Cut Rates, Now!

The recent fed rate cut of 75 basis points was a move by the Federal Reserve to keep the US economy from going into recession and to calm down the financial markets. In India too the need for a rate cut is increasing, day by day. The interest rate sensitive sectors like Consumer durables & the transport equipment sector have been performing below expectation & if the interest rates are not cut their performance will deteriorate further. The interest rate differential between India & US has increased even more due to the rate cut in the US. This will further attract more foreign flows. Already the RBI is struggling to manage the existing flows; Can it handle more? No way!

The cost incurred to sterilize the rupee has also been growing. The higher interest rates with increased curbs on foreign loans will increase the cost structure of Indian companies.

The question then arises, how much should the rate cut be; a 25 basis point cut would be a conservative one while a 50 basis point cut will be aggressive. RBI is unlikely to implement a cut of over 50 basis point & keeping in mind the conservative style of RBI a 25 basis point cut may be more likely if there is a rate cut.

But will RBI bite the bullet now?
We will know by tomorrow.

Investors watchout!

The recent market crash was a good way of tempering investors exuberance in the equity markets. Way too many people were getting into the markets without understanding the nuances of the market.

Too often investors get into the market without the knowledge or the understanding of the equity markets. When the markets do fall, such investors take the biggest loss. For a person to invest in the equity markets directly they must understand the nuances of investing, understand the company & its business model, the risk factors associated, comparative valuations, regulations affecting the company, etc. If a person is not able to do this then investing through Mutual Funds is the ideal option.

Only investors who take the right decisions will benefit from the equity markets in the long term.

Fiscal Responsibility?

The Government has been issuing Oil Bonds to Oil Marketing Companies (OMC) to cover the large losses being made by the OMC's. The OMC's have not been able to pass on the increase in prices to the end users due to "political compulsions" likely to be faced by the politicians if the prices were increased. These Bond issuances go against the spirit of the Fiscal Responsibility and Budgetary Management (FRBM) Act.

The Fiscal Responsibility and Budgetary Management Act passed by the Indian parliament in 2004 attempts to limit the revenue deficit into a specific policy target. The Act requires the central government to wipe out the revenue deficit completely by the end of 2008-09.

Such Bond issuances bypass the FRBM requirement. What’s more it is not restricted to the oil sector alone; the Fertilizer industry has also been a recipient of similar bonds.

It’s a pity that the capable team of Dr Manmohan Singh, Dr Montek Singh Ahluwalia & Mr P. Chidambaram are not able to live upto their ability. Is the coalition politics to blame? The answer is quite simple.

Fair Taxation system?

The Finance Bill for the year 2007-08 was announced on the 28^th of February 2007. Many called it a poor budget, others said it was a good one. But there is one aspect which successive budgets have failed to address: Why are the “Super rich” farmers not asked to pay taxes?

There is no logical answer to that question. There are so many farmers who earn more than Rs 10 lakh p.a, yet the government sees it fit to leave them out of the tax structure.

These are rich farmers who can afford to pay taxes, by bringing them into the tax net the government can mop up a tidy amount year after year, cutting the deficit, but more importantly making the tax structure fairer. Is it fair that a salaried employee who earns Rs 5 lakh p.a pays tax while a farmer who earns Rs 20 lakh p.a does not?

First the government needs to bring in legislation to allow taxation of agricultural income, which is not currently allowable under the constitution. But this is a politically difficult decision, which political parties are not willing to take. To cover for their folly, the government keeps increasing other taxes, which can so easily be avoided.

Can the government show some “courage” to take this step…only time will tell. Until then “Fair” is not the word we will associate with the taxation system in India.

Dr Singh & Mr Chidambaram, are you listening? Will we see some change in budget 2008?

Only time will answer that question...

Finally some action on the Education front!

The Government has proposed to invest over 8000 Crore in the 11^th five year plan in the education sector. Many new universities are also proposed to be opened including new IIM’s & IIT’s & the infrastructure at the existing institutes/universities will be upgraded. This is a step in the right direction. While more action is needed, it is refreshing to see some action by this government which otherwise has done little on the economic reforms front.

As I have pointed out in my earlier post, the corporate sector really needs such policy measures to make them compete effectively in the global arena.

Dont throw out the baby along with the bathwater!

The rupee has been on a sustained uptrend for the last 18 months. In 2007 alone it has appreciated by over 12% against the US Dollar. This has largely been due to the large amount of inflows in the form of Foreign Direct Investment (FDI), investment by Foreign Institutional Investors (FII) & External Commercial Borrowings (ECB) by Indian corporates.

India is a developing economy & needs a lot of capital to sustain its growth. The recent moves of the RBI & Finance Ministry to curb foreign inflows is a wrong move; its like throwing out the baby along with the bathwater! The rupee appreciation has been a big challenge for most Indian companies. Instead of curtailing inflows India needs to increase its ability to absorb foreign inflows into sectors like infrastructure, retail, power, Oil & Gas, etc.

The reforms process is also crucial, but due to political (read power) needs the government is also not taking the reforms process forward. The reforms process can stimulate the Indian economy & not only keep the growth going but will also increase the ability of the economy to absorb more capital.

While the RBI & Finance Ministry's desire to keep the rupee from appreciating too much may be acceptable, the way they are going about doing it is certainly not.

Student Cities

No Indian university, including the prestigious Indian Institutes of Technology (IIT), figure among world's top 200 universities this year.

The higher educational system in India has been in the pre-historic era for some time now. There is talk about increasing the number of universities and providing them more autonomy. There is need for more universities, no doubt about that.

The infrastructure in our cities is crumbling, adding more universities will create a huge traffic problem around the universities. Can cities like Mumbai or Bangalore cope up with that kind of pressure on their infrastructure? Unlikely.

There is a need to develop smaller cities as “Educational Hubs”. This will solve many problems and prevent many from arising. For starters the smaller cities will benefit as more “spending youth” settle down in these cities providing more job opportunities. The pressure of migration in urban cities will reduce in a small way, instead of increasing as has been the trend in the past few years as the smaller towns will provide more employment opportunities. The municipal authorities in these smaller cities can become more self sufficient owing to increased tax collection.

These new universities will also improve the quality and quantity of manpower which is available. This is one of the many challenges which Indian Industry, especially the IT, Pharma, Biotech industries are facing today.

India needs to start innovating to solve problems of its own rather than copying measures which have worked abroad. The next 50 years can be ours if we put our best foot forward.