Real Estate Intelligence Service, Wednesday, November 11, 2009

Sops to stay till West grows enough to boost exports: FM

Sops to stay till West grows enough to boost exports: FM
The Economic Times, November 11, 2009, Page 9

Pranab Mukherjee emphasises boosting farm productivity through different means for a sustained growth in domestic demand

Our Bureau NEW DELHI

FINANCE minister Pranab Mukherjee, who has begun work on the budget for the next fiscal, said on Tuesday his government would continue with the stimulus sops till developed economies and wealthier nations see robust growth. The priority for the government would be to invest heavily in boosting farm productivity, which would lead to a sustained growth in domestic demand.

Speaking at the India Economic Summit on Tuesday, Mr Mukherjee said the government would retain its strategy of firing up rural demand as it was not possible to compensate the fall in exports to rich countries by diversifying into other markets overnight. “There is a need to generate domestic demand till a robust recovery takes place in developed markets....60% of India’s exports go to the EU, North America and Japan. We cannot diversify market overnight,” said the minister.

Exports account for a fifth of India’s over $1.2 trillion economy. There has been a visible improvement in exports since September. Official data showed that in the first half of the current fiscal, exports fell 28.5% to $77.9 billion from $108.9 billion in the same period last year. But in September, the fall was limited to 13.8% year-on-year at 13.6 billion, which was an improvement from the steepest decline of about 39% in May.

Mr Mukherjee said that agriculture output cannot be increased by merely spending more money. There has to be a linkage between the innovation at research labs and universities and the farmer so that yield per hectare increases

“Skill and productivity of farmers should increase as agriculture land is limited and population is growing....We need massive investments in agriculture,” said the minister.

Mr Mukherjee also said he expected the economy to return to a high growth trajectory of 9% by 2011-12. “The economy is expected to grow at 7% next fiscal and 8% after that. Thereafter, it will gather more momentum. We will be able to reach 9% or more by the end of the eleventh five year plan,” the minister said. The Prime Minister’s Economic Advisory Council has estimated that the economy, which expanded 6.7% last fiscal, may grow between 6.25% and 6.75% this financial year despite bad monsoon affecting farm sector output.

Exiting monetary policy stimulus a challenge: RBI

Exiting monetary policy stimulus a challenge: RBI
The Economic Times, November 11, 2009, Page 9

MUMBAI: RBI, which has begun exiting the easy money policy, on Tuesday said it found supporting growth without compromising financial stability a challenge, even as the government continues to be cautious about ending stimulus. An end to easy money policy could lead to higher cost of funds, which could hurt investments and stunt growth. “For the Reserve Bank, the challenge is to support the recovery process without compromising factors like the financial stability of economy,” RBI deputy governor Shymala Gopinath said at an IBA-organised seminar here. In the short term, exiting from the monetary stimulus, managing the capital flows and revival of domestic demand and consumption would also throw challenges to the policymakers, Mr Gopinath said.

GST code released; April 1 launch unlikely

GST code released; April 1 launch unlikely
The Financial Express, November 11, 2009, Page 1

fe Bureau, New Delhi

India moved a giant step closer to its most radical indirect tax reform in many decades with a panel of state finance ministers unveiling a discussion paper on the goods & services tax (GST), a new levy that would replace most indirect taxes at central and state levels.

The paper, described as “initial,” said GST would have two components—central and state—with both applicable on a largely uniform base across the country with minimal rate variations and as few exemptions as possible.

However, with several issues remaining unresolved, there were clear indications from both Union finance minister Pranab Mukherjee and chairman of the empowered committee of state finance ministers Asim Dasgupta that introduction of GST would miss the proposed April 1, 2010 deadline.

The discussion paper amounts to a significant compromise on what experts think an ideal GST structure should be, as it kept petroleum goods and alcoholic beverages outside the purview of the proposed tax. Also, purchase tax on foodgrain would be kept out, although a tax on sales by definition should be subsumed in GST. Octroi, a cumbersome levy that exists in Maharashtra, the most industrialised state in the country, would also be outside the GST ambit.

The paper suggests a dual rate structure for goods at the state level and expects the Centre to follow suit. Services, however, will be taxed at a single rate. The paper shies away from prescribing tax rates. It does not describe unambiguously the taxation and revenue-assigning procedures for inter-state services like telecom and financial intermediary services. Neither has it spelt out the norms for inter-state transactions of services.

The panel of state finance ministers has prescribed the adoption of an IGST on inter-state trade, which will be administered by the Centre. IGST will effectively be an instrument for transfer input credit from one state to another, rather than a cost to businesses. The transfer of revenue between states would be on a netted basis, with fixed periodicity.

The GST structure outlined by state finance ministers would now be critically examined by the Centre and other stakeholders, including industry, before the Centre initiates a process to make the requisite Constitutional amendments and other legal changes.

“The first discussion paper of the empowered committee has come today, which will be followed by discussions with trade and industry. We at the Union finance ministry also need to look at it, and there are also legislations and Constitutional amendments required. Completing all these processes will take time. We will have to have a full-fledged GST,” Mukherjee said.

Significantly, some states still are not fully on board, another stumbling block for implementation of the tax. “There are still some difference amongst states… each state has its own local nature and problems,” Dasgupta said.

The discussion paper gives more leeway on the threshold for the tax. It has called for a uniform threshold of Rs 10 lakh for goods and services at the state level, but proposed adequate compensation for states in the northeastern region and special category states that have a lower threshold prevailing under the extant value-added tax regime.

For Central GST, it has proposed that the threshold should be kept in sync with the current position. For goods, it may be kept at Rs 1.5 crore and can be appropriately high for services. “Such multiple thresholds will be highly problematic for a harmonised GST,” said Ernst & Young partner Satya Poddar.

“The GST structure is more or less in line with the expectations of trade and industry. However, a re-look is needed into certain areas such as the exclusion of petroleum products from GST as well as other open areas like the purchase tax. The other important part of GST, the rate structure, also needs to be finalised,” said PricewaterhouseCoopers executive director R Muralidharan.

RBI keeps vigil on surplus liquidity

RBI keeps vigil on surplus liquidity
The Financial Express, November 11, 2009, Page 1

fe Bureau, Mumbai

The Reserve Bank of India (RBI) is monitoring the liquidity situation closely and will take necessary action as and when required, RBI deputy governor Shyamala Gopinath said on Tuesday. She was speaking at the India China Financial Conference 2009, organised by the Indian Banks’ Association.

“We are monitoring the liquidity situation closely and depending on the situation, will take action,” said Gopinath on asking if the central bank would drain the excess liquidity in the system through the use of open market operations. Talking about the low credit growth in the banking system, Gopinath said the lower growth may not be reflecting true demand conditions in the economy.

“Low credit growth is a concern for the RBI. One has to take into account other sources of finance for companies. We are seeing companies raise money through debt markets, bonds, commercial papers, external commercial loans and from the equity market,” she said.

Highlighting the strength of the Indian banking system amidst global financial crisis, she said it is noteworthy that notwithstanding the pressures of a slowdown, the net NPA to net advances ratio increased marginally to 1.1% as on March 2009, from 1% recorded in the year-ago period.

Significantly, gross NPA to gross advances ratio remained constant at 2.3 %. Thus, in terms of the two crucial indicators-capital and asset quality-the Indian banking sector has exhibited resilience amidst testing times.

It is noteworthy that contrary to the trend in some advanced economies, the leverage ratio (Tier-I capital to total assets ratio) in India has remained high, reflecting the strength of the Indian banking system. The growth rate of consolidated balance sheet of banks decelerated to 21.2% in 2008-09 from 25% a year ago. The growth rate was, however, higher than the nominal gross domestic product (GDP) (at current market prices) resulting in a higher ratio of assets of banks to GDP, she said.

On credit growth, Gopinath said, overall credit demand from the manufacturing sector slowed down reflecting a decline in commodity prices and drawdown of inventories. Two, corporates were able to access non-bank domestic sources of funds and external financing - which had almost dried up during the crisis - at lower costs. Three, unlike in the previous year, oil marketing companies reduced their borrowings from the banking sector as oil prices moderated. Four, a significant amount of bank finance has gone to the corporate sector through banks’ investment in units of mutual funds. Five, banks have also reined in credit to the retail sector due to the increased risk on account of the general slowdown. This credit retrenchment was more pronounced in the case of foreign banks and private banks, she explained.

On the 70% provision coverage norm for banks, Gopinath said banks can maintain more than 70% as per their asset quality. On whether RBI is looking at increasing the minimum provisioning ratio for sub-standard and other such asset buckets, she said RBI is looking at the resilience of banks and wants them to set aside profit for future buffer.

Talking about inflation, Gopinath said India is facing a challenge of an upturn in inflation, which has started heading upwards after staying at very low levels.

“The timing of the withdrawal of monetary policy might diverge considerably between developed and emerging nations. We really need to consider the exit from expansionary policy because we cannot be an outlier here,” said Gopinath. The fiscal consolidation is also likely to pose a major challenge for the government in the future, but as such the current account and fiscal deficits are manageable, she added.

Double-digit growth by next year: Nasscom

Double-digit growth by next year: Nasscom
The Hindu Business Line, November 11, 2009, Page 3

‘We have to move beyond 6 major cities to grow’.

Our Bureau, New Delhi

With a turnaround in global business sentiment, the Indian IT sector is expected to return to double digit growth by the next financial year, according to the Nasscom President, Mr Som Mittal.

“I think we are already seeing the changes in the trends that we had anticipated. While the first quarter was relatively flat, the vector is still right. This year, the growth is anticipated to be around 4-7 per cent and double digit growth will be reached by the next fiscal,” Mr Mittal said on the sidelines of the India Economic summit on Tuesday.

Mr Mittal pointed out that that while there were some positive signs, the industry might not reach the levels of growth it had posted till 2007.

“We had growth rates of 30 per cent for a whole decade. But it is very difficult to sustain that. In the next 10-12 years, we will grow at a compounded annual growth rate of about 14 per cent,” he added.

Action plan

Mr Mittal said that to achieve this growth, Nasscom (the National Association of Software and Services Companies) had charted out an action plan.

“We would like to increase our industry size, which was $50 billion last year to $225 billion. To reach this, we have to move beyond doing work in just the top six cities and move to the 43 other cities identified,” he said.

He added that hiring was starting to pick up again and by January, hiring levels should be “back to normal”.

Managing capital inflows will be a big challenge: RBI

Managing capital inflows will be a big challenge: RBI
The Hindu Business Line, November 11, 2009, Page 4

Premature exit from expansionary policy can derail fragile growth: Shyamala Gopinath.


Our Bureau, Mumbai

The Reserve Bank of India is concerned about the volatility of capital inflows and its impact on the financial stability of emerging economies like India.

With India expected to tighten rates ahead of other countries, there is a possibility that the country will face a deluge of inflows due to the higher interest rate differential.

“Capital flows have resumed on the promise of India’s growth prospects. Under this backdrop, problems associated with a synchronous tightening of monetary policy, viz., exit from the expansionary policy earlier than others, can be especially relevant for emerging market economies like India. Here again one has to manage the trade off between the costs and benefits to the economy and that of preserving financial stability,” said Ms Shyamala Gopinath, Deputy Governor, RBI, while addressing the third India-China Finance Conference, here on Tuesday. Last year, following the global financial crisis, the Indian market had witnessed large-scale withdrawals by foreign institutional investors. However, from January this year, the FIIs have been net investors to the tune of $13 billion.

In fact, the capital account balance turned negative during the third quarter of 2008-09, the first time since the first quarter of 1998-99, mainly due to net outflows under portfolio investment, banking capital and short-term trade credit.

She pointed out that most of the developed countries do not face an immediate risk of inflation unlike India, which is actively confronted with an upturn in inflation.

“There are emerging signs of underlying inflationary pressures. The inflation based on different Consumer Price Indices continues to remain stubborn at double digits and the prices of food articles and essential commodities in WPI increased substantially on year-on-year basis,” she said.

In the second quarter Review of the Monetary Policy, the Reserve Bank of India had revised the inflation projection upward to 6.5 per cent from 5 per cent.

She said the challenge for the central bank is to support the recovery process without compromising on price stability.

“Premature exit will derail the fragile growth but a delayed exit can potentially engender inflation expectations. The balance of judgment at the current juncture is that it may be appropriate to sequence the ‘exit’ in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored,” she said.

Explaining the reasons for the fall in non-food credit growth to 4.3 per cent in the current financial year, Ms Gopinath said lower credit demand from the manufacturing sector, corporates getting easier access to non-bank domestic sources of funds and external financing at lower costs, and reduced borrowings from oil marketing companies has led to lower credit growth.

Speaking at the event, Dr Ma Delun, Deputy Governor, People’s Bank of China, said that the Chinese central bank will maintain an accommodative monetary policy while closely monitoring global economic developments.

Delayed exit may stoke inflation: RBI

Delayed exit may stoke inflation: RBI
Business Standard, Section II, Page 3

BS Reporter / Mumbai

The Reserve Bank of India (RBI) on Tuesday said that an exit from an easy monetary policy must be calibrated in a manner that kept inflationary expectations well-anchored.

Speaking at the India-China Financial Conference, RBI Deputy Governor Shyamala Gopinath said that for emerging economies, such as India, the challenge was not to repair the financial sector or to curb excessive growth relative to the real sector, but to bring stability with a sound oversight to further the task of financial empowerment.

Going forward, managing capital flows and fiscal consolidation would be major short-term challenges for the country, Gopinath said. “The case for return to a path of fiscal consolidation, when there are convincing signs of recovery, need not be over emphasised,” she added.

With reform of financial institutions across the world on the agenda, the trade off between the high quality capital and the cost in meeting the genuine financing needs of the economy would have to be finalised.

While identifying systemically important entities, in addition to their size, there is a need to assess interconnections and complexity while calibrating higher capital and liquidity requirements, according to her.

She said while the issue of leverage has been sought to be addressed for banks, there was an equally pressing need to address this in the larger context of leverage by non-banking entities through banks and funding markets, which may be currently out of regulatory oversight.

“Prudential frameworks will also need to address the concerns regarding intermediation in foreign currency through the financial sector, which posed systemic risk in the recent crisis,” she added.

Speaking on reforms in accounting standards, Gopinath said there was a need to reduce pro-cyclicality in accounting in the case of fund-based leveraged financial entities to reduce a build-up of systemic risk. “For this purpose, accounting standards must promote provisioning based on expected losses, that is, to permit a forward looking approach. On the use of fair value, it must be recognised that this system depends on continuous availability of market prices and liquid markets.”

Govt to tighten rules for FDI approvals

Govt to tighten rules for FDI approvals

Surajeet Das Gupta / New Delhi

FIPB powers to be expanded, automatic route curtailed.

The government has finalised sweeping changes to the country’s foreign direct investment (FDI) policy to account for increasing concerns voiced by security agencies.

A 21-member committee of secretaries (CoS) chaired by Cabinet Secretary K M Chandrasekhar is meeting on 17 November to discuss key changes, some of which were incorporated in guidelines at the end of 2007 that were subsequently discussed by inter-ministry groups.

These new guidelines include amending the automatic approval list by significantly expanding the role of the Foreign Investment Promotion Board (FIPB), the nodal agency for clearing FDI proposals. FIPB will now scrutinise proposals in which funds are routed through tax havens (like Mauritius) and those that fall under a proposed “sensitive list” even if they are under the current automatic approval route.

FOREIGN DIRECT INVESTIGATION

Some key changes under discussion in FDI policy

* FIPB approval mandatory even if the sector attracts automatic approval, if the investment is on the sensitive list or is from a tax haven
* List of country-specific FDI restrictions to be expanded beyond only Pakistan if required
* Sensitive sectors include seaports, airports, aviation, telecommunications, ISPs international long distance , refining, petroleum, hydrocarbon exploration, shipping, roads, real estate, defence, pharmaceuticals
* Scrutiny of FDI proposals in the sensitive list by the Committee of Secretaries on Financial Investment, which will have representatives from security agencies
* “Trigger list” for scrutiny will include investors, sectors and locations (like Jammu & Kashmir)
* A threshold FDI criterion for further scrutiny by ministries, regulators
* “Dynamic checks” to allow for post-approval cancellation
* Foreign Investments (National Security Concerns) Act to incorporate all powers for the central government to ensure national security is not compromised by FDI

FIPB, which comprises members from most key ministries, will also consider foreign personnel and the requirement for imported labour in FDI applications before giving approval. The issue of foreign workers has recently been a source of controversy, with the government objecting to Chinese blue-collar workers coming into India on tourist visas instead of business visas to work on high-tech construction projects.

The CoS, comprising home, foreign, defence, finance, various administrative ministries and the PMO among others, will also review and expand locational restrictions on foreign companies. Currently, foreign companies working on hydro-electric projects are not permitted within a 50 km belt in border states. Now, each state will have a clearly demarcated area within which FDI projects will not be allowed. These restrictions will include sensitive coastal areas.

The government is also planning an FDI “trigger list” — comprising investors with suspected illegal sources of funds or linkages, sensitive areas (like aviation, telecommunications etc) and sensitive locations (like Jammu & Kashmir) — for special scrutiny.

It also plans to put in place a threshold FDI criterion that will be fixed by various administrative ministries as well as the central bank and the stock market regulator. under which any FDI proposal above this level would also trigger scrutiny.

A “dynamic checks” system will also operate after an FDI proposal is approved, if subsequent developments require permission to be blocked. A designated agency will be set up and equipped with a database to scrutinise FDI approvals.

There are also plans for a Foreign Investments (National Security Concerns) Act which will incorporate all powers for the central government to ensure national security is not affected by inflow of foreign investment. Calls for deeper scrutiny of FDI investments started in 2006, when the National Security Council secretariat came out with a paper on the potential threat to India’s national security from FDI.

The matter was discussed at various meetings taken by the CoS between 2007 and guidelines for scrutiny of foreign investors were drawn up at the end of that year. Subsequently, members from key ministries such as defence, industries, home and corporate affairs formed groups to assess specific threats in various sectors and locations, and changes required in the laws. A draft paper incorporating all these suggestions and specific measures will come up for discussion in the 17 November meeting.