Weekly Digest

Indians pay more for petrol than neighbors

Petrol in India is costlier than in its neighboring countries and in the US, primarily because of high taxes.
Petrol in Delhi currently costs Rs 66.42 per liter as against Rs 44.88 a liter price in the US, minister of state for petroleum and natural gas RPN Singh told Rajya Sabha in a written reply to a question.

Even after this month's reduction of Rs 2.22 per liter in rates, petrol at Rs 66.42 a liter in Delhi is costlier than Rs 48.64 a liter in Pakistan.Whereas in Sri Lanka it is Rs 61.38 per liter, Rs 52.42 a liter in Bangladesh and Rs 65.26 per liter in landlocked Nepal. Incidentally, Nepal does not have a refinery and imports its entire requirement from India. However, petrol in Europe is costlier than in India. In the UK, it is priced at Rs 104.60 per liter.

Prime Minister Manmohan Singh said of the Rs 66.42 per litre price of petrol in Delhi includes Rs 26.59 a liter because of taxes (both central excise and local sales tax or VAT).The US has only Rs 5.32 per litre tax on petrol while it is Rs 62.47 a liter in UK.Petrol price in India has risen 39% or Rs 18.49 per liter, since April 2010.

Actually Petrol in Delhi cost Rs 47.63 per liter to in 2010.

The refinery price of petrol is just Rs 36.82 per litre, on top of which Rs 2.25 in inland freight and marketing cost and margin is added. Besides, Rs 14.78 per litre is the excise duty component and Rs 11.07 a litre is the sales tax that Delhi government charges. Another Rs 1.50 is the commission that petrol pump dealers earn

"Whenever there is an increase in retail selling prices of these petroleum products, the state governments' sales tax/VAT collection goes up correspondingly," Singh said.

Illustrating the states' increase in revenue due to hike in fuel prices, the minister said for every Re1 increase in petrol price per litre, the Delhi government raked in 20 paise as the VAT rate in Delhi was 20 percent.

Similarly, for every Re1 increase in price of a litre of diesel, the Delhi government raked in 12.5 paise in taxes as the VAT rate for the fuel was 12.5 percent.

Manmohan stays firm on FDI decision

Prime Minister Manmohan Singh on Tuesday said the government's decision to allow foreign equity in retail was not taken in haste but after a careful thought to how it would benefit the common man in India. "We didn't take the decision hastily. We have thought a lot and firmly believe that this decision will benefit us a lot," said Manmohan Singh, addressing a rally of elected Youth Congress leaders in New Delhi.

Manmohan Singh said foreign direct investment in India's retail sector would benefit farmers as "this will bring latest technology to India and improve its agriculture sector by saving farm produce from being destroyed. This will curb inflation and the common man can get daily essential commodities at lesser rates”.

He asked young leaders of the ruling Congress to help the government in sending a right message to the public about its intention behind the FDI in India. Manmohan Singh flayed the opposition for opposing the key decision on economic reforms, saying they were disrupting parliament and blocking crucial legislations needed for India's economic prosperity.

He said the world economic situation was affected by the US and European debt crisis. We weathered the storm of 2008 meltdown. We need new legislations and amendments to older ones now. We need parliament to work properly, but the opposition is not allowing it to happen. He said the government was trying to end the parliament logjam, triggered by various issues, including inflation, statehood for Telangana and now the FDI controversy.

He said the government has put certain conditions in the FDI decision so that small and medium enterprises were not affected by the proposed foreign equity. There will be no coercion. The states which think it is not fruitful can choose not to allow foreign shops in their states.

IMF Warns Japan on Threat of Debt

The IMF released a report warning that Japan’s debt is unsustainable.  True:  Japan has the highest debt to GDP ratio or any nation in the OECD.  However, Japan is vastly different from Europe in that its debt is internally financed by the Japanese people.  Furthermore, Japan’s unique case of deflation makes JGB the only investment vehicle in which someone can receive a positive return.  Japanese institutions and citizens will continue to roll over their bonds and buy new JGB.  The problem with Europe is not that their debt is too high (which it is) but that it is viewed as too risky for investors to roll over.  I do not see a massive liquidation of JGB by the Japanese people any time soon. 

Interest payments on this debt are so high (even with very low rates) that Japan must finance its government operations with ever higher borrowing.  There is no chance the central bank in Japan can raise rates at this point.  If you would like to know how Japan got into this trap, look at the United States today.  We are dutifully following them down the same path.  If we do not change course I would suspect a future U.S. debt crisis to look more like Japan than Europe.

Video:

http://online.wsj.com/public/page/0_0_WP_3001.html?currentPlayingLocation=37&currentlyPlayingCollection=News&currentlyPlayingVideoId={8FF3D298-2E74-40B1-872F-F0EF247D263A}

EUROZONE says "HELP!!!!"

The Greece crisis or to put more rightly the anchor for Euro crisis is seen as result of excess spends and no saving attributes of the country. The sore public spending, done blindly out of the borrowings, thus, leading to a crisis of unmanageable debt on such a large scale. Greece total Debt mounting to 329 Billion Euros and total debt in % of GDP being 165.6% , highest in the modern history.

Let us analyze some of the suggestions made by Financial Times columnist Martin Wolf: “Thinking through the unthinkable “

a) Restoration of external competitiveness and economic growth

One way to achieve it is through aggressive monetary easing, i.e., devaluating Euro to increase competitiveness. Weak Euro will raise exports. Strategically it will help core to move out of periphery into the international market to balance out the asymmetry caused by current euro crisis. Within the Periphery (PIGS nations) it is the structural imbalance which is major reason for widening productivity gaps. There is an urgent need for major structural reforms to fuel innovation and growth in public-sector productivity to meet its own domestic demands and not completely depending on Core for services and products.

b) Deflationary adjustments in periphery

Other important step on periphery front would be taking stringent austerity reforms to tackle the imbalance due to overspending within the country.

However the Austerity measures to contain spending should not affect the price directly like- higher interest rates as a reform measure. We know Interest rate changes should satisfy both high investments and high savings.

In current scenario direct price adjustments like increasing interest rates may be useful for periphery to control spending as:

·        Borrowing will become expensive,

·        Consumers will postpone consumption,

·        Thus containing the spending and raising the savings.

But dampening consumer demand will have adverse impact on core as supply will be affected directly driving out investments and thus decline in productivity.

Government needs to restrict the spending power through other cut measures like cutting nominal wages, scraping tax exemptions, imposing luxury levies, cutting down on benefits, cap on bonuses, pensions, reduction in subsidies ,etc. And these austerity reforms are needed across the board for everyone and not the bourgeoisie class only.

But drawback can be an unrecoverable spiral deflation which will further lead to sector shrinks, leading economy to collapse further.

c) Financing of the periphery by core

Looking at the third solution it is more idealistic assuming that financing alone will help periphery recover. The bailout “rescue packages” (so far 2 bailouts for Greece) has only proven not tackling the crisis, but only postponing the inevitable fall out.

d) Debt re-structuring and partial breakup of EU

Another solution seen can be ECB writing off debts and investing in the non- operational but productive assets to revive country’s economy. Will such action bring out the desired outcomes again doubtful itself, as apart from political wrangling and structural imbalance, growth is also slow because of loopholes in work rights enactments like generous pension benefits, unemployment allowances, etc. without any corresponding increasing productivity thus weakening the economy  further.

For sake say one other way of re-structuring is- Core like Germany proposing buyout. But “colonization” means Greece losing its sovereignty and in current scenario with Greece at advantage, it can rather choose to step out of euro Zone and other Eurozone countries may follow suit. While countries will move out of the Euro Zone easily, debt will still remain and pile up on ECB.

With no particular solution yet in hand to help resolve, Questions still remain wide open to be answered like:

Should Greece fiscal failure to be blamed solely or the EU Core (Germany, the Netherlands, Austria, and France) equally to be blamed for prompting and propelling the purchase power in periphery resulting in a crisis this big?

What are the Country specific solutions that are needed to answer the problem?

What  common solutions /measures on the whole inclusive of all EU countries needed to be undertaken which has  provisions to make sure that future defaults of other Eurozone countries could be contained in initial phase itself ?

Posted by: Malvika Marwah

Weekly digest (7/11/11 to 13/11/11)

DGCA to look into reasons behind cancellation of flights by Kingfisher

The Directorate-General of Civil Aviation (DGCA) will examine the reasons behind more and more cancellation of the Kingfisher flights. The airline has cancelled over 80 flights over past three days including nearly 30 on Wednesday itself.

The airline is believed to have grounded six aircraft. In this regard, the airline clarified that it has initiated reconfiguration of its aircraft. This exercise will require few of the aircraft to be out of service for the next few weeks, requiring a temporary modification of some of the flight schedules. Once the reconfiguration is complete, these aircraft will be pressed back into service, it added.

Reality check:

The airline, laden with huge debt, is facing problems from various vendors and service providers over payment. It is getting service on cash and carry basis from oil companies. Kingfisher has suffered a loss of Rs 1027 crore in 2010-11 and has a debt of over Rs 7057 crore. Kingfisher is trying to reduce expenditure as much as possible.

Aviation sources said the airline has grounded eight of its leased turboprop ATR aircraft. Airport operators, too, are putting pressure on the airline to clear their dues relating to airport and other charges.

Video:

http://ibnlive.in.com/videos/201105/cashstrapped-kingfisher-cancels-almost-80-flights.html

Moody's downgrades rating of Indian banks

Global ratings firm Moody's on Wednesday downgraded the entire Indian banking system's rating outlook from “stable” to “negative,” citing the likely deterioration in asset quality in the months ahead.

The ratings agency said monetary tightening and a slowdown in the economy would cut bank loan growth, while a recent liberalization of savings deposit rates by the central bank would pressurize lenders' profitability.

The BSE banking index fell on the news of the downgrade to 11,307.99 at 9:37 am, down 0.1 per cent, against a 0.2 per cent rise in the benchmark index.

Financial Services Secretary D.K. Mittal said, “We are not concerned. We are not affected by the downgrade. Looking at how the global banks are faring, we are much stronger and the ratings have no significance”.

SBI Chairman Pratip Chaudhuri pointed out that the health of Indian banks was much better compared to their global lenders. “Perhaps they [rating agencies] are stung by experience elsewhere. But otherwise I feel Indian banks are well-regulated. We don't deal in exotic products. Also, the amount of leveraging is low, we do 12-14 times while the best of European banks leverage up to 20 times,” he said.

The new Moody's report further concludes that bank ratings may come under downward pressure, although currently, the negative outlook on the banking system contrasts with the stable outlook assigned to the bank financial strength ratings of 14 of the 15 rated banks.

For those banks with weaker capital ratios on average and higher asset quality pressures relative their individual rating levels, their standalone ratings are likely to come under pressure as underscored by Moody's downgrade of the State Bank of India's BFSR to D+/Stable/Baa3 from C-/Stable/Baa2 on 4 October 2011.

Moody's expects the government to remain committed towards providing support to both public and private banks. Such potential support translates to an average one-notch uplift to the banks' debt and deposit ratings to Baa2, compared with their standalone base line credit assessment of Baa3.

Microfinance institutions may continue to face credit crunch

Exactly a year after the state government introduced a self-styled AP Micro Finance Institutions Act— a first in the country— MFIs are grappling to survive. Not only have repayments plunged from about 90 per cent to less than 10 per cent in the past year, fresh loan disbursements are few and far between.

The Act prevents MFIs from offering multiple loans and stipulates they cannot give loans without government permission.

Lending from banks has also dried up with MFIs coming under fire for allegedly charging exorbitant interest rates and pressurizing borrowers to repay loans.

Banks had stopped lending to microfinance institutions across the country after the Andhra Pradesh Government put in place a regulation in October last year.

According to a senior official of Indian Banks' Association, corporate debt restructuring of loans of major microfinance institutions early this year made banks aware of the ‘hollowness' in the asset quality.

It is important for banks to avoid a repeat of this situation and, hence, there is caution, he added.

As a result, operations have been hit hard and companies including top five players in the country chiefly SKS Microfinance Ltd, Bharatiya Samruddhi Finance of Basix Group, Spandana Spoorty, SHARE Microfin and Asmita Microfinance Ltd are now diversifying into other services such as offering insurance policies, gold loans and credit for buying mobiles.

 Dilli Raj, CFO, SKS Microfinance said, “We are not adding any new members this year. We’d rather focus on servicing existing customers. While micro loans will continue to be our activity, we are planning to seek a banking license so as to diversify our services. Besides, we are also conducting pilot programmes such as loans for mobile phones and facilitating kirana stores to buy goods on credit.

India’s Wants and Gains: G20 Summit Cannes, 2011

India was in an ebullient mood which was clearly visible when Mr. Manmohan Singh offered India’s help in solving the Eurozone crisis. It sought to push for increase in banking transparency and exchange of information to combat tax fraud and other illicit flow of capital across borders (The sarcasm is that India couldn’t trace money inside the economy). Cannes declaration urged all jurisdictions to adhere to the international standards in AML/CFT areas. It also asked Global forum (105 Signatories) to complete the first round of reviews and advance the next round. India could not initiate a discussion with other G20 members with regards to Financial Transaction Tax (FTT) for the development of the economy. India which was facing double digit food cost inflation this month can take solace from the fact that G20 has taken up the issue of price volatility in foods as a serious issue. However, G20 had not initiated any discussion on export restrictions on food commodities . The declaration also had no mention of regulatory regime global commodity prices. As, India was on the verge of becoming the fourth strongest economy in the G20 group it felt the need for greater representation of itself in the IMF board. To this extent it was disappointed when G20 declaration did not offer any firm commitments. While India has managed to play a key role in shaping the G20 agenda, the Cannes summit is bogged down by the Euro zone crisis. But going forward the Indian influence on G20 will depend on how India addresses its’ own problems. In such a scenario will India take up its issues in other world forums and are the countries all ears to what India is pitching for is still a question mark to Manmohan and Co.

Post by: Tandlum Suhash

What is China upto in the Eurozone??

Has this question hit you like a sudden burst of rain? The European Financial Stability Fund is expected to hit the 1 trillion euro mark and this will not be possible without Chinese support. It is interesting to consider how an emerging market which till the last decade was a closed economy (with trade barriers) today is the knight in shining armour for the developed world.

Chinese President Hu Jintao visit for the G 20 summit later this week is being touted by the Europeans as an opportunity to win him over and get China to support the bailout. China on the other hand would use this opportunity not just to generate goodwill but also to fulfill its colonial ambitions. Knowing fully well the motives of China, Europe is still willing to bend that extra bit. Will this redraw the global trade balances? Is this a paradigm shift in not just global wealth concentration but also in power centres? Do post your thoughts and watch out for India's stance at G 20 later this week..Lots to ponder about!!!