suspect not many including some of the correspondents covering the subject are  aware of the implications of the case.

To put the issue in perspective, it is important to keep in  mind three developments. One, the recent judgement of the Bombay High Court, which ruled in the Shell case that the transfer of shares of   Indian wing of Shell to another group company abroad did not amount to transfer of capital assets and did not attract  tax. In another case, that is Vodofone, the Bombay High Court in 2008 held that a similar transaction was one of transfer of capital assets situated in India and hence Indian tax authorities has the jurisdiction to levy tax.

Subsequently, aggrieved by the decision, Vodofone went in appeal to the Supreme Court. The apex court held that  the transaction between Vodofone and Hutch was a share transfer and not a transfer of capital assets. To ensure brevity, the reasoning of the Supreme Court is not reproduced here. The court has made a legal distinction  between a company and its shareholders. The judgement also did not make a distinction between the shareholding that constituted a controlling interest and shares that are purely financial investment. The court laid stress on the legal identity of the company  and held that once the shareholders of the company have a legal identity distinct from the company, no matter what the proportion of the shares they hold, it follows that the two companies would have distinct identities even if one held a controlling share in the other.  It  emphasizes that even a subsidiary has an identity that is distinct from its parent holding company.

The second important point is that the tax  authorities should not ask (look through) whether the transaction is a tax avoidance method, but apply the "look at" test to ascertain its legal nature.  Going behind the "corporate veil"  or looking through would be legitimate only in cases where it can be established that there is a deliberate intention of evading taxes.
However, the Indian government feels that if an Indian company conducts a financial transaction, the government should get its tax. In 2012, India changed its Income Tax Act retrospectively and made accountable for companies in similar situations to pay taxes and confirmed that Vodofoe  will have to pay taxes to the tune of US$ 3.3 billion.   (Esteemed readers are advised to refer the Court judgments to have a clear idea about the intent of the judgements)
A few points that have to be considered in this cae are the following:
1. Since the opinions of the jurists, legal experts, policy makers etc. are sharply divided in this case, should we have a more informed debate on this issue before taking a decision. The finance  minister has announced that that an empowered committee was set up to look into the issue of retrospective tax in the last Budget. The public should be informed as to what stage are the deliberations of the committee and when will it come out with the report.
2. Foreign investors make up their decision to invest in a country based on many factors. One among them is the certainty and continuity of tax, rules, legislation etc. since  they  can plan it well in advance and make arrangements accordingly. The government coming out with a clear legislation in this regard will augur well and it should fact in what are the tax provisions for similar situations in foreign countries. This will obviate delayed litigation and the so called policy paralysis.
3. The legislative pieces governing tranafer pricing should be referred to the law commission to look into the complex issues that have been addressed in the judgements such as look in and look through, distinction between money investment coming from clean sources as against  tax havens. In the said case of Vodofone investment has come through Canyon Islands, a tax haven. Significantly, transfer price issues have come up in India in the recent times, ever since mergers and acquisitions have become  frequent happenings. Our legislation in this regard is at a nascent stage. We have to have more clarity since it is going to be a regualr feature in our  economic landscape.
4. Also, the judgement has to be seen in perspective of many such mergers and acquisitions in the pipeline. Some of the companies, after such mergers or acquisitions will emerge stronger cornering a sizable market share, defeating the very purpose of competition laws.  
5. Similarly, an empowered body can decide doing away with retrospective tax, which by the very import of the word in uncertain and unpredictable. In this regard, it is better to give amnesty to the past cases by imposing fines decided by both government and  parties rather than allowing such cases to drift in the court.

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Be Courageous Rajan: Keep Nation's Interest First

Business Economics & Services Team (BEST)
             



Business Economics & Services Team (BEST)


Be Courageous Rajan: Keep Nation's Interest First

 The media is hell bent on pushing RBI Governor Raghurm Rajan  to do the most expected and that is slashing the interest rate. There are suggestive stories appearing with regularity in almost all newspapers about the imminent rate cut, He seemed to be a listener most of the time the cacophony of demands and sometimes veiled threats. But Rajan gives  some indications, of late, that he is his own man and can rough up pressure exerted from any source, however powerful they may be.

RBI Governor's lambasting of low debt recovery from the corporate defaulters is significant. Corporate can roll out umpteen reasons for the low recovery, such as economic slowdown, high cost of capital, widespread sickness etc. The outstanding value of debt accumulated over the years works out to quite a tidy sum; something  close to Rs 2.5 lakh crore. This is enough to fund the entire Swatch Bharat or enough to build houses for a sizable number of homeless people or providing basic health  to  millions of people.
Importantly, a causal look at the time series on defaults indicates that it was prevalent even during the boom years also. There are many cases studies, which bear testimony to the fact most of the accumulated debts are due to mismanagement, family disputes, willful default and diversion of funds  disbursed  for other activities including speculative operations.
Rajan is not new to such situations. In the past also, he experienced similar contradictions and aberrations. His magnum opus " Fault Lines" is a crystallization of  his hands-on experience and thoughts on crony capitalism and how it has subverted the market polices to the advantage of a few and powerful.

By now the RBI Governor must have realized the opaqueness of the Indian financial sector, which is mired in myriad of  loosely cobbled up policies, exemptions and conditions that are heavily loaded in favor of certain sections of the people. For instance, there are policies that act as cushion  against  higher interest rates. A case in point is the 5 percent interest subsidy enjoyed by certain segments of industry like textiles under Technology Up-gradation Fund(TPF), which is a hotbed of corruption. Some of the well run industries get funds at zero or negligible rate. The public would like to know how many such companies are defaulting teh reapymnets, which comes to them almost free of interest rate.    Rajan should ask himself why hell break loose when the capital market dithers and all out cries at high decibels resonate the Indian media space. Death due to negligence, poverty or high handedness of officialdom go unreported or pushed to  innocuous corners. This is the great Indian paradox.

Now there is a new pitch on cut in interest rate. A snap poll conducted by a powerful media group found that the possibility of a rate cut in December this year is remote. The survey claims that it is the perception of the entrepreneurs, whom they have surveyed. The survey also suggests that possibly in February 2015, a rate cut can be expected. I do not know the coincidence of the so called survey and freeloaders charge made by Rajan on the debt defaulters.  

The RBI Governor has been put into a spot when the finance minister has aligned with the protagonists of interest rate reduction.  The FM  believes that a reduction in interest rate will kick start the economy. I sincerely hope that the erudite finance minister is not swayed by the well orchestrated campaign conducted by the vested interests. Rajan should realize that two of his immediate predecessors were not decorated as much as he himself, but they valiantly stood the ground to see that monetary policies are rolled out based on the ground realities and not according to the  whims and fancies of the concerned minister or the media reports. One expects Rajan also to show some courage and stick to his rules even if that  costs him dearly. That is what his two immediate predecessors did and they will be remembered for that courage and conviction. 






    

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