Corporate advance tax payments up 22%

In a signal of robust increase in corporate incomes, overall advance tax payments by the India Inc for the current financial year have increased by buoyant 22%. Total advance tax paid by the corporates reached Rs 1.97 lakh crore in the current fiscal compared Rs 1.60 lakh crore in the last fiscal.

Highest tax payer as per the advance tax figures was publically controlled ONGC which paid Rs 8,492 crore, an increase of 35% compared to 2009-10. Another oil sector major, Reliance Industries, saw its overall advance tax payment increase by 38% to Rs 4,244 crore in the current financial year. Insurance major LIC paid Rs 3,599 crore as advance tax, nearly 11% higher than previous year.

Advance tax payments are often considered as a good barometer of overall performance of the economy and also serve as a lead indicator for growth in overall gross domestic product. However, part of the growth seen this year could also be attributed to the somewhat lower base as growth last year was weaker in many sectors and hence tax outgo also grew at a slower pace.

Nonetheless, the robust growth in tax receipts indicates that overall economy was doing well and if the trend continues, it will help the government meet an ambitious budgeted fiscal deficit target. The finance ministry has pegged fiscal deficit at 4.6% for the next fiscal. But experts have been raising doubts that given the high crude prices and implied increase in subsidy outgo, it would be difficult to adhere to the target deficit, particularly in light of the fact that there will be no one time receipt like the 3G revenue in next fiscal. 

Government panel to meet for pooled pricing of natural gas

The government has constituted a panel for deliberating on pooled pricing of gas irrespective of the source, international or domestic or public or private within the domestic space and the group is likely to meet within a week. The panel will be headed by Planning Commission Advisor on energy and is expected to come up with final recommendations pretty soon.

Demand for natural gas in the country has been increasing sharply, particularly from the power and fertilizer companies for whom there is a major feed stock. Further, overall output of gas in the country has been increasing rapidly and there are prospects of more gas supply from newer discoveries in near term. In this wake the government has been actively looking at a framework for pool pricing of gas in India.

At present, gas is sold at different prices based upon the source of the gas. For instance, domestic gas from public and private sector companies is mostly sold at $4.2 per per million British thermal unit (mmBtu). On the other hand, Australian LNG, which is to be imported by Petronet from its Kochi terminal in Kerala is indexed at 14.5% of crude oil price and will therefore cost over $14 mmBtu.

The terms of reference (ToR) of the committee indicate that the government wants an early alternative to differential pricing and is more inclined to get a pooled pricing solution as soon as possible. This is also reflected in the fact that the ToRs pre-suppose that the decision of a pooled price has already been taken and that the panel will only deliberate on the best method or formula for operating pool prices, without evaluating any other option.

Finance Minister tables Banking Laws (Amendment) Bill in Parliament

Union Finance Minister Pranab Mukherjee on Tuesday tabled the Banking Laws (Amendment) Bill - 2011 in the lower house of the Parliament. The main aim of the Bill is to improve the regulatory powers of the central bank and reform the norms governing voting rights in both the public sector and private sector banks.

In case of the nationalized banks, the Bill proposes to raise the ceiling on voting rights of shareholders from 1% prevailing currently to 10%. It also proposes to enable the nationalized banks to increase or decrease their authorized capital with approval from central government and RBI. Presently, the nationalized banks are subjected to a ceiling of Rs 3,000 crore authorized capital.

In case of private banks it proposes to remove the voting right restriction of 10% for private sector banks in the total voting rights of all the shareholders of the banking company. It is proposed to “remove the existing restriction on voting rights limited to 10% of the total voting rights of all the shareholders of the banking company,” said the statement of objects and reasons of the bill.

The Bill also includes provisions to further empower the central bank. Such a step was felt necessary before new banking licenses were issued so that the central bank is in a better position to regulate the industry. Once the bill is passed, it will be mandatory for anyone to obtain prior approval from RBI to acquire 5% or more of the share capital of a bank and the central bank will have the right to impose whatever conditions it deems fit for such acquisitions.

The bill will also exempt bank mergers and acquisitions from provisions of competition act. This is being done to ensure that bank mergers and acquisitions are exempted from scrutiny of competition commission of India (CCI) and continue to be overseen by the RBI only. This point was request by the central bank itself as bank mergers also often have to be evaluated from point of view of stability of overall banking industry. Many times a bank merger might become necessary to rescue an ailing bank even if it leads to significant increase in market share of acquiring bank.

SEBI grants MF license to Indiabulls, IIFL and UBI

The Securities and Exchange Board of India (SEBI) has given a final approval to Indiabulls Financial Services, India Infoline (IIFL) and Union Bank of India-KBC Asset Management to start their mutual fund business. Indiabulls and India Infoline had applied for a mutual fund license in 2007 and 2008, respectively. Union Bank had applied in 2009.

India Infoline will be launching the products in two months time. The company is looking to launch Index and ETF products. With a GDP of 9%, India Infoline feels that the mutual fund is a long-term business in India and it has a huge growth proposition.

SEBI is not comfortable in granting licenses to financial services companies and has expressed concerns over granting mutual fund licenses to non-serious players. Currently it has around 23 pending mutual fund applications.

The MF industry is witnessing a phenomenal 9% growth with close to asset under management of Rs 6.2 lakh crore. The new entrants in the mutual fund industry feel that India's asset management industry is underpenetrated and doesn't even constitute even 10% of the GDP. At the same time the industry is also witnessing exits by HNIs from mutual funds to other short-term investment opportunities.

The financial crisis in 2008 has seen many new entrants in the mutual fund business burning their fingers.  Also the market regulator has removed the entry load barrier which many fund houses see as a boon to the MF industry.

Assocham sees excessive use of monetary policy hurting growth

A recent study by the industry body Assocham has concluded that continued monetary policy tightening by the Reserve Bank of India (RBI) was beginning to have negative impact on Indian businesses as rising cost of funding was not only squeezing profit margins but also rendering some investment plans unviable.

“The country is pursuing a high growth strategy and braving the pains of high inflation. If the economy continues to use monetary policy without fiscal consolidation of appropriate degree, higher interest rates will continue to fuel high cost of production and squeeze profit margins of India Inc,' observed the study conducted to evaluate current economic health of the country.

It advocated that the government should also begin focusing more on the fiscal consolidation and try to focus on improving the efficiency of public spending. The central bank too had pointed out a number of times that a high fiscal deficit was hindrance to effective working of monetary policy. While the government has budgeted the deficit for current fiscal at 4.6%, which sounds reasonably low in current circumstances, experts doubt that there could be upside to the budgeted level in wake of surging crude prices and implied increase in subsidy outgo.  

The study by Assocham also observed that a large part of the inflation problem stemmed from food prices that were rising because of supply shortage. Even though some food article prices were cooling, the food articles index was still hovering at 10% rate from previous year. This could result in a more broad-based inflation in manufactured sector as well, concluded the study.

Further, while inflation was high, industrial growth was slowing down. The Assocham noted that the industrial production dropped to 5.5% in the third quarter of current fiscal year from 9.1% in second quarter and 12% in the first. While there was a slowdown in consumer goods too, greater worry was the slump seen in capital goods sector. The latter reflected that future industrial growth prospects too would be weak until the investment cycle picks up further. This however is unlikely while the central bank is hiking its policy rates in every review.

Prefer direct investment to portfolio inflows: RBI

The Reserve Bank of India (RBI) said on Tuesday that it preferred greater amount of long-term and stable flows through foreign direct investment (FDI) into the country rather than often short-term oriented foreign institutional investment (FII) to bridge the current account deficit (CAD) that faces.

The Governor of the central bank D Subbarao said that while inflow of foreign capital was welcome for bridging the CAD, the RBI would always prefer the stable inflows in terms of FDI, which comes with a long term commitment, rather than volatile portfolio inflows which can reverse in case of even a small change in either domestic of global economic scenario.

In fact the RBI had raised the issue in its last two monetary policy reviews as well. The Central bank had expressed concern about the widening of the CAD and the nature of its financing in its third quarter review released on Jan 25. Going by the recent robust export performance though, the CAD for 2010-11 is now estimated to come lower than earlier expected, at around 2.5% of GDP.

overnment tables GST Bill in Parliament

Union Finance Minister Pranab Mukherjee on Tuesday tabled the Bill aiming at amending some of the tax related constitutional provisions required for implementing the much awaited Goods and Services Tax (GST), the country's most ambitious tax reform yet.

The constitutional amendment would allow states to levy tax on services for the first time. As per the current provision in the constitution, the states cannot tax services while the Union government can also not tax goods beyond the factory gate. Therefore, taxation powers of both the Union government and states will have to be raised to bring them in line with the GST. This will need a constitutional amendment bill to be first passed by the two houses of Parliament and then by at least two-third of state assemblies.

However, the road to implementation of the GST is not very clear so far as there is no complete agreement among states yet. A number of states, particularly the opposition ruled ones, are still firm on their stand that GST in its proposed structure will erode the fiscal autonomy of states, as provided in the Constitution. The Union government has already brought out a fourth revised draft of amendment bill that takes care of some of the issues raised by the states.

For instance, the third draft had proposed setting up a GST Council by the Act of Parliament, instead of President’s order. This was not acceptable to States as it would have resulted in provincial government’s autonomy being at the mercy of Union Parliament in many other situations. In the fourth draft that has been tabled in Parliament, it is proposed to set up a GST Council by Presidential order.

The purpose of the GST is to integrate all the indirect taxes on goods and services at the state and central levels including the value-added tax (VAT), excise and service taxes etc. Since the GST will bring all these taxes under one head, it will be easy to pay and collect taxes resulting in reduced cost of collection and greater compliance. The finance ministry has in a recent study pegged the benefits from GST in terms of national output at Rs 70,000 crore in 2004-05 prices. 

Global steel production up 8% in Feb, falls marginally in India

In a signal of improving global economy, world crude steel production increased by 8.8% to 117 million tonne in the month of February 2011 compared with the same month last year, showed the data compiled by World Steel Association (WSA). However, in India, crude steel output dipped marginally by 0.5% to 5.1 million tonne during the same period.

The decline in India is mainly due to some supply constraints rather than demand weaknesses. In fact, demand for steel has been seen rising over last few months even as steel companies hiked prices at least three times in Dec-Feb period owing to higher cost of production and better demand-supply scenario in the market. Local steel producers expect that output will increase in coming months as demand from infra and auto space is likely to remain buoyant.

In case of China, the largest steel producer in world, steel production for February 2011 stood at 54.3 million tonne, up 9.7% compared to February 2010. Japan produced 8.9 million tonne of crude steel in February 2011, an increase of 5.7% compared to the same month last year. However, Japanese production is expected to be much lower in March due to ongoing nuclear crisis. In South Korea, production jumped massively by over 25% to touch 5.0 million tonne in February 2010.

Looking at the European Union, Germany’s crude steel production for February 2011 stood at 3.7 million tonne, up 7.9% on year-on-year basis while Italy’s crude steel production was 2.3 million tonne, up 4.9% compared to the same month last year. In other European countries too production was seen increasing between 6-10%, indicating that the continental economy was continuing recovery despite some sovereign debt concerns.

Elsewhere in the rich world, the US produced 6.6 million tonne of crude steel in February 2011, 5.6% higher than February 2010. Brazilian crude steel production in the month under review was 2.7 million tonne, an increase of 11.4% on February 2010. The world crude steel capacity utilization ratio stood at 82.0%, better than upwardly revised figure of 80.9% for January 2011. On year-on-year basis the utilization ratio was 2.7 percentage points higher.

Government may allow 200,000 tonne of sugar exports today

Having waited for several months, the government is likely to allow around 200,000 tonne of sugar exports on Tuesday under unrestricted sales or the open general license (OGL) which will be first tranche of the half a million tonne of exports announced earlier.

Last December, the Union Food and Agriculture Minister Sharad Pawar had announced sugar exports to the tune of 5 lakh tonne. However, the government, hit by high food inflation, kept the issue undecided and later referred it to the Empowered Group of Ministers (EGoM), headed by Finance Minister Pranab Mukherjee. The group is slated to meet on Tuesday to consider operationalising the announcement.

The reason behind not allowing sugar exports even as domestic production scenario seemed rosy and prices were crashing was overall high food inflation. The government had withheld the request by the farm ministry as food inflation was not witnessing the traditional decline over the months of Nov-Dec. However, with the food inflation now showing significant decline in the months of Jan-Feb, there is a possibility that government will allow some exports. 

The meeting of the EGoM is being held after Pawar sought the intervention of the Mukherjee for an early decision on this issue because the window to export sugar from India is available only up to end of April. In May, sugar from Brazil, the largest sugar producer in the world, will start coming into global markets, making it very difficult for Indian producers to exports. Also, global prices might come down further by then, which will make exports unprofitable by Indian exporters.

According to the agriculture ministry, extension of stock limits and substantial surplus production of the sweetener has depressed domestic prices below cost of production. If prices remain down, it will impact the payments to cane growing farmers, which in turn will impact the area under sugarcane cultivation in the next season, thus impacting sugar output next year. 'If sugar prices are not stabilized and cash flow to mills are not improved, I fear that we will end up paying a huge subsidy to clear cane payment arrears of farmers,' Pawar said while seeking intervention of Mukherjee in exports.