As the new government battles stubbornly high food inflation, the pre-budget economic survey today predicted that the headline inflation would ease by year end, providing room to the RBI to cut interest rates."Headline WPI (wholesale price index) inflation is expected to moderate by the end of 2014. However, risks to the outlook stems from possible sub-normal monsoon and higher crude oil prices (on account of the crisis in Iraq)," the Economic Survey 2013-14 tabled in Parliament by Finance Minister Arun Jaitley said.As inflation eases, it is expected that the RBI would adopt a more accommodative stance and bring down interest rate."The monetary management challenge will also be helped by fiscal consolidation and addressing of supply side constraints that exacerbate food inflation. All these factors, in tandem, are expected to create room for monetary easing later this fiscal year," it said.However, WPI inflation rose to a five-month high of 6.01 per cent in May from 5.20 per cent in the previous month mainly driven by higher prices of food items.Talking about the challenges, the Survey said, the Meteorological Department has predicted below-normal rainfall at 93 per cent of the long period average with 70 per cent probability of an El Nino occurring.The odds of a drought are 60 per cent now, compared with 25 per cent in April, Skymet, a private forecaster said.Besides, the other most prominent risk (to price rise) is the impact on oil prices on account of the crisis in Iraq.Crude oil prices are hovering around USD 110 per barrel.Two-thirds of India's oil needs are met through imports. Iraq is the second-largest oil supplier after Saudi Arabia.The survey said inflation showed signs of receding with average wholesale price index (WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14 compared to 7 and 9 per cent over the previous two years. Consumer price inflation, though higher than the WPI, has also exhibited signs of moderation with CPI (new-series) inflation declining from 10.21 per cent during 2013-14 to about 9.49 per cent in 2013-14, the survey said.Food inflation, however, remained stubbornly high during 2013-14, reaching a peak of 11.95 per cent in third quarter.Highlighting reasons, the survey said, high inflation, particularly food inflation, was the result of structural as well as seasonal factors.Contribution of the commodity sub-groups, fruits and vegetables, as well as egg, meat and fish to the food inflation has been very high, it said.However, inflation in Non Food Manufactured Product (WPI core) has remained benign throughout the year, with average inflation moderated to four year low of 2.9 per cent in 2013-14, which indicates that underlying pressures of broad-based inflation have somewhat eased, it said.IMF has projected that most global commodity prices are expected to remain flat during 2014-15, which augurs well for inflation in emerging market, including India.The survey noted that the course of gradual monetary easing that had started alongside some moderation of inflationary pressures at the beginning of the financial year 2013-14 was disrupted in May 2013, following indications of possible tapering of the US Fed's quantitative easing.Following the ebbing of volatility in the foreign exchange market, it said, RBI initiated normalisation of the exceptional measures in a calibrated manner since its mid-quarter review (MQR) of September 20, 2013.The interest rate corridor was realigned to normal monetary policy operations with the MSF rate being reduced in three steps to 8.75 per cent between September 20, 2013 and October 29, 2013, it said.RBI in its Third Quarter Review of Monetary Policy on January 28, 2014, hiked the repo rate by 25 basis points to 8 per cent on account of upside risks to inflation, to anchor inflation expectations and to contain second round effects, it said.The move was intended to set the economy securely on the disinflationary path, it added.
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India's fiscal situation is worse than it appears, Prime Minister Narendra Modi's government said in an economic report on Wednesday (9 July) that called for tough measures to shore up public finances and reduce inflation.The tone of the report is bound to increase speculation that Finance Minister Arun Jaitley will announce a higher fiscal deficit target in his maiden budget, which he presents to parliament on Thursday."The Economic Survey 2013-14 conveys a sense of urgency about the course the economy needs to undertake," Arvind Mayaram, the finance ministry's top bureaucrat, wrote in a foreword of the report.Jaitley's predecessor set a target of keeping the fiscal deficit to 4.1 percent of gross domestic product in an interim budget before the new government took office.Many economists say that goal is unrealistic, because the outgoing government left a stack of unpaid bills to state oil companies that have eaten into this year's finances.A Reuters poll of economists this week predicted the government would set a new deficit target of 4.4 percent.Wednesday's report recommended tackling food and fertiliser subsidies to lower spending, while broadening the tax base. Tax collection is less than 9 percent of gross domestic product, about a quarter of the average in the OECD group of developed nations.The Economic Survey, presented the day before the federal budget, forecast GDP growth of between 5.4 and 5.9 percent in 2014/15. It warned that weak monsoon rains which are essential for farming could keep growth closer to 5.4 percent.In June, the RBI forecast growth of 5.5 percent in the financial year that ends in March 2015.Asia's third-largest economy has been stuck in its longest rut in a quarter of a century - with growth below 5 percent - while Modi's government has been dogged by a food-price spike in its early weeks.Modi, 63, won a landslide general election victory in May with a pledge to boost growth and create jobs for the 1 million people who enter India's workforce every month.The budget for the current fiscal year was delayed by the election, which handed Modi's Bharatiya Janata Party (BJP) the strongest electoral mandate in India in three decades.(Reuters)
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The rupee sliped to 60.4550/46 from previous close of 60.4335/4450.Dollar index, a basket of currencies traded against the greenback, hits 13-month high.But rupee supported as FIIs bought a net $105 million of debt on Monday and $60.4 million (provisionally) in shares on Tuesday.The Nifty is trading up 0.38 per cent, nearing record highs.(Reuters)
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India's fiscal situation is worse than it appears, Prime Minister Narendra Modi's government said in an economic report on Wednesday (9 July) that called for tough measures to shore up public finances and reduce inflation.The finance ministry delivered the annual economic survey - prepared by senior economic advisor Ila Patnaik - on the state of Asia's third-largest economy a day before Modi's new government presents its first budget.Following are highlights of the report:Fiscal DeficitIndia needs sharp fiscal correctionFiscal situation of the central government is worse than it appearsNeed for subsidy reforms for fiscal consolidationRecommends raising tax-to-GDP ratio for fiscal consolidationShortfall in revenues can be contained through better mobilisation and reformsGrowthGDP growth seen at 5.4-5.9 percent in 2014/15Economic growth of 7-8 percent not seen before 2016/17Downward risk to economic growth due to poor monsoon, external factorsInflationGovernment needs to move towards low and stable inflation through fiscal consolidationWholesale Price Index (WPI) inflation expected to moderate by end-2014Consumer Price Index (CPI) inflation showing signs of moderationNeeds to create a competitive national market for foodCurrent Account Deficit2014/15 current account deficit may be contained to around $45 billion or to 2.1 percent of GDPExternal debt remains within manageable limitsBalance Of PaymentsImprovement in balance of payments position during late 2013-14 was swift thanks to import restrictions and economic slowdownNeed to adjust to advanced economies' eventual exit from accommodative monetary policy stanceSubsidies Rationalization of subsidies such as fertilizer and food essentialNeed to shift subsidy programme from price subsidies to income supportTaxationGovernment needs to move towards simple tax regime, fewer tax exemptions and single rate of goods and services tax (GST)GST to play vital role in indirect tax reformDirect Taxes Code (DTC) required to replace existing income tax laws; will reduce compliance costs and boost tax collectionForex Market*Intervention in forex market by Reserve Bank of India is behind accumulation of reserves "generally"Report Comments"India needs sharp fiscal correction ... Improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment." "It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of the large unmet development needs.""Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation."(Reuters)
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With the BJP government firmly in the saddle, things are already beginning to look better, and indeed, even in the short time that the government has been in place, the feel clearly is that the government is decisive.With the Union Budget round the corner, there are a whole host of expectations and one aspect which has been relatively 'under the radar' is relating to corporate restructuring. In the context of corporate restructuring, often generated by the need for a subsequent transaction (e.g. hiving of a division from a company into another company, to facilitate a JV) or changing the form of a business entity (e.g. conversion from company to LLP) to avoid the over burdensome requirements under the Companies Act 2013, or indeed merging two companies in similar businesses, there is an urgent need to look at the overall framework to make corporate restructuring less painful, primarily from a tax standpoint.An example is the cumbersome provisions u/s 2 (19) (AA) of the Income Tax Act, which requires, as an example, demerger at a book value. One fails to understand the need for this, because depreciation is anyway permitted on the WDV of the block in the hands of the transferor company (in demergers, incidentally, the Companies Act also contains this provision which makes the situation even worse, in the sense that even if one is willing to pay the tax, one cannot do a demerger at other than book value). Similarly, there are several restrictive conditions on setting off of losses in the context of company amalgamation. A large number of companies want to convert into an LLP, not just, (as the tax department believes) for avoiding dividend distribution tax (the actual quantum of dividends distributed are often quite small, even if the profits are large), but often to avoid overly cumbersome compliance requirements under the Companies Act (even, under the earlier Companies act) as, the flexibility of funding by infusion and extraction of capital, which is not really a tax issue. However, the condition of a 60L limit for tax neutrality on conversion is a major deterrent.To sum up, very often, corporate restructuring does not involve any change of economic interest and it would be worthwhile for the government for considering making such conversions tax neutral without providing too many needless conditions and fetters.The author is senior tax partner of PwC India
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Retirement fund body EPFO on Tuesday (26 August) announced 8.75 per cent rate of interest on provident fund deposits for the current fiscal, a move which would benefit its over five crore subscribers across the country.The decision to retain interest rate of 8.75 per cent was taken at a meeting of EPFO's apex decision making body the Central Board of Trustees chaired by Labour Minister Narendra Singh Tomar here in the capital."EPFO will provide 8.75 per cent rate of interest on PF deposits for 2014-15," Tomar told reporters after CBT meeting.As per practice, now the Employees' Provident Fund Organisation's (EPFO) trustees' decision would be implemented after the concurrence of the finance ministry.EPFO's Central Provident Fund Commissioner K K Jalan said, "The benefit under the Employees' Deposit Linked Insurance (EDLI) Scheme would be increased to a maximum sum assured of Rs 3.6 lakh from existing Rs 1.56 lakh."The sum assured under EDLI is provided in proportion to monthly wage ceiling which is Rs 6,500 at present. It would be enhanced to Rs 15,000 per month soon.Senior Labour Ministry officials present in the meeting apprised the board that the notification regarding enhancement of wage ceiling has been sent to press after Law Ministry's clearance and will be reality soon.They also told that the notification providing minimum monthly pension entitlement of Rs 1,000 under the Employees' Pension Scheme run by EPFO will also be notified simultaneously. After notification, around 28 lakh pensioners getting less than Rs 1,000 per month would immediately benefit.At present all those employees with basic wages of up to Rs 6,500 per month at time of joining, can become member of EPFO schemes. Now with increase in wage ceiling around 50 lakh more workers are expected to come under the ambit of EPFO.The minister also revealed that the board has decided to appoint credit rating agency CRISIL as consultant for the third time to engage new fund managers and evaluate their performance for three-year term beginning April 1, 2015. (PTI)
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Farmer Ranganath Watpade made a killing last year by putting off selling his onions until four months after he harvested them. This year, the same trick has backfired.The country has produced a record harvest, but many farmers in the onion bowl of Maharashtra have lost a large share of their crop damaged in storage, adding to the country's inflation woes.A doubling in retail prices across major cities is especially troubling for staples such as onions, an ingredient that is present in just about every Indian meal.Unseasonal weather, hoarding and price manipulation have in the past led to dramatic price rises, and the new administration of Prime Minister Narendra Modi is anxious to avoid the political fallout that has hit other governments over the cost of the food.Supply shocks like these complicate the government's task of battling weak growth and inflation. It also underlines the irony of high food costs in India, which after China is the world's biggest fruit and vegetable producer.Finance Minister Arun Jaitley's budget on Thursday (10 July) will have to navigate through these issues as he must address inflation while steering away from populist measures such as food and fuel subsidies. Annual wholesale prices in May rose to a 5-month high of 6.01 percent.Importing onions would be the only effective way to curb soaring prices, agriculture experts say, but similar steps in the past have failed to ease supplies."The only solution is imports, but that can't be done overnight," said R.P. Gupta, director at the National Horticultural Research and Development Foundation (NHRDF).Prices are unlikely to calm before December. Planting of the new season crop has been delayed by scorching heat and subdued rainfall, blunting the affect of emergency measures by the government aimed at getting supplies to market and keeping a lid on prices."At the time of storage the bulbs looked good, but as I started pulling them out last week I realised that the ones at the bottom of the heap were rotten," said Watpade, 62.On a recent visit, most farmers from this tiny village 200 km (125 miles) north of Mumbai were busy picking rotten onions from stocks piled up in fields or in makeshift sheds.In spite of the experience in Watpade's village, India's onion production was estimated at a record 19.3 million tonnes in the year ending June 30, up nearly 15 percent from the previous year. But that has been too little to calm prices.No Quick FixHeavy rains in March also hit the crop grown for seeds, making quality seeds scarce for planting in the current season."Last year the seed price was Rs 400 ($6.70) per kg. This year the price has jumped to Rs 1,700 per kg. And even at this price, we are not getting quality seed," says Sampat Watpade, another local farmer who has cultivated onions for four decades. The two farmers are not related but, as is often the case in Maharashtran villages, they share the same family name.Higher seed prices and now a subdued rainfall during the monsoon season are likely to reduce the area under summer-sown crops, says Gupta of the horticultural foundation. Even crops that are planted will have lower yields, he said.Rains have been 42 percent lower than normal since the June 1 start of monsoon season, but in Maharashtra the shortfall has been 72 percent. The lack of water has sharply reduced the amount of seedlings grown in nurseries for transplanting.The planting delay will cause severe onion shortages from August to November, a festival period in the South Asian country when demand will rise, said Changdev Holkar, a director at the National Agricultural Cooperative Marketing Federation (NAFED).Trade MeasuresThe government has curbed exports, urged state governments to crack down on hoarding and let farmers sell onions directly to consumers. Such moves may curb speculation, but will not increase supplies, said Holkar."Since the crop has been lost and planting has been delayed, supplies will remain tight until December."Indians eat 15 million tonnes of onions a year. The country exported 1.36 million tonnes of onions in the year through March 31.Last year, India imported a few cargoes of onions from Iran, Afghanistan and China. But large-scale imports are not possible as few producers have big enough surpluses to meet India's demand."India is considered to be an exporter. If it starts large-scale imports, then prices will gallop in the world market and imports would become uncompetitive," said Holkar of NAFED.(Reuters)
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India's economy likely grew at its fastest in two years between April and June, according to a Reuters poll, as improved sentiment after Narendra Modi's election victory in the middle of the quarter coincided with a rebound in investment, manufacturing and construction.Prime Minister Modi is expected to deliver major reforms, but the lack of progress on that front, along with poor monsoon rains is expected to hamper the recovery in growth from worryingly low levels.Asia's third largest economy likely grew 5.3 per cent in the first quarter of this fiscal year (April-March), up from 4.6 per cent in January-March, according to the median consensus of over 40 economists surveyed by Reuters last week.That would be the fastest since the quarter that ended in March 2012 and reflects the upturn in factory activity during recent months. Official gross domestic product data is due to be released on Friday."Capital goods, a leading indicator for investment activity, logged a significant 13.9 per cent rise in output in the first quarter of FY15," said Aditi Nayar, Senior Economist at ICRA.Indian manufacturing activity grew at its quickest pace in 17 months in July as order books swelled, marking the ninth consecutive month of expansion according to the HSBC Purchasing Managers' Index (PMI) survey, compiled by Markit.And factory production grew for the third straight month in June.Economists however did not significantly change their growth forecast for the 2014-15 fiscal year, with the average at 5.4 per cent.For all the hopes invested in Modi's government, economists cautioned that the economy's momentum depended on reforms that could prove difficult to pass through parliament.Despite is massive majority in the lower house, the government lacks a majority in the upper house and it has so far failed to initiate major reforms, and has been confined to taking minor steps to encourage saving and investment."Additional reforms are required to ensure that a sustained and broad-based recovery takes root," said ICRA's Nayar.The poll also showed India's current account deficit likely widened to $7.1 billion in the April-June quarter, compared to a deficit of $1.2 billion in the previous three months, after restrictions on gold imports were lifted.In percentage terms, the current account deficit probably widened to 1.50 per cent of gross domestic product against 0.20 per cent in Jan-March quarter.India's Finance Secretary Arvind Mayaram said last monththat India needs to keep its current account deficit between 2.0-2.5 per cent for 2014/15.(Reuters)
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