Finance panel charts course to fiscal health
The Economic Times, December 31, 2009, Page 9
Kelkar-Led Commission Proposes Hike In States’ Share Of Tax Revenues
Our Bureau NEW DELHI
THE Thirteenth Finance Commission submitted its report on Wednesday, recommending a five-year fiscal consolidation road map and a higher share for states in the tax revenues collected by the Centre over the next five years ending 2015.
The commission, chaired by former finance secretary Vijay Kelkar, has recommended a higher devolution to states from the current 30.5%, and a new methodology to deal with the off-budget expenditure, especially oil bonds.
“The recommendations (of the panel) will be reflected in the Budget,” finance minister Pranab Mukherjee told reporters, but declined to give details.
The government said it would table the report of the 13th Finance Commission in Parliament in due course.
The President constitutes the Finance Commission under Article 280 of the Constitution. The commission’s chief task is to recommend a formula for distribution of tax revenues between the Centre and the states and amongst the states themselves every five years.
Currently, the share of states and Union Territories in central taxes is 30.5% of the shareable taxes of the Centre. Mr Kelkar declined to give details on the revenue share. But a government official, who did not wish to be named, said it is proposed to be increased by about 2-3%.
The recommendations are unlikely to meet states’ expectations. State governments had asked for an increase in their share in the divisible pool of the central taxes to 50%. They had also demanded that all central surcharges and cesses be included in the divisible pool.
The recommendations are based on revenue neutral rates keeping 2008-09 as the base year. “Our assumption is revenue neutral. There will not be any impact as rates would be neutral, and the revenue of states and the Centre would be protected,” Mr Kelkar said.
The report, which will be made public only after it is tabled in Parliament, has refrained from recommending a rate for the proposed goods and services tax (GST). “There’s no recommendation on the tax structure. It’s on revenue sharing between the Centre and the states ... rates were not talked about, it’s the revenue sharing,” Mr Kelkar said.
The report will be given by the President to the finance ministry, which will take it up with the Cabinet. The Cabinet will then adopt the report after which it will be tabled in the Budget session of Parliament.
The commission’s suggestions, which will cover a five-year period starting from April 1, 2010, are not binding, but they are generally implemented by the government.
The shareable central taxes include corporation tax, income tax, wealth tax, Customs, excise duty and service tax. The taxes that are not shared with states include some cesses, like for education and road.
States are budgeted to get Rs 1.64 lakh crore as their share of taxes in the current fiscal, up only marginally from revised Rs 1.60 lakh crore in 2008-09.
Thursday, December 31, 2009
Finance panel charts course to fiscal health
Time not ripe to exit stimulus measures: FM
The Economic Times, December 31, 2009, Page 9
NEW DELHI: India will have to strike a balance between the needs of the economy and urgency to improve government’s finances, finance minister Pranab Mukherjee said on Wednesday. The fiscal stimulus measures announced in the last financial year, which included cuts in indirect taxes such as excise duty and service tax and extra borrowings-funded increased expenditure, had boosted the slowing economy. The measures, however, pushed up fiscal deficit to 6.2% in the previous fiscal and a projected 6.8% in the current year—a 16-year high. The finance minister pointed out that it is too early to comment on the timing of the rollback of stimulus measures. “Exiting from the stimulus packages now may not be the correct approach because if the world economy collapses, the depression would be deeper,” Mr Mukherjee said.
Where are the skilled Indians?
Where are the skilled Indians?
The Economic Times, December 31, 2009, Page 12
The sooner we build quality educational institutions that can churn out professionals to help propel economic growth to 8-9%, the sooner we can eradicate illiteracy and poverty, says Neeraj Kaushal.
THERE are two prevalent perceptions about India in the west. On the one hand, people scoff at India’s failure to reduce poverty and illiteracy in a substantial manner even as many Asian countries have made successful strides into lowering both. On the other, there is widespread admiration, bordering on envy, about the nation’s immense pool of highly-skilled professionals who have become important players in the global economy. In the western view, there are two Indias: the Poor and Illiterate India, and India of its highly-skilled professionals.
It is the second India that is focus of this column. In the last two decades, the number of skilled Indian professionals working abroad has grown many times. Indians are the most educated ethnic group in the US and one of the richest too. A quarter of all H1B visas for professionals to work in the US are issued to Indians. Many industrialised countries like Canada, Germany, the UK, the US and Japan have been competing to attract skilled workers from India and other developing countries. India, along with other large emerging economies, has become a major source of skilled workforce for several industrialised countries.
Ironically, India does not have enough high-skilled professionals to fulfill its domestic needs. Years of brain drain may have played a tiny role in this. But the primary cause of skill shortage is the sudden surge in growth in the nation’s economy and increased investments in several sectors. Indeed, there is some evidence of the start of a reversal of brain drain in recent years as many professionals return to India after a stint abroad for better economic opportunities.
Yet, skill shortages remain acute in several areas. India may be a major source of talent for the global economy, it produces far less talent than what is required to meet the needs of its fast-expanding economy. Consider this: Indian engineering schools produce around 12,000 new civil engineers a year. The country needs at least 70,000 additional civil engineers to meet its massive infrastructure needs! Currently, Indian engineering schools produce civil engineers that meet just about a sixth of the industry’s additional needs. These shortages have become the biggest obstacle to investment in infrastructure.
Several factors explain this scarcity. During the 1990s, as the world economy was experiencing an internet boom, the demand for Indian IT engineers increased and salaries of IT professionals skyrocketed. Many were being hired by foreign companies even before they finished schooling. In response, students started opting for engineering courses in IT, communications and electronics, and the number opting for civil and mechanical engineering plummeted. Engineering colleges reacted to these changes in supply and demand by shutting down civil engineering departments and expanding or creating departments of communications, IT and electronics. Of the 1,700 engineering schools approved by the All India Council for Technical Education, only 200 offer civil engineering degrees today.
During most of the past two decades, a substantial proportion of the investment in the schools of engineering was to cater to the demand from the IT and communications industry, Indian as well as foreign. No one even considered that there would be demand resurgence in traditional fields of engineering such as mechanical or civil. Not many during the 1990s believed that the Indian economy would grow at 8-9% a year and the infrastructure sector would need to expand at 30% a year to sustain long-term growth. All this has changed with the government and the private sector investing billions in national highways, airports, railway stations, ports, commercial real estate and housing.
WITH growing prosperity, more people can now buy high-duty consumer durables including electronic goods, in turn, raising demand for mechanical and electrical engineers who can manufacture these goods. In 2007, Global Survey of Business Executives by McKinsey found that Indian executives were not very confident in finding suitable talent in India. The current year does not seem to be much different. There are shortages of doctors, nurses, scientists, pilots, and teachers in schools and colleges. And there are shortages of CEOs as well.
These shortages are a good sign. They indicate that the economy is growing. The shortages would encourage private and public sector investment in technical education; build schools and colleges across the country that will train professionals who will, in turn, modernise the Indian economy.
The Indian society has suffered a great deal from a criminal neglect of investment in human capital. The neglect has been at all levels: primary, secondary, tertiary and technical education. Currently, India’s colleges and universities enrol only 10% of the college-going population (aged 18-24 years) against 20% in China, over 15% among Asean countries and about 60% in the US. Raising college enrolment to 15%, the stated target of the 11th Five-Year Plan, would mean increasing the number of schools and colleges in the country by 50%.
The Indian higher education system suffers even more due to poor quality. As Prime Minister Manmohan Singh said two years ago, more than 60% of Indian universities and 90% of colleges are of belowaverage quality. More than three million students graduate every year from these universities, but only 10-15% are equipped with skills to start work. Among engineers who graduate, only a quarter have the skills to start work in a global standard industry. According to a World Bank report, India would suffer a shortfall of more than half in the skilled human resources needed to modernise its economy.
Education can be the next big area of economic growth in the country. Population dividend that everyone keeps talking about cannot be reaped unless we invest in people, train them to work in Indian companies that have global standards. Despite promises by the policy planners to raise investment in education to 6% of GDP, state and central governments together have spent less than 4% of GDP on education. The 11th Five-Year Plan has proposed a four-fold increase in investment in education. Anything less than that would mean further delays in eradicating illiteracy and poverty.
Tower of Babel | Too many government gurus confuse the market
Business Standard, December 31, 2009, Page 9
Business Standard / New Delhi
Economists are known to be a fairly harmless lot with a penchant for disagreeing with each other. This can be mildly annoying or simply amusing, depending on one’s perspective, and has given rise to a rather tame brand of “economist” jokes. But when the economists happen to belong to different agencies of the government and differ on their forecasts or their opinion on policy, the discord could have deeper consequences. Take the case of GDP growth forecasts for 2009-10. The Reserve Bank of India has a forecast of 6 per cent for the year. The Prime Minister’s Council of Economic Advisers (CEA) has an official forecast of 6.5 per cent, but recent statements by its chairman suggest that it could revise its forecast up to a range of 7-7.5 per cent. The deputy chairman of the Planning Commission believes that growth could be somewhat higher than 7 per cent. The mid-year review of the economy released by the finance ministry earlier this month forecasts growth at 7.75 per cent or more and the finance minister seems to believe that the economy will grow by 8 per cent.
One could argue that this difference is actually good for policy-making. Dissent rather than consensus creates awareness of the risks associated with policy choices and could make policy-making robust. The problem, however, is the fact that financial markets tend to take these forecasts quite seriously and base investment and trading decisions on them. They also, perhaps somewhat naively, expect the different agencies of the government to speak in a common voice. When the government appears to speak in a “babel” of voices instead, it confuses market participants, often leading to a rise in market volatility. The problem becomes even more acute when there are conflicting opinions on specific policy measures. The recent confusion in the government bond markets over the likely monetary response to food inflation is an example. Officials from both the finance ministry and the Reserve Bank of India have repeatedly emphasised that they view the current inflationary episode as essentially “supply-driven” and hurried monetary action would not have much impact. The chairman of the CEA on the other hand suggested a few days back that if food prices did not abate soon, an “early reversal” in monetary policy is warranted. This led to a sharp spike in bond yields. The 10-year bond yield (a commonly-used benchmark for the bond market), fearing an imminent rate hike, went up by almost a quarter of a percentage point in response to the CEA chairman’s statements. It settled down later as the monetary move did not come through and the fear abated. The global financial and economic environment remains fuzzy and financial markets have more than their fair share of risks and uncertainty to deal with. Government economic agencies might want to desist from adding to this with their cacophony of discordant views. This does not, of course, mean that there should be no difference of opinion between them. But it is perhaps best to keep these behind closed doors and present a more consistent view to the public.
Realty mutual funds, investment trusts to open up new channels of funding
The Financial Express, December 31, 2009, Page 6
Sajan C Kumar, Chennai
Initial public offerings (IPOs) in the near-term, real estate mutual funds (REMFs) and real estate investment trusts (REITs) in the medium-term are likely to emerge as new channels of real estate financing in the country. Property funds are also expected to enhance their activities in coming quarters.
The market capitalisation of country’s real estate firms, which equals to just 2.2% of the aggregate equity market capitalisation, far below than the 10-15% level found in advanced economies, is an indicator of the future potential, said Ramesh Nair, managing director (Chennai & Hyderabad), Jones Lang LaSalle Meghraj, a global realty consultancy firm.
According to estimates, the real estate sector will require an additional $3.66 billion to construct undertaken commercial projects and fulfil the unmet housing demand. While sources of funding have become scarce in the aftermath of the 2008 global financial crisis, there are some emerging channels, which are likely to help the sector continue its high-growth story.
With several real estate players having submitted red herring prospectus to the Sebi, a total of $3.31 billion is expected to be raised in coming months. Given that the Sebi has recently allowed anchor investors to participate in this fund-raising channel, IPOs can be an attractive vehicle to tap domestic as well as foreign institutional investment. Additionally, they provide a good exit option for most PE investors that have a short-term to medium-term investment horizon, Nair told FE.
According to a study on emerging trends in real estate finance carried out by Jones Lang LaSalle Meghraj, REMFs and REITs have played an important role in institutionalising real estate investment in many countries. The essential difference between them is that while investment made by REITs are only permitted in income-generating physical real estate assets, REMFs can take exposure in securities of real estate companies as well. Currently, both of these vehicles remain a future prospect in India.
As per Sebi regulations, REMFs in India have to invest in direct ownership of real estate (that accrues rentals and capital appreciation), mortgage-backed securities and securities of companies dealing in the development of real estate. However, a minimum of 35% of net assets have to be invested in direct ownership, leaving an upper limit of 65% on security exposure by REMFs, says the study.
According to the study, real estate developers HDIL, HDFC, ICICI, L&T and Unitech are some of the players that have expressed interest in launching REMFs. While issues related to valuation and taxation are currently holding back this emerging vehicle, the government is expected to clear these uncertainties soon. Similarly, regarding REITs, many policy issues are yet to be resolved, and authorities concerned have yet to come up with clear regulations.
The study says there are challenges that must be addressed in order to bring about a smooth improvement in the sources of funding. Establishing a nodal real estate regulator will be a welcome step in enhancing transparency and making the sector more organised. Clarifications pertaining to taxation and valuation issues for existing REMF and REIT guidelines will also be expected in the coming quarters.
MCA wants India Inc to set aside part of budget for CSR
The Financial Express, December 31, 2009, Page 11
Neha Pal, New Delhi
“Companies should allocate a specific amount in their budget for corporate social responsibilty activities that may be related to profits after tax, cost of planned CSR activities and any other suitable parameter,” according to a ministry of corporate affairs report on voluntary corporate social responsibilities.
The report suggests that the corporate social responsibility (CSR) policy of the business entity should provide for an implementation strategy that should include identification of projects, time schedule and monitoring, setting measurable physical targets with time-frame, organisational mechanism and responsibilities.
“Companies may partner with local authorities, business associations and non-government organisations. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development,” says the report.
The report further suggests that companies may evolve a system of need assessment and impact assessment while undertaking CSR activities in a particular area. Independent evaluation may also be undertaken for selected projects from time to time. To share experiences and network with other organisations the company should engage with well established and recognised programmes or platforms which encourage responsible business practices and CSR activities. This would help companies improve on their CSR strategies and effectively project the image of being socially responsible.
The report also says that the companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports and other communication media.
As per the report, companies should respect the interests and be responsive to all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large and create value for all of them. They should develop a mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur.
Roadmap for CSR initiatives
The Hindu Business Line, December 31, 2009, Page 7
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The Ministry of Corporate Affairs has brought out guidelines that identify six core elements as essential to any CSR policy.
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The CSR guidelines exhort companies to function ethically.
Mohan R. Lavi
A company recruiting a candidate stated that it was looking for a responsible person, to which the candidate replied that he was the perfect fit as in all his previous organisations whenever something went wrong he was held responsible.
A series of corporate slip-ups over the past 6-7 years have forced regulators to draw up a series of corporate governance measures which were basically rule-based. None of these however tackled the intent behind the slip-up — a wanton desire to mislead shareholders and, thereby, society.
The Ministry of Corporate Affairs (MCA), at the conclusion of the India Governance Week, has come out with Corporate Social Responsibility Voluntary Guidelines 2009 as a partner to its Corporate Governance Guidelines 2009.
Corporate Social Responsibility
The Guidelines open well by stating that each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part of overall business policy and aligned with its business goals.
The policy should be framed with the participation of executives at various levels and be approved by the board. Six core elements have been identified as essential to any CSR policy — care for all stakeholders, ethical functioning, respect for workers' rights and welfare, respect for human rights, respect for environment and activities for social and inclusive development.
Care for all stakeholders is meant to respect the interests of and be responsive towards all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large, etc., and create value for all of them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur. Ethical functioning is meant to be that their governance systems should be underpinned by ethics, transparency and accountability. They should not engage in business practices that are abusive, unfair, corrupt or anti-competitive. Also, companies should provide a workplace environment that is safe, hygienic and humane and which upholds the dignity of employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis.
Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party. Companies should take measures to check and prevent pollution recycle, manage and reduce waste, manage natural resources in a sustainable manner and ensure optimal use of resources such as land and water, proactively respond to the challenges of climate change by adopting cleaner production methods, and promote efficient use of energy and environment friendly technologies.
Finally, the guidelines state what was perceived to be CSR till date — depending on their core competency and business interest — companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include education, skill building for livelihood of people, health, cultural and social welfare, etc., particularly targeting at disadvantaged sections of society.
Implementation Guidance
The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities, setting measurable physical targets with timeframe, organisational mechanism and responsibilities, time schedules and monitoring.
Companies should allocate specific amount in their budgets for CSR activities. This amount may be related to profits after tax, cost of planned CSR activities or any other suitable parameter. Companies are also advised to network with other companies on CSR initiatives and disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their Web site, annual reports, and other communication media.
A spate of corporate governance guidelines over the past few years have prescribed rules for entities to follow — the CSR guidelines exhort companies to think and act good. Together, they should be a force to reckon with in the years to come.
Retail realty yet to recover fully
The Economic Times, December 31, 2009, Page 24
PTI MUMBAI
INDIAN retailers may be rejoicing at better sales in the October-December festive season, but a full recovery of the retail real estate sector still hinges on availability of spaces at competitive rates and improvement in consumption, global consultant C B Richard Ellis has said.
“The retail sector will take some time to fully recover, depending on the economic growth or improvement in domestic consumption, consumer sentiment and availability of retail space at competitive costs,” CB Richard Ellis (South Asia) chairman and managing director Anshuman Magazine said in a statement here on Wednesday.
Improving consumer sentiment and competitive retail rentals had, however, resulted in the sector “ambling towards better activity levels, especially in Tier I cities”, he added.
The global real estate consultancy firm also expects an oversupply of new office spaces across the country, which will keep rentals flat in 2010 despite positive indicators that demand for commercial real estate was improving.
“On the office market front, demand is expected to improve although the rentals are expected to remain flat in the medium term due to the forecasted large supply of office space,” Magazine said.
The year 2010 may, however, see “some sustainability in the residential market as activity levels have improved,” he said.
Prices for residential, retail and commercial real estate across the country plummeted in 2009 as a global economic meltdown and tight liquidity froze demand.
Residential sales declined significantly and demand for office spaces saw a substantial drop, triggering a decline in rentals and postponement or cancellation of projects, while retail real estate was also significantly impacted.
However, each of these three segments have witnessed an improvement since the previous year as reduction in prices, softening of interest rates and an improvement in the economic sentiments led buyers back to the market, the consultancy firm said.
MIXED FORECAST
Improving consumer sentiment and competitive retail rentals resulted in the sector ambling towards better activity levels, especially in Tier I cities
On the office market front, demand is expected to improve but global consultant C B Richard Ellis expects rentals to be flat in 2010 on back of oversupply of office spaces.
Wednesday, December 30, 2009
No rate hike for six months: SBI
No rate hike for six months: SBI
The Times of India, December 30, 2009, Page 21
Surplus Liquidity, Low Credit Offtake Will Force Banks Not To Up Interest
TIMES NEWS NETWORK
New Delhi: India Inc can rejoice. State Bank of India chairman OP Bhatt on Tuesday indicated that there will be no increase in interest rates for next six months despite inflationary pressure.
As inflation is rising, the speculation is rife that RBI might take measures to tighten the money supply, leading to hardening of interest rates, in its review of monetary policy in January. As the global economy is still in the grip of recession, industry captains feel that any hike in interest rates will affect the economic recovery in India.
Bhatt said there was surplus liquidity in the system and credit offtake was slowly picking up. This situation of liquidity surplus will force banks not to increase interest rates. Because of this surplus liquidity, banks have cut deposits rates. But they are not cutting the lending rates due to slow credit offtake, despite the speculation that RBI can increase key rates (repo or reverse repo) to contain inflation.
In the eight months of the current financial year till December 4, while the deposits with the commercial banks rose by 3,69,535 crore, credit offtake was only Rs 1,44,151 crore. This forced the banks to park around Rs 100,000 crore with the RBI at reverse repo rate of 3.25%.
When the interest rate condition was benign, SBI had cut its lending rates, particularly home loan rate. Bhatt claimed that the 8% interest rate on home loan announced by SBI had helped reviving real estate market. The buyers have started coming back and cement and steel sectors have also started improving, he said. In fact, SBI’s decision to cut the rates forced other banks to follow suit, he added.
Bhatt does not think Indian economy had been affected by global recession. ‘‘The recession did not hit India the way it had affected European countries last year. There was only a slowdown in the growth rate which came down to 7% from 9%,” he said.
Replying to a question on withdrawal of stimulus package by the government in the prevailing situation, Bhatt said it should not be taken back but ‘phased out’ in staggered manner.
Referring to the ongoing merger process of SBI associate banks, Bhatt said SBI is a major stakeholder in SBI associate banks like State Bank of Saurashtra and State Bank of Indore. “In fact, we did not have less than 75% stake in any of these banks and owned 100% in State Bank of Hyderabad and State Bank of Patiala which were with us for the last 50 to 60 years,” he said.
State Bank of Saurashtra has merged while process was on in regard to State Bank of Indore, Bhatt said. The merger would improve SBI in terms of efficiency in operation, release of capital.
RBI hints at tighter money supply
Bangalore: Concerned over the spiralling food prices, the Reserve Bank has indicated at tightening money supply to contain the rising inflation pressures.
“Effective assessment of the inflation process, and using monetary policy actions at the right time would be critical to enhance the effectiveness of the inflation management policy,” RBI deputy governor Shyamala Gopinath said. She further said there is a risk of high inflation in essential commodities affecting inflation expectations over time and give rise to generalised inflation. “Given the dominance of food price inflation in shaping the overall course of the inflation path, the policy challenge is to address the supply constraints,” Gopinath added.
The food inflation was nearly 19% last week while the overall wholesale price inflation rose to 4.78% in November compared to 1.34% in October. PTI
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