Thursday, October 29, 2009
World Bank to partner Centre in urban renewal mission
World Bank to partner Centre in urban renewal mission
The Hindu Business Line, October 29, 2009, Page 21
G. Srinivasan, New Delhi
Buoyed by the tangible success of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in improving civic amenities across the country in urban areas, the World Bank has come forward to partner in the ‘unique urban initiative” of the Government of India.
Disclosing this to Business Line here, the Ministry of Urban Development, Secretary, Dr M. Ramachandran hoped “a $5.2 billion loan from the Bank should work out” soon. He said this would be an additional measure as the Ministry has moved the Planning Commission, seeking more allocation of funds in the backdrop of growing demands from cities. He said as the Plan panel is fully “appreciative” of the huge resources for the tasks on hand, it would be able to signal further resource support sometime during this year itself along with the mid-term appraisal it would be making.
The resources allocated for seven years from 2005 to 2012 would not be sufficient since all of that already stands committed, he said adding that cities were asking for more support. This plea for further scaling up the unique scheme is understandable, given the fact that it has proved to be “a big boon to the cities as the hitherto neglected urban infrastructure.
With the main remit of the implementation of reforms under JNNURM being to foster enabling milieu for the growth of cities by augmenting urban service delivery effectively, land management, financial management and stakeholder participation in governance, Dr Ramachandran said that now cities get used to the much-needed reform agenda, finding additional resources is getting due importance and organised city transport and shift towards use of improved public transport were the notable outcomes of the mission.
He pointed out that when the Mission was approved in 2005 with a provision of Rs 50,000 crore as Central assistance implying thereby about Rs 1 lakh crore of projects would be taken up in the country’s 65 mission cities and some towns out of the total 5161. Now, he said, projects worth Rs 1 lakh crore were under implementation.
Infrastructure projects
As many as 467 infrastructure projects worth Rs 50,339 crore with Additional Central Assistance (ACA) commitment of Rs 23,856 crore with about 81 per cent being in water supply, sewage, drainage and solid waste management were under implementation in mission cities, he said adding another 753 projects worth Rs 12,824 crore with Rs 10,340 crore committed as ACA have been taken up in 636 small towns.
To a specific query about reforms being undertaken under the mission, he said some cities have done well on this. Andhra Pradesh, Gujarat, Kerala figure in this, while cities of Andhra Pradesh, some cities of Gujarat, Maharashtra, Kerala, Tamil Nadu were able to do better compared to other cities. More importantly, he said, 59 out of 65 mission cities have been credit rated, most of them for the first time with as many as 36 having investment grading now.
The Hindu Business Line, October 29, 2009, Page 21
G. Srinivasan, New Delhi
Buoyed by the tangible success of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in improving civic amenities across the country in urban areas, the World Bank has come forward to partner in the ‘unique urban initiative” of the Government of India.
Disclosing this to Business Line here, the Ministry of Urban Development, Secretary, Dr M. Ramachandran hoped “a $5.2 billion loan from the Bank should work out” soon. He said this would be an additional measure as the Ministry has moved the Planning Commission, seeking more allocation of funds in the backdrop of growing demands from cities. He said as the Plan panel is fully “appreciative” of the huge resources for the tasks on hand, it would be able to signal further resource support sometime during this year itself along with the mid-term appraisal it would be making.
The resources allocated for seven years from 2005 to 2012 would not be sufficient since all of that already stands committed, he said adding that cities were asking for more support. This plea for further scaling up the unique scheme is understandable, given the fact that it has proved to be “a big boon to the cities as the hitherto neglected urban infrastructure.
With the main remit of the implementation of reforms under JNNURM being to foster enabling milieu for the growth of cities by augmenting urban service delivery effectively, land management, financial management and stakeholder participation in governance, Dr Ramachandran said that now cities get used to the much-needed reform agenda, finding additional resources is getting due importance and organised city transport and shift towards use of improved public transport were the notable outcomes of the mission.
He pointed out that when the Mission was approved in 2005 with a provision of Rs 50,000 crore as Central assistance implying thereby about Rs 1 lakh crore of projects would be taken up in the country’s 65 mission cities and some towns out of the total 5161. Now, he said, projects worth Rs 1 lakh crore were under implementation.
Infrastructure projects
As many as 467 infrastructure projects worth Rs 50,339 crore with Additional Central Assistance (ACA) commitment of Rs 23,856 crore with about 81 per cent being in water supply, sewage, drainage and solid waste management were under implementation in mission cities, he said adding another 753 projects worth Rs 12,824 crore with Rs 10,340 crore committed as ACA have been taken up in 636 small towns.
To a specific query about reforms being undertaken under the mission, he said some cities have done well on this. Andhra Pradesh, Gujarat, Kerala figure in this, while cities of Andhra Pradesh, some cities of Gujarat, Maharashtra, Kerala, Tamil Nadu were able to do better compared to other cities. More importantly, he said, 59 out of 65 mission cities have been credit rated, most of them for the first time with as many as 36 having investment grading now.
Core sector growth runs out of steam, slides to 4%
Core sector growth runs out of steam, slides to 4%
The Financial Express, October 29, 2009, Page 1
fe Bureaus, New Delhi
Growth in infrastructure sector output slipped to 4% in September from an upwardly revised 7.8% in August, data released by the commerce & industry ministry showed on Wednesday.
This would likely result in lower growth in the index of industrial production, which grew in double digits--10.4% in August--after a gap of 22 months. The infrastructure sector—comprising cement, coal, steel, electricity, crude oil and petroleum refinery products—accounts for almost a third of the IIP. Growth in the Core Six stood at 4% in September 2008.
“IIP for September will not be in double digits,” confirmed DK Joshi, principal economist at rating agency Crisil. In the first half of the fiscal, though, infrastructure output growth was at 5%, up from 3.4% in the same period last year.
India’s chief statistician, Pronab Sen, said IIP growth in September is unlikely to match the August pace, which was buoyed by a low base-year growth of 1.7% in the same month last year.
Coal and cement, which topped the charts in August with growth rates of 12.95% and 17.6%, respectively, slipped to 6.5% each in September. Electricity generation grew 7.5%, against 4.4% last September, while petroleum refinery product output expanded by 3.45% against 2.8%.
Finished steel production declined by 0.4%, against 2.1%. Crude oil remained in the negative zone with a 0.5% decline in September, compared with 0.4%. Crude oil production in H1 was -1.25%, compared with 0.8% in the corresponding period last year. Petroleum refinery products slipped to -3.6% from a positive 4.5% in the first six months of last fiscal. Coal production grew 11.6% in the first half of the fiscal, up from 8% in the same period last year.
Electricity generation during April-September grew 6.8%, from 2.6%. However, finished steel production declined by 3% from 3.3%. Cement production grew by 12.3% in the first half of the current financial year vis-à-vis 5.5% in the same period of 2008.
The Financial Express, October 29, 2009, Page 1
fe Bureaus, New Delhi
Growth in infrastructure sector output slipped to 4% in September from an upwardly revised 7.8% in August, data released by the commerce & industry ministry showed on Wednesday.
This would likely result in lower growth in the index of industrial production, which grew in double digits--10.4% in August--after a gap of 22 months. The infrastructure sector—comprising cement, coal, steel, electricity, crude oil and petroleum refinery products—accounts for almost a third of the IIP. Growth in the Core Six stood at 4% in September 2008.
“IIP for September will not be in double digits,” confirmed DK Joshi, principal economist at rating agency Crisil. In the first half of the fiscal, though, infrastructure output growth was at 5%, up from 3.4% in the same period last year.
India’s chief statistician, Pronab Sen, said IIP growth in September is unlikely to match the August pace, which was buoyed by a low base-year growth of 1.7% in the same month last year.
Coal and cement, which topped the charts in August with growth rates of 12.95% and 17.6%, respectively, slipped to 6.5% each in September. Electricity generation grew 7.5%, against 4.4% last September, while petroleum refinery product output expanded by 3.45% against 2.8%.
Finished steel production declined by 0.4%, against 2.1%. Crude oil remained in the negative zone with a 0.5% decline in September, compared with 0.4%. Crude oil production in H1 was -1.25%, compared with 0.8% in the corresponding period last year. Petroleum refinery products slipped to -3.6% from a positive 4.5% in the first six months of last fiscal. Coal production grew 11.6% in the first half of the fiscal, up from 8% in the same period last year.
Electricity generation during April-September grew 6.8%, from 2.6%. However, finished steel production declined by 3% from 3.3%. Cement production grew by 12.3% in the first half of the current financial year vis-à-vis 5.5% in the same period of 2008.
Core grows mere 4%, may pull down IIP
Core grows mere 4%, may pull down IIP
The Economic Times, October 29, 2009, Page 9
Just Petro Refinery Products & Crude Oil Segments Show Yr-On-Yr Rise In Sept
Our Bureau NEW DELHI
THE industrial output growth, as measured by the Index of Industrial Production (IIP), may see a drop in September from the 10.4% growth registered in August as the index of core sector industries, which has a weightage of 26.7%, clocked a 4% growth in September, sharply lower than the 7.8% in the month before.
None of the six core industries captured by the index — crude oil, petroleum refinery products, coal, electricity, cement and finished steel (carbon) — showed a month-on-month uptick in production.
Crude oil and petroleum refinery products were the only two segments that showed a higher annual growth rate in September. Analysts are expecting the growth rate in these two segments to gather momentum as the output from Reliance’s KG basin and Cairn’s oilfield in Rajasthan stabilise. Policymakers pointed that this would have an impact on electricity generation as well.
Planning commission member Saumitra Chaudhari told ET: “The gas output from oil fields, which started production recently, will help in keeping the electricity generation high.” He added this was one of the reasons why the electricity generation was relatively high inspite of reservoir levels being low on account of truant monsoon. With the late revival of monsoon, the reservoirs are also recharged, especially in south.
A recent note by Citi economist Rohini Malkani points out that the strong coal production in first half of the year may be due to higher cement production, as coal is an input and a source of power in cement production.
“The delayed monsoon has helped the construction industry and will lead to better yearon-year growth in cement and steel,” Mr Chaudhari pointed out.
On a cumulative basis, the core sector index was up 4.8% during first six months of the year, outpacing the 3.4% growth seen during the same period last year. Growth in coal and cement in the first six months of the current fiscal outperformed growth in same period last year.
The Economic Times, October 29, 2009, Page 9
Just Petro Refinery Products & Crude Oil Segments Show Yr-On-Yr Rise In Sept
Our Bureau NEW DELHI
THE industrial output growth, as measured by the Index of Industrial Production (IIP), may see a drop in September from the 10.4% growth registered in August as the index of core sector industries, which has a weightage of 26.7%, clocked a 4% growth in September, sharply lower than the 7.8% in the month before.
None of the six core industries captured by the index — crude oil, petroleum refinery products, coal, electricity, cement and finished steel (carbon) — showed a month-on-month uptick in production.
Crude oil and petroleum refinery products were the only two segments that showed a higher annual growth rate in September. Analysts are expecting the growth rate in these two segments to gather momentum as the output from Reliance’s KG basin and Cairn’s oilfield in Rajasthan stabilise. Policymakers pointed that this would have an impact on electricity generation as well.
Planning commission member Saumitra Chaudhari told ET: “The gas output from oil fields, which started production recently, will help in keeping the electricity generation high.” He added this was one of the reasons why the electricity generation was relatively high inspite of reservoir levels being low on account of truant monsoon. With the late revival of monsoon, the reservoirs are also recharged, especially in south.
A recent note by Citi economist Rohini Malkani points out that the strong coal production in first half of the year may be due to higher cement production, as coal is an input and a source of power in cement production.
“The delayed monsoon has helped the construction industry and will lead to better yearon-year growth in cement and steel,” Mr Chaudhari pointed out.
On a cumulative basis, the core sector index was up 4.8% during first six months of the year, outpacing the 3.4% growth seen during the same period last year. Growth in coal and cement in the first six months of the current fiscal outperformed growth in same period last year.
Centre to scale down infra targets
Centre to scale down infra targets
The Financial Express, October 29, 2009, Page 1
Surabhi, New Delhi
A sharp decline in highway and port sector investments, coupled with the absence of bankable public-private partnership (PPP) projects, has forced the UPA government to scale down its ambitious plan to invest $514 billion to plug the country’s glaring infrastructure deficit in the 11th Five-Year Plan period.
According to a senior government official, the Planning Commission’s mid-term appraisal in December will admit to this failure in no uncertain terms and revise the infrastructure investment target for the current Plan to $420-450 billion, which many analysts think would still be a tall order.
This clearly shows that the decline in private corporate investment caused by the global economic crisis was barely offset by an expansionary fiscal policy, which saw more government money chasing infrastructure projects.
“The final estimate (of investments) will be in by December, when the Planning Commission will complete mid-term appraisals for the 11th Plan, but it’s unlikely to be any higher than $450 billion. Performance hasn’t been up to the mark, largely because of the road sector lagging behind,” said the official on condition of anonymity.
The 11th Plan targets increasing infrastructure investment from 5% of GDP in the base year (2006-07) to 9% by the terminal year (2011-12). In absolute terms, it required investments to be scaled up from $222 billion in the 10 th Plan to $514 billion (Rs 2,056,150 crore) in the 11th Plan.
“Achieving even a reduced target of $400-odd billion would be welcome news, but will be a challenging task given the economic slowdown, coupled with the massive delays in awarding PPP projects in the last two years,” said PwC ED Amrit Pandurangi.
Financing may have proved to be a cause of concern in the last one year as funds dried up because of the global financial crisis. But a lack of feasible projects on the shelf, together with ministerial inefficiencies, contentious clauses in bidding documents and disputes on land acquisition have made potential investors wary.
For marketmen, who have been betting big on infrastructure sector stocks in recent years as the private sector was expected to pitch in about 30% of investments, this is par for the course. “Everyone had already factored in that the target won’t be met. Getting $514 billion in investments over a five-year period is a very tall order. Even if the government was serious in its intentions, the policies just aren’t in place,” said UK Sinha, CMD at UTI Asset Management Company, which manages infrastructure funds of over Rs 4,500 crore.
At the same time, the appraisal is revealing some surprising facts: for instance, the laggard power sector has shown the best performance among core infra sectors so far.
Though the Plan targets 78,577 mw of new power projects, it is going to do much better than the 10 th Plan, with around 60,000-65,000 mw coming on stream by March 2012.
The largest deficit is expected in the highways sector, which will not meet targets even if work speeds up to the extent promised by UPA-II surface transport minister Kamal Nath. Just about 4,000 km of national highways have been awarded in the three years of the Plan, against a target of six-laning 6,500 km of the Golden Quadrilateral, 1,000 km of expressways and four-laning 20,000 km of highways.
Efforts to upgrade port infrastructure to keep up with India’s growing global trade have largely remained on paper. Few projects were awarded under UPA-I shipping minister TR Baalu and a recent embargo by the environment ministry has further impeded progress. Capacity upgrades underway at the JNPT and Tuticorin ports have been hit by litigation. The Plan envisages new capacity of 485 million metric tonne (mmt) in major ports and 345 mmt in minor ports.
The railways, despite shying away from aggressively using the PPP route, has seen sufficient investments, be it in gauge conversion or building new lines. It has also managed to secure crucial funding from the Japanese government for the dedicated freight corridor. The only delay is seen in modernising railway stations. Of the 22 stations to be modernised under the 11 th Plan, construction hasn’t begun on even one.
The Economic Survey 2008-09 has also highlighted the difficulty in meeting the $514-billion target for investments. “Achieving it is a challenging task. In recent years, tangible progress has been made in attracting private investment in infrastructure. However, such public initiatives are constrained by factors like inadequate shelf of bankable projects and lack of long-term finance,” it said.
The Financial Express, October 29, 2009, Page 1
Surabhi, New Delhi
A sharp decline in highway and port sector investments, coupled with the absence of bankable public-private partnership (PPP) projects, has forced the UPA government to scale down its ambitious plan to invest $514 billion to plug the country’s glaring infrastructure deficit in the 11th Five-Year Plan period.
According to a senior government official, the Planning Commission’s mid-term appraisal in December will admit to this failure in no uncertain terms and revise the infrastructure investment target for the current Plan to $420-450 billion, which many analysts think would still be a tall order.
This clearly shows that the decline in private corporate investment caused by the global economic crisis was barely offset by an expansionary fiscal policy, which saw more government money chasing infrastructure projects.
“The final estimate (of investments) will be in by December, when the Planning Commission will complete mid-term appraisals for the 11th Plan, but it’s unlikely to be any higher than $450 billion. Performance hasn’t been up to the mark, largely because of the road sector lagging behind,” said the official on condition of anonymity.
The 11th Plan targets increasing infrastructure investment from 5% of GDP in the base year (2006-07) to 9% by the terminal year (2011-12). In absolute terms, it required investments to be scaled up from $222 billion in the 10 th Plan to $514 billion (Rs 2,056,150 crore) in the 11th Plan.
“Achieving even a reduced target of $400-odd billion would be welcome news, but will be a challenging task given the economic slowdown, coupled with the massive delays in awarding PPP projects in the last two years,” said PwC ED Amrit Pandurangi.
Financing may have proved to be a cause of concern in the last one year as funds dried up because of the global financial crisis. But a lack of feasible projects on the shelf, together with ministerial inefficiencies, contentious clauses in bidding documents and disputes on land acquisition have made potential investors wary.
For marketmen, who have been betting big on infrastructure sector stocks in recent years as the private sector was expected to pitch in about 30% of investments, this is par for the course. “Everyone had already factored in that the target won’t be met. Getting $514 billion in investments over a five-year period is a very tall order. Even if the government was serious in its intentions, the policies just aren’t in place,” said UK Sinha, CMD at UTI Asset Management Company, which manages infrastructure funds of over Rs 4,500 crore.
At the same time, the appraisal is revealing some surprising facts: for instance, the laggard power sector has shown the best performance among core infra sectors so far.
Though the Plan targets 78,577 mw of new power projects, it is going to do much better than the 10 th Plan, with around 60,000-65,000 mw coming on stream by March 2012.
The largest deficit is expected in the highways sector, which will not meet targets even if work speeds up to the extent promised by UPA-II surface transport minister Kamal Nath. Just about 4,000 km of national highways have been awarded in the three years of the Plan, against a target of six-laning 6,500 km of the Golden Quadrilateral, 1,000 km of expressways and four-laning 20,000 km of highways.
Efforts to upgrade port infrastructure to keep up with India’s growing global trade have largely remained on paper. Few projects were awarded under UPA-I shipping minister TR Baalu and a recent embargo by the environment ministry has further impeded progress. Capacity upgrades underway at the JNPT and Tuticorin ports have been hit by litigation. The Plan envisages new capacity of 485 million metric tonne (mmt) in major ports and 345 mmt in minor ports.
The railways, despite shying away from aggressively using the PPP route, has seen sufficient investments, be it in gauge conversion or building new lines. It has also managed to secure crucial funding from the Japanese government for the dedicated freight corridor. The only delay is seen in modernising railway stations. Of the 22 stations to be modernised under the 11 th Plan, construction hasn’t begun on even one.
The Economic Survey 2008-09 has also highlighted the difficulty in meeting the $514-billion target for investments. “Achieving it is a challenging task. In recent years, tangible progress has been made in attracting private investment in infrastructure. However, such public initiatives are constrained by factors like inadequate shelf of bankable projects and lack of long-term finance,” it said.
City growth:When big is not beautiful
City growth:When big is not beautiful
The Economic Times, October 29, 2009, Page 13
INCREASING CITY SIZE COMES WITH ITS PITFALLS — HIGH COST OF LIVING, CRIME, POLLUTION & CONGESTION
KALA SEETHARAM SRIDHAR
INDIA has 35 cities with million-plus population, with Mumbai leading the pack with a population of about 17 million. The question arises —can individual cities grow forever and whether there is an optimum city size? This is an important question as development plans of cities frequently follow the direction of development rather than guiding them. Is the current size of cities justifiable in terms of greater efficiencies in the production of goods, services and amenities offered to their residents? General equilibrium models of city growth refer to the drawbacks of increasing city size — high cost of living, crime, pollution and congestion costs. For example, in Bangalore, the one-way commute time to work increased from about 24 minutes in 1991 to 40 minutes in 2001. Thus, city population can grow, but the city may or may not grow economically. This happens as a city will experience congestion and decline in its economic output if its population grows beyond a certain limit.
One manifestation of excessive city growth is the suburbanisation and urban sprawl we see in India’s cities. With decentralisation of population and jobs from the dense core of cities to less densely developed suburbs, monocentric cities have evolved into polycentric cities. While such decentralisation is caused by rising incomes, rising land costs at the city centre and problems with the central city (high taxes, poor public services, high crime rates), recent research also attributes urban sprawl to strong land use controls in India’s cities. A research shows that the maximum floor area ratio (FAR) — which refers to the ratio of built area to plot area — permissible in India’s cities is not even five whereas cities across the world have FARs ranging from well above 10. A higher FAR implies vertical city growth. Vertical city growth is more efficient if the infrastructure necessary to support it is in place — it would be poor public economics not to use fully-serviced plots of land with water and sewer networks, roads in the centre of the city. Low FARs lead to inefficient cities.
Efficiency of cities is partly determined by the mobility and access needs of the population as it has a direct relationship with the city’s economic activity such as commute to school, jobs and shopping trips. While Indian cities’ decentralisation has been caused by rising incomes and the use of the automobile, one direct outcome of the urban sprawl has been that Indian cities have become automobileoriented with little space for pedestrians and cyclists. For instance, Indians bought 1.5 million cars in 2007, more than double than that in 2003.
Delhi, Mumbai, Kolkata and Bangalore have 5% of India’s population but 14% of its registered vehicles. Pedestrians and cyclists account for a substantial part of urban population. In Delhi, pedestrians and cyclists account for around 55% of the population. Pedestrian accessibility in Indian cities is poor – there are no sidewalks, and where they exist, they are taken over by parked vehicles, uncollected garbage, or encroachment by local businesses.
Rightly, a recent research points out that policymaking related to urban transport has focused predominantly on road infrastructure development such as the construction of flyovers. However, given the fact that pedestrians and cyclists are the most vulnerable road users, budgets for the provision of infrastructure for them have been minuscule. This is not consistent with their number. A 3.5 metre lane has a carrying capacity of 1,800 cars per hour while it can carry 5,400 bicycles per hour. Providing segregated infrastructure for pedestrians and cyclists would not cost much, but would greatly improve the efficiency of cities by facilitating the mobility of masses.
The above does not imply that we do not need highways or expressways of international standards. We need them for long distances and for facilitating movement of public transport that is affordable, convenient and safe to use. Highways are efficient if they are used for high occupancy vehicles such as public transport as compared to cars.
What the above implies is that decentralisation and sprawl have occurred in India’s cities, with economic growth, rising incomes, rising land costs, and land use regulation playing a role. With rising incomes, the sprawl has also brought about increased usage of cars with poor access for pedestrians and cyclists. We have to consciously decide what kind of cities we want. Only innovative city planning and better infrastructure to support them, better space and planning for pedestrians, cyclists and public transport will ensure that we have efficient and equitable cities whose costs do not outweigh their benefits.
(The author is senior research fellow, Public Affairs Centre. Views are personal)
The Economic Times, October 29, 2009, Page 13
INCREASING CITY SIZE COMES WITH ITS PITFALLS — HIGH COST OF LIVING, CRIME, POLLUTION & CONGESTION
KALA SEETHARAM SRIDHAR
INDIA has 35 cities with million-plus population, with Mumbai leading the pack with a population of about 17 million. The question arises —can individual cities grow forever and whether there is an optimum city size? This is an important question as development plans of cities frequently follow the direction of development rather than guiding them. Is the current size of cities justifiable in terms of greater efficiencies in the production of goods, services and amenities offered to their residents? General equilibrium models of city growth refer to the drawbacks of increasing city size — high cost of living, crime, pollution and congestion costs. For example, in Bangalore, the one-way commute time to work increased from about 24 minutes in 1991 to 40 minutes in 2001. Thus, city population can grow, but the city may or may not grow economically. This happens as a city will experience congestion and decline in its economic output if its population grows beyond a certain limit.
One manifestation of excessive city growth is the suburbanisation and urban sprawl we see in India’s cities. With decentralisation of population and jobs from the dense core of cities to less densely developed suburbs, monocentric cities have evolved into polycentric cities. While such decentralisation is caused by rising incomes, rising land costs at the city centre and problems with the central city (high taxes, poor public services, high crime rates), recent research also attributes urban sprawl to strong land use controls in India’s cities. A research shows that the maximum floor area ratio (FAR) — which refers to the ratio of built area to plot area — permissible in India’s cities is not even five whereas cities across the world have FARs ranging from well above 10. A higher FAR implies vertical city growth. Vertical city growth is more efficient if the infrastructure necessary to support it is in place — it would be poor public economics not to use fully-serviced plots of land with water and sewer networks, roads in the centre of the city. Low FARs lead to inefficient cities.
Efficiency of cities is partly determined by the mobility and access needs of the population as it has a direct relationship with the city’s economic activity such as commute to school, jobs and shopping trips. While Indian cities’ decentralisation has been caused by rising incomes and the use of the automobile, one direct outcome of the urban sprawl has been that Indian cities have become automobileoriented with little space for pedestrians and cyclists. For instance, Indians bought 1.5 million cars in 2007, more than double than that in 2003.
Delhi, Mumbai, Kolkata and Bangalore have 5% of India’s population but 14% of its registered vehicles. Pedestrians and cyclists account for a substantial part of urban population. In Delhi, pedestrians and cyclists account for around 55% of the population. Pedestrian accessibility in Indian cities is poor – there are no sidewalks, and where they exist, they are taken over by parked vehicles, uncollected garbage, or encroachment by local businesses.
Rightly, a recent research points out that policymaking related to urban transport has focused predominantly on road infrastructure development such as the construction of flyovers. However, given the fact that pedestrians and cyclists are the most vulnerable road users, budgets for the provision of infrastructure for them have been minuscule. This is not consistent with their number. A 3.5 metre lane has a carrying capacity of 1,800 cars per hour while it can carry 5,400 bicycles per hour. Providing segregated infrastructure for pedestrians and cyclists would not cost much, but would greatly improve the efficiency of cities by facilitating the mobility of masses.
The above does not imply that we do not need highways or expressways of international standards. We need them for long distances and for facilitating movement of public transport that is affordable, convenient and safe to use. Highways are efficient if they are used for high occupancy vehicles such as public transport as compared to cars.
What the above implies is that decentralisation and sprawl have occurred in India’s cities, with economic growth, rising incomes, rising land costs, and land use regulation playing a role. With rising incomes, the sprawl has also brought about increased usage of cars with poor access for pedestrians and cyclists. We have to consciously decide what kind of cities we want. Only innovative city planning and better infrastructure to support them, better space and planning for pedestrians, cyclists and public transport will ensure that we have efficient and equitable cities whose costs do not outweigh their benefits.
(The author is senior research fellow, Public Affairs Centre. Views are personal)
India moves up, turns world’s third-largest steel producer
India moves up, turns world’s third-largest steel producer
Hindustan Times, October 29, 2009, Page 25
The country has consolidated its position as the third-largest steelmaker in the world behind Asian rivals China and Japan, jumping three spots in the pecking order for steel producers in the first nine months of this year.
With the global downturn still impacting the steel industry worldwide, United States and Germany are the two biggest victims of the downturn, with the former slipping two positions.
China and India were the only two countries to report growth in the sector this year so far. All others — including developing countries like Brazil and Ukraine — have declined in high double digits. The extent of the downturn is such that of the 66 countries that together make up for over 98 per cent of world's steel production and consumption, only 8 have been able to grow.
"It shows the strength of the economy that we are now the third largest steelmaker in the world even as most other countries are still fighting the downturn," said steel minister Virbhadra Singh. "Our per capita consumption of steel is still very low and vast chunks of rural market is still untapped. It is my endeavour to increase the penetration of steel in rural markets and have urged the private sector to open up more steel processing units in those areas."
Further, this may not be the end of the Indian fairytale as industry experts are of the opinion that India would overtake Japan eventually.
"There are clear indications that China and India are the countries that have come out of the recession the fastest and there is an uptake in demand in construction related industries and automobiles in India," said Bishwanath Bhattacharya, Associate Director (KPMG Advisory). "Though Japan is still ahead of India, there is no disputing the fact that it is not likely to grow much further while India is definitely on an upward trajectory. In around 6-7 years time India would be only behind China."
Realty back in reckoning as FIIs cut blue-chip stake
Realty back in reckoning as FIIs cut blue-chip stake
The Economic Times, October 29, 2009, Page 15
Attractive Valuations A Big Pull Factor; Agrochem, Breweries & Mining Also Shine
Vijay Gurav MUMBAI
DLF, Unitech and HDIL are the latest darlings of foreign funds expecting a quick buck, even as they slash holdings in companies such as Infosys Technologies and infrastructure builders due to concerns about order flows and high valuations, a study of latest filings shows.
The sudden fancy for real estate among those overseas funds were probably due to the surge in fund raisings by those debt-ridden companies in the recent bull run when most of them sold shares at less than a third of their peak 2007-08 valuations which overseas investors found attractive. “With interest rates expected to remain benign and stable, some dedicated funds might have bought on hopes of a significant upswing in high-beta sectors like realty,” said Tata Asset Management CEO Ved Prakash Chaturvedi. High beta stocks are those which rise or fall more than the benchmark indexes.
As of September 30, 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, including industry leaders like DLF, Unitech, Indiabulls Real Estate and HDIL. That is higher than the previous year’s 9.6% and the year before’s 10.3%. Indian companies, including Unitech and DLF, have so far raised $12.3 billion through share sale this year and another $17.4 billion may be raised by fiscal year-end exploiting a record stock market rally which saw the benchmark indices more than double from their troughs earlier this year.
It was not just one sector that foreign funds who have invested $14.4 billion in the current calendar year so far have favoured, but also raised stakes in sectors such as agrochemical, a key beneficiary in an agrarian economy like India, breweries which benefit from rising incomes in urban centres, and mining. Last year they pulled out $12 billion.
Overseas funds own 25.6%, 18.6% and 17.9%, respectively, in agrochemical, breweries and mining sectors. Companies such as United Phosphorus, United Spirits, Gujarat NRE Coke and Sesa Goa have large foreign holdings.
But the once that were favoured in the last bull rally — technology, capital goods, cement and retail — aren’t lucky this time. Combined FII holdings in all the listed IT companies fell to 12.1% as on September 30, 2009, compared to 15.6% as on September 30, 2008. Their exposure in capital good sector fell to 9.9% from 12.1% and to 15.1% from 18.5% in retail space. “FIIs have been underweight on IT companies due to outsourcing concerns,” said Centrum Broking MD Devesh Kumar. “Cement companies are adding new capacities and investors would wait for demand to pick up, which would also depend on the pace of infrastructure development in the country.”
International companies stung by the economic slowdown have been cutting their spend on technology which the Indian companies depend upon. SAP, Europe’s biggest business software producer, on Wednesday cut revenue forecast for the year as companies held on to purse strings.
Indian infrastructure companies are also showing delays in executing orders and their valuations at more than 25 times in some cases such as Larsen & Toubro, seem to have run ahead of themselves.
The Economic Times, October 29, 2009, Page 15
Attractive Valuations A Big Pull Factor; Agrochem, Breweries & Mining Also Shine
Vijay Gurav MUMBAI
DLF, Unitech and HDIL are the latest darlings of foreign funds expecting a quick buck, even as they slash holdings in companies such as Infosys Technologies and infrastructure builders due to concerns about order flows and high valuations, a study of latest filings shows.
The sudden fancy for real estate among those overseas funds were probably due to the surge in fund raisings by those debt-ridden companies in the recent bull run when most of them sold shares at less than a third of their peak 2007-08 valuations which overseas investors found attractive. “With interest rates expected to remain benign and stable, some dedicated funds might have bought on hopes of a significant upswing in high-beta sectors like realty,” said Tata Asset Management CEO Ved Prakash Chaturvedi. High beta stocks are those which rise or fall more than the benchmark indexes.
As of September 30, 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, including industry leaders like DLF, Unitech, Indiabulls Real Estate and HDIL. That is higher than the previous year’s 9.6% and the year before’s 10.3%. Indian companies, including Unitech and DLF, have so far raised $12.3 billion through share sale this year and another $17.4 billion may be raised by fiscal year-end exploiting a record stock market rally which saw the benchmark indices more than double from their troughs earlier this year.
It was not just one sector that foreign funds who have invested $14.4 billion in the current calendar year so far have favoured, but also raised stakes in sectors such as agrochemical, a key beneficiary in an agrarian economy like India, breweries which benefit from rising incomes in urban centres, and mining. Last year they pulled out $12 billion.
Overseas funds own 25.6%, 18.6% and 17.9%, respectively, in agrochemical, breweries and mining sectors. Companies such as United Phosphorus, United Spirits, Gujarat NRE Coke and Sesa Goa have large foreign holdings.
But the once that were favoured in the last bull rally — technology, capital goods, cement and retail — aren’t lucky this time. Combined FII holdings in all the listed IT companies fell to 12.1% as on September 30, 2009, compared to 15.6% as on September 30, 2008. Their exposure in capital good sector fell to 9.9% from 12.1% and to 15.1% from 18.5% in retail space. “FIIs have been underweight on IT companies due to outsourcing concerns,” said Centrum Broking MD Devesh Kumar. “Cement companies are adding new capacities and investors would wait for demand to pick up, which would also depend on the pace of infrastructure development in the country.”
International companies stung by the economic slowdown have been cutting their spend on technology which the Indian companies depend upon. SAP, Europe’s biggest business software producer, on Wednesday cut revenue forecast for the year as companies held on to purse strings.
Indian infrastructure companies are also showing delays in executing orders and their valuations at more than 25 times in some cases such as Larsen & Toubro, seem to have run ahead of themselves.
Commercial real estate loans may cost more
Commercial real estate loans may cost more
The Hindu Business Line, October 29, 2009, Page 7
Provisioning norms for advances raised to prevent NPAs.
Our Bureau, Mumbai
Interest rates on loans to commercial real estate sector may move up with the Reserve Bank of India increasing the provisioning requirement for advances to this sector from the present level of 0.4 per cent to 1 per cent.
The RBI has expressed concern that loans to commercial real estate sector have the potential to become NPAs as this sector has witnessed large-scale restructuring of advances.
In its Second Quarter Review of Monetary Policy 2009-10, the central bank said, “In view of the large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets (NPAs).”
In his address, the RBI Governor, Dr D. Subbarao, said while at an aggregate level, the amount of non-food bank credit going to the commercial real estate is small, at about 3.7 per cent, the rate of credit growth has been accelerating.
Second, the restructuring proportion of bank loans to this sector is 14 per cent, against 4 per cent at an aggregate level. These were the reasons that prompted the RBI to increase the provisioning requirement.
Asked about the impact of this move on lending by banks to this sector, Dr Subbarao said: “I am sure that banks are going to make judgements in their best interests. This (increasing the provisioning) will certainly make banks to look at or revisit their lending to the real estate sector. It will also drive the necessary correction in prices.” When asked if banks will pass on the increase in provisioning to their customers, the Chairman and Managing Director, Canara Bank, Mr A .C. Mahajan, said that when pricing products, banks do not pass all the expenditure incurred. The loan is related to the benchmark prime lending rate and the move will not have much impact.
The State Bank of India Chairman, Mr O. P. Bhatt, said that the move could push up the rates on loans to the commercial real estate sector by 2-3 basis points.
However, according to the Bank of Baroda Chairman and Managing Director, Mr M. D. Mallya, the 0.6 per cent increase in standard provisioning does not amount to much and is unlikely to have an impact on interest rates. In the case of Bank of Baroda, the total exposure to commercial real estate is around Rs 4,000 crore, he added.
By restoring the provisioning for commercial real estate to old levels, the RBI is indicating that it is happy with the recovery. But the step will make banks more cautious while lending to realty sector, said the UCO Bank Chairman and Managing Director, Mr S. K. Goel,
No asset bubble issue
The ICICI Bank Managing Director and CEO, Ms Chanda Kochhar, said it is not an issue of asset bubble.
“In between, there was not much credit flow to the commercial real estate sector. So the relaxation in the provisioning norms was to increase the flow of credit to the sector. Now that there is sufficient credit flow to the sector and activity has picked up , the standard asset provisioning has been restored,” she said.
Puravankara Projects net up at Rs 60 cr
Puravankara Projects net up at Rs 60 cr
The Hindu Business Line, October 29, 2009, Page 17
Our Bureau, Bangalore
Puravankara Projects has posted a net profit to Rs 60.86 crore during the second quarter of the fiscal, against Rs 50.47 crore recorded during the corresponding period last year.
The company attributed the improved performance to the good response to projects launched by subsidiary Provident Housing, sale of land and available flats.
Revenues increased 62 per cent to Rs 226.39 crore (Rs 139.37 crore).
During the quarter, the company sold about eight acres in Kochi for about Rs 145 crore, “as this land was not intended to be developed in the near term,” said Mr Ravi Ramu, Director, Puravankara Projects. The company also acquired 27.7 acres in Coimbatore, though plans for its use have not been finalised.
Mr Ramu said Provident Housing projects at Chennai and Bangalore have received a good response. These projects have units in the price range of Rs 15 lakh to Rs 20 lakh. “During the recession, we neither increased nor decreased our prices. But don’t expect this to continue,” said Mr Ramu.
There were possibilities of real estate prices in Bangalore going up in the next two quarters, he said. “There is a lot of demand for good-quality products that are correctly priced.”
The company, Mr Ramu said, was looking at new launches. “This is an opportune time to actively look at new launches.”
On the company’s plans to raise funds, he said, “We have kept our plans to dilute shareholding at bay. We will go to the market when valuations improve.”
The company said that joint developments would be the way forward for Provident Housing. “We used the slowdown period to seal deals,” said Mr Ramu.
Provident Housing has put its hospitality plans on the back-burner, though it has identified land for the projects from its land bank and tied up with hospitality partners.
Wednesday, October 28, 2009
Curtains for easy monetary policy
Curtains for easy monetary policy
The Economic Times, October 28, 2009, Page 1
No Change In Key Rates, But SLR Increased By 1%
Our Bureau MUMBAI
RBI governor Duvvuri Subbarao on Tuesday ended his soft monetary policyaimed at easing the credit crisis last yearby withdrawing liquidity-boosting measures, becoming the third central banker in the world to do so after Israel and Australia. An increase in lending rates is now imminent next quarter if consumer and asset prices remain high. Benchmark rates were, however, kept unchanged.
Mr Subbarao withdrew a special facility that made funds available from banks to mutual funds and finance companies; made loans to commercial real estate more expensive; forced banks to invest more in government bonds; and asked lenders to set aside more funds for bad loans. The special facility was introduced last year to boost liquidity to financial sector firms after the credit markets froze.
RBI maintained the repurchase rate, or repo ratethe rate at which it provides funds to banksat 4.75%; reverse repo ratethe rate at which it accepts deposits from banksat 3.25%; and the cash reserve ratiothe slice of deposits banks have to mandatorily park with the central bankat 5%.
But the central bank surprised the market in its choice of instruments to announce the exit of an easy money policy. The statutory liquidity ratio (SLR), which prescribes the percentage of deposits that banks are required to invest in government debt, has been raised from 24% to 25%, which Mr Subbarao said was a reversal of an exceptional measure. Last year, at the height of the global credit crisis, RBI had lowered the SLR to ease credit flow to industry.
The apex bank also raised its forecast for inflation as measured by the Wholesale Price Index to 6.5% by March 2010, from 5% earlier, as food prices continue to rise on short supply due to the worst monsoon rains in more than a quarter of a century.
We could see stronger action in the coming quarters, StanChart India CEO Neeraj Swaroop said. RBI will wait for stronger data before taking more aggressive measures, he said.
JPMorgan India chief economist Jahangir Aziz also foresees a sharp rise in lending rates if RBI were to hike interest rates later. The Indian Banks Association (IBA)the lobbying arm of commercial bankssaid it expects interest rates to remain stable for a while.
Despite fiscal policy managers saying they want to ensure that there is a solid rebound in growth before interest rates are hiked, the Centre and Reserve Bank governor have chosen a policy that leads rather than follows the market.
HOLDING TIGHT
A non-event
Not really. Without hiking interest rates, the Guv has done enough to hint that rates will harden in a few months. Lending rules have been tightened and a few fire-fighting measures taken during the October '08 crisis have been withdrawn
Whom will it hurt?
Builders and banks. Loans to builders, particularly those setting up office buildings, malls and multiplexes, will become more expensive. Banks will have to provide more, or set aside a bigger slice of their earnings, for such loans, even if the borrower does not default
So, what happens to loans that have turned sticky
Banks will have to step up their provisioning for bad loans. If a loan outstanding is Rs100 crore, a bank will have to provide a minimum 70% (or, Rs 70 cr). This will impact profits of many big banks. Bankers feel RBI should take a relook at this
Has RBI made things difficult for the consumer
No. Banks are not expected to hike interest rates on home, auto and personal loans immediately. But they may in Jan. That's when RBI may hike CRRthe slice of customer deposit that banks set aside as cash with RBIto reduce surplus money with banks
Then, why's Dalal Street nervous
The market was set for a correction and took the hawkish policy as a trigger. Realty stocks plunged & biggies like SBI and ICICI slipped. Besides higher provisioning , RBI said it will not relax the mark-to-market accounting norm on g-sec holdings of banks. So, banks will have to take m-t-m hits as interest rates rise
Is RBI trying to discipline banks
In a way. Besides new loan rules, it will also outline broad rules on the salaries banks pay to their CEOs and senior managers. While RBI today has the last word on CEO pay, there are no guidelines like the ones applicable for bonus payments
H I G H LI G HTS
Keeps benchmark interest rates unchanged
Hikes SLR by 100 bps to 25%
Retains GDP forecast for FY10 at 6%
Says industrial output may revive in the near term
Cuts money supply growth target a hint that CRR may rise
Funds just got costlier for builders
Funds just got costlier for builders
The Economic Times, October 28, 2009, Page 13
RBI move to hike provisioning for realty loans aims to avoid creation of another bubble
Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP
THE RBIs credit policy announced on Tuesday appears intended to rein an incipient bubble in the real estate sector. T
he provisioning requirement for loans to commercial real estate has been increased from 0.40% to 1%, implying costlier bank loans for the sector. As most of the realty companies rely on bank funding, especially in times of financial crisis, this move could have an impact on the sector.
As banks often keep a cushion for any regulatory changes in provisioning, this measure is more for bringing moderation in the realty sector. Since necessary reduction in prices has still not taken place and there is fair amount of money available for the sector, this step is to avoid creation of another asset bubble , says M Narendra, executive director of Bank of India.
Not unexpectedly, industry officials differ. According to Rajeev Talwar, executive director of DLF, Stability in major parameters is a good sign, but increasing the risk weightage for commercial real estate is a negative signal, which is perhaps not required so early in the economic revival process. It remains to be seen whether this latest measure has the desired impact of curbing any further rise in property prices. Since there is a huge latent demand to be fulfilled, some builders are confident of sales being unaffected by any increase in prices. Indeed, in some cities property prices have gone up by 5-15 % in past two-three months.
But other industry official doubt whether any price increase can be passed on. Property prices are a function of demand and supply and it will not be easy for developers to pass this extra cost to the buyers as many places, especially in central Mumbai and parts of Delhi, have already seen a significant price run-up , says Keki Mistry, vice-chairman and managing director of HDFC.
Sudhir Reddy, managing director of IVR Prime, a southbased builder, says: It is easier said than done that companies will pass on the incremental cost of funds to homebuyers. One must not forget that increase in market price will result in additional construction costs for builders. This will not be possible when places like Hyderabad, Chennai and Pune are still facing a glut in demand. Sunil Malhotra, CFO of Delhi-based Omaxe, says: As demand is still price-sensitive , it will not be easy for developers to pass that extra cost to consumers.
In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows that the apex bank has become vigilant . Hari Pandey, VP-finance , HDIL, says the increased provisioning will not cost more than 30-50 bps at present.
The Economic Times, October 28, 2009, Page 13
RBI move to hike provisioning for realty loans aims to avoid creation of another bubble
Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP
THE RBIs credit policy announced on Tuesday appears intended to rein an incipient bubble in the real estate sector. T
he provisioning requirement for loans to commercial real estate has been increased from 0.40% to 1%, implying costlier bank loans for the sector. As most of the realty companies rely on bank funding, especially in times of financial crisis, this move could have an impact on the sector.As banks often keep a cushion for any regulatory changes in provisioning, this measure is more for bringing moderation in the realty sector. Since necessary reduction in prices has still not taken place and there is fair amount of money available for the sector, this step is to avoid creation of another asset bubble , says M Narendra, executive director of Bank of India.
Not unexpectedly, industry officials differ. According to Rajeev Talwar, executive director of DLF, Stability in major parameters is a good sign, but increasing the risk weightage for commercial real estate is a negative signal, which is perhaps not required so early in the economic revival process. It remains to be seen whether this latest measure has the desired impact of curbing any further rise in property prices. Since there is a huge latent demand to be fulfilled, some builders are confident of sales being unaffected by any increase in prices. Indeed, in some cities property prices have gone up by 5-15 % in past two-three months.
But other industry official doubt whether any price increase can be passed on. Property prices are a function of demand and supply and it will not be easy for developers to pass this extra cost to the buyers as many places, especially in central Mumbai and parts of Delhi, have already seen a significant price run-up , says Keki Mistry, vice-chairman and managing director of HDFC.
Sudhir Reddy, managing director of IVR Prime, a southbased builder, says: It is easier said than done that companies will pass on the incremental cost of funds to homebuyers. One must not forget that increase in market price will result in additional construction costs for builders. This will not be possible when places like Hyderabad, Chennai and Pune are still facing a glut in demand. Sunil Malhotra, CFO of Delhi-based Omaxe, says: As demand is still price-sensitive , it will not be easy for developers to pass that extra cost to consumers.
In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows that the apex bank has become vigilant . Hari Pandey, VP-finance , HDIL, says the increased provisioning will not cost more than 30-50 bps at present.
Provisioning norm to raise commercial realty prices
Provisioning norm to raise commercial realty prices
Business Standard, October 28, 2009, Page 12
Raghavendra Kamath / Mumbai
Developers expect up to 75 bps increase in cost of funds
Developers said property prices were likely to go up after the Reserve Bank of India (RBI) increased the provisioning for commercial real estate. This, they said, would increase the cost of funds.
Developers expect up to 75 basis points rise in cost of funds after the central bank increased banks’ provisioning requirement for commercial real estate from 0.40 per cent to 1 per cent.
“I think affordable housing will become more expensive as banks will raise rates and credit offtake will slow. Availability of bank funds will become a big issue for developers now. We will bank more on our sales and instead of raising additional funds. We will focus more on internal accruals,” said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer. “Execution of projects will suffer due to lack of bank funds,” said Wadhawan.
A number of property developers such as DLF, Unitech, HDIL and Lodha, among others, have ventured into affordable housing since the third quarter of the previous financial year to beat the slowdown in property sales. The projects are 25-40 per cent cheaper than market prices and carry margins of 15-20 per cent as against the luxury projects’ margins of over 50 per cent.
“It will certainly increase our cost of borrowing. We will consider this increase like any other increase in input cost,” said Bharat Mody, chief financial officer of Akruti City.
RBI increased provisioning as it felt that credit flow to commercial real estate had risen sharply and there had been large increases in restructuring of loans by developers. Some top developers of the country such as DLF, Unitech and HDIL have restructured loans worth Rs 10,000 crore after RBI allowed banks to do so.
“The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by banks. While the restructured portion at the aggregate level was 4 per cent, it was 14 per cent for the real estate sector. This prompted us to raise the provision requirement for the real estate sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.
Loans to the real estate sector grew 41.5 per cent in the 12 months up to August 28, 2009, to Rs 96,701 crore. On the other hand, total non-bank food credit grew 13.3 per cent in the 12 months up to August 28, 2009, to a total outstanding of Rs 26,23,551 crore.
In November last year, RBI had reduced the risk weight on loans for the commercial real estate industry to 100 per cent from 150 per cent and reduced standard asset provisioning requirements to 0.40 per cent.
This was after the developers met the finance minister to express concerns over liquidity. Apart from drastic fall in property sales, developers were facing severe liquidity crunch as bank debt and foreign borrowings dried up and domestic stock markets fell sharply.
Analysts said developers would now find it difficult to raise funds. “It will be challenge for developers to get bank debt. Financial closure will become difficult for real estate projects,” said Ambar Maheshwari, director of investments at DTZ, an international property consultant.
However, developers say since many of them have restructured debt or reduced their debt levels, the RBI move will have less impact on their existing loan portfolio. “If we go for additional funding, the cost will be higher. It will not have much impact on our existing debt,” said Sunil Malhotra, vice-president, finance, at Omaxe, a New Delhi-based developer.
Bankers also say the RBI move will not lead to any drastic rise in rates. “This (increase in provisioning) may not translate into a sharp rise in lending rates. The interest rates are already low and any small increase can be absorbed,” said a head of treasury with a private bank.
A senior State Bank of India official said there could up to 40 basis point rise in interest rate on loans disbursed to builders. This would be done to offset the additional amount that banks would have to set aside for standard real estate assets.
Sensex tanks 387 points
Sensex tanks 387 points
The Hindu Business Line, October 28, 2009, Page 1
Our Bureau, Mumbai
The Monetary Policy seems to have disappointed the stock market. The bellwether Sensex shed 387 points on Tuesday to close at 16,353.4 points and the broader Nifty ended the day lower by 2.5 per cent at 4,846.7.
Though there was no rate hike, the RBI signalling the end of its easy money policy led to heavy selling in banking and realty stocks, brokers said.
The BSE Realty index fell by 6.24 per cent, the biggest loser among the sectoral indices, followed by Bankex by 3.82 per cent.
The RBI has made funds more expensive for some sectors. The feeling that inflation is weighing on the minds of policy-makers and a rate hike is likely in the near future unnerved investors. Global cues were also negative. All these pulled the market down sharply, said Mr Avinash Gupta, Assistant Vice-President for Research Equity at Bonanza Portfolio.
Traders booking profits ahead of this month’s Futures and Options’ expiry on Thursday also drove down the market further.
FII were net sellers of equity for Rs 548.7 crore, while domestic institutions were net buyers for Rs 141.5 crore.
The market breadth was negative as 2,287 scrips declined while 442 advanced. All sectoral indices on the BSE ended the day in the red.
Wipro, Tata Motors and Hindustan Unilever were among the few Sensex gainers. The biggest losers included Hindalco, Tata Steel, Bharti Airtel and Reliance Communications.
The Hindu Business Line, October 28, 2009, Page 1
Our Bureau, Mumbai
The Monetary Policy seems to have disappointed the stock market. The bellwether Sensex shed 387 points on Tuesday to close at 16,353.4 points and the broader Nifty ended the day lower by 2.5 per cent at 4,846.7.
Though there was no rate hike, the RBI signalling the end of its easy money policy led to heavy selling in banking and realty stocks, brokers said.
The BSE Realty index fell by 6.24 per cent, the biggest loser among the sectoral indices, followed by Bankex by 3.82 per cent.
The RBI has made funds more expensive for some sectors. The feeling that inflation is weighing on the minds of policy-makers and a rate hike is likely in the near future unnerved investors. Global cues were also negative. All these pulled the market down sharply, said Mr Avinash Gupta, Assistant Vice-President for Research Equity at Bonanza Portfolio.
Traders booking profits ahead of this month’s Futures and Options’ expiry on Thursday also drove down the market further.
FII were net sellers of equity for Rs 548.7 crore, while domestic institutions were net buyers for Rs 141.5 crore.
The market breadth was negative as 2,287 scrips declined while 442 advanced. All sectoral indices on the BSE ended the day in the red.
Wipro, Tata Motors and Hindustan Unilever were among the few Sensex gainers. The biggest losers included Hindalco, Tata Steel, Bharti Airtel and Reliance Communications.
Tuesday, October 27, 2009
Growth forecast falls to 6% in RBI survey
Growth forecast falls to 6% in RBI survey
Business Standard, October 27, 2009, Page 1
BS Reporter / Mumbai
Professional forecasters have added to Reserve Bank of India (RBI) Governor Duvvurri Subbarao’s dilemma on timing the exit from an accommodative monetary policy stance.
A median forecast released by RBI in the pre-policy ‘Macroeconomic and Monetary Developments: Second Quarter Review 2009-10’ this evening lowered the economic growth projection to 6 per cent from the 6.5 per cent projected three months ago. At the same time, the forecast on inflation based on the wholesale price index (WPI) was raised to 3 per cent, as against 1.6 per cent estimated earlier.
Last week, the Prime Minister’s Economic Advisory Council headed by C Rangarajan had said the economy could grow between 6.25 per cent and 6.75 per cent, as against the 7-7.5 per cent projected in January.
In fact, it was the only agency to have lowered the forecast with the other projections hovering between 5.1 per cent and 7.2 per cent.
During the next financial year, the forecasters have projected a gross domestic product growth of 7.7 per cent, as against 7.5 per cent estimated in the previous survey. Inflation is expected to be 5.8 per cent.
While the median for the forecasters’ survey was closer to the estimates released by RBI at the time of the first quarter review in July, the central bank appeared more worried about inflation than growth.
Apart from the fact that the report chose to devote most of its analysis on the growth and inflation outlook to price rise, RBI acknowledged that weak recovery and elevated levels of consumer price index-based inflation had made the policy challenges difficult. “Among the alternative plausible sources of inflation that could determine the near-term inflation outlook, factors which support possible firming up of headline inflation clearly overshadow the factors which may help in containing inflationary pressures,” it added.
Inflation based on the wholesale price index was estimated at 1.2 per cent on October 10, 2009 and RBI said that inflationary pressures had started to emerge, with WPI showing a 5.9 per cent increase over the March 2009 level and CPI inflation staying stubbornly in double digits. “From the stand point of monetary policy, anchoring inflation expectations in the face of sustained high inflation in essential commodities will be a key challenge,” it added.
On economic growth, however, RBI appeared more optimistic and said that the survey had forecast lower growth due to the impact of the deficient monsoon on farm sector output. According to the professional forecasters’ survey, agricultural production was projected to dip by 1.4 per cent during the current financial year.
But it listed eight factors including the impact of the stimulus packages, and improved showing from the industrial and infrastructure sectors to draw comfort. The other positives listed included revival in capital flows and stock markets, improvement in overall global economic and financial conditions, improvement in lead indicators such as freight movement and data coming from sectors such as cement, steel and automobiles.
Besides, it pointed out that business confidence had improved. RBI’s Industrial Outlook Survey, conducted in July-August, also showed further improvement in the sentiments of the manufacturing sector and indicated that the industrial sector could gain further growth momentum.
The survey revealed that the demand conditions had improved, better employment prospects across sectors (with textiles being the sole exception), return of pricing power that could give rise to higher selling prices and better availability of finance. It also indicated that working capital requirement would grow in the third quarter and help reverse the decelerating trend. The only negative from the survey was higher input costs.
While inflation was the biggest worry for RBI, it also listed seven risks to growth staring with a deceleration in private consumption and investment demand. It said a contraction in credit card and consumer durables-related credit pointed to a deceleration in private consumption. In any case, non-good credit growth has decelerated in recent months to a new 12-year low in the year to October 9.
RBI said deficient rains in some parts of the country and floods in some other areas could affect rural demand. The other bad news was depressed external demand for services and contraction in non-oil imports and weak capital goods production.
“Managing this tradeoff between supporting growth and reining in inflation expectations poses a complex policy challenge,” RBI said.
RBI survey lowers growth outlook to 6%
RBI survey lowers growth outlook to 6%
The Hindu Business Line, October 27, 2009, Page 7
Our Bureau, Mumbai
The overall growth outlook has been impacted by the decline in agriculture output on account of the deficient monsoon, the Reserve Bank of India said in the second quarter review of Macroeconomic and Monetary Developments, released on Monday.
The RBI’s survey of professional forecasters has suggested a downward revision in the growth outlook for 2009-10 from 6.5 to 6 per cent.
Contrary to this, the RBI’s industrial outlook survey had indicated an expansion in the economy and projections of other domestic and international agencies had also pointed to an improvement in India’s growth outlook.
In the ninth round of survey of professional forecasters’ conducted by RBI in September 2009, the projection for sectoral growth rate for agriculture was revised downwards from 2.5 per cent to -1.4 per cent, whereas for industry the projection was revised upwards from 4.8 per cent to 6.3 per cent. For services, the forecasters suggest modest downward revision from 8.3 per cent to 8.1 per cent.
According to the survey, some factors that indicate a faster and sustained recovery in growth include visible signs of industrial recovery such as 5.8 per cent growth in IIP during April-August 2008 as against 3.3 per cent in same period last year, the infrastructure sector showing higher growth of 4.8 per cent in April-August 2009, revival in capital flows in the first half of 2009-10 after two consecutive quarters of net outflows in the second half of 2008-09 and significant recovery in the stock market.
Among the downside risks, listed by the survey, are deceleration in growth of private consumption and investment demand, deficient monsoon and drought like conditions in several parts of the country, deceleration in non-food credit growth, negative growth in non-oil imports and weak growth in capital good productions.
RBI loath to spoil feel-good party, but tense over prices
RBI loath to spoil feel-good party, but tense over prices
The Economic Times, October 27, 2009, Page 9
ET Bureau, MUMBAI
The Reserve Bank of India has acknowledged the resurgence of the feel good factor in the Indian economy but has said that growth and
inflation continue to be a concern.
Maintaining a hawkish stance on inflation, the central bank has highlighted its concern over slowdown in credit offtake and surplus liquidity in the system, giving no clear indication on its rate stance. In its report on Macro and Monetary Developments in Q2 of 2009-10, the Reserve Bank has noted that `The combination of a weak recovery and elevated CPI (consumer price index) inflation has already magnified the complexity of policy challenges, notwithstanding the subdued nature of headline WPI inflation so far.’
`While premature reversal of the monetary policy stance entails the risk of stifling recovery, persistence of accommodative stance could adversely impact inflation expectations.’
However, the results of its survey based on “assessment for July- September 2009” and “expectations for October-December 2009” point to a strong momentum in industrial recovery. Both the indices remained above 100 for the second consecutive quarter (100 is the threshold that separates contraction from expansion). According to the central bank’s analysis, this suggests that the industrial recovery already seen up to August 2009 in terms of trends in IIP growth could gain further momentum.
According to the survey findings, the outlook for employment is also improving and firms are expected to increase their workforce on the back of expected increase in demand.
Among the positive pointers to the economic recovery include improved financial conditions as reflected in return of capital flows, significant recovery in the stock markets, and better transmission from low policy rates to declining lending rates. The RBI has also said that there should not be any concerns about private credit getting crowded out since over 80.4% of the government borrowing programme has been completed so far as there is adequate liquidity in the system.
But it is concerned about the deceleration in private consumption and investment demand that it says needs to be reversed from the low levels seen in the first quarter of 2009-10 for ensuring a sustainable recovery.
No change in key rates expected, CRR may be hiked: Banks
No change in key rates expected, CRR may be hiked: Banks
Business Standard, October 27, 2009, Section II, Page 2
BS Reporter / New Delhi
The Reserve Bank of India (RBI) may leave the policy rates untouched when it reviews the monetary policy on Tuesday, HSBC India CEO Naina Lal Kidwai said on Monday. TY Prabhu, chairman of the Oriental Bank of Commerce (OBC), seconded her views. The bankers, however, agreed there might be a small increase in the cash reserve ratio (CRR) as the system was flushed with funds.
"The RBI governor is clearly concerned about inflation, while he fully understands that having expansionist monetary policy has been important to provide the stimulus we need. I expect the rates to remain flat. A little bit change in CRR is fine," she told reporters on the sidelines of an industry event.
Prabhu declined to comment on the possible action by RBI, but agreed there was no immediate pressure (on the RBI to increase rates) due to adequate liquidity in the system. “We expect the present policy stance to continue. Interest rates would remain at the present level for the next three to six months.”
OBC executive director S C Sinha said a 25 basis points increase could be expected in CRR but overall interest rates would remain soft because of comfortable liquidity situation.
Kidwai added that the monetary policy was not just meant for tinkering with rates and the central bank could revise rates even outside the credit policy if needed.
She said the economy had started recovering and some action could be expected around December.
HSBC is expecting India to grow at 6.5 per cent this year and 8 per cent in 2010-11.
Asked whether RBI was expected to revise its credit growth target of 20 per cent for 2009-10, she said the central bank might stick to the target while asking banks to lend more.
“It may push banks into lending. This is the time to loosen purse strings.”
Business Standard, October 27, 2009, Section II, Page 2
BS Reporter / New Delhi
The Reserve Bank of India (RBI) may leave the policy rates untouched when it reviews the monetary policy on Tuesday, HSBC India CEO Naina Lal Kidwai said on Monday. TY Prabhu, chairman of the Oriental Bank of Commerce (OBC), seconded her views. The bankers, however, agreed there might be a small increase in the cash reserve ratio (CRR) as the system was flushed with funds.
"The RBI governor is clearly concerned about inflation, while he fully understands that having expansionist monetary policy has been important to provide the stimulus we need. I expect the rates to remain flat. A little bit change in CRR is fine," she told reporters on the sidelines of an industry event.
Prabhu declined to comment on the possible action by RBI, but agreed there was no immediate pressure (on the RBI to increase rates) due to adequate liquidity in the system. “We expect the present policy stance to continue. Interest rates would remain at the present level for the next three to six months.”
OBC executive director S C Sinha said a 25 basis points increase could be expected in CRR but overall interest rates would remain soft because of comfortable liquidity situation.
Kidwai added that the monetary policy was not just meant for tinkering with rates and the central bank could revise rates even outside the credit policy if needed.
She said the economy had started recovering and some action could be expected around December.
HSBC is expecting India to grow at 6.5 per cent this year and 8 per cent in 2010-11.
Asked whether RBI was expected to revise its credit growth target of 20 per cent for 2009-10, she said the central bank might stick to the target while asking banks to lend more.
“It may push banks into lending. This is the time to loosen purse strings.”
Rates will stay, but CRR hike likely
Rates will stay, but CRR hike likely
The Hindu Business Line, October 27, 2009, Page 7
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The Government is probably mindful of the RBI’s concerns but wants to be sure the recovery has taken hold and will endure.
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S. Balakrishnan
“RBI Governor meets Finance Minister ahead of Monetary Review,” screams newspaper headlines.
It’s certain the Governor made a case for tightening of policy. Going, however, by the public pronouncements of those in Delhi, it’s equally certain Mr Pranab Mukherjee demurred.
Who’s right?
The economy took a steep dive in Q42008 and Q1 2009. The RBI didn’t dither. It acted with commendable initiative and speed to slash banks’ reserve ratios and interest rates. The former was especially important in providing sufficient liquidity to the economy. Combined with these was the continuation and increase in Government spending without worrying about its effect on the budget deficit. To everyone’s relief, the economy picked up smartly and quickly.
Apart from the National Rural Employment Guarantee Scheme injecting some income into the rural unemployed, the Pay Commission’s substantial enhancement of the salaries of Government employees was India’s version of a fiscal stimulus. Some State Governments followed suit, with the result that consumer spending and, more critically, business and consumer confidence got a boost. The RBI has been entirely accommodative of Government’s needs during this period. The latest GDP and industrial production data confirm the near “normalisation” of the economy.
Capex is back
Stock prices were driven unreasonably low – the Sensex went below 8,000 – and have since recovered most of the fall or gone over in many cases. Real estate prices are climbing – they never actually fell in the prime areas of the metros. Capex, at least in infrastructure, is back.
The major concern is the trade deficit, thanks to rising international oil prices and flagging traditional exports such as textiles. But remittances and non-resident Indians’ deposits are buoyant thanks to the crisis of confidence in the major financial institutions of the world.
Overall, the RBI Governor seems to be playing from a strong hand if indeed he prefers to remove some of the monetary relaxation.
The Government is probably mindful of the RBI’s concerns but wants to be sure the recovery has taken hold and will endure. The wild card is not so much the domestic situation as a slip back of the US economy and markets. It could have a significant psychological and then real effect.
Therefore, there’s a high likelihood of the powers-that-be finding a middling sort of solution.
Liquidity
That would involve leaving policy rates – the repo and reverse repo – where they are and focusing on liquidity. The RBI’s discomfort is plainly with the excess reserves of over Rs 1,00,000 crore held by banks, with the potential to exit into the economy.
The modus vivendi might be to raise the Cash Reserve Ratio by 25-50 basis points. It’s tantamount to making bank funds more expensive without actually raising rates.
That could be the face-saving way out for the Government and the RBI.
High inflation rates a cause for concern
High inflation rates a cause for concern
Business Standard, October 27, 2009, Section II, Page 3
BS Reporter / Mumbai
Although year-on-year inflation is still only 1.2 per cent, strong upward trends seen in the Wholesale Price Index (WPI) inflation and the persistence of high Consumer Price Index (CPI) inflation are a cause of concern, the Reserve Bank of India (RBI) said in its pre-monetary policy review today.
The WPI inflation has risen by 5.9 per cent over its end-March 2009 level, while CPI inflation has been in double-digits for the past few months.
The recent increase in the WPI was largely because of the upward revision of prices of petrol and diesel, increase in prices of freely priced fuel products and higher prices of sugar, vegetables and medicines.
According to the Reserve Bank of India (RBI), CPI inflation persisting at high levels could lead to inflation, as wages and prices would come under increasing pressure of upward revision as pricing power and wage bargaining in the economy gradually returned.
Other factors that could contribute to inflationary pressures are high inflation in food and essential commodities, limited import options for specific commodities and the risk of a further increase in minimum support prices (MSPs) of agricultural crops.
“Given the supply-side sources of emerging inflationary pressures, the policy focus needs to be directed at improving both supply conditions and supply chain for more efficient distribution,” RBI said.
On the other hand, the sources of comfort on the inflation front could be a persistence of negative output gap, weak aggregate demand as well as stabilisation of international oil prices over the last few months.
The recent deceleration in broad money growth despite the accommodative monetary policies of the central bank was a positive sign, RBI said.
Effective use of the high stock of foodgrains with special focus on improved distribution, a better harvest during the rabi season and selective import of certain commodities would further contain inflationary pressures, according to RBI.
Realty, banking stocks take hit
Realty, banking stocks take hit
The Financial Express, October 27, 2009, Page 1
A day ahead of RBI's review, shares of rate-sensitive sectors witnessed heavy late selling on domestic equity bourses on Monday. The BSE realty index was the biggest loser, falling4.59 % , with DLF Ltd ending the day at Rs 454.70, shedding 5.41 %. The BSE Bankex lost 1.64%, with India's largest public sector lender, SBI, off by 2.05% to end at Rs 2,353.85. Private sector lenders ICICI Bank and HDFO Bank lost
1.49% and 0.08%, respectively. The 3()..share Sensex of the BSE closed the day at 16,740.50 points, down 70.31, or 0.42%, while the broader 50-share Nifty of the NSE dropped 26.15 points, or 0.52%, toendat4970.90. "Even if rates are not tinkered with, there is an overhang about RBI coming out with some statement reversing its accommodative monetary policy going forward, "said Elara Capital analyst Arup Misra.
Realtors in South defy trend, say no to price hike
Realtors in South defy trend, say no to price hike
The Financial Express, October 27, 2009, Page 12
Sajan C Kumar, Chennai
Bucking the national trend, realtors in south India appear to be in no mood to raise prices. A cross section of leading construction firms which FE contacted say after the lull, demand has just started picking up and they want to cash in by pushing up the volume. “We cannot afford to drive away customers when the demand is there,” said T Chitty Babu, chairman and CEO, Akshaya Pvt Ltd, one of the key realty players in Chennai. Sentiments across the realty market have seen a marked improvement, with some favourable steps taken by the Tamil Nadu government. A substantial number of enquiries are coming in and, coupled with the low interest rates, the enquiries are sure to be converted into bookings, he said.
Many of the realtors in the South say their first priority will be to clear out the inventory at the prevailing price. The builders in Mumbai and Delhi have hiked prices of residential apartments by 10% to 15% during the last three months.
Prakash Challa, president, Confederation of Real Estate Developers Association of India, said though there has been no increase in prices like Delhi and Mumbai, some developers have cut down on the discounts they were offering in the lull period. Sudharshan KS, CEO, Ozonegroup, said, “At a time when the market has taken a positive turn with enough enquiries pouring in we will be focusing on pushing our projects with added vigour.”
Ravindra Sannareddy, managing director, Sri City said the realty sector is thriving with activities. “Even when the country was going through the impact of the meltdown, the commercial realty segment was very active. The only slowdown was in the residential segment, which obviously saw fewer transactions, compared to the boom period
KA Mohamed Saleem, managing director, Asset Homes said, “Slowdown or no slowdown Kerala has always been a stable market for realtors with no significant escalation in prices. Though there has been a pause in construction during the height of the meltdown, the prices have not come down drastically. Therefore, we see no scope for a price hike when the realty market is on a revival path.”
Housing min tweaks Parekh panel report
Housing min tweaks Parekh panel report
The Financial Express, October 27, 2009, Page 23
Kakoly Chatterjee, New Delhi
The housing ministry is fine-tuning the recommendations of the Deepak Parekh committee on affordable housing. The ministry does not want the monthly installments of both the categories, the economically weaker sections (EWS) and the lower middle income group (LMIG), to exceed more than 25-30% of the monthly income of the house owners.
The equated monthly installments (EMI), in absolute terms, should be in the range of Rs 500 to Rs 750. The ministry has suggested that the duration of payments should be around 15 years.
If an owner is paying interest of Rs 750 for Rs 100,000 every month, the interest rate works out to be 0.75%. Banks are reluctant to give loans at such low interest rates mainly because people from economically weaker sections do not have any regular jobs and therefore their payments on loans is uncertain.
With banks and home finance companies reluctant to lend to this category owing to the high risk of defaults, the ministry is looking at setting up a housing micro finance company. For this, the ministry has set up a committee to find out if there should be a micro finance company with focus on housing finance. The ministry is also considering whether the housing micro finance company should take household savings as deposits. The ministry is in consultation with banks and financial institutions as to how funds can be availed at a cheaper cost. The Deepak Parekh committee report on affordable housing had suggested that EMIs for EWS and LIG housing should not exceed 30% of gross monthly income, while for MIG, it should not be more than 40% of the gross monthly income. People earning up to Rs 3,300 a month come under the EWS category, while people earning up to Rs 7,300 fall under the MIG category.
I-T Department serves fresh notice on DLF
I-T Department serves fresh notice on DLF
Business Standard, October 27, 2009, Page 3
BS Reporter / New Delhi
The Income Tax (I-T) Department has issued a fresh notice to realty major DLF even as it’s appeal against an additional tax liability imposed on it by the I-T Department is being heard.
The demand for additional tax payment first came after the Institute of Chartered Accountants of India (ICAI), which sets auditing standards, revised its accounting norms during 2005-06. The change had required real estate developers and construction companies to change from the conventional way of accounting to the new method and incorporate the changes in their tax liabilities.
Pursuant to the change, a special audit conducted by the I-T Department resulted in a demand for additional tax payment from DLF based on its account books for the financial year 2005-06. DLF appealed against the I-T Department’s move and informed the stock exchanges that any adverse ruling could result in an additional tax liability of Rs 200-300 crore.
DLF has termed the fresh notice from the I-T Department as a “routine follow-up”.
“This is a routine notice as a follow-up to last year. The due legal process is on and our appeal on last year’s assessment is sub judice in the I-T Department. DLF is sure of its facts and figures, which will be duly considered in the appeal,” a company spokesperson said.
Tax Department issues notice to DLF for assessment year 2007-08
Tax Department issues notice to DLF for assessment year 2007-08
The Hindu Business Line, October 27, 2009, Page 2
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“We are sure of the fact and figures which will be considered in the appeal”, said Mr Rajiv Talwar.
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Our Bureau, New Delhi
The Income-Tax Department has issued a notice to real estate major DLF Ltd for a special audit for the assessment year 2007-08.
Earlier this year, in relation to a tax matter pertaining to financial year 2005-06, the Tax Department had passed an order, adding close to Rs 1,200 crore as DLF’s taxable income for FY06.
The company had challenged the order with the appellate authorities and the matter is currently under appeal.
When contacted, the DLF group Executive Director, Mr Rajiv Talwar, confirmed that the company had received the notice.
“We are sure of the fact and figures which will be considered in the appeal,” he said.
Company sources said that the latest notice was in line with the previous tax case. “If a view is taken for a particular year, it may be incumbent on the assessing officer to take that view for the next year,” sources said.
In May the company, in a disclosure to the BSE, had referred to the tax case for fiscal 2005-06 and stated that it had got an expert opinion on the enhanced taxable income and was confident that the addition would not be sustained by the appellate authorities.
“In an unlikely event, if the said order is not reversed by the appellate authorities then it can result in a contingent liability of about Rs 300-400 crore,” the company had said, at that time.
The addition to income was the fallout of a special audit report of the Income-Tax Department. The Report of the Special Auditor recommended that the Tax Department re-assess about Rs 1,200 crore as additional income. On May 6, the Assessing Officer, following audit and assessment proceedings, issued an order adding most of the amount suggested in the Special Audit Report.
The year 2005-06 was the first year in which revised accounting norms prescribed by the ICAI (Institute of Chartered Accountants of India) became applicable for construction and real-estate development companies.
These norms allowed real-estate companies to use the ‘percentage of completion method’ (PoCM) to recognise revenues and profits.
DLF started using the PoCM from FY 2005-06, prior to which all accounts were prepared in accordance with the conveyancing method. DLF went public in mid-2007.
Under the PoCM method, revenues are recognised based on the actual proportion of completion of a project, while earlier the builders would recognise income and profits only after a project was completed.
The Hindu Business Line, October 27, 2009, Page 2
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“We are sure of the fact and figures which will be considered in the appeal”, said Mr Rajiv Talwar.
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Our Bureau, New Delhi
The Income-Tax Department has issued a notice to real estate major DLF Ltd for a special audit for the assessment year 2007-08.
Earlier this year, in relation to a tax matter pertaining to financial year 2005-06, the Tax Department had passed an order, adding close to Rs 1,200 crore as DLF’s taxable income for FY06.
The company had challenged the order with the appellate authorities and the matter is currently under appeal.
When contacted, the DLF group Executive Director, Mr Rajiv Talwar, confirmed that the company had received the notice.
“We are sure of the fact and figures which will be considered in the appeal,” he said.
Company sources said that the latest notice was in line with the previous tax case. “If a view is taken for a particular year, it may be incumbent on the assessing officer to take that view for the next year,” sources said.
In May the company, in a disclosure to the BSE, had referred to the tax case for fiscal 2005-06 and stated that it had got an expert opinion on the enhanced taxable income and was confident that the addition would not be sustained by the appellate authorities.
“In an unlikely event, if the said order is not reversed by the appellate authorities then it can result in a contingent liability of about Rs 300-400 crore,” the company had said, at that time.
The addition to income was the fallout of a special audit report of the Income-Tax Department. The Report of the Special Auditor recommended that the Tax Department re-assess about Rs 1,200 crore as additional income. On May 6, the Assessing Officer, following audit and assessment proceedings, issued an order adding most of the amount suggested in the Special Audit Report.
The year 2005-06 was the first year in which revised accounting norms prescribed by the ICAI (Institute of Chartered Accountants of India) became applicable for construction and real-estate development companies.
These norms allowed real-estate companies to use the ‘percentage of completion method’ (PoCM) to recognise revenues and profits.
DLF started using the PoCM from FY 2005-06, prior to which all accounts were prepared in accordance with the conveyancing method. DLF went public in mid-2007.
Under the PoCM method, revenues are recognised based on the actual proportion of completion of a project, while earlier the builders would recognise income and profits only after a project was completed.
Monday, October 26, 2009
India Inc making up for lost time in raising funds
India Inc making up for lost time in raising funds
Business Standard, October 26, 2009, Page 1
Ranju Sarkar / New Delhi
Reasons vary from fear-psychosis to retiring debt to growth capital
The lull has given way to a storm. After a year of waiting on the sidelines, India Inc is raising money with a vengeance. In the last four months alone, companies have raised nearly Rs 90,000 crore in equity and debt. And the party looks set to be a long one, with companies planning to raise another Rs 100,000 crore in the next six months.
While some such as Hindalco, JSW Steel, India Cements, Essar Oil, Tata Steel and Jet Airways have already announced plans to raise a combined Rs 70,000 crore, there are many who are redrawing proposals to enter the market to raise money.
The money that has been raised since the beginning of July includes Rs 43,572 crore in equity through qualified institutional placements, initial public offers and rights issues. Around Rs 45,000 crore have come from debt issues.
The reasons for the fund-raising deluge after the one-year drought are many. For some, it is the fear that the good markets may not last for long and they want to raise money to ensure they are not drained for liquidity like last year.
A Subba Rao, president & chief financial officer of GMR Infrastructure, believes in the fear psychosis theory. “Today there’s water, so collect it. Tomorrow, there could be a drought,” he says.
This is best illustrated by real estate companies. After their bigger peers like Unitech and DLF raised money, over half a dozen companies have lined up initial public offerings, or IPOs.
Hari Prakash Pandey, deputy general manager (finance) and CFO, HDIL, a Mumbai-based real estate company, agrees. “It is the fear psychology that’s driving companies to raise money. There’s still fear that something may happen and good markets may not last. Today, a window is available to raise equity. So companies are saying let’s go and raise capital,” he says.
But others see a more long-term vision than mere fear-psychosis. For them, companies are also raising money to reduce debt, complete existing projects or for meeting their future capital needs. S Ramesh, COO, Kotak Investment Banking, says some companies, which were not able to complete projects earlier, are raising money to create a buffer, while a few others like Larsen & Toubro are raising money to meet their future needs.
‘‘With consumption picking up, companies realise that they may need to soon invest in new projects,’’ says Ramesh. Some like Tata Motors raised money to refinance debt taken for acquisitions while others are raising money to complete projects on which they went slow in the downturn or because of the liquidity crunch last year.
Real estate companies, which kicked-off the QIP rush, raised equity to reduce debt. “Companies were over-leveraged. In a downturn, even a 1:1 debt equity ratio looked high. As debt comes down and sales pick up, internal accruals could be released for growth,” says Pandey. This will help real estate companies as they were paying interest rates of 12-15 per cent on these loans with annual interest outgo of Rs 400-500 crore.
This may not be easy. Aditya Sanghi, managing director, investment banking, Yes Bank, says investors have become choosy and want to back stories which have an outcome. “If 15-20 real estate companies want to raise Rs 1,000 crore, I am not sure if the market is ready for it.”
But still the market has enough appetite for companies with strong fundamentals seeking growth capital.
What has helped in this process is the easing up of the foreign currency loan markets in the last few months with the spreads on the Libor (London Inter Bank Offered Rate) coming down. Spreads are the rate paid over the benchmark Libor as the cost of borrowing for overseas bonds.
Indian companies can save 150-200 basis points on interest costs by borrowing in dollars, inclusive of the hedging costs. GMR’s Rao says companies can borrow five-year money fixed Libor at an effective cost 9.75 per cent (covered for the interest rate risk as well). Five-year money from Indian banks costs 11-11.50 per cent.
The problem, however, is that not many banks are willing to lend for five years. Most of them do not want to tenure to cross a year. Besides, the loans are not comparable as no rupee loan is available at a fixed rate for five years. The interest rate on a five-year loan is reset every year. But companies can borrow from insurance companies or mutual funds, or from public markets, like Tata Capital did, at 11.5-12 per cent.
Arvind Parakh, director (business development) & CFO, JSL, says companies that have strong balance sheets can leverage them overseas. With the convertible bond market overseas opening up, companies are raising money through convertible bond issues. A few like Sesa Goa, Larsen &Toubro and Tata Motors have already raised money through a combination of QIP and foreign currency convertible bonds, or FCCBs.
FCCBs are back in vogue as premiums have gone up to 30 per cent. “Four months back, the premium was low (15-16 per cent) and the coupon was ruling at 5-6 per cent. It did not make sense for promoters as it was a zero-sum game,” says Rao. Now, investment banks are recommending FCCB issues as they see good demand and a new set of investors.
The pure bond market is also opening up for Indian companies. Last week, State Bank of India raised $750 million (Rs 3,500 crore) through five-year bonds. Other banks and PSUs may soon raise more. Seshagiri Rao, deputy MD, JSW Steel, says that with three-four issues from banks and PSUs, the bond markets could open up for Indian companies.
(With inputs from Deepak Korgaonkar and Swapnil Mayekar, BS Research Bureau)
Companies' Q2 results show healthy rise in net profit
Companies' Q2 results show healthy rise in net profit
Business Standard, October 26, 2009, Page 2
Deepak B Korgaonkar / Mumbai
The 452 companies that have so far declared their financial results for the quarter ended September have posted a healthy 28.5 per cent rise in net profit, but only a single-digit growth of 3 per cent in net sales.
The net profit growth reported by India Inc during this quarter was the highest since the one in June 2007, when a sample of 381 companies showed a 35 per cent jump in net profit.
The profit margins also improved. The operating profit margin is up 320 basis points to 21.9 per cent in September, while net profit margin is up 255 basis points to 12.4 per cent.
Automobiles, cement, real estate, paints, gas distributions, auto ancillaries and engine sectors have all posted over 50 per cent growth in net profit. Also, a smart turnaround by sugar, petrochemicals, shipping and textile sectors, and reduction of losses by food processing, glass and electronics sectors has pushed up the profit growth rate.
The growth in profitability was helped by lower interest costs. For manufacturing companies, this increased by 9.8 per cent against over 20 per cent growth in earlier quarters.
Out of 452 companies, the net profit of as many as 98 has more than doubled.
Thirty-six companies reported net profit growth between 50 per cent and 100 per cent, while 36 others reported a net profit against a net loss in the same quarter of the previous year.
The automobile sector has stolen the show by reporting over 100 per cent growth in net profit.
The six auto companies reporting quarterly numbers so far have posted a combined Rs 1,613 crore net profit against Rs 794 crore reported in the same period last year.
Jubilant Organosys, Finolex Industries and Garware Offshore are among the those who have turned losses to profit, while Subex, Upper Ganges Sugar and SRF Polymers have reduces their losses by more than 50 per cent.
However, non-ferrous metals, hotels, tea and coffee, entertainment, bearings, ferro alloys, pesticides and mining sectors have reported a fall in their net profit.
US grows fastest in 2 yrs as stimulus takes hold
US grows fastest in 2 yrs as stimulus takes hold
Business Standard, October 26, 2009, Page 8
Bloomberg / Washington
Economy grew at a 3.2 per cent from July through September
The economy in the US probably grew in the third quarter at the fastest pace in two years as government stimulus helped bring an end to the worst recession since the 1930s, economists said before reports this week.
The world’s largest economy grew at a 3.2 per cent pace from July through September after shrinking the previous four quarters, according to the median estimate of 65 economists surveyed by Bloomberg News. Other reports may show sales of new homes and orders for long-lasting goods increased.
Americans flocked to auto showrooms and real-estate offices last quarter to take advantage of government programs such as “cash-for-clunkers” and tax credits for first-time homebuyers. Growing demand caused stockpiles to keep falling, which will prompt companies to rev up assembly lines and help sustain the recovery into 2010 even as unemployment climbs.
“The recovery is off to a decent but unspectacular start,” said Joe Brusuelas, a director at Moody’s Economy.com in West Chester, Pennsylvania. “While another large drawdown in inventories will be a drag on third-quarter growth, it sets the stage for a longer and stronger upturn in manufacturing.”
The Commerce Department’s report on gross domestic product is due October 29. The four consecutive decreases through the second quarter marks the longest stretch of declines since quarterly records began in 1947. The economy shrank 3.8 per cent in the 12 months to June, the worst performance in seven decades.
Stocks have rallied as earnings at companies from Caterpillar Inc to Morgan Stanley topped estimates. Profits exceeded expectations at about 80 per cent of the companies in the Standard & Poor’s 500 Index that have released results, according to Bloomberg data. That marks the highest proportion in data going back to 1993. The S&P 500 closed at a one-year high on October 19.
Consumer spending last quarter probably jumped at a 3.1 per cent annual rate from the previous three months, the biggest gain since the first quarter of 2007, the GDP report is also projected to show.
September readings on household purchases, due from the Commerce Department on October 30, may show the quarter ended on a soft note after the Obama administration’s car incentive expired the month before. Spending probably fell 0.5 per cent last month as car sales slowed after jumping 1.3 per cent in August, the biggest gain since 2001.
The so-called cash-for-clunkers program offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles. The plan boosted sales by about 700,000 vehicles, according to a Transportation Department estimate.
Will it last?
Business Standard, The Smart Investor, October 26, 2009, Page 1
Ram Prasad Sahu / Mumbai
While there are visible signs of a recovery in the real estate market, price hikes by developers and any increase in interest rates could halt this momentum.
The realty sector, which was the worst affected by the downturn last year, seems to be exhibiting early signs of a recovery. Price cuts on projects over the last six months and healthy pre-sales during the festive season seems to suggest that demand, which had all but disappeared in the third and fourth quarter of 2008-09, seems to be trickling back. Developers are tweaking their business model by launching smaller apartment sizes and playing the volume game to keep prices low and create buyer interest. What has helped matters, believes Ramnath S, director, Research, IDFC-SSKI, are factors such as job security and affordability, which are gradually improving, and a lot of companies likely to revise salaries upwards as against a freeze last year. The benign interest rate environment has also helped. Ramnath believes that pay commission hikes will also increase disposable income of government employees.
Higher sales...
While demand as of now seems to be buoyant in the residential space and is likely to gather momentum, is it significant? Says Sanjay Dutt, CEO, Business, Jones Lang LaSalle Meghraj, a realty consulting firm, “The slowdown hit the market shortly after the Navratri-Diwali season in 2008 after registering the usual 30-35 per cent upsurge in sales typical of the period. Sales increased 25-30 per cent this time around and is significant as this is the first upsurge in demand after a prolonged downturn.” Driving home the point, Ramnath cites the sales of DLF and Unitech, India’s largest listed realty companies, during the current financial year. “Unitech has launched about 17 million square feet (mnsqft) worth of properties across the country selling over 40 per cent of that. Incrementally, Unitech has launched about 6 mnsqft of affordable housing properties selling about 1 mnsqft of properties till date. DLF too has sold a total of about 4 mnsqft of properties till date. These events indicate an uptick in volumes in the sector.”
...leading to higher prices
The uptick has however led realty players to increase prices. Ramnath believes that new properties launched in Mumbai, for example, were offered at 10-15 per cent higher prices as against their lows in March 2009 quarter. Moreover, developers are now offering properties without any discount and freebies (such as waiver of stamp duty and registration charges). Says Dutt, “Developers in key cities have been hiking prices to test the flexibility of the market. At first, this trend was evident only in the luxury and semi-luxury segments, but it has now percolated down to the mid-income housing segment as well.” A good example is DLF’s Capital Greens project in Delhi. DLF increased its prices at Phase II of this project to Rs 6,750 per square feet in September 2009, which is at a 30 per cent premium to those in Phase I launched in April 2009.
Market’s liking it too
The improving fundamentals of developers on the back of price hikes, increased liquidity through QIPs, asset sales and pre-sales observed over the last few months is not lost on the market. The BSE Realty index, the worst performer of 2008 is up 248 per cent since its March 2009 lows. This indicates that current valuations are not cheap. In a bid to cash in on the recovery, leading realty companies are planning to raise money from the primary markets to the tune of over Rs 14,000 crore. This could also suck out liquidity and may cap appreciation of prices of listed scrips, say analysts.
Profitability impact
Ramnath believes that improvement in profitability will depend on future projects. “Profitability will improve only after subsequent new projects are launched at higher prices as compared to previous projects which we believe is unlikely in the current scenario. Developers are likely to hold on to current (increased) price levels until demand increases significantly from current levels.” The worrying factor for realty players continues to be the commercial and retail space, which suffer from oversupply and will take at least another two quarters to recover. In a recent report on the sector, a J P Morgan report says that rentals for office space have already corrected by 30-40 per cent from their peak levels on the back of slow demand and leasing activity and vacancy rates remain high at over 10-15 per cent across key markets.
The research firm believes that while demand from domestic corporates has started to firm up, IT/ITES demand is likely to remain subdued. We review the operations of the largest players by market capitalisation in the sector.
DLF: Attractive price points and a revival in the fortunes of the sector have helped India’s largest realty player lure buyers for its residential properties. The company is likely to maintain its mid-income housing focus which has yielded good results in Delhi where it was able to sell 1,400 units (2 mnsqft) and 1,250 units (1.8 mnsqft) at the Delhi Capital Greens project (phase I and II, respectively) and 0.5 mnsqft in Bangalore over the last six months. Including the above, the company has launched about a third of the proposed 15-16 mnsqft residential projects for the fiscal. The story is not as rosy on the commercial and leasing segments. While the company sold over a 1 mnsqft of commercial and office space in the first quarter and demand seems to be improving, the fortunes of this space is likely to see a significant upswing only next year. Its leasing business, too, is going through a similar business cycle.
While things are looking up, the slow and gradual pick up in volumes will continue to be a drag on its revenues. Analysts estimate that its September quarter revenues will be down by half y-o-y. Ebidta margins are likely to shrink 900-1,000 bps to about 50 per cent as the company realigns its focus towards affordable housing segment (below Rs 30 lakh per unit). The company plans to exit non-core business (wind power, SEZs) and land bank to raise Rs 5,500 crore in 2009-10. This will help it to improve its cash position, manage debt repayments of Rs 1,165 crore and increase pace of execution. Though the stock trades at a discount to its NAV, a fall of 10-15 per cent in its share price would make it attractive from a long term perspective.
HDIL: Increasing prices of transfer of development rights (TDR), which had bottomed in the March quarter of 2008-09, augurs well for HDIL. TDR prices have spiked 80 per cent from levels of Rs 1,100 per sqft in March 2009 quarter and will benefit HDIL which is executing the first phase of the airport slum rehabilitation project where it has TDRs of nearly 45 mnsqft. Almost all the revenues in the current fiscal are likely to come from the sale of about 3 million sqft of TDRs. The company launched three residential projects totalling 1.9 mnsqft in Andheri and Kurla, in Mumbai. Considering the high demand (it has managed to sell 80 per cent of the 1,814 units at these sites), the company raised prices between 5-14 per cent. In addition to these, HDIL plans to launch 2 mnsqft of residential projects in Mumbai in the current fiscal. A key concern for HDIL was the debt levels, which have come down significantly post the Rs 1,688 crore QIP in July 2009. The company has used over 80 per cent of this to repay debt and bring down its net debt-equity ratio to manageable levels of 0.44. While the residential project launched in different parts of Mumbai will yield revenues in 2010-11 and 2011-12 (the company follows the completion method of accounting) and the increasing prices of TDRs are a plus, the current quarter revenues and operating profit are expected to come down by 64 per cent and 79 per cent to Rs 200 crore and Rs 97 crore, respectively. At the current levels, the stock is expensive.
Indiabulls Real Estate: Indiabulls Real Estate (IBREL) has been able to lease out 0.7 mnsqft of space at the One Indiabulls Centre (Mumbai) at Rs 175 sqft per month. Considering that this is higher than the earlier rates of Rs 150 per square feet, both at the Jupiter and Elphinstone Mills, and future negotiations are likely to be at the new rate, it should boost cash flow of its Singapore-listed subsidiary Indiabulls Properties Investment Trust, which undertakes the leasing operations. A rights issue by IPIT to the tune of Rs 600 crore should also help reduce a part of its Rs 636 crore debt. On the residential sales front, IBREL sold all the units (0.53 mnsqft) of the first phase of its Sky project in Mumbai and has also launched three residential projects next to its One Centre. While the company launched about 9 mnsqft in 2008-09, it is planning to launch about 10 mnsqft in 2009-10, of which 5 mnsqft has already been launched. The company has also been the highest bidder at Rs 1,376 crore for the Mantralaya development project in Mumbai, which could add 1.5 mnsqft to its land bank and about Rs 29 to its NAV. The Rs 1,500 crore IPO of IBREL’s subsidiary, Indiabulls Power, should help it to fund the capital requirements of power projects in Maharashtra.
While the cash flow from the proposed rights issue of IPIT, IPO of its power subsidiary and the QIP (Rs 2,650 crore) of IBREL should help matters, growth in its various businesses will depend on the pace of execution. In realty, while thus far the construction work at its NCR and Chennai work is going on, other properties are facing delays according to an ICICI Securities report. While cash is not an issue for IBREL (it has Rs 3,000 crore worth Rs 75 per share), any delay in execution of it’s residential, SEZs (not yet notified) or power projects could be costly. Analysts peg the sum of parts valuations (power and real estate) between Rs 335-355 indicating that returns of about 21 per cent from the current prices.
Unitech: Unitech has had positive newsflow recently with the government approving Telenor’s (a partner in telecom venture) proposal to hike the stake in Unitech Wireless to 74 per cent. The company has had a good first seven months (March to September) going by the response to its launches aggregating to 21.30 mnsqft of residential and commercial property. The company has managed to book sales Rs 4,000 crore from the sale of 10.11 mnsqft. It plans to launch about 30 mnsqft and achieve about 20 mnsqft of pre-sales in this fiscal, says an analyst. Of the past projects which total an area of 22.31 mnsqft, the company has delivered about a fifth and expects to complete delivery of the rest by March 2011. Improved cash flow from the sale of hotels and plots (Rs 940 crore), two QIPs (Rs 4,400 crore) and Rs 386 crore from Unitech Wireless have helped bring down debt levels to about 0.6 times from 1.7 times last year.
Like DLF, the company is eyeing the affordable housing segment and has launched projects under the Unihomes brand catering to budgets between Rs 10-30 lakh range. After the sale of about 900 units at its Unihomes project in Noida, the company is planning to launch more apartments under this brand. Analysts estimate that the company is likely to have a strong second quarter on the back of higher project and asset sales. Considering the recent spurt in sales at its new launches and balance sheet deleveraging is already factored into the current price and it is trading at a premium to its NAV, expect little upside to flow through in the current fiscal.
Mumbai, Delhi are leading realty market revival
Mumbai, Delhi are leading realty market revival
The Financial Express, October 26, 2009, Page 4
Mona Mehta
Following the real estate sector’s revival, Raheja Universal Private Ltd (RUPL) has outlined a vision for development of 35 million sq ft of realty projects, 23 million sq ft of pipelines and how it foresees spearheading pan-India presence. Ashish Raheja, managing director of Raheja Universal Private Ltd, spoke to Mona Mehta on the ‘realistic pricing’ challenges the company would want to overcome amidst expanding its realty presence to other cities
Could you give details of ongoing real estate projects in the commercial, residential and retail segment? What are your expansion plans in India?
The company is actively pursuing premium residential projects across its core region of operation – Mumbai — and has already sketched plans to launch many new projects across South and North Mumbai.
With strong brand equity and an indelible footprint in Mumbai, we have now embarked on an ambitious venture to replicate our signature in Navi Mumbai and other cities across India, some of them being Goa, Mangalore, Nagpur, Chandigarh and Pune.
The total saleable area of on-going and forthcoming projects is to the tune of 18 million sq ft approximately. This includes residential towers, signature residential towers, office towers, residential complexes, corporate parks and townships.
What is your take on the revival gaining ground in the Indian realty market?
During the second half of 2008, the onset of the economic slowdown led both buyers as well as developers to sit up and take stock of the real estate scenario. In the residential segment, end-users became apprehensive about taking up long-term loan obligations due to job market uncertainties. Moreover, they adopted a ‘wait and watch’ policy to take advantage of consistent price declines. On the supply side, developers became concerned about increasingly limited funding options and a substantial decline in aggregate demand.
Now, there are signs of revival in the real estate sector with the metros Mumbai and Delhi leading the way.
Demand in Mumbai has always been real and with some re-calibration of product and pricing by developers as well as positive steps like bank rate cuts and overall economic stability, buyers are flocking to quality developers as they realise that this might be the best time to buy. The recovery in the commercial and retail segment is a little slower than the residential one but surely reviving.
How many affordable housing projects is Raheja Universal planning to launch?
We believe that the affordability is a critical aspect. However, its relative nature has to be recognised. In Mumbai, as you move from the northern suburbs towards the island city, the value of what is an “affordable” increases drastically. Looking at the extreme shortage of options and land, even a Rs 2-crore apartment in South Mumbai can be termed affordable. Similarly, apartments in the range of Rs 40-50 lakh are affordable in suburbs like Andheri- Malad-Kandivali-Borivali area.
The same cannot be said for other tier-II cities where anything above Rs 10 to Rs 25 lakh may not be termed as affordable.
What are your views on the price correction in the Indian real estate market?
There has definitely been a price correction across certain geographies and asset classes due to the effect of the economic slowdown. This has been more drastic in locations or segments where there has been oversupply and speculation like in Retail and IT. Overall there has been up to 35% drop in prices which even after recovering by 15% is still down by 20%. Developers have accordingly re-calibrated their product to cater to the market.
Tell us about the new land and real estate deals Raheja Universal plans to enter into?
Apart from strategic deals in Mumbai Metropolitan Region, we also have plans for key cities outside Mumbai namely Goa, Mangalore, Chandigarh, Nagpur and Pune.
We are also keenly following the developments in the real estate markets across India to put into place an expansion plan that is well thought out and based on strong positive fundamentals.
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