Fuel price cut drags inflation further to 1-year low of 4.39%
The Economic Times, February 13, 2009, Page 7
Our Bureau NEW DELHI
REFLECTING the recent cut in fuel prices, inflation dropped to a 12-month low of 4.39% for the week ended January 31, 2009, leaving room for the central bank to slash interest rates further to lift industrial production levels that are currently on a downward spiral.
On Thursday, yields from 10-year bonds fell to the lowest in more than a week, on the back of expectations of a rate cut. Given the demand slump and the contracting industrial output, inflation rates will only fall from here on, rating agency Crisil principal economist DK Joshi said.
“If the current scenario continues, India might get into a deflationary scenario by Marchend for a brief period,” he said.
However, the annual rate of increase in prices of food products was still close to the 10-year high though there was some moderation in prices over the week. The wholesale price index (WPI)-based annual rate of inflation was 5.07% in the week before and at 4.74% in the corresponding week last year.
The fuel price index, which has a weightage of 14.23% in WPI, showed a 3.1% drop over the week due to lower prices of petrol (11%), liquefied petroleum gas (8%) and diesel (7%).
The government had cut retail fuel prices of petrol, diesel and LPG by Rs 5, Rs 2 and Rs 25, respectively, in the last week of January. The fuel index is currently 3.53% below its level last year.
Food articles also became marginally cheaper over the week as the impact of the trucker strike — which lasted eight days in the beginning of January and had pushed up the annual rate of inflation in food articles to a 10-year high — eased out. Fruit and vegetables, along with spices and condiments, got cheaper by 3% each over the week. However, the annual inflation on food articles, which is at 11.48%, still remains close to 10-year high on account of prices of certain cereals which firmed up.
Annual inflation in manufactured products eased to touch 5.26% for the week from 5.37% the week before. Analysts are expecting the prices of manufactured items to ease further as the second round impact of fuel price cuts gets factored into the prices.
Friday, February 13, 2009
Fuel price cut drags inflation further to 1-year low of 4.39%
Inflation dips to 4.39%, RBI may cut key rates
Times of India, February 13, 2009, Page 21
NEW DELHI: Inflation has dipped to 4.39% in the week ending January 31, the lowest level since January 12, 2008, mainly due to recent fuel price cuts by government. On January 28, government had cut petrol price by Rs 5 a litre, diesel by Rs 2 a litre and LPG by Rs 25 per cylinder. In the week ending January 24, inflation was at 5.07%.
Such a steep fall in inflation will give RBI enough room to cut key rates,paving the way for banks to lower interest rates. In the last two weeks, inflation declined by 1.25 percentage points. Many economists feel that if government and RBI do not check this fall now, inflation may turn negative by April, triggering a deflation scenario, which means, in the absolute term, prices may start falling.
At the same time, as the industrial production has turned negative in December, economists feel that government should announce another stimulus package and RBI should cut rates to revive the growth.
During the week, consumer items like liquor became cheaper by 15%, fruit and vegetable by 3% and tea by 1%. During the week, prices of groundnut oil dipped 3%, while imported edible oil and mustard oil declined by 2% each.
New norms to pump Rs 10,000 cr into realty industry
New norms to pump Rs 10,000 cr into realty industry
Financial Express, February 13, 2009, Page 4
fe Bureau, Mumbai
The Rs 65,000 crore Indian real estate sector is expected to attract investments to the tune of Rs 10,000 crore, if according to the new foreign direct investment (FDI) rule, companies having FDI will be able to invest in non-FDI compliant projects, which are smaller than 10 hectare/50,000 sq mt, opines real estate companies, international property consultants and lawyers. Rohan Shah, managing partner, Economic Laws Practice told FE, “As per the new FDI rule change, real estate sector will foresee a big change only if investments are allowed below 5 lakh sq ft real estate project apart from pre-trading of real estate, then more new investment opportunities will come up.”
According to Nayan Shah, CEO, Mayfair Housing Private Ltd, “With the new FDI rule, we expect investments to the tune of Rs 10,000 crore to come up in the real estate sector by this calendar year-end.”
Aasheish Agarwaal, real estate analyst, Edelweiss Capital Ltd opines, “As per the new FDI rule change, companies having FDI will be able to invest in non-FDI compliant projects, which are smaller than 10 hectare/50,000 sq mt. These projects have a quicker turnaround time and have lesser risks associated with them. Further, these developers will also be eligible to acquire ready properties.”
Prior the announcement, foreigners were allowed to invest only in greenfield properties spread over 25 acres area (for services housing plots) or 50,000 sq mt built up area for construction—development projects with minimum investment norms, repatriation clauses and development clauses. “Thus, the new FDI rule will have a positive impact on the real estate sector by affording developers with foreign money a greater degree of strategic freedom, enabling them to offer a larger range of projects, which will ultimately benefit the end-consumers,”Agarwaal added.
However, Pranay Vakil, chairman, Knight Frank India said, “What I feel is that the impact of the new FDI rule is meant for the future FDIs, but not the existing FDIs. For instance, if a foreign company investing to the tune of 49% in an Indian company that invests the remaining 51% forms a new company, this new company would now be free to launch subsidiary that will not be governed by FDI limitations. If government announces new FDI rule, it should be done directly rather than forcing companies to create a new subsidiary. Currently, existing FDI is coming through the Mauritius route.”
Companies having FDI will be able to invest in non-FDI compliant projects, which are smaller than 10 hectare/50,000 sq mt
Prior the announcement, foreigners were allowed to invest only in greenfield properties spread over 25 acre
Recession and real estate in India
The Economic Times, February 2009, Page 14
In an earlier article (ET, Nov 19) I had argued that the current global recession has clearly dominant Keynesian features. The crucial issue is not just the fact that there is a demand contraction but that this has been brought about by a market failure which fuels adverse expectations on the part of both producers and consumers.
These adverse expectations lead to reduced production by producers anticipating lack of demand and increased savings by consumers anticipating lack of jobs. Over time, actions of both producers and consumers further justify their expectations which then become self-fulfilling.
In the absence of government intervention (which fills in the missing demand) it is not clear when and how such expectations get reversed. In the 1930s, it took a whole decade to reverse such expectations and even then only because of government intervention. Today, governments have already started coordinating actions and it is unlikely that this recession would last as long.
However, it is still foolhardy to guess when exactly the current recession would come to an end. We have various guesstimates ranging from end 2009 to middle 2010 but it must be clearly realised that there is no scientific basis for such estimates. After all, how can one estimate when the "feel good" factor returns to reverse adverse expectations?
The crucial role of expectations is also clear from the fact that monetary policy has successfully driven interest rates to near zero levels in most OECD countries and yet there is still no sign of demand recovery.
In India too the RBI has tried valiantly to drive interest rates down. Yet the impact seems limited. Over the period September to December last year the RBI pumped in almost all the liquidity it had sucked out of the system in the preceding 12 months. Yet, the PLRs of banks have barely fallen and the new funds have only found their way into the market for government’s T-Bills. Bank holdings of T-Bills are way above the legal requirements. In other words, banks would rather hold government notes promising about 3% to 3.5% return rather than lend to investors at even reduced rates of 7% to 8%! A strange situation where the government pumps money into the system only to see it finding its way back to them via funding of government debt! Expectations are adverse indeed.
This is particularly important in the real estate sector which is now going through very rough times (likely to get much rougher!). The importance of the real estate sector in India cannot be understated given the strong forward and backward linkages that it generates.
The sector has demand implications for intermediate inputs like steel, cement, etc., while keeping afloat the whole construction industry including transport and other intermediate labour services. Given its importance for the economy it is worthwhile to see how adverse expectations are playing a role in this sector and what are the possible solutions.
It should be noted that the role of expectations is particularly important in sectors where speculative activity is greatest. Speculation is typical of the real estate sector in India. A simple test is to compare the purchase price of a property (commercial or residential) with its rental rate.
Casual empiricism indicates that the rental on a residential 2BHK property in a major metro like Delhi is around Rs 1,20,000 per annum. The purchase price of a similar property was around Rs 50,00,000 last year. However, the return on a fixed deposit of Rs 50,00,000 at around 10% per annum would be almost five times the rental. The difference is the return to speculation.
It is not surprising then that adverse expectations have hit the real estate sector hardest. Why are monetary measures not succeeding? For one, the banking sector has still not reduced interest rates sufficiently. Today, bank rates are still around 10-11% on a long-term housing loan.
This must come down to around 6-7% to attract new borrowers. Second, as the RBI periodically announces measures to reduce interest rates this fuels expectations of further cuts and discourages investment in all fixed assets including real estate.
Third, developers are obviously caught in the speculation trap having mopped up most of their own properties in the past on the assumption of a speculative gain in the future. While they have so far expected the government to bail them out, this is unlikely to happen and one can expect substantial property price reductions in the next one year.
The bottom line? The real estate sector has so far relied mainly on upper income domestic demand and external demand. This is unlikely to revive in the near future. For the mass domestic market the ‘Indian dream’ of owning one’s own home is unlikely to be realised at current prices. Only a combination of much lower home loan rates and a significant drop in prices can energise the real estate market on a sustainable basis. What is clear is that monetary measures alone will not suffice at least in the short run.
FII holdings in Indian cos down to 2003 level
The Times of India, February 13, 2009, Page No. 21
MUMBAI: Foreign investors, the most influential investor group in the Indian market, have reduced their holdings in Indian companies drastically in the last four quarters and are back to their December 2003 holding levels. However, domestic institutional institutions (DIIs), led by insurance companies, have cushioned part of the FII exodus. And now, for the first time ever, DIIs own more than what retail investors hold in Indian companies, an analysis by a Citigroup arm of the latest disclosed shareholding patterns showed.
The report also pointed out that for the first time in four years, DIIs and retail investors, that excludes promoters, own more than FIIs. In BSE 500 stocks, which make up for 94% of the all BSE listed companies, DIIs now hold 8.86%, while retail investors hold 8.64%. Retail investors, who were holding 16.4% of the BSE 500 companies in March 2001, have mostly been shedding their positions since then.
Sebi data also shows that in 2008, FIIs took $13 billion (Rs 54,500 crore) out of the Indian market, a trend reversal from a $17 billion (Rs 72,700 crore) net inflow in 2007. Compared to this, DIIs -- which include mutual funds, insurance companies, banks and other financial institutions -- pumped in nearly Rs 14,000 crore in 2008, more than double the Rs 6,400 crore they had invested in 2007.
The Citi report titled ‘Back to...2003' said the last quarter's sell-off, when about 1.4% of FIIs holdings were sold, brought it down to 15.5%, the same level where it was five years ago. This is the same level where it was during the early days of the last bull market. In value terms, foreign ownership is still higher at $94 billion than in December 2003, ‘‘but the level is almost of an age gone by,'' the report said.
The landmark shift in ownership data, showing DIIs holding more than the combined holding of retail investors, could also be a sign of a maturing market. ‘‘Domestic investors (ex-promoters) now collectively own more than foreigners for the first time in four years. The big gainers continue to be the insurance companies who now own 5% of India Inc,'' the report said.
Foreign funds are known to concentrate their holdings in blue chips and the latest data corroborates the same. As of last quarter, FIIs held 22.5% in the 30 sensex stocks, while retail investors held 8.6%, insurance companies 6.4% and mutual funds 4.1%.
Getting real on realty
Getting real on realty
Business Standard, February 13, 2009, Page 9
Thanks to the realty sector crying hoarse and the fact that an economy in a serious downturn does call for government action, India’s real estate majors have got some respite. They will now be able to reschedule the loans that were to be repaid by March 2009, and some restructuring can also be expected, now that banks don’t have to classify the loans as NPAs. And at least home loan rates from the State Bank of India have been slashed — you can finance a home at 8 per cent. Whether or not it can afford to do so given that 1,000-day money still fetches a depositor 9 per cent is another question. The problem, however, is that if the real estate majors don’t get real, they could soon be in line for another bailout next year, or even earlier. Much of the problem, as is evident, is of their own making. They didn’t see the writing on the wall and so, while cashing in on the boom on the way up, didn’t lower prices quickly enough as the economy started slowing. Or perhaps they didn’t want to?
One would have thought that in return for the government’s generosity, the industry would return the favour. After all, they’re using up scarce capital. Also, construction costs are down now that prices of steel have fallen nearly 50 per cent. But even though the signs of trouble are pretty apparent to everyone now, you still don’t find too many cuts in prices by real estate majors. Sure, there are the usual discounts of 10-20 per cent being offered, but these aren’t really serious offers. If you look closely enough, builders aren’t really offering to slash costs in existing locations—for instance, DLF is selling apartments in Hyderabad at 20 per cent below the market price. But most are holding on to inventory in the posh areas, and are converting larger flats into smaller ones; the prices per sq ft aren’t really lower.
This sounds counter-productive. For, with construction costs collapsing, you’d expect that, even at lower prices for completed flats, the margin structure of the majors wouldn’t get affected too badly — for the older players like DLF where the land banks are so old, the incremental costs are only those of raw materials and labour. So, if they lowered prices and attracted more buyers (it’s a myth that, with job uncertainty, the middle classes will not buy property even if priced correctly), the builders would see their cash flows improve. Also, builders were ostensibly bailed out so that they could create jobs for construction workers. But most developers are postponing or stalling projects, so where are the jobs for construction workers?
One reason why builders are not really making sharp cuts in prices, is possibly because they’re underestimating the slump. So, they’re willing to lose some income now for capital appreciation later. A look at some analyst reports suggests this is unlikely to happen. If sales volumes collapse like they’re expected to—CLSA expects DLF’s top line to fall from Rs 14,438 crore in 2007- 08 to Rs 9,907 crore in 2008-09 and Rs 5,079 crore in 2010, and Merrill Lynch reckons Unitech’s revenues will slide from Rs 2,998 crore in 2008-09 to Rs 2,557crore in 2009-10 —the debt overhang will get killing. In the December 2008 quarter, by the way, industry revenues were down anywhere between 60-90 per cent. The reported net debt, however, is huge. DLF’s is close to Rs 14,000 crore, Unitech’s is Rs 9,000 crore and Sobha’s Rs 1,800 crore. A Deutsche Bank report says a spike in debtors and debtor days, across the sector, implies either that customers are delaying payments or have stopped paying. Now combine the two to see how potent the combination is. According to CLSA, DLF’s interest bill in 2009-10 will be in the region of Rs 1,800 crore on revenues of just over Rs 5,000 crore. In 2010-11, the bill is expected to be only slightly smaller at Rs1,680 crore. The story is not much better for Unitech; interest payments are estimated to rise from Rs 264 crore in 2008-09 to Rs 423 crore in 200910. Given this, isn’t it a better idea to simply slash prices in a few projects and get cash flows going? Unless, of course, the real estate majors are confident they’re too big to fail, and another bailout is around the corner. That, after all, is the real lesson from the US financial crisis — you don’t pay for your sins, we do!
DLF withdraws from Bengal project
Financial Express, C&M, February 13, 2009, PI
Real Estate developer DLF has withdrawn from the Rs. 5000-crore Dankuni township project near the metropolis citing the current economic recession. After a Cabinet sub-committee meeting on industry on Thursday, principal secretary with the CM’s secretariat Subesh Das said that DLF had intimated that the it would not undertake the project due to the economic downturn.
Thursday, February 12, 2009
Mini budget may give tax breaks on housing
The Times of India, February 12, 2009, Page 1
Prabhakar Sinha, TNN
NEW DELHI: The interim budget to be announced on Monday could bring some cheer to consumers and investors, as acting finance minister Pranab Mukherjee may use the opportunity to announce one more stimulus package in the form of targeted tax incentives.
Sources in the government told TOI that Mukherjee may announce tax sops aimed at boosting the housing sector, which has been identified as a potential driver for the economy and job creation during a slowdown.
Normally, propriety would demand that an outgoing government not announce any major policy decisions or changes in the tax structure in an interim budget. But, given the global economic crisis and its impact on India, the UPA has the opportunity to argue that it cannot remain a silent spectator and allow things to drift for months till the new government can assume office.
One populist measure that is being seriously considered to kick start the realty sector -- which could help revive a number of related sectors like steel, cement and electric appliances -- is an increase in the deduction allowed for payments on housing loans.
Sops for realty likely
Hindustan Times Business, February 12, 2009, Page 23
Buffeted by an extraordinary global economic slump, the interim budget to be announced next Monday is likely to unveil several sops for the realty and associated sectors including tax breaks for cement and steel.
As a precursor to the interim budget preparations, a committee of secretaries headed by cabinet secretary K.M. Chandrashekhar has prepared the broad contours of a fresh set of fiscal measures.
Officials did not rule out a cut in excise duty on cement and steel from its current levels of 10 per cent.
Housing sector has been singled out for special attention as it can raise demand through greater income and additional employment generation.
“Construction activities need to be stimulated as this sector has considerable employment potential,” a senior official requesting anonymity said. “The interim budget would contain measures for the housing sector.”
Unfavourable real estate and stock market conditions have coincided with a sharp increase in the scale and size of projects executed and planned over the past two years. As a result, many builders — mainly small and medium-sized ones — are operationally stretched, besides being financially leveraged.
“In an environment where job security is diminishing, business confidence is low and net worth hit by falling stock markets and house prices, better affordability due to property price correction or lower mortgage rates alone cannot act as the catalyst for sales reversal in the real estate sector,” said Siddharth Bothra, an analyst with of Motilal Oswal.
The slowdown in the construction activity can be gauged from the sharp fall in capacity utilisation of cement in India.
The total installed capacity of cement at the beginning of 2008-09 stood at close 200 million tones and another 40 million tonnes were planned to be added during the year.
“While capacity addition has taken place, demand for cement has declined,” the official said.
Capacity utilisation in the cement industry has declined from 95 per cent in 2006-07 to about 85 per cent in the current year mirroring the slowing down of the construction sector.
Finance Minister Pranab Mukherjee has indicated that measures are on the anvil to boost growth in labour intensive sectors.
Posts
