Sunday, 15 January 2017

Budget 2017 likely to compensate for Demonetisation Pain

After the historic announcement of demonetisation in November, Union Budget 2017-18 is now seen as the silver lining.  The common man is expecting some relief with heightened anticipation of rebates, benefits and sops in the form of tax breaks to soothe the discomfort caused by the demonetization.

The expectation from the government this year are even more given the temporary slowdown expected in the economy on account of demonetisation. Apart from addressing the issues raised by demonetisation in the upcoming budget, there are two key changes which the Union Budget 2017 will witness. For the first time, the budget will be presented in the Parliament on 1 February 2017 as compared to the regular practice of presenting it on the last day of February. Defying the age-old tradition, the initiative of presenting the Union Budget in the parliament along with the Railway Budget is also a significant change this year.

With less than a month to go for the Union Budget 2017-18, there is a lot of expectations and speculations about what it has in store.  Following are some of the expectations that the industry has from this years’ budget.
The top expectation from the Budget is lowering of Income tax for the individual tax payers as well rationalizing the tax structure for the corporates. For individual tax payers, the government is expected to increase the tax exemption slab from Rs 2.5 lakh to Rs 3 lakh. The finance minister is also expected to bring down the corporate tax rate in the range of 27-28 per cent. A lower tax rate would bring some cheer for India Inc as it would help neutralise any short-term slack in growth due to demonetisation.
The Finance Minister is expected to focus more on farmers and on those sectors, which can create more jobs in the economy. The rural economy is crucial for India as over half of rural households depend on agriculture as their primary means of livelihood. According to Economists, the forthcoming budget will focus more on lifting the rural economy, which is badly hurt by the demonetisation drive.
Real estate industry also has high expectation from the upcoming Budget 2017-18. The government is expected to provide clarity on GST, raise House Rent Allowance (HRA) deduction and announce policies to standardize construction materials in order to uplift the real estate industry.
Further, auto industry is pinning its hopes on the upcoming Budget to lift consumer sentiment and looking for concrete incentives to promote fleet modernisation as well as electric vehicles. The automobile industry expects concrete policy on commercial vehicles and passenger vehicles.
With a vision to move towards a cashless economy and reduce the black money generation after the demonetization, the government is expected to announce further measures to encourage digital payments. Additional benefits to those opting for cashless transactions through credit cards, debit cards and mobile wallets are expected to be part of the Union Budget 2017-18.

As a result of the merger of the Rail Budget with the Union Budget, a lot of new measures focused on further development of infrastructure are expected. The modernization of railways is long overdue and the recent accidents are expected to give further impetus to increased government spending on railways’ modernization.
While there is a lot of buzz around the 2017 Union Budget, let’s wait and watch the upcoming events and hope that it will bring the smile back on the faces of the Indian citizens.
Latin Manharlal Group

Friday, 30 December 2016

Last Day of Demonetisation: Final Goodbye to Rs 500 & Rs 1,000

As the year comes to an end, it is also time to bid adieu to the high value bank notes. Today is the last day to deposit old Rs 500 and Rs 1,000 notes in banks after 50 days of the announcement of demonetisation by the Prime Minister Narendra Modi on November 08, 2016. From December 31, 2016, onwards, anyone holding Rs 500 or Rs 1,000 notes could be levied hefty fines.

Even though the 50 days deadline now comes to an end, the daily struggle for lakhs and lakhs of people so far to get their money back from the ATMs or bank branches is not likely to end soon. Let's take a look at the positives and the weaknesses of demonetisation of notes on the people and the economy at large.

Since the decision to ban high value currency notes was taken in early November, the government has showed the sunnier side of the note ban and its benefits on the economy in the long run. From declaring war on black money to terror funding, from fake currency to corruption, and finally becoming a cashless economy, multiple reasons have been cited since the announcement of scraping Rs 500 and Rs 1,000 notes.
With this move, the government planned to keep a tight leash on the corruption front. This decision came in as a blow for the black money holders having trucks of money undeclared and who are enjoying life without paying any tax. The move has also emerged as a blow to funding of terror in Jammu & Kashmir as well as Left-wing extremist violence across several states. With this move, the hawala cash transfers to terrorists and separatist elements based in Kashmir, have come to an abrupt halt.
Through the demonetisation exercise, the government has been working hard to become a cashless economy and is inspiring more and more people to adopt the digital payments system for their transactions. Usage of cards – both credit and debit – has grown four-fold since the announcement of demonetisation on November 8. Also, average ticket size of card transactions has fallen, signalling that many Indians have started using cards for their daily purchases.
Impact of demonetisation is also clearly visible with tax collection figures witnessing double-digit growth. According to Finance Minister Arun Jaitley, there has been a 26.2 per cent increase in central indirect tax collection till November 30. This included robust growth in excise duty of 43.5 per cent, services tax 25.7 per cent and customs duty 5.6 per cent. Meanwhile, net direct tax collections till 19 December had increased 13.6 per cent.
While numerous advantages of demonetisation rolling into the economy could still be long way away, there are immediate challenges the economy is already gazing upon. Even though new currency notes have reached almost all parts of the country, bank branches are still not able to quench the cash requests of customers. Most banks have set withdrawal limits much below the mark prescribed by RBI which is Rs 24,000 per week.
Economic growth has also come off on account of low liquidity in the system. Inadequate currency supply, in an economy which is predominantly cash-driven, has reduced the buying power of people, and at a macro level, their consumption pattern.

However, the Modi Government’s bold gamble with note-bandi in the long run is expected to propel growth capital as large swathes of informal economy becomes formal. It is expected to significantly transform the domestic economy in due course in terms of greater inter-mediation, efficiency gains, accountability and transparency through increasing adoption of digital modes of payments.
Latin Manharlal Group

Wednesday, 14 December 2016

Demonetisation Effect: Inflation Cools to 2-yr Low in November

India's retail inflation eased significantly last month after Prime Minister Narendra Modi's shocking demonetization drive dented the consumer spending, fuelling hopes of an interest rate cut by the Reserve Bank of India at its next policy review in February 2017.

According to the data released by statistics office, consumer inflation, the benchmark price gauge of the RBI eased to its lowest level in two years to 3.63 per cent in November from 4.20 per cent in October. It was 5.41 per cent during the corresponding period last year.

The fall in in the inflation was primarily due to sharp slowdown in food prices which registered its fourth consecutive month of decline, coming in at 2.11 per cent in November from 3.32 per cent in October.

In addition, Inflation rate based on wholesale price index (WPI) also decelerated for the third consecutive month to 3.15 per cent in November from 3.39 per cent a month ago, as a squeeze in cash availability impacted prices of perishable commodities.
Prime Minister Narendra Modi's shocking move to cancel 500-rupee and 1,000-rupee banknotes, which accounts for 86 per cent of the cash circulating in Asia's third-largest economy, has disrupted daily life, discouraging consumer demand. The slow pace of replacing the old currency with the new Rs 500 and Rs 2,000 banknotes is expected to have led to the demand compression, which has eventually hit the small businesses.

November's reading is way below the Reserve Bank of India's (RBI) 5 per cent inflation target for March 2017 as well as the medium-term target of 4 per cent. The monetary policy committee headed by RBI Governor Urjit Patel had earlier this month held interest rates steady and said demonetisation of high value currency notes could lower prices of perishables and reduce CPI inflation by 10-15 basis points by December.
With this sharp slowdown in inflation, there is room for further rate cuts by RBI in the next policy meeting. However, before penciling in RBI's next move, the economists are eyeing the advance estimates of GDP and the December CPI numbers.  

Latin Manharlal Group

Tuesday, 22 November 2016

Demonetization: Short-Term Pain but Long-Term Gain

Taking the whole country by surprise, Narendra Modi has pulled off a shocking move to demonetize higher value currency notes as he waged war on the evil of black money in Asia’s third biggest economy.

While it’s hard not to overlook the short-term repercussions of wiping out Rs 500 and Rs 1000 notes which comprise 86 per cent of total value of currency in circulation, the long-term implications of demonetization are seen as positive.

Demonetization has sent out a strong message about the country’s anti-corruption drive which will improve investment sentiment in the long-run.

While the sudden cash crunch may have crippled the common man, demonetization marks a crucial step in India’s bid to transform into a cashless economy.

With cash-intensive sectors such as food, transport, real estate and restaurants likely to be severely hit, this fiscal’s GDP could be squeezed by 0.8 to 1 per cent. In the longer term, demonetization may help bolster economic growth as more and more of the informal economy becomes formal and the Goods and Services Tax comes into play.

Successful unearthing of unaccountable money could propel tax gains for the government, good news for India’s fiscal deficit.

An interest rate cut also looks likely on the cards in the coming months as a cash squeeze exerts downward pressure on consumer food prices amid lower purchases. Lower borrowing costs will augur well for India Inc. particularly rate-sensitive sectors such as auto and banking. Also, the withdrawal limits on cash will propel faster growth of bank deposits, supporting lower long-term deposit and lending rates.

 Looking beyond the long queues outside banks and ATMs, wobbly stock markets and short-term consumption & growth squeeze, Modi’s latest reform is a well-thought out one. The key to its success lies in its implementation.

The bottom line -No gain without pain!

Latin Manharlal Group

Wednesday, 2 November 2016

Uptick in Manufacturing PMI underpins India’s Economic Recovery

India’s factory activity expanded at its fastest pace in almost two years in October, with a robust rise in new orders as well as output, supporting the strong growth story of the Asia's third largest economy.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector spiked up to 54.4 in October, a 22-month high, from September's 52.1, marking the biggest monthly jump in almost five years, with a reading above 50 signaling expansion.
The manufacturers attributed the latest rise in production to solid growth of the new orders, which surged significantly in October, pointing towards the strength in the underlying demand.  While, foreign orders continued to contribute to the upturn in the total new work, the rate of growth in new businesses from overseas eased to a three-month low.  

Meanwhile, the output increased for the tenth straight month and at the quickest rate in nearly four years in October.  The output sub-index, which measures the overall production, was at 57.2 in October, the highest since December 2012, and up sharply from 53.3 in September, the report noted.

The survey showed that consumer goods producers outperformed their intermediate and investment goods counterparts, registering stronger rates of expansion for both output and new orders. Despite the robust growth in new work, employment sub-index was left unchanged. Meanwhile, buying levels grew at their strongest rate in 14 months, while stock levels increased at the fastest pace since July 2015.
Moving ahead, input costs grew at its fastest rate since August 2014, part of which was passed on to the consumers by way of higher selling prices. It is likely to continue on an upward trend. This shows that risk of inflation is gathering steam yet again which had cooled to a 13-month low in September due to moderating food prices.

The increase in the inflation rate will also affect the prospects of any further easing from the Reserve Bank of India (RBI), which earlier this month surprised markets by cutting its benchmark repo rate by 25 basis points to 6.25 per cent. The next meeting of the Monetary Policy Committee (MPC) is scheduled on December 6 and 7.
Latin Manharlal Group

Tuesday, 18 October 2016

Softening Inflation offers scope for another Rate Cut in FY’17.

Benign inflation numbers and likelihood of a dovish monetary policy committee stance leaves the door open for further monetary policy easing this fiscal. The move could fuel additional growth by supporting government’s effort to boost economic growth to above 8 per cent to create job opportunities.

The sharp retreat in consumer inflation to a 13-month low at 4.31 per cent in September 2016 from 5.05 per cent in August 2016 is indeed a good reason for cheer, particularly when the festival season is round the corner. Retail inflation, the RBI’s benchmark price gauge has fallen below the tolerance level, leaving scope for a reduction in policy rates. The government had recently notified an annual inflation target of 4 per cent plus or minus 2 percentage points.

Further, India's wholesale prices cooled in September after touching a two year high in August. WPI inflation in September was 3.57 per cent compared with 3.74 per cent in August. Similar to retail inflation, the drop in wholesale inflation is attributed to easing food prices. Good rains kept a lid on food prices as food inflation moderated to 5.75 per cent year-on-year in September 2016 and lower than 8.23 per cent in the previous month.

The recently formed Reserve Bank of India Monetary Policy Committee, under new Governor Urjit Patel, slashed the rates by 25 basis points to 6.25 per cent in a surprise move on October 4, 2016, after inflation hit a five-month low in August.

The change in the RBI’s policy position with respect to the cut in real interest to 1.25 per cent from the 1.5 per cent -2.0 per cent range along with expanding the time to achieve 4 per cent inflation by three years to March 2021 from March 2018 provides with additional room for monetary easing in the near-term.
Since the start of 2015, the RBI has cut 175 basis points from its key repo rate. But, after the next expected cut to 6 per cent, the central bank is now projected to hold rates steady for the rest of the 12-month survey horizon.

A rate cut from here-on would help the Indian government in its efforts to lift the economic growth to above 8 per cent. It was last measured at 7.1 per cent in the March-June quarter from 7.5 per cent in the year ago period.

Latin Manharlal

Tuesday, 4 October 2016

India’s factory activity moderates in September

India’s manufacturing activity has moderated in September indicating that the growth in the sector has lost some momentum, creating a case for a reduction in interest rates by the Reserve Bank of India.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector stood at 52.1 in September compared to 52.6 in August, with a reading above 50 signaling expansion in the manufacturing activity over the previous month.

The activity in the Indian manufacturing industry eased slightly in September but the output is still rising at a decent pace and the sector looks likely to have delivered a stronger contribution to the GDP growth in Q2 FY2016/17, with the quarterly reading for the PMI’s Output Index up from 51.4 during April-June to 53.6.

The biggest area of strength for factory growth was the external demand as firms witnessed robust surge in new export orders since July 2015, supported by the growth in output and purchasing activity, while new improved client demand also supported the upswing in order books.

As far as prices of manufacturing goods are concerned, the survey noted that the average purchase costs increased at a faster pace in September, but one that was weak compared to its long-run trend. Data implied that manufacturers attempted to protect profit margins as output charges were raised further.

Despite ticking higher, the rate of inflation was historically muted and it has given the central bank enough room to ease policy further. The Reserve Bank of India in its monetary policy review today slashed its key lending rate or the repo rate by 25 basis points to a six-year low of 6.25 per cent, from 6.5 per cent.

Consumer inflation in India cooled sharply to 5.05 per cent in August, almost at the RBI's March 2017 medium-term target of 5 per cent, and with favorable monsoon rains, it is expected to tread lower in the coming months.