fiscal deficit estimates, unconvincing, Budget 2012

The Budget was expected to make some credible fiscal correction and lay out a clear roadmap for fiscal consolidation. It is now accepted that fiscal consolidation has suffered a setback. This article looks into the creative accounting in fiscal correction and the setback to monetary-fiscal co-ordination.

The process has been revenue-led, with little expenditure rationalisation (see table).

Deficit correction has been envisaged through increase in indirect taxes — mainly service tax, and non-tax revenues (primarily through sale of telecom licences). Expenditure cutbacks are expected to come about through reduction of major subsidies. The reliance on indirect taxes has inflationary potential.

There is no evidence of expenditure rationalisation in the Budget, except for the proposed amendment to the introduction of a Medium Term Expenditure Framework. However, the efficacy of such a policy measure (considering that the next Budget will be a pre-election one) seems open to doubt.

CONTINUED FISCAL SLIPPAGE

Deficit targets will once again not be met. The year 2012-13, compared with 2011-12, is not expected to see any dramatic changes in economic growth on the domestic or global front. Growth and fiscal outcomes will be similar, except for some improvements on the revenue side (taxation).

To maintain the budgeted deficit numbers, the government will resort to cutbacks in Plan expenditure, leading to reduction in developmental expenditure.

In addition, on account of market uncertainties, disinvestment proceeds may not be fully realised. Keeping in view the past years' experience of sale of telecom licenses, the amount expected to be raised this time around looks over-optimistic. The budgeted fiscal deficit at 5.1 per cent may slip further to 5.5 per cent of GDP.

The golden rule for deficit correction is to eliminate the revenue deficit. The Budget for 2012-13 proposed to amend the Fiscal Responsibility and Budget Management (FRBM) Act by giving statutory recognition to the concept of “Effective Revenue Deficit” (Revenue deficit less grants given to States for creation of capital assets). Paragraph 12-14 (page 20) of Fiscal Policy Strategy Statement justifies the use of Effective Revenue Deficit (ERD).

The 13th Finance Commission in its report in paragraphs 9.20-9.25 recognised the definitional refinements in respect of revenue deficit and grants for creation of assets as capital grants. However, in paragraph 9.24 (page 130) of its report, it has clearly mentioned that it would be appropriate to continue with the existing classification of expenditure as revenue or capital and that it cannot be disturbed in an ad hoc manner.

Thus, the claim of Budget 2012-13 that zeroing of ERD tantamounts to elimination of revenue deficit is a reflection of creative accounting.

MONETARY OPTIONS REDUCED

Financing of the fiscal deficit reveals the following. First, during 2011-12, there was higher recourse to short-term borrowings (91,182 and 364 day treasury bills) to the extent of Rs 1,16,084 crore as against the budget estimate of Rs 15,000 crore.

This implies that during 2012-13, there will be greater pressure on the short-term interest rates on account of higher borrowings to repay these treasury bills.

Second, the gross market borrowings during 2012-13 would be around 5.6 per cent of GDP (Rs 5,69,616 crores). Such a high level of market borrowing would put adverse pressure on monetary, liquidity and debt management. Third, even though the budget estimate assumes zero net Ways and Means Advances (WMA) from the RBI, in the event of continuation of tight liquidity conditions, the recourse to WMA is inevitable. This development would further aggravate the problems of monetary management. With such fiscal pressure, there is no manoeuvrability left with the RBI for a policy (repo) rate reduction.

Securities issued against small savings as a financing item of fiscal deficit are budgeted at Rs 1,198 crore, against an outflow of Rs 10,302 crore. This implies that small savings is losing its importance as a financial savings instrument. The National Small Savings Fund (NSSF) is budgeted to have a loss of Rs 7,117 crores in 2012-13 on top of a loss of Rs 6,233 crores in 2011-12 and a loss of Rs 12,706 in 2010-11.

The accrued income has fallen short of expenditure on account of higher interest payments and management costs. This has occurred despite a reduction in agent commissions. The proposed Rajiv Gandhi Equity Savings Scheme with tax incentives would have adverse implication for small savings as the tax exemption would entice savers.

Our FRBM experience for the last 8 years has been in the nature of an unkept promise. Therefore it is appropriate that an Independent Review and Monitoring of the implementation of FRBM process be instituted in the form of a fiscal council. This would add to the integrity and effectiveness of the Budget.

BY Dr. R. K. PATTNAIK  & Dr.ARCHANA PILLAI

10 things to know about Mahindra Satyam, Tech Mahindra merger

Mahindra Satyam and Tech Mahindra are likely to announce a merger plan today. The move was widely expected. In January, Mahindra Satyam Chairman Vineet Nayyar had said that the two firms would merge by the end of this year. The Mahindra name is likely to be retained in the combined entity.

Tech Mahindra had acquired the scam-hit Satyam Computer Services in 2010 and re-branded it as Mahindra Satyam with the eventual goal of merging the two firms. In January 2009, erstwhile Satyam Computer’s founder and then Chairman B Ramalinga Raju had admitted to fudging account books to the tune of thousands of crores of rupees.

The most important factor to watch for markets would be the swap ratio, which is the ratio in which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition. On the basis of the current market prices where the shares of Mahindra Satyam and Tech Mahindra are trading, the likely swap ratio appears to be close to 9:1. That is, 1 share of Tech Mahindra will be issued for every 9 shares of Mahindra Satyam.

Here are 10 things to know before the announcement is made.

1. The boards of Tech Mahindra & Mahindra Satyam will meet today to finalise the merger plans for the two technology ventures. In a statement to the Bombay Stock Exchange Mahindra Satyam said, "Satyam Computer Services Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on March 21, 2012, inter alia, to consider the Amalgamation of the Company with Tech Mahindra Limited..."

2. Shares of both companies traded higher ahead of the board meeting. At 0918 hours, Tech Mahindra stocks rose nearly 2.5% higher on the BSE at Rs 664. Shares of Mahindra Satyam jumped 2.2% at Rs 75.80. The BSE Sensex gained 0.2% or 33.47 points at 17,349.

3. Implications: The combined entity will have revenues of $2.7 billion. The combined entity will become 5th largest IT company in terms of market cap. British Telecom, which contributes 35% of revenue, will contribute only 16% of revenue in the merged entity. Exposure to telecom verticals will reduce to 55-60% against 100% currently. The combined entity will create a diversified company in terms of geographical reach. The merged entity will have a net cash of Rs 1,500 crore on its books against a net debt of Rs 1,100 crore currently. The earnings per share of the merged entity would be Rs 79 per share.

4. The market will be keenly watching the nuances of the merger structure and swap ration between Mahindra Satyam and Tech Mahindra. Possible scenarios: (a) Tech Mahindra buys Mahindra Satyam, or (b) Mahindra Satyam buys Tech Mahindra, or (c) Merger between Tech Mahindra and Mahindra Satyam. Jagannadham Thunuguntla, Strategist & Head of Research at SMC Global Securities Limited says Tech Mahindra will buy Mahindra Satyam in all likelihood.

5. Swap Ratio of the merger will be the most important factor: The swap ratio can be based on different bases such as net worth, EPS (earnings per share), market price, etc.

6. Irrespective of the swap ratio, the impact on the promoter group 'Mahindras' will be limited, as they hold virtually similar percentage of stake in both the entities. That is, they hold about 42.65% stake in Mahindra Satyam and 47.65% stake in Tech Mahindra. However, any swap ratio in favour of Tech Mahindra may prove to be slightly better for 'Mahindra' group.

7. Any swap ratio close to 9:1 will make the merger transaction "market-price" neutral, which means that there may not be any arbitrage opportunity left for the shareholders of both the companies. "However, the swap ratio close to 9:1 appears to be "value" decretive for the shareholders of Mahindra Satyam and "value" accretive for the shareholders of Tech Mahindra, Thunuguntla said.

8. If the final swap ratio is close to 9:1, then the combined entity will be having the market cap to the tune of about Rs 17,000 crore.

9. If the final swap ratio is close to 9:1, then the current Mahindra Satyam shareholders will hold about 51% in the combined entity and the Tech Mahindra shareholders will hold about 49% in the combined entity.

10. British Telecom, other promoter of Tech Mahindra, will be closely watching this space as they hold about 23.20% stake in Tech Mahindra. If the swap ratio is 9:1, then British Telecom will hold about 11.44% stake in the combined entity.

(With inputs from SMC Global Securities Limited note on the merger)

Cheers Future Mangers: No effect of recession on B-school placement

The job market, according to B-Schools that have released their placement data, hasn't looked this good in a long time for fresh management graduates. Top global recruiters have upped their hiring, average salaries have jumped by a minimum of 20 per cent and the number of companies visiting campuses for placement interviews has touched the three-digit mark in most institutes.

The 2012 Placements Story is best told by the experience of IIM-C. Campus interviews at the institute were slotted to be held over five days, but each of the 356 students of its graduating class bagged a job in four. And some must have landed more than one, because the number of collective offers for the batch stood at 423.

Leading the field, of course, is IIM-A, where the prestigious Boston Consulting Group has issued offers to 17 graduates, as against 11 last year. The placement process is still in progress at IIM-A, so the final figures aren't in.

Already, the average salary being dangled is reported to be in the stratospheric Rs 22 lakh to Rs 27 lakh range. The amounts on offer are being buoyed because of the interest evinced by big-ticket consulting companies such as McKinsey (which also hired 17 students from the Indian School of Business, Hyderabad), Bain and Co, AT Kearney, Accenture and Oliver Wyman.

At IIM-C, Zurich Financial Services have come to an Asian BSchool for the first time in its history to recruit for its Zurich and New York offices. Bank of America Merrill Lynch, according to CoolAvenues. com, has hired for an international finance opening based out of Hong Kong.

Capital One has made a global offer for its Dallas (Texas) office. And Swiss- Italian steel giant Duferco is hiring for the first time for its Lugano (Switzerland) head office.

The good news isn't limited to the IIMs. "As many as 98 per cent of our students got jobs within the first three days," an ebullient Fr. E. Abraham, director, XLRI-Jamshedpur, says.

Global investment banking and securities firm Goldman Sachs has made 12 offers for asset management and investment research jobs at the institute. XLRI's graduating batch of 235 has snapped up 284 offers, confirming the pattern of more jobs than new graduates.

Even at newbie IIM-R, the graduating batch of 47 has 58 offers to show, and the placement exercise is continuing. At Bharatiya Vidya Bhawan's S. P. Jain Institute of Management and Research, the batch of 176 has got 257 offers - 51 per cent of them going home with an annual domestic salary package of Rs 15 lakh or more.

"Our highest domestic salary this year is Rs 19 lakh, compared with Rs 15.5 lakh last year," Munish Bhargava, head of placements, IIFT, discloses. "The average salary of our students has also gone up to Rs 12.1 lakh from Rs 11.62 lakh last year," he adds.

IIFT students have accepted offers from 80 companies, including 33 first-time recruiters such as Duferco Group, German logistics giant Duegro, consulting biggies KPMG and Technopak, and ecommerce leader Flipkart. At XLRI, the highest domestic salary is Rs 40 lakh and the top international offer stands at Rs 61.8 lakh.

B-Schools attribute this surge in interest in hiring to the active role of the alumni. "Our alumni network around the world played a critical role in the placement process," Bibek Banerjee, director, Institute of Management Technology, Ghaziabad, says.

The sentiment is shared by Amit Dhiman, IIM-Calcutta's placement director, who says in a statement to CoolAvenue.com: "The alumni played a crucial role in this bad market scenario and were there to support us whenever we needed them. This shows the strength of Brand IIM-C."

Union Budget 2012-13- From the IMT-H Intellect Purse

Hello friends,
Below are the links to the articles on Union Budget 2012-13 by Dr. R.K. Pattnaik, Professor & Dean, IMT-H; and our beloved Dr. Archana Pillai, Associate Professor (Economics & Strategy), IMT-H; published in The Hindu Business Line and Free Press Journal :

1) Pattnaik R.K., Archana Pillai (2012, March 12). Action plan to cut fiscal deficit needed. The Hindu Business Line.  http://www.thehindubusinessline.com/opinion/columns/article2988282.ece?homepage=true
2) Pattnaik R.K.,Archana Pillai (2012, March 14).Time to lay out road map and push growth. Free Press Journal. http://www.freepressjournal.in/news/52682-time-to-lay-out-road-map-and-push-growth.html
3) Pattnaik R.K.,Archana Pillai (2012, March 17) Budget misses the mark on the fisc. Free Press Journal http://www.freepressjournal.in/news/53361-budget-misses-the-mark-on-the-fisc.html