Finmin may not tinker with corp tax rate

Finmin may not tinker with corp tax rate
The Economic Times, January 18, 2010, Page 9

Deepshikha Sikarwar, ET Bureau

NEW DELHI: The finance ministry is likely to keep the corporate tax rate unchanged at 30%, as it faces stiff resistance from companies to the draft direct tax code's proposal to cut the rate to 25% and remove all exemptions.

"Corporates are resisting the phasing out of exemptions even with a lower tax rate," said a senior government official.

The industry prefers the current system where the effective corporate tax rate is only about 20% due to various exemptions, he said requesting anonymity.

The Central Board of Direct Taxes, the key government body that formulates and administers tax policy, is not willing to cut rates, as any reduction in statutory rate will further reduce the effective rate and dent the government's revenues.

The government is already struggling with a 16-year high fiscal deficit, equivalent to 6.8% of the gross domestic product for the 2009-10 fiscal year.

The finance ministry is also likely to retain the tax exemption given to retirement savings at the time of withdrawal in the draft direct taxes legislation.

The tax code has also suggested and exempt-exempt-tax (EET) taxation regime for existing schemes such as provident fund. Under an EET arrangement, investments in savings schemes and the returns earned on them are exempt from tax, but the entire corpus is subject to tax at the time of withdrawal. The proposal has received flak from financial experts.

The government seems to be in favour of continuing the existing regime that is a mix of EEE (exempt-exempt-exempt ), EET and ETE (exempt-tax- exempt).

The draft direct taxes code, unveiled in August 2009, seeks to replace the decades old Income Tax Act, 1961. The code is proposed to come into effect from April 1, next year.

These changes along with a proposal to levy a minimum alternate tax (MAT) on gross assets figured in the discussions at a meeting between Prime Minister Manmohan Singh and finance minister Pranab Mukherjee, said the official quoted earlier.

The review exercise is now aimed at bringing a new law that will further the objective of reform , yet be acceptable to 'aam aadmi'. The official said the key policymakers are keen to continue with the proposed MAT on gross assets. But the definition of gross assets could be changed to give some relief to asset heavy infrastructure companies.

The draft code has proposed a levy of 2.0% MAT on the value of gross assets of all non-banking companies and 0.25% on banking companies.

The value of gross assets is the aggregate value of fixed assets of a company, capital works in progress and the book value of other assets, after taking out the accumulated depreciation on fixed assets and the debit balance of the profit and loss account, if included in the book value.

The finance ministry is looking to keep capital works in progress out of this definition to give relief to infrastructure companies.

"The industry's reservations on asset-based MAT is on the very principle of it and hence does not get adequately addressed by exempting elements like work-in-progress . While the infrastructure sector, with its long gestation periods, will get relief for the initial period, what constitutes work-in-progress will become a bone of contention with the revenue authorities. I still believe that the MAT provisions existing in the current Act should be continued with minor tweaks, if necessary" said Amitabh Singh, partner, Ernst &Young.

Indian infra cos are ahead of China's in returns race: Nomura MD

Indian infra cos are ahead of China's in returns race: Nomura MD
The Economic Times, January 18, 2010, Page 14

Deeptha Rajkumar, ET Bureau

He feels bank and real estate stocks in India could suffer if inflation continues to rise at the current rate. Meet Paul Schulte, managing director & head of multi-strategy research, Asia (ex-Japan) at Nomura, who believes Indian shares have had a great run, but are expensive at these levels. In an e-mail interview with Deeptha Rajkumar, he talks of his outlook for Asian markets, and how there is a stronger case for emerging market equities than developed market equities.

Going forward, what is your outlook on Asian equities, emerging markets in particular?

The outlook remains very bright. Leverage levels in Asia are among the lowest in the world. Banks are flush with cash. Loan-to-deposit ratios are low. Government budgets are under control. Contrast with the West where we should see significant increases in tax rates over the coming years. The problem in Asia is inflation.

How do you view the liquidity scenario near term? Are people still chasing assets in emerging markets or are valuations likely to temper the mood?

Many western governments will be very busy trying to get out-of-control-budgets back in line. This will involve tax increases and budget cuts. They will do this to avoid being downgraded by ratings agencies, whose credibility is in tatters anyway. But markets must obey the ratings agencies, because the Basel II Accords unfortunately organise themselves around these organisations. So, central banks will be forced to leave ‘policy-loose’ to counter tightening fiscal policy. If central banks raise rates while governments are tightening at the same time, we will have a policy disaster on our hands. But I think, this has a small chance of happening.

Do you see a bubble formation in emerging markets due to access to cheap money and how is this likely to impact other markets?

The liquidity in bubbly markets like China has nothing to do with large increases in lending. It has everything to do with an undervalued currency. China may be doing itself a large disservice in the longer run by leaving the currency undervalued, because this forces central bank intervention and causes a surge in liquidity.

If you were to pick an asset class or market for this calendar?

We are looking at China and India and see a very important development. Indian infrastructure companies (hard infrastructure) are beating Chinese firms in terms of returns on equity. Companies like Reliance and GAIL are interesting. But financials and other services in China are beating Indian players in terms of RoE. This is the soft infrastructure. So, we would prefer stocks in China like CITIC Bank and CITIC Securities.

Will this be another weak year for the dollar? What does it mean in terms of fund flows or fund interest to a market like India?

Japan has done an about face in mid-December and has made a loud and unequivocal commitment to inflation targeting. A strong yen is a classic signal of deflation. The yen should continue on a weaker trajectory for 2010, offering a reprieve to the dollar. But the problems with Greece and Ireland remain an albatross for the euro in the long term.

Do you believe that there is still a leg of momentum left in global markets? And when that occurs, will it drive high beta sectors even higher?

The high beta rally may be waning. As inflation moves up, stocks like property counters and banks may suffer, especially in India. We would switch from Indian banks to Chinese banks now.

What is your outlook for the Indian market? The market had witnessed $17 billion of FII flows in 2009, do you foresee the same amount of appetite this year?

The Indian market is a bit expensive. It has had a great run. Indian banks have outperformed their Chinese counterparts over the past few months by a wide margin. It is the number one “inflation problem” country in the region in 2010. We believe the Reserve Bank of India (RBI) could tighten more aggressively than many think. It is already tightening by letting the currency strengthen.

What are the instruments drawing money this year? Last year, it was all about exchange-traded funds (ETFs).

Investors are focusing on Japanese financials and other Japanese equities, because no one owns them anymore. Investors threw in the towel on Japan. So, Japan is now draining money from Asia for the first time in years. Soft commodities like food are also getting the limelight. Look at India last week. It became the largest importer of palm oil.

UBS to focus on India business

UBS to focus on India business
The Economic Times, January 18, 2010, Page 15

George Smith, ET Bureau

UBS started its banking operations in India last year at the height of the global crisis. ET’s George Smith Alexander met Alexander Wilmot-Sitwell, CEO of UBS Investment Bank and chairman & CEO, UBS Group EMEA. Mr Wilmot-Sitwell says, that after China, India is the new focus area for the group and the bank will be increasing its present headcount of 150 here by another 40-50% in the next 12 to 18 months. Excerpts:

What are the plans for UBS on the business front and hiring in India?

For us, India is a strategic priority for continued investment and growth. We have a full banking licence and need to build our business around that. We will focus on high networth private markets with our wealth management platform and corporate institutional franchise in the securities and investment banking platform. We will grow our headcount by 40-50% in the next 12-18 months. The new hires will be in fixed income and equities and in other areas like foreign exchange and debt capital market. We are also building our operations, technology, back office and will be hiring in these divisions too.

How do you see Swiss banks looking at changing regulations, specially on higher disclosure?

I don’t think Swiss banks will be regulated fundamentally differently from other international banks. The Swiss regulator is likely to adopt the same types of requirements and regulations that will be adopted around the world. I hope that the regulatory landscape will be a much more consistent one. The difficulty and challenge that we have at the moment is the very uneven playing field between the different interpretations and engagements with regulation in different jurisdictions. I think it will be a lot better for the banking industry as a whole for a much more consistent approach taken by different regulators around the world so that the levels of disclosure, capital and transparency of regulation and of operation are consistent right across the world.

The Swiss banking regulator had said last year that large banks like UBS and Credit Suisse should be broken up. Your comments.

I don’t think that’s a sensible approach because I think the global economy needs to be serviced by banks that are able to operate on a global basis and with sufficient scale to have an impact. I think to fragment the banking industry will be a reversal of the globalisation trend and will result in banks of insufficient scale, knowledge and international capability to be able to service the needs of global industry. If banks were forced to break up, become smaller and less international, I don’t think that will be in the best interest of the global economy.

How is UBS taking advantage of the Chinese growth?

In China, we participated and put together a joint venture company with the Beijing Municipal Authority and that company trades under the name of UBS Securities. It gives us a licence to trade securities in the domestic market. We also have asset management, wealth management and an investment banking presence. Over the past three years, we have been the most successful international firm in China. To some extent, we probably focused more resources earlier over a long period of time on China within the Asia region and increasingly we are now turning our focus of growth to India, as it is the next area where we see growth opportunities for us.

How do you see regulations changing globally for banks and their impact?

We are beginning to see the impact of some of the new rules being drafted and applied. There is no doubt that banks will have to carry more capital and are going to be more regulated and more closely scrutinised than they have been in the past several years. The impact of regulatory supervision is probably going to be greater than many people have factored in. Whether it’s leverage ratios, capital ratios or liquidity — these are all measures that we are going to see fundamental changes in the way that banks are supervised. There are a lot of people who will suggest that banks are going to be significantly less profitable in the future, as they will have leverage ratios applied to them and as such they will not be able to drive the same returns on capital as we have seen in the past.

How much does Asia contribute to UBS revenues now? Will this proportion increase over the next 4-5 years?

Asia brings in 20% of our revenues. We have very explicity targeted Asia as a region where we are stronger and have above-average growth over the medium term. Therefore, we will continue to invest in the Asia region and grow at a fast rate than the other regions.

DLF to exit Prudential JV

DLF to exit Prudential JV
The Economic Times, January 18, 2010, Page 17

May Sell Its 39% Stake in DLF Pramerica To Prudential Financial

Dheeraj Tiwari NEW DELHI

INDIA’S largest realty firm is selling its entire stake in DLF Pramerica to overseas partner Prudential Financial, thus exiting the mutual funds altogether to focus on its core business.

Prudential Financial (PFI) is expected to buy DLF’s entire 39% stake in the asset management company that is yet to start operations. The move is in line with DLF’s decision to focus on its core assets and move out of its non-core business, a person close to the matter told ET.

Both DLF and PFI refused to comment on the development.

The PFI Group is likely to buy out DLF’s existing stake at par value to take full control of the asset management company. It is difficult to put a value to the transaction as the equity structure of the AMC is not known.

In 2008, the stock market regulator Securities and Exchange Board of India (Sebi) had granted ‘in-principle approval’ to PFI, to set up an asset management company.

Both the companies had indicated to invest $45 million over the next few years, and provide investment management operations for both retail and institutional clients.

The real estate major is looking at all avenues to reduce its debt, which at present is more than around Rs 12,000 crore.

DLF in the last one year has been exiting from all its non-core businesses. The company has already sold assets worth Rs 1,200 crore, including its stake in the joint venture with Ackruti City.

It is also said to be looking to exit from its international luxury hotel chain Aman resorts and its wind energy business. It is expected to raise around Rs 6,000 crore from sale of these assets and other non-core businesses.

However, an official from the Pramerica, the brand name used in India by Prudential Financial, told ET that DLF was exiting from the venture because of the new proposed regulatory changes under the new Sebi Mutual Fund Regulations.

“In the current structure, PFI is the sole sponsor and DLF is the finance partner. Under the new guidelines, DLF would require to apply for approval as sponsor, for which it is not eligible,” the official said requesting anonymity. As per the new mutual fund guidelines, any company that does not have a five year track record in financial services is not eligible to apply to Sebi as a sponsor for a mutual fund. However, the life insurance joint venture of the two groups, DLF Pramerica Life Insurance, will continue to operate as per plans. DLF holds 74% stake in the life insurance venture.

Real Estate Intelligence Service, Friday, January 15, 2010

Spike in inflation fans rate fears

Spike in inflation fans rate fears
The Financial Express, January 15, 2010, Page 1

fe Bureaus, New Delhi

Inflation rose to a year’s high of 7.3% in December, driven by a 20% jump in food prices, amid indications that generalised inflationary pressures are looming large. With the December wholesale price index rising to its highest after November 2008, and going way above 4.8% reported in the previous month, it looked certain that RBI would attempt to contain liquidity in the upcoming policy review, analysts said.

The annual inflation rate was 6.15% in December 2008.

Prime minister’s Economic Advisory Council chairman C Rangarajan told FE that even though supply-side management is key to controlling inflation, some containment of liquidity seemed necessary. “Some monetary action to contain liquidity can be tho-ught of,” he said, adding that the food prices were still “very high” although, lately, there has been “some tendency” for the prices to moderate.

Weekly whole sale price data for food items released on Thursday came as a respite—food inflation for the week ended January 2 stood at 17.28% from a year earlier as against 18.22% in the previous week.

However, that could hardly dissuade the central bank from using its monetary tools, especially since latest data showed that industrial production rose at faster-than-expected 11.7% in November, signalling robust economic recovery.

Further, Thursday’s data also raised concerns that inflation could continue to rise and peak at 10% in March 2009, as against the RBI forecast of 6.5%.

When the central bank reviews the monetary policy on January 29, it could raise cash reserve ratio (CRR) by half a percentage point or so, if it did not also go for a very moderate hike in policy rates as well, analysts that FE spoke with, said.

“We believe that a gradual policy normalisation through liquidity withdrawal and a higher policy rate are preferable to steeper rate hikes later on. We expect the rate hiking cycle to begin later this month,” said Sonal Varma, vice-president, Nomura Financial Advisory & Securities (India) Ltd.

In December, there was steep increase in prices of food items and manufactured edible items like sugar. While prices of potatoes were up 123.85%, pulses were dearer by 41.58%. As a result, non-processed food articles component of the WPI was up 19.17% against 10% in the same month of 2008. This pushed up the primary articles group index by 14.88%, against 11.15% seen in December, 2008.

Processed food articles in December were costly by 26.4% compared with 4.21% a year ago. This was because sugar prices have shot up by 54% in December, against 14.51% seen in the same month of 2008. Rising food prices has the government worried and was a hot topic of discussion in a pre-Budget meeting between finance minister Pranab Mukherjee and his colleagues from the states. In an attempt to cool down prices, the government on Wednesday announced an extension of validity of duty free sugar imports, eased sugar processing norms and committed to release 2-3 million tonne of food grain in the open market.

The bond market yields eased as the inflation data was seen in line with expectations. While the 30-share Sensex gained 0.4% to end at 17584.87, the 50-stock Nifty increased 0.5% to close at 5,259.90.

Inflation surges to 7.31% in Dec, exceeds RBI estimate

Inflation surges to 7.31% in Dec, exceeds RBI estimate
Business Standard, January 15, 2010, Page 6

7.3% inflation raises rate hike specture

7.3% inflation raises rate hike specture
The Economic Times, January 15, 2010, Page 1

Our Bureau NEW DELHI

STEEL and zinc joined sugar and potatoes to take inflation for December 2009 past RBI’s target for the fiscal year, raising the odds that the central bank could resort to some form of monetary tightening as concerned policymakers try to curb rising prices.

Government data on Thursday showed inflation, as measured by the Wholesale Price Index, rose the most in more than 12 months to 7.31% from a year earlier, a day after the PM called a meeting with chief ministers seeking their cooperation to control a situation that threatens to get out of hand.

The inflation rate is ahead of RBI’s revised target of 6.5% for the fiscal year. It was 6.15% last year.

The acceleration in price rise, which began with rising food costs due to a poor monsoon, is spreading to industrial products as economic growth on the back of an easy money policy and low taxes lifts demand for cement, cars and steel.

While this has put the focus firmly on what the central bank will do at its upcoming monetary policy review on January 29, an overwhelming majority of economists polled by ET on Thursday expect RBI to follow China and only raise banks’ reserve requirements.

Inflation jumps to 7.3% in Dec

Inflation jumps to 7.3% in Dec
Hindustan Times, January 15, 2010, Page 1

New Delhi, Jan. 15 -- India's wholesale inflation rose by 7.3 per cent in December, even as policymakers launched a plan to contain prices by shoring up supplies of staple items such as sugar and foodgrain.

Latest price data released on Thursday showed monthly inflation jumped nearly 3 percentage points from November's 4.78 per cent, though food inflation eased to 17.28 per cent after reaching nearly 20 per cent last month.

More worryingly, prices of non-food items such as textiles, paper products, metals and machinery were also on the rise.

"Week-on-week food inflation is down, which is a very good (sign)," Chief Economic Advisor Kaushik Basu said.

The spike in inflation rate puts pressure on Reserve Bank of India (RBI) to suck out excess money from the system to control prices. The RBI will meet on January 29 for a quarterly review of monetary policy, alth-ough economists said increasing interest rates would be ineffective in cooling the drought-related surge in food prices.

"The inflation jump has been driven by food items, and monetary action can't fix that," said Rajeev Malik of Macquarie Securities.

Analysts expect RBI to increase the percentage of money commercial banks need to park with the central bank by 0.5 per cent, to 5.5 per cent. There is also talk of a potential fuel price hike, which would further lead to cost pressures.

Double-digit inflation by Mar?

Double-digit inflation by Mar?
Times of India, January 15, 2010, Page 23

Jumps To 7.31% In Dec; RBI May Be Forced To Tighten Money Supply

TIMES NEWS NETWORK, New Delhi

The annual rate of inflation based on wholesale prices jumped to 7.31% for the month of December, 2009 as compared to 4.78 % for November. This is likely to force RBI to follow the tight monetary policy resulting into increase in the interest rates.

At 7.31%, it is already above the Reserve Bank of India's projection of 6.5% with upside bias by March 2010. According to Sonal Varma of Nomura Global Economics, a research firm, at the current pace, inflation is likely to rise above 8% in January and inch closer to double-digits by March, 2010.

Also, data released at December-end showed that consumer price-based inflation accelerated to 13.5% in November, 2009 from 11.5%. Varma said eonomic activity is accelerating and inflationary pressures are rising. The December figure is on the top of high inflation of 6.15% in December 2008. The latest figure — driven up mainly by sugar, pulses and potato — added to the government's worries over price rise and will push back any effort to free motor fuel prices.

The numbers also reinforced the expectation of a tighter monetary policy by RBI. The last time wholesale inflation exceeded the December level was in November, 2008 when it had reached 8%. A ray of hope, however, came from weekly food inflation that eased a tad to 17.28% in the week ended January 2 from 18.22% a week ago but pulses, potatoes and onions remained expensive. Despite signs of cooling off, overall data does not allow for slack and point towards a deepening food inflation threatening to spill over into the wider economy.

Prices of processed food items, for example, rose 26.40% in December and nonprocessed food items turned expensive by 19.17%. Potatoes rose over 70% during the week ended January 2, onions and pulses over 45% each and cereals by over 14%.

"Week-on-week it (food inflation) is down, which is a very good (sign). There are a whole lot of measures that are going through that have been decided on," chief economic advisor Kaushik Basu said. Earlier, Planning Commission deputy chairman Montek Singh Ahluwalia had also said that food inflation would ease next month as fear of negative impact of poor monsoon on farm produce has eased.

But the worry is now that prices of manufacturing items may rise due to increase in demand because of revival in the economic activities. The weekly inflation data released on Thursday shows a steep increase in naphtha, bitumen and furnace oil prices. Rising prices of fibres and oilseeds have also led to an increase in nonfood primary articles by 3.9% in December from November and an additional 0.7% in the first week of January.

Therefore, Varma said that inflationary pressures are still building and the current input cost inflation is expected to result in higher manufactured product prices in coming months. In addition, while food price inflation appears to be abating, much of the fall is confined to fruits and vegetables.

Costlier Living

Consumer price-based inflation accelerates to 13.5% in November, 2009 from 11.5% in October, 2009. The latest surge is driven mainly by the price rise in sugar, pulses and potato.

Moreover, prices of manufacturing items may rise due to increase in demand because of revival in the economic activities. This may result in inputcost-led inflation in manufacturing sector.