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.

The new wave of outsourcing?

In a recent article by Prashant Agrawal published in Mint he puts forward the idea of India becoming the world’s retirement home.

It’s a fascinating idea. While there may be a few issues which may prevent it from happening like families wanting their elderly to be closer; it does provide India with an opportunity to tap into something new which would provide many job opportunities.

If such retirement communities are built in smaller towns & cities it would really help in developing such places. It would increase the demand for Cement (owing to construction of homes), Medical facilities (the elderly would require them on a regular basis), Telecommunication facilities among other things. This would keep the Indian industry in good spirit as the market for their products would keep increasing. It would also improve the tax collections of the government. The direct & indirect jobs created would also be many in number.

While it would also mean the available resources of India would be shared by a larger pool of people, the overall benefits would far outweigh the drawbacks. A move like this will be a win-win scenario for all the parties involved, India as well as the "outsourcing" country. The government should look at such “innovative” ways of keeping the Indian economy growing.

But will the Indian government push for it? The recent events, unfortunately, do not provide a positive answer.

Petro China & the equity markets

The stock markets have been on a bull ride for some time now. The emerging markets of China & India have especially done well.

The Market Capitalization of Petro China crossed US$1 Trillion, thus making it bigger (in terms of market capitalization) than the Indian GDP! Is this a true indicator of the performance of Petro China or a indicator of the over-optimism prevalent in the equity markets at this point of time? Logic would indicate that it’s the latter rather than the former.

But logic is not something we associate the equity markets with, especially in such "Bullish" times!

Is the OPEC hurting its own interests?

OPEC has, in the past 2 years, taken steps to maintain high prices of Crude oil. But is this in its best interest? With the prices of Crude hitting $94, it presents a great investment avenue for alternate energy sources, be it man-made or natural. Historically the price of Crude has been at moderately low levels which did not attract much investment in alternate energy sources. But with the high prices becoming a norm rather than an aberration, it is attracting investment in alternate energy sources. From Jatropha to Corn, from ethanol to bio-diesel, many avenues are being tested.

In the long term by encouraging such investments OPEC may be sowing seeds of its own downfall. While it is in the best interest of all the stake holders to have a price which provides value to all the people concerned, by having prices rule at such high levels OPEC seems to be benefitting at the expense of the end-user. In the short term this may not have an impact as there are no alternatives, but in the long term it will not be ideal for OPEC to maintain such high prices by limiting supply.

Oil may be a limited resource, yet the alternates are being developed at a fast pace due to the high prices of Oil. An alternative may be found much earlier than the Oil reserves run out...

Economic Development

The Indian economy is doing well. That is a blessing as well as a curse. It is a blessing because it helps the country grow, it improves the living conditions when the growth is
evenly distributed, it provides more room for the government to target its expenditure
better, etc. But in the current scenario, it is also a curse. The government is not doing
enough to take the development measures forward. India has come this far only because of these development measures, slowing or halting these measures will really hurt the Indian economy in the long term.

Another worrying factor is that the growth is not evenly distributed, the rich are getting
richer and the poor are staying where they are. This is something which really needs to be dealt with in an appropriate manner. Not by increasing taxes, as is being suggested by many politicians. The better way is to take measures to provide more opportunities to
everyone, especially the underprivileged. This is very important. As the economic divide
grows it will create a lot of social issues; more violence and more crime. Managing it at a later point of time will be very challenging and time consuming. The damage it will cause to the society will be devastating.

It is high time the government took measures to take the development forward and take
measures to provide more opportunities to everyone, especially the poor. India has entered an era of growth; let’s take it forward, Mr. Prime Minister.

(This article was published in The Economic Times issue dated 22 May 2007)

Participatory notes: To Ban or not to ban

Participatory notes (PN) are simple instruments used by foreign investors who are not registered with SEBI but want to take exposure in Indian securities. Participatory notes are typically issued by brokerages houses in India or their associates. FIIs who don’t want to register with SEBI but want to take exposure in Indian securities also use PNs. Brokers buy or sell securities on behalf of their clients on their proprietary account and issue PNs in favour of the interested foreign investors. The PN issuer also repatriates the dividends and capital gains back to these investors. So the PN issuers act like an exchange; they execute the trades and use their own accounts to settle the trades. They keep the investor’s name anonymous. This is the primary issue.

In the last 3 years over $ 20 Billion was invested in India by FIIs. Over 20% of this amount was through the PN route. That’s a lot of money through unknown sources. SEBI is of the view that a good chunk of this amount is hedge fund money, Indian money routed back into India through various illegal means and unknown wealthy private investors. This makes SEBI and RBI very uncomfortable as they are unable to either regulate them or find out about them.

The flight of capital is an important factor, which makes the regulators jittery. The East Asian Crises is a good example of this. In the late 1990`s large amount of capital was withdrawn from the Asian economies like Malaysia, Thailand, etc by foreign investors; hurting these economies. SEBI and RBI do not wish for that to be repeated in India.

While the concerns of SEBI and RBI are fair and genuine, banning PNs completely is not the way forward. PNs are an easy way of investing and huge amount of money has already been invested through this route. Banning PNs will likely lead to flight of capital leading to a big fall in stock market and a quick depreciation of the rupee as well. It will also erode the confidence of the investors in general and small Indian investors in particular.

Then how should this problem be tackled?

SEBI and RBI must make it easy for international investors (be it Institutions or Individuals) to register and invest directly in India. This will make their task more simpler.

Finance & Business

Finance as a topic is humongous for a person to cover, yet this blog will look to do justice to this area, which is my biggest passion. I will cover a wide variety of topics from hedge funds to rupee volatility, from interest swaps to interest rate, from RBI to FOMC, from SEBI to FSA…the sky is the limit…

Issues must be looked at from finance perspective along with an analysis of the impact of such issues as well. The impact part is more related to business and provides a more complete picture. So covering that becomes relevant and important.

Welcome to the World of Finance & Business!