Cutting The Crorepati Cord

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08 November, 2014

Even though finance minister P. Chidambaram expects higher growth, he may find incomes of several high earners falling mysteriously to Rs 999,999, or just below the Rs 1-crore figure that attracts the new surcharge.

The ministry finally decided to bite the bullet and go in for what is being called the ‘super-rich tax’. Chidambaram said that only 42,800 people admitted to earning in excess of Rs 1 crore, and this measure was a one-year, temporary “bridge finance” of sorts. Most people are sceptical because, in the past, cesses and surcharges have tended to last much longer.

But it’s not the collection from individuals alone that matters (the net tax gain is just Rs 800 crore: the surcharge bringing in Rs 4,400 crore and a giveaway of Rs 3,600 crore), but what comes in from corporates earning more than Rs 10 crore that amounts to a more substantial Rs 13,000-14,000 crore. So, even if a few individuals declare themselves poorer, the 4,100-odd firms that make the cut will surely find it harder to do so.
— Anjuli Bhargava

No Deficit On Assumptions This Year
Fiscal math can very often be fuzzy, and the Union Budget for FY14 appears to be no different. That said, finance minister P. Chidambaram managed to present a sensible budget, one committed to a fiscal deficit target of 4.8 per cent — there were no big announcements, but there were no big giveaways either, and the big bugbear of a subsidy bill seems reasonable.

Although what is a bit worrying is that Chidambaram has taken many things for granted — beginning with GDP growth estimates of 6.7 per cent for FY14. Given that the third quarter GDP growth for FY13 came under the 5 per cent forecast (at 4.5 per cent), GDP growth for the full year may barely touch 5 per cent. That has implications for tax revenues because, if growth assumptions don’t pan out, tax collections will be lower and the fiscal deficit may miss the target. Next, the estimated receipts from disinvestment seem too high at Rs 55,800 crore. In the best year, the government had raised about Rs 30,000 crore.

Also, spectrum sales are budgeted to bring in around Rs 41,000 crore — ambitious, given that only around Rs 10,000 crore was raised in FY13. So, if assumption is the mother of all mess-ups, the key assumptions of the Budget seem tenuous.
— Srikanth Srinivas

Odd Numbers
In his 8th budget, finance minister P. Chidambaram played a carefully orchestrated balancing act. But crunching numbers can bring to light a series of contradictions and concerns.

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Graphics: Madhumangal Singh

Home Economics

In an otherwise flat budget, the real estate sector stood out for special treatment. Affordable housing got a push with P. Chidambaram allowing an additional deduction on interest of up to Rs 1 lakh, on loans of up to Rs 25 lakh, for first-time homebuyers. He also hiked the allocation for rural housing loans by 50 per cent.

On the flip side, he’s imposed a 1 per cent tax deduction at source on all land transfers to curb speculation and undervaluation; reduced the rate of abatement on high-value flats to 70 per cent, thus, increasing the service tax outflow — making luxury homes more expensive.
— Gurbir Singh

Making Savings Hard To Resist
Some old ideas become new ideas. Expressing his concern over the decline in household savings rates — which have fallen from over 36 per cent in FY09 to 30 per cent in FY12 — finance minister P. Chidambaram announced the government’s intention to introduce index-linked bonds some time soon so as to boost savings.

The decline in the savings rate is much more a function of people choosing non-financial assets, like gold and real estate, or moving their savings outside the formal system, where it can be counted. Thus, the idea of instruments that can protect capital from being eroded by inflation and give you a better post-tax return, like the Rajiv Gandhi Equity Savings Scheme (RGESS). To boost investor sentiment, Chidambaram enhanced the limits for the RGESS in the 2014 budget.

What about index-linked bonds? The Reserve Bank of India (RBI) mooted the idea as far back as 1997; in 2004, they published a position paper on it. In 2011, the idea was brought up again by RBI governor D. Subbarao. Now it’s Chidambaram’s turn.

On the face of it, not much has changed in the last few years for retail investors to be interested in this kind of instrument now; the bond market has never been a big hit with them. So how do we know it’s an idea whose time has come?
— Srikanth Srinivas

On The Bourses: Win Some, Lose Some

Savvy investors on Dalal Street are elated over the Centre’s decision to lower securities transaction tax (STT) to 0.01 per cent from 0.017 per cent on deals involving equity futures.

While equity investors clink their wine glasses to celebrate, commodity traders are trying to drown their sorrows. The government has decided to levy a 0.01 per cent commodities transaction tax (CTT) on those taking a ‘futures’ position in non-agricultural contracts like bullion and energy.

This, according to commodity brokers, will reduce speculative trades on the exchange, but may encourage traders to shift to the dabba (illegal and unregulated markets) trading system.

One may also expect a spillover of speculative trades into the ‘CTT-free’ agricultural commodities counters, the brokers said.
— Shailesh Menon

In The ‘Pink’ Of Good Economics

The Congress Jaipur declaration after its Chintan Shivir in January had made a case for a “national bank to provide financial services to women”. This Union Budget, finance minister P. Chidambaram gave shape to His Master’s Voice — a state-run bank for women is to be set up, with the government infusing an initial capital of Rs 1,000 crore.

Another pledge by the ‘grand old party’, as the Congress is also known, was to “ensure all measures are taken to make women safe and protected”. And one got to see that in the Rs 1,000-crore Nirbhaya Fund. Jaipur also saw a call for responsive programmes to meet youth aspirations, especially those that would create jobs, for which

Chidambaram set aside Rs 1,000 crore for a National Skill Development Fund. The declaration had recorded the party’s concern over insufficient allocations and utilisation under the Tribal Sub-Plan (TSP) and Scheduled Caste Sub-Plan (SCSP) in central and state budgets — the Union Budget hiked allocations by 17.6 per cent to Rs 21,710 crore for the TSP and by 18 per cent to Rs 37,113 crore for the SCSP.
— Raghu Mohan

The Road Runner

The centre seems to have finally taken note of the demands from firms in the roads and highways sector for a regulator and has said it intends to set one up. The industry says a regulator is needed for three primary reasons: One, it is unfair that the National Highways Authority of India (NHAI), which is party to a concession agreement, signs the agreement and then gets to take the final call in case of a dispute. Second, there are some stretches where the road is tolled by both NHAI and its private partner. While the latter revises its base rate every year, NHAI often doesn’t bother. So, on the same road, passengers may be asked to pay different tolls for different stretches, leading to resentment among users.

Third, users will have a neutral party to complain to should they find either the quality of the road or service sub-standard.

— Anjuli Bhargava

An Impending HR crisis

State-run banks are headed for a huge leadership crisis. Pratip Chaudhuri (in pic) will retire as chairman of State Bank of India after a stint of two and a half years (September 2013). Bank of Baroda’s S.S. Mundra is there for just one and a half years (July 2014). But short is not always sweet. It gives the chairman and managing director little time to think and execute a strategy in these complex times , and at times, the corner rooms even lie vacant. In comparison, private bank CEOs get a run of at least three years, usually longer. But the trouble runs deep.

According to the 2010 A.K. Khandelwal Committee on human resources in state-run banks, over the next five

years, 80 per cent of general managers (GMs), 65 per cent of deputy GMs, 58 per cent of assistant GMs and 44 per cent of chief managers will retire. The intake of new officers at these banks has not kept pace as the private sector pays better, and bank unions are not votaries of lateral recruitment. With so many of the leadership positions becoming vacant, the finance ministry better sit up and take action.
— Raghu Mohan

Deal Breaker?

It doesn’t take much from the regulators to get lawyers fuming these days. Their latest grouse is the Securities and Exchange Board of India’s (Sebi) recent circular requiring more approvals on schemes of arrangements such as mergers and acquisitions (M&As).

Nitin Potdar, M&A partner at law firm J. Sagar Associates, says the new rules will choke the flow of deals as it elongates the process. The new rules call for firms to obtain a no-objection certificate from stock exchanges. The worry, of course, is that it also exposes a firm to malicious investor complaints in an attempt to thwart the deal.

Sebi’s circular, which requires a two-third majority among voting non-promoter shareholders to approve the deal proposal, seems to be a reaction to the spate of complaints about companies entering into restructuring deals with promoter-owned companies at valuations that are detrimental to minority shareholders. But for the straightforward deal, this could be a significant drag on the process.

— Abraham C. Mathews

In Search Of Trade Volumes

MCX-SX, India’s third stock exchange, is learning the “Great Indian Equity” trick the hard way. MCX-SX has launched a desperate drive to enhance volumes through its “liquidity enhancement scheme” (something which BSE had also done a few months ago). It plans to jack up trades via cashbacks and discounts to brokers and market intermediaries.

Since its launch on 11 February, the new exchange has recorded a dismal average daily turnover of Rs 11.6 crore till 26 February. Though not a fair comparison, the National Stock Exchange (NSE) and Bombay Stock Exchange

(BSE) logged Rs 1.29 lakh crore and Rs 12,590 crore, respectively, during the same period.

Experts say MCX-SX is seeing a tepid response because it has not yet formally listed firms on the exchange boards. It has admitted 1,116 firms under the “permitted to trade” category. In contrast, established exchanges such as BSE and NSE have 5,195 and 1,664 formally listed companies, respectively, on their rolls.
— Shailesh Menon

A Fantasy Rail Budget

Railways minister Pawan Kumar Bansal was not as theatrical as his predecessors, but he definitely had one entertaining idea: setting up the Indian Railways Institute of Financial Management as a unique solution to the Railways’ financial sustainability challenge.

Never mind that he can’t find the money to finish the 350-odd projects worth Rs 1.47 lakh crore , or that the ministry hasn’t come up with more than Rs 600 crore worth of public-private partnerships of a targeted Rs 1 lakh crore by FY17. In many ways, the finances — and proposed financing — of the Railway Budget for this year and the next four, read like a fantasy novel. In the first 10 months of FY13, passenger and freight traffic were well short of targets — 25 per cent against 30 per cent, and 11 per cent against 25 per cent, respectively. As the economy grows slowly, traffic revenue growth in FY14 isn’t likely to be met either.

Bansal, or his successor, has four years to raise Rs 95,000 crore in internal accruals to meet the 12th Five Year Plan target for internal accruals (he has Rs 10,000 crore now). How the Railways can meet its financial targets will make a good project for his new institute. But there’s really no gravy on his trains.

— Srikanth Srinivas

Walking A Tightrope

Tariff hike has always been a double-edged sword. And when you draw power into the equation, there is always the possibility of a blow-out.

Many states are caught between the need to increase tariffs so as to bridge the gap between cost for purchasing power and revenue realised, and the increasing opposition to tariff hikes.

Although they need to bite the bullet soon, experts think that the upcoming 2014 elections will influence decisions, and it is unlikely that states will hike the electricity tariffs like the 23-odd states and Union Territories did in fiscal 2013.

Almost all the states have filed their Average Revenue Requirement (ARR), the first step in tariff revision, but the process is expected to get delayed in several states, especially the 10 that are due for elections.

A. Subba Rao

The Bihar Electricity Regulatory Commission, for instance, has already expressed its reservations about announcing a steep hike for 2013-14; the state announced a hike of 12.1 per cent in FY13 and 19 per cent in fiscal 2012. But a bigger cause of concern is that this “cautious” approach may take a toll on India’s distribution companies, dragging them deeper into financial distress.

— Chhavi Tyagi

Fat-loss Programme

Debt-burdened GMR Infrastructure is changing its strategy. The firm’s Group CFO,A. Subba Rao, says it will try the “build-stabilise-exit” model to move ahead. The accumulated debt of GMR has shot up to Rs 37,000 crore. The main objective now is to cut debt by Rs 10,000 crore by March 2014. “Divestment is the best way to cut costs,” says Rao. GMR is in talks for offloading stakes in its three highways, and could also rope in strategic investors in its power projects.

Globally, infrastructure firms do try the “churn-the-assets” strategy to stay afloat. But in India, it’s the opposite.

GMR took a step ahead, but it needs to ensure premiums while exiting.
— Nevin John

Market Manipulators Under The Scanner

If the Securities and Exchange Board of India (Sebi) has its way, market manipulators who have been getting off easily will finally pay. The regulator is now setting up a panel to deal with them. The problem is that while Indian laws are supposedly more stringent than their US counterparts, a good lawyer can easily spot the loopholes. Like, even though circumstantial evidence is admissible in civil suits, judges insist on Sebi first proving that the intention of the accused was malicious.

Alas, Sebi, without the power to ask for call data records, can’t do that. The laws on front-running (buying of shares just before a huge order is placed) also needs to be codified. Currently, only institutions, not individuals, are penalised. It needs to be seen if Sebi is more successful now.
— Abraham C. Mathews

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A Question Of Who Will Take The Blow

It looks like the Indian population will have to take a hit on its wallet for the cause of the greater good, or in this case, huge lumps of coal. The in-principle approval from the Cabinet Committee on Economic Affairs (CCEA) for

14-18 paise will be the increase in power generation costs

pooling of coal prices is expected to bring relief to over 28,000 MW of stranded capacity and even the 50,000 MW of thermal capacity expected to operationalise in

four years.

While averaging the price of imported and domestic coal will result in an increase of 14-18 paise per unit (CEA estimates) in the generation cost, experts agree that the move is in the right direction — that is, towards improving coal availability.

India’s imports 12-14 per cent of its total coal requirement and this is only expected to go up as the demand for electricity increases. Given the high accumulated losses of utilities (Rs 2 lakh crore as of March 2012), it is imperative that the increase in the cost of generation is not retained at the level of distribution firms, and is passed on to consumers. A middle path now needs to be found between the discoms’ need to hike electricity tariffs and the opposition of states and

consumers to any increase.
— Chhavi Tyagi

A Skewed Realty

A 2012 report by the housing and urban poverty alleviation ministry estimates a shortage of 18 million houses among the economically weaker sections (EWS). The bulk of the new projects started by private developers, though, seem to concentrate on the middle and the top end of the market in all cities. Part of the reason is that during the boom years, most property giants bought land at very high costs, often taking on high debt to build up land banks. Also, the cost of construction material and labour has been rising consistently. That is why few developers see any benefit in aiming at the low-end housing market. Most prefer to stay where the margins are high enough to get them out of trouble.

— Ankita Ramgopal

Is Maruti Going Electric?

Auto giant Maruti Suzuki is believed to be developing an electric car. “This is the direction technology appears to be moving. With fuel shortages becoming a reality, cars running on electricity will become a ubiquitous phenomena,”

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said a Maruti official on condition of anonymity.

With the M&M Reva still selling around 25 units a month, India is no stranger to electric cars. While Maruti has been toying with the idea of an electric car since 2010, this is its first major play in the segment.
— Swati Garg

Measure Pay Hikes By Peanuts

Inflation may be eating away the bulk of your wages, but don’t bank on fat pay hikes to offset it. This year will see India Inc. doling out average wage increases of 10.3 per cent, forecasts HR consulting firm Aon Hewitt in its annual salary survey.

Worse, these are optimistic projections, says Sandeep Chaudhary, partner (talent and rewards), Aon Hewitt India. The actual hikes may be in the range of 9-9.5 per cent. This will be the lowest wage hike in a decade, even lower than the 10.7 per cent wage hike given by India Inc. last year at the height of the economic slowdown.

Even as some CEOs are taking a cut in their pay, India also continues to be the nation with one of the highest wage differentials in the world. The top manager here draws 822 times the salary of the junior-most employee. In the US, this is 625 times, and it is 550 times in China. Ascribing it to low-entry salaries and the need to pay huge sums to key talent in top jobs, Chaudhary says, “We are seeing increasing shareholder activism around this.”

For those looking to jump sectors, life sciences projects a hike of 13.1 per cent, while infrastructure is the lowest at 6.1 per cent.
— Chitra Narayanan

Television Thinks Out Of A (new) Box

Think digital marketing and what is the medium that comes to mind? Online? Why not TV? And no, not just smart TVs. Now, thanks to mandatory digitisation, marketers can use set-top boxes (STBs) to gather user profiles and do targeted advertising. As Jayant Changrani, country head and general manager at Cisco’s NDS (a video software firm), says, new STB technologies enable advertisers to beam localised 30-second ads over national networks.

So, a south Delhi resident can watch a different ad during the same national programme than someone in West Delhi.

With Web TV gaining currency and online ad shares rising, TV broadcasters globally are feeling threatened. In the US and UK, online video streaming has already dented TV ad revenues. In India, this could be a way for broadcasters to guard their turf by thinking out of the box — or rather, thinking from a new box!
— Chitra Narayanan

(This story was published in Businessworld Issue Dated 25-03-2013)