Real Estate Intelligence Report, Tuesday, February 10, 2009

Gross fiscal deficit to touch 9.5%, says Fitch

Gross fiscal deficit to touch 9.5%, says Fitch
Business Standard, February 10, 2009, Section II, Page 3

Reaffirms local, foreign currency ratings.

While reaffirming India’s currency ratings, Fitch today said that the country’s fiscal health is likely to slip further due to the economic slowdown, a slew of tax cuts and the extra spending announced by the government to boost demand.

It affirmed the country’s long-term foreign currency and local currency Issuer Default Ratings (IDRs) at ‘BB-’, or ‘investment grade’.

While retaining the ‘negative’ outlook on the local currency rating, James McCormack, head of Asia sovereign ratings at Fitch, said, “Fiscal conditions are likely to continue to deteriorate as the economy weakens and the central government response with both tax and expenditure measures.”

India’s economic growth is likely to slow down to 7.1 per cent in the current financial year ending March 2009 from 9 per cent for 2007-08, according to government estimates.

The consolidated general government deficit of the country will reach 9.5 per cent of the gross domestic product (GDP) by March 2009, up from 6.1 per cent a year ago. The deficit estimate takes into account oil and fertiliser bonds, which are “off the balance sheet” or “below the line” items, resulting in a slight increase in government debt, to 77.9 per cent of GDP.

Despite the growing fiscal imbalance, India’s external creditworthiness remains strong, supporting the ‘stable’ outlook on the foreign currency IDR, it added. India faces a modest external financing requirement compared to others in its rating group, and the country has ample external liquidity.

According to Fitch estimates, India’s current account deficit will fall to 1.2 per cent of GDP in 2009-10 from 2.9 per cent of GDP in 2008-09. The growth rates of services exports and remittance inflows are expected to decline with the advanced economies in recession. But, the effects of lower oil prices and a reduction in the growth rate of non-oil imports will be even greater.

The short-term debt on a residual maturity basis, including amortisation payments on medium-term debt obligations, will be $60 billion, well below official foreign exchange reserves (excluding gold) of $241billion.

Despite the growing fiscal imbalance, Fitch indicated that the country’s external creditworthiness remains strong, supporting the ‘stable’ outlook on the foreign currency IDR. The outlook on the foreign currency IDR and local currency IDR remained unchanged at ‘stable’ and ‘negative’, respectively.

Reassuring CSO estimates

Reassuring CSO estimates
The Economic Times, February 10, 2009, Page 14

Disaggregated Numbers Not So Promising

THE Central Statistical Organisation’s (CSO) advance estimate of GDP growth for 2008-09 — 7.1% — is of interest for two reasons. One, it is in line with recent estimates made by two respected entities: the RBI (7%) and the Prime Minister’s Economic Advisory Council (7.1%). Two, they provide much-needed solace that GDP growth would not decelerate to below 7%. Of course, these are only advance estimates and cannot be taken as the last word. Last year, for instance, advance estimates placed GDP growth for 2007-08 at 8.7%. However, quick estimates revised the growth rate upwards to 9%. This time around, it is unlikely we will see the numbers being revised upwards; nevertheless to the extent the CSO is best placed to make macro estimates, their numbers certainly carry greater credibility.

That’s the reassuring part; what is less reassuring emerges from an examination of the disaggregated numbers. First, agriculture is projected to grow at just 2.6%, down from 4.9% the previous year. Given that close to 65% of the country’s labour force is dependent on agriculture, a slowdown here means more human distress than what the numbers tell. Second, manufacturing growth is expected to halve — from 8.2% the previous year, growth is expected to be just 4.1% in 2008-09. Agreed, index of industrial production numbers released till November 2008 had already given us a grim warning. Nonetheless, CSO numbers that confirm the gloom on the manufacturing front are not a happy augury. On the services front, CSO numbers bear out the slowdown in construction — down from 10.1% last year to 6.5% this fiscal. Predictably, ‘community, social and personal services’ are expected to record a dramatic increase — from 6.8% last fiscal to 9.3% this year. But a large part of the increase here is probably on account of the Sixth Pay Commission largesse and NREGS payouts. So is there no silver lining? Yes, there is. The rate of gross fixed capital formation has held up; indeed it is largely higher at 32.1% as against 31.6% last fiscal. Not much, perhaps, but in gloomy times, good enough.

Range-bound equities

Range-bound equities
The Economic Times, February 10, 2009, Page 14

Investors Face Difficult Choices

MOST panellists at the ‘Equity Outlook- 2009’ discussion hosted by ET Now, ET’s upcoming business news channel, were of the view that the stock market would be range-bound, and 2009 would most likely end at 8,000-8,500 for the sensex. The only silver lining, if one can call it that, was the near consensus that India would be among the first to come out of the slump and that the stock market would look up much before the real economy turned a corner. There was, however, no consensus on when that turnaround could happen, though some expected the outlook to improve in early 2010 but warned things might get worse before they got better. Clearly, equity investors face difficult choices. Though, equities offer a promise of decent gains over a three-to-five-year horizon, in the short term, there are significant risks. There would be many 20-30% bear market rallies, one of which, hopefully, would eventually turn into a sustained stock market upturn. If an investor chooses to wait for a definite revival, she is sure to miss out on the initial part of the rally. On the other hand, if she invests in this volatile market, the returns could be flat or, in the worst-case scenario, suffer an erosion that could be as deep as 20% from the current levels.

One way out of this dilemma is to stay clear of equities for a while and instead invest in debt, bank deposits or mutual funds. Bank deposits still offer a decent 8% interest while debt funds can give much higher returns if interest rates decline further, which is a distinct possibility. With inflation likely to fall sharply in the near future, debt would in fact yield very high real returns, besides providing capital protection. The returns from debt investment would also make up partly for the initial rally investors may miss out on because of a cautious approach. Also, mid- and small-cap stocks tend to join the rally when the front-line companies and the large caps have already run up sharply. Indeed, some of the panellists did not see the small/mid cap stocks going anywhere for the next 3-4 years. Therefore, a prudent mix of large and small/mid cap stocks can deliver a good return even if the investor joins the rally when the blue chips have already travelled some distance.

New Companies Bill likely to see stronger auditing regulations

New Companies Bill likely to see stronger auditing regulations
The Financial Express, February 10, 2009, Page 2

Neha Pal

In the wake of the Satyam accounting fraud, the ministry of corporate affairs has woken up to the need of stronger auditing standards and feels that the new Companies Bill would provide a stronger regulatory platform since the Centre would notify the same as part of the bill. Currently, there is no provision for auditing standards and it is up to the Institute of Chartered Accountants of India (ICAI) to decide on the implementation of both the accounting and auditing standards.

Jitesh Khosla, joint secretary, ministry of corporate affairs told FE , “As per the new Companies Bill, 2008, there is a provision that the auditing standards will be prepared by the Centre.

This would be quite relevant considering the fact that the Satyam fraud has raised questions about auditing standards and the role of auditors”.

Ved Jain, former president, ICAI said, “I don’t think the government needs to form a separate regulatory body to avoid cases like Satyam, since the Satyam episode is nothing but an accident. After the Enron episode in the US , the Public Company Accounting Oversight Board was formed and the Sarbanes Oxley Act was also introduced and Satyam was covered by both”.

The new Companies Bill, currently before the Parliamentary standing committee on finance, specifically provides for a clause, which states, “The Centre may, after consultation with the National Advisory Committee on Accounting and Auditing Standards, by notification, lay down auditing standards. Provided that until any auditing standards are notified, any standard or standards of auditing specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing standards. The Centre may, after consultation with the advisory committee, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditors’ report shall also include a statement on such matters as may be specified therein”.

Pledged share funds under lens

Pledged share funds under lens
The Economic Times, February 10, 2009, Page 1

Sebi To Seek Details On End Use Of Money Raised Via Pawned Shares

Ashish Rukhaiyar & Reena Zachariah MUMBAI

THE Securities and Exchange Board of India (Sebi) is planning to make it compulsory for promoters to disclose the end use of funds raised through pledging their shares with financiers, a move intended to increase transparency and provide more information to investors.

Such information would help investors find out if the money has been used to fund comparatively risky activities like property speculation, unrelated diversification or personal expenditure. The regulator is also considering putting in place rules to prevent misuse of the holding company structure by promoters to get around the disclosure requirements. Promoters often hold shares in the listed company through a privately-held offshoot. Technically, it is possible for them to raise money by pledging the equity of the unlisted company, which holds the listed company’s shares.

Though promoters must disclose the quantum of pledged shares in the listed entities, they need not reveal pledged shares in their holding companies, which in turn have a stake in the listed company. Many promoters, market participants say, may resort to the holding company structure to circumvent the norms on disclosure of pledged shares.

Market watchers said the data on pledged shares put up on the stock exchange websites do not reveal the full picture. Brokers say the practice of pledging shares is not new. What concerns investors is the purpose for which the funds were raised.

Most promoters who have disclosed details of their pledged shares have said the money was raised for meeting working capital requirements. But brokers say there are many instances where the funds were used by promoters to raise their stakes in the listed entities through creeping acquisition, through conversion of warrants or simply to prop up the stock price. It is believed that some promoters also used this route to acquire personal assets.

More measures in interim Budget, hints Tendulkar

More measures in interim Budget, hints Tendulkar
The Economic Times, February 10, 2009, Page 7

New Delhi: The government is likely to announce more fiscal and monetary measures in the interim Budget to stimulate demand in the economy, PM’s EAC chairman Suresh Tendulkar said at the roundtable on economic outlook, 2009-10, organised by PHDCCI on Monday. RBI, on its part, is expected to bring down interest rates further after the vote on account, which would increase credit outflow and enhance investment.

CSO forecasts GDP growth at 7.1%

CSO forecasts GDP growth at 7.1%
Business Standard, February 10, 2009, Page 2

The predictio is the the slowest in last six years

India’s economy is projected to grow 7.1 per cent in the current fiscal, the slowest in six years, due to the adverse impact of the global economic crisis, especially on the manufacturing sector.

Economists are calling the preliminary estimates by Central Statistical Organisation (CSO) “optimistic” because industrial production and export growth have deteriorated in the last four months.

Pointing to early signs of slowdown, like investment growth — as measured by gross fixed capital formation (GFCF) — dropping to single digits for the first time in six years, experts have called for additional fiscal stimulus to revive demand. In addition, they have urged the Reserve Bank of India to lower interest rates as headline inflation is expected to drop to the 3 per cent level by March 2009.

Based on today’s estimate, the government expects the growth rate in the second half of the current financial year at 6.4 per cent as the economy grew 7.8 per cent in the first half ended September 2008.

“Key numbers like capital formation point to slowdown. Fiscal spending needs to be raised,” said Govinda Rao, director, National Institute of Public Finance and Policy (NIPFP). He expects the economy to expand 6.5-7 per cent in the current fiscal.

Asia’s third largest economy grew at an average rate of 8.9 per cent for four years till April 2008. In 2007-08, it grew 9 per cent.

“This (7.1 per cent projection) does appear a bit optimistic given that industrial production, exports and tax collections have seen a sharp deceleration and in some cases a contraction,” Rohini Malkani, economist with Citi India, wrote in a research note. She predicts that the economy will grow 5.5 per cent in fiscal 2009-10.

Six out of eight components of Gross Domestic Product (GDP) — the sum of goods and services produced in the country— showed lower growth compared with the 2007-08 figures. Only mining and quarrying as well as community, social and personal services are expected to post higher growth rates.

Agriculture, expected to register robust growth because of increased acreage for winter crops, is projected to grow 2.6 per cent in 2008-09, as against 4.9 per cent in the previous fiscal. The Prime Minister’s Economic Advisory Council’s “Review of the Economy 2008-09” had projected a growth rate of 3 per cent for agriculture.

Manufacturing is expected to grow only 4.1 per cent as against 8.2 per cent in 2007-08. The services sector, which contributes more than 55 per cent to India’s GDP, is projected to grow 9.6 per cent, much higher than the estimates by non-government research agencies.

GFCF, seen as a proxy for investments, dropped to single digits in 2008-09. This is cited as evidence of slowdown as mostly private sector investments drove 60 per cent of India’s growth rate in 2007-08.

In order to compensate for the likely drop in private sector investment, the next government will have to increase spending, say experts.

“If we continue the fiscal stimulus into the next year, our economy will not be slowing as much as the rest of the world,” said Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

The advance estimate by the CSO is followed by a quick estimate and a revised estimate. The final figure comes two years after the financial year is over. With overall growth slowing, the per capita income based on 1999-00 prices is expected to grow 5.6 per cent to Rs. 25,661 in the current fiscal, as against 7.6 per cent in the last fiscal. Per capita income in today's prices is estimated at Rs. 38,084 in fiscal 2008-09, an increase of 14.4 per cent.

Seven wonder

Seven wonder
The Financial Express, February 10, 2009, Page 6

CSO brings some cheear

Central Statistical Organisation’s (CSO) efforts and official data delivery systems are improving on reducing the time lag, though quality can only be judged later. There have always been discrepancies between CSO’s advance, quick, provisional and final estimates, but invariably at decimal point. The overall story doesn’t change and, ahead of schedule, CSO has now provided advance real GDP growth estimates of 7.1% in 2008-09, compared with 9.0% in 2007-08. Breakdown in four quarters isn’t available yet. However, the background is growth of around 7.5% in the first half of 2008-09, implying growth of around 6.5% in the second half. The global shock didn’t show in the first half. And with zero (indeed, negative) growth in exports, bad news on IIP (index of industrial production) and repeated stories of job losses, growth of 5% or below—not 6.5%—was expected in the second half of 2008-09. Nominal GDP is converted to real GDP using GDP deflators. Unless something is non-transparent on these deflators, any dire prognosis is wrong and India is far better placed than believed. Thanks to monetary tightening, growth had dropped from 9% to 7.5% and CSO figures suggest only 0.5% has been shaved off because of the global impact. This compares with the 1.5 to 2% shaving off earlier expected by the Planning Commission.

Real per capita income growth of 5.6% in 2008-09 may not be as high as 7.6% last year, but is significant. What has driven 7.1% growth? It isn’t agriculture, forestry and fishing, which has slowed to 2.6% from 4.9% last year. Nor is it industry, narrowly defined. Construction has had a role. However, 7.1% has been largely driven by the 10.3% growth in trade, hotels, transport and communications (primarily railway freight and telephone connections) and the 8.6% growth in finance, real estate and business services. Incidentally, again contrary to expectations, the investment story isn’t that bad either. In current prices, gross domestic capital formation increased to 34.6% from last year’s 34% (constant price figures are a little lower). If these figures are right and aren’t dramatically revised downwards later, the impact of global recession on India hasn’t been much; remember, in this context it is too early for either fiscal or monetary stimuli to have registered any positive effects. A case can be made out for time lags, to the effect that the shock will show up in 2009-10. However, that’s not convincing. Instead, given these CSO numbers, growth projections for 2009-10 should also now be revised upwards, from 5% to 7%. CSO has probably achieved more in reversing sentiments than the government’s monetary and fiscal policy combined.

GROWTH INTACT

GROWTH INTACT
The Economic Times, February 10, 2009, Page 1

INDIAN ECONOMY SEEN GROWING 7.1% DESPITE SLOWDOWN

Our Bureau NEW DELHI

IT’S 7.1 and not out. The Indian economy will turn in the second-fastest growth rate in the world after China’s 8% for 2008-09, according to the advance estimates of national income released by the Central Statistical Organisation (CSO). To boot, India’s GDP is expected to sustain or improve on this growth rate next fiscal, according to the Prime Minister’s Economic Advisory Council. With a growth rate of 7.1% this fiscal, the economy would have turned in a spectacular 8.5% compound growth rate over 2004-05 to 2008-09, coinciding with the term of the present government.

CSO’s forecast of 7.1% in the current fiscal, the lowest in the last six years, is higher than those by most non-government estimates. The economy had grown 7.8% in the first half, suggesting a sharp slowdown in the second half. Growth has been fuelled by sustained investment and still-buoyant services, according to the statistical agency. Growth rate in the manufacturing sector halved from 8.2% in 2007-08 to 4.1% in 2008-09.

The rate of growth is forecast to decline in all sectors barring two—mining and quarrying, and community, social and personal services. The latter is expected to benefit from higher government expenditure on social schemes as well as the Sixth Pay Commission award.

While the government saw this higherthan-expected growth as a positive for the future, some non-government analysts were sceptical about the 7.1% growth and found the numbers too optimistic. “This is indeed a very positive development. A sure sign that the sun is coming out from behind the clouds,” said economic affairs secretary Ashok Chawla.

Economist Saumitra Choudhuri expects economic momentum to pick up in the coming months and the growth rate to improve in 2009-10 while a majority of private sector forecasts say just the opposite. Citi, for example, maintains that growth in 2009-10 will be just 5.5%.

Two months still remain in the current fiscal and the last quarter has the highest weight in the GDP calculations, a fact reiterated by the country’s chief statistician Pronab Sen. “The growth rate in the last quarter will decide the growth rate for the current fiscal as it has a weight of more than 35% in the total gross domestic production for the year,” he told ET.

“The 7.1% growth suggests that economy is expected to grow at 6.3% in the second half of the fiscal. The increase in government spending—the government has announced an additional expenditure of Rs 3 lakh crore for the current fiscal through two supplementary grants and two fiscal stimulus packages—will have a cushioning effect for the economy and will partly offset the slowdown in private consumption,” said Crisil principal economist DK Joshi.

Indeed, increased government consumption is expected to partly make up for the decline in the rate of growth in private consumption, which is projected to drop to 6.7% in the current fiscal from 8.5% the year ago. Meanwhile, the growth rate of government consumption is expected to rise from 7.4% to 16.7%.