Budget Highlights 2007

• Ambit Capital
  
  Agri investment to go up by +2% of GDP
  Irrigation focus to benefit Kirloskar Bros
  Education thrust to benefit paper & stationery cos; +ve for BILT, Navneet , Camlin
  Rural thrust to benefit Infra, Irri, Power;+ve for IVRCL, Jain Irrigation
  Education sector focus to benefit NIIT, Aptech, Educomp & Prithvi Info
  Rural focus will benefit SBI, PNB, BOI for agri advances
  Immunisation prog +ve for Wockhardt, Panacea Biotech
  Farm sector focus +ve for tractor cos - M&M, Punjab tractors, Escorts
  Agri focus +ve for Monsanto, Rallis, Bayer Crop, JK Agritech
  Irrigation thrust to benefit Jain Irri, Finolex pipes
  APDRP +ve for Jyoti, KEC Int'l, Kalptaru
  Ultra Mega Power Projects +ve for BHEL, Alstom, Siemens, ABB
  UMPP also +ve for PFC
  Increased outlay to NHDP +ve for L&T, Gammon, HCC
  CBM projs benefits Shiv Vani, ONGC
  TUF extension to benefit textile sector
  Higher tourism allocation to benefit Hotels, Pvt. Airports
  More branches for RRBs Positive for PSU Banks
  Short selling allowed for inst will improve liquidity in the mkts
  Higher defence exp to benefit BEL, BEML, L&T, Dynamatic Tech, AstraMicro
  Increased focus on PPP to benefit construction cos
  E-governance thrust benefits Vakrangee, 3i Infotech, TCS
  Rural telephony to benefit Rel Com, Bharti Airtel
  Fiscal deficit of 3.3% to ease pressure on interest rates
  Reduction of peak import duties to benefit Capital goods cos
  Customs on man-made fibre reduced from 16 to 8%
  TUF continuation to benefit textiles, +ve for SRF
  RSM: concession rate of 5% to all research units
  CVD on aircrafts incl helicops negative for Global Vectra, Air Deccan, SpiceJet
  RSM: no change in service tax rate
  Excise duty on petrol & diesel reduced, +ve for Oil Mktg Cos & economy in general
  Excise duty on footwear reduced, +ve for Bata, Liberty, Mirza Tanners
  RSM: Excise on cigarettes increased by 5%
  RSM: service tax exemption increased to 8,00,000
  ITC to marginally impacted by excise hike
  Service tax net widened, includes individual PMS services
  RSM Infrastructure status for Gas Pipeline & Storage Facilities & Navigation schemes
  Section 80 IA benefit extended to ppeline cos, very +ve for PSL, JSAW, Man Industries, GAIL, GSPL, IGL
  Diamond Mfg & trd deemed income taxation introduced
  RSM: Benign assessment procedure for gems industry
  Hotel & Conventions centres to get tax benefit
  Tax holiday for new hotels, +ve for Parsvnath, Anant Raj
  MAT introduction negative for software cos
  MAT levy on exempt Dividend & Cap Gain income for corporates
  Cap Gains Exemption for NHAI & REC bonds to continue
  Increase in dividend distribution tax -ve for corporates/MFs
  FBT exemption for Free Samples; to benefit corporates
  ESOP SUBJECT TO FBT
  Corporate Headline Tax Rate 33.99%
  Additional education cess of 1% to hit corporate earnings
  ATF exemption on smaller aircrafts to benefit Air Deccan
  Budget -ve for IT & Cement cos
  RSM: Tax deduction for housing projects not extended
  Housing Companies Exemption lapses
  Budget +ve for pipeline cos, cap goods, oil mktg cos, infra, FMCG & textiles
  Service tax exemption on clinical trials, +ve for DRL, Ranbaxy
  RSM: service tax on commercial rentals
  SEZ benefit restricted to new units; trf of exst bus not eligible
  
• CNBC-TV18
  
  Healthcare allocation increased; +ve Max India, Apollo Hospitals
  More focus on HIV eradication; +ve MNC Pharma, Cipla, Wockhardt
  Education allocation increased; +ve Educomp, NIIT, APTECH
  Healthcare allocation increased; +ve Max India, Apollo Hospitals
  Focus on HIV eradication; +ve for MNC Pharma cos like Novartis
  More allocation to self house groups; +ve ICICI Bank
  Higher Allocation for roads; +ve IVRCL, HCC, Gammon, Nagarjuna
  More agri focus spending; +ve ITC
  Higher Agri Focus; +ve Ruchi Soya, Agro Dutch, Agro Tech
  Higher farm lending; +ve for all PSU banks
  Higher agri focus; + Ve fertiliser & pesticide co
  More Irrigation projects; +ve pipe for cos esp PSL
  IT spending on Food corporation on India; Focus - TCS, CMC
  Seven more UMPP under process; focus: NTPC, Lanco, GMR, REL Ener, Tata Power
  Seven more UMPP under process; Focus - PFC
  Higher outlay under NHDP; +ve IVRCL, HCC, Gammon, Nagarjuna
  Higher Outlay for road infrastructure; + ve cement and CV players
  Seven more UMPP's to be awarded; +ve Electric Eq suppliers
  Higher outlay for TUF; + ve Lakshmi Machine Works
  Higher outlay for TUF; + ve Gokaldas, Arvind Mills
  Higher outlay for TUF; + ve textile cos
  Higher tourism allocation; + ve TFCI
  New mortgage guarantees/instruments to be introduced; + ve HDFC, HDFC Bank, Dewan Housing, LIC
  New mechanism for unlocking value thru exchangeable bonds against subsidiaries by group cos; Focus - Tata Motors, M&M, Bharat Forge, CESC, Bajaj Auto
  Allocation to defence increased; + ve BEL, Nelco, Astra, Avantel, CMC, Zen Technologies
  Higher e-Governance Spend; Focus CMC, ICSA, Wipro, 3i Infotech, TCS, Vakrangee Software
  PHASE OUT OF CST; PREPARE ROADMAP FOR INTRODUCTION OF GST BY 2010; + ve INDIA INC
  ON COURSE TO ACHIEVE FRBM TARGETS, + VE INDIA INC, MKTS
  PEAK CUSTOMS DUTY CUT ( Non Agri); + ve INDIA INC
  Customs duty on PTA, MEG Cut; + ve RIL, IPCL, INDO RAMA
  Cut in customs duty on Gem stones; + ve Vaibhav Gems, Gitanjali Gems
  Custom reduced on medical equipment to 7.5%; + ve Apollo Hospitals, Max India
  Customs duty cut on man-made fibre; + ve RIL, Indo Rama
  NO INCREASE IN SERVICE TAX; + ve INDIA INC, Indian Consumer
  Excise duty cut in Diesel & Petrol from 8% to 6%; + ve HP, BP, IOC
  Duty cut on water carriage pipes; + ve PSL, Ratnamani, Finolex Pipes
  Increase in excise duty for cement prices above Rs.190 per bag; -ve ACC, Guj Amb, Shree Cements
  NO CHANGE IN CORP TAX; - ve India Inc
  Infrastructure status for Gas Pipeline; Positive GAIL, CAIRN, RIL, GSPL
  Cut in service tax on Clinical trials; + ve Biocon
  MAT definition tweaked
  Tax Benefits extended for 5 more years; + ve Pharma & Auto co's
  IT/ITES sector to come under MAT: to pay 11.22% of adjusted Book profits; - ve IT industry - Infosys, TCS, Wipro
  150% weighted deduction extention ;+ve for pharma sector Sun Pharma, Ranbaxy, Dr reddys
  Dividend Distribution Tax hiked; - ve for high dividend payers - ONGC, NTPC, IOC, RIL
  Esops to be brought under FBT; - ve Tech, Media cos
  Dividend Distribution Tax increased; - ve Mf's
  Rent on Commercial properties; - ve Unitech, Mah Gesco
  EFFECTIVE TAX RATE UP FROM 33.66% to 33.99%; Tax rates of 30.90% for SMEs (total income < 10mn)
  Service tax exemption on clinical trials; + Ve Dr Reddy, Ranbaxy, Biocon
  Service tax on commercial property rent; - ve Pantaloon, Shoppers Stop, Trent
  Service tax on commercial property rent; - ve Multiplexes
  MAT not levied on 10 AA - SEZ's spared; marginally positive for SEZ players
  Proposal for Single tax levy on Telecom; directional + ve for telecom's
  Export Duty of Rs 300/tonne on iron ore; Negative for Sesa Goa
  Customs duty cut on coking coal; + ve for steel, power co's
  Measures to contain cement prices; +ve for construction co's

Budget leaves IT Companies on MAT

Shares of IT and BPO companies sank on Wednesday after Finance Minister P. Chidambaram announced that the Minimum Alternate Tax (MAT) will be extended to these companies.

"I propose to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B of the Income Tax Act," Chidambaram said in his budget speech in the Lok Sabha.
The Finance Minister said that he introduced MAT in 1996-97 for companies with book profits, and its purpose was to bring about horizontal equity in taxation. " MAT should therefore apply, as far as possible, to all corporate incomes," he said.

Also hurting the software companies' shares was the proposal to bring Employees' Stock Option Plan (ESOP) under the Fringe Benefit Tax (FBT). " The value of the fringe benefit will be determined, in accordance with a prescribed method, on the date of exercise of the option," the Finance Minister said.

The BSE IT index was down 5.85% to 4869.99. Among the major losers in the IT space were: HCL Tech (9.7%), Satyam (8.4%), Wipro (7.3%), Mphasis (7%), TCS (6%) and Infosys (5%).

"We believe that extension of MAT to companies that had earlier been promised 10A and 10B exemptions is likely to have an adverse impact on certain players," said Ashank Desai, Non-Executive Chairman, Mastek.

"In addition to that, the inclusion of ESOPs under FBT will add to the challenges being faced by employers in knowledge-intensive industries in attracting and retaining world-class talent," he added.

PAN made sole ID number for investors

Permanent Account Number (PAN) issued by the Income Tax Department has been made the sole identification number for all participants in the securities market.

Presenting the Budget, the Union Finance Minister said that an alphanumeric prefix or suffix would be added to PAN to indicate investments in different instruments.

This means along with their PAN, investors have to include some other numbers or alphabets indicating that investments in equity, bonds or mutual funds, said an official with a Mutual fund.
The decision is welcomed by investors, as they were confused by different proposal from SEBI and mutual fund organizations to go in for separate identification numbers.

Capital market regulator SEBI had introduced MAPIN followed by Mutual fund identification number (MIN) by Association of Mutual Funds in India (AMFI).

According to Mr A.P. Kurian, Chairman of AMFI, details of how to go about a single number — PAN - would be finalised soon. He said mutual funds would still have to follow the KYC (know your customer) norms.

Move on cement will be counterproductive

The 50 per cent increase in excise payable on cement retailing at over Rs 190 a bag (50 kg) is likely to push cement prices higher rather than lower, as intended by the Finance Minister.

Cement manufacturers, distributors and even consumers agree on this issue.

The announcement that excise, currently at Rs 400 a tonne, will be reduced to Rs 350 if the retail price is under Rs 190 a bag, or hiked to Rs 600 a tonne otherwise, has not gone down well and raised fears that cement may be sold in the black market.

Cement retails at an average of Rs 200 a bag across the country, said Mr D.D. Rathi, CFO of Grasim Industries. In high-demand markets such as Mumbai, the price range is Rs 225-250.

"The Government move will only push up cement prices as none of the cement companies, except for a few small ones in South India, sell at Rs 190. The cement manufacturers will only pass on the additional burden to customers, thus pushing up prices further," said Mr Hitesh Agrawal, Senior Research Analyst, Angel Broking.

In an effort to reduce duty by a marginal amount, the Government will in fact increase prices by Rs 12 a bag, because cement sells in retail at more than Rs 190, said Mr Rathi.

"How can you price your product based on what kind of excise duty it will attract? Price is a measure of manufacturing cost and distance, and freight rates have only been increasing. How can I sell at the same price at a place close to my factory and also at a location far away from it," he asked. Excise duty is a pass-through and will anyway end up being stacked on the ultimate consumer.

"Basic economics of demand and supply will overrule everything else," said Mr Krishna Kumar Karwa, Managing Director of Emkay Share & Stock Brokers Ltd.

"Tracking prices at the retail level for calculating excise duty is going to be a tough task," said Mr V.R. Datta, a Mumbai-based wholesale cement dealer.

"If I mark my cement bags to retail at Rs 190, how do I monitor the price at which it is sold," asked Mr Rathi.

In a high demand situation, there is also a risk that cement meant to be sold at an MRP of Rs 190 could be sold at a premium by retailers, leading to blackmarketing, said analysts. This would result in raids on retailers.

"Increased excise duty on cement would eventually be passed on to the consumer. For Indian construction, the costs would be higher and unpredictable," said Mr Y.M. Deosthalee, CFO of L&T, which is a large consumer of cement.

Cement stocks witnessed nervous selling by funds and retail investors. Shares of ACC, the country's biggest cement maker, tumbled by Rs 61 or 6.35 per cent to Rs 900.05, while Ultratech Cement fell Rs 55.30 or 5.84 per cent to Rs 891.10. Grasim Industries lost Rs 119.60 or 5.13 per cent to Rs 2,212.60, Gujarat Ambuja Cements plunged Rs 9.75 at Rs 115.95.

Tax disadvantage after Rs 5.10 lakh

Budget 2007 provides for increase in basic exemption limit of Rs 10,000 for personal income tax. The basic limit for women assessees has been enhanced to Rs 1.45 lakh and for senior citizens the limit has been pegged up at Rs 1.95 lakh. For regular taxpayers, individuals or HUFs, the basic income limit has been enhanced to Rs 1.1 lakh.

A new cess called "secondary and higher education cess" at 1 per cent of the tax (which means tax plus surcharge) has been introduced in this Budget. For individual taxpayers with income above Rs 10 lakh the maximum marginal rate of tax would be 33.99 per cent. Tax disadvantage sets in after the taxable income exceeds Rs 5,10,000.

In the case of taxpayers with income above Rs 10 lakh, the increase in basic limit has no impact owing to the `senior and higher education cess'.

The saving for taxpayers is not even Rs 1,000, and in respect of senior citizens the tax benefit is not really Rs 2,000 but much less.

Small and medium enterprises: In Budget 2007 surcharge has been withdrawn in the case of small partnership firms and corporates with income less than Rs 1 crore. For these companies, the effective tax rate has been reduced from 33.66 per cent to 30.90 per cent, resulting in tax relief of 2.76 per cent.

Tax on ESOPs: Shares allotted by companies to employees as sweat equity is not chargeable to tax as salary income at the time of allotment. The employer too would not have paid any tax on such allotment. Budget 2007 seeks to adopt the fair market value of the shares allotted to employees as chargeable to fringe benefit tax. However, when an employee transfers such shares the value subjected to fringe benefit tax earlier will be adopted as the cost of acquisition. Both Section 49 and Section 115-WB have been subjected to consequential amendments.

Educational loan repayment: Section 80-E relating to repayment of education loan has been extended for repayment of loan taken by the assessee for higher education of his relative (spouse and children). Currently onlyloan taken for higher education of self is eligible for deduction upon repayment. The Budget 2007 has extended the tax incentive in respect of loan repayment relating to education of relative. The term `relative' covers spouse and children of the taxpayer.

This is a welcome amendment as, in most cases, the borrower may not have an income and can start repayment only after completion of education. Now parents may opt to pay the education loan of children and thereby gain reduction in tax liability. Taxpayers now have some scope for tax planning in view of this change.

Telecom tariffs to fall with single levy regime

Telecom consumers got a mixed bag from the Budget, which on one hand proposed a single tax regime for telecom service providers and on the other brought mobile content service providers under the service tax net.

While the move to simplify the multi-farious levies paid by the service providers to a single slab could lower the overall tariffs for telephone services, the decision to bring content providers under the service tax net could make mobile value-added services such as ringtones, downloads and other entertainment-based applications dearer.

Currently, telecom operators pay up to 30 per cent of their annual revenues in the form of various levies, which include 10 per cent licence fee, 12 per cent service tax, 4 per cent spectrum charges and other State specific levies such as octroi and sales tax.

Panel to be formed

The Finance Minister, Mr P. Chidambaram, has asked the Department of Telecom to set up a committee to study the present structure of levies and make suitable recommendations to Government.

The Cellular Operators Association of India said that if the total levy is brought down by 5-6 per cent, it could result in much lower tariffs. However, the industry expressed concerns that no time frame has been set for the committee to make its recommendations.

Government's receipts from licence fee have been projected to increase from Rs 8,799 crore (Revised Estimates 2006-07) to Rs 9,902 crore (Budget Estimates 2007-08). There is also some cheer for more than 24 lakh PCO booth owners of State-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd who have been exempt from paying income-tax on the commission they earn.

The Budget also sought to underline Government's thrust on improving rural telephony by increasing the outlay for Universal Service Obligation fund from Rs 1,500 crore (RE 2006-07) to Rs 1,800 crore (BE 2007-08).

There's good news for telecom companies engaged in research and development. They will be allowed to deduct amount equivalent of one-and-a-half times of their investments for another five years. This provision was scheduled to end on March 31, 2007.

The use of bio fuels also got a leg up with the Government abolishing excise duty on such fuels. Cellular operators are increasingly deploying bio fuels to power their base stations and the waiver would reduce costs. However, the decision to bring renting of commercial property under service tax net will make it expensive for telcos to deploy their switches and base stations.

Mixed bag

Ringtones, downloads could get dearer as mobile content is brought under service tax

BSNL and MTNL PCO booth owners get income-tax relief on commission

Use of bio-fuels to power mobile base station gets a boost with excise duty waiver

Rural telephony gets more funding

Tax benefits for telecom R&D companies extended by 5 more years

ICRIER to study impact of big retail on mom-’n’-pop stores

Following directions from the Prime Minister’s Office (PMO), the commerce & industry ministry has mandated Icrier to prepare a study on the domestic retail sector, specifically to see if the emergence of large, organised retailers would displace mom-’n’-pop stores. The development is significant since Congress president Sonia Gandhi has called for an assessment of the future of small vendors if multinational retail giants such as Wal-Mart are allowed to set shop here.

The study will look at the impact that domestic retail chains have already had as well as the likely effect of allowing foreign-owned retail chains in the country, the commerce & industry minister Kamal Nath said on Tuesday.

It is expected to be a multi-dimensional study with focus on impact on farmers, employment, dislocation, prices and the small-scale segment. “Icrier has been asked to take into account various aspects of the retail industry and its affect on several elements of the economy. It is essentially a study on big-versus-small rather than foreign-versus-domestic retail,” Mr Nath said.

Last week, the PMO had written to the department of industrial policy & promotion (DIPP), seeking a study on the points raised by Ms Gandhi over the livelihood concerns of small vendors hawking fruit and vegetables. The letter had essentially asked the DIPP to consider the impact of both multinational retail giants and domestic retailers on small-scale entrepreneurs and mom-’n’-pop stores in the country.

The study is supposed to take into account the impact of retail chains such as Pantaloons, Shopper’s Stop and Reliance, apart from multinationals such as Wal-Mart. A number of players including Tesco and Watson are keen to tap the Indian market.

The minister also declared record FDI inflows of $2.04 billion in December 2006, which is 480% higher than the inflow of $0.35 billion in the same month of the previous year. Large chunk of the investments came in textiles, business services, chemical products and ceramics. Huntsman Investments of the Netherlands made the largest investment in textile sector. The company had earlier received a nod from FIPB to invest Rs 122.50 crore for acquisition of its existing Indian company. The other big investment came from Cairn, which invested in business services.

We expect total FDI inflows of $12 billion this year against $5.5 billion in 2005-06, the minister added. Total foreign equity investments were recorded at $9.3 billion during April-December 2006-07 against $3.5 billion in 2005-06.

The index of industrial production showed a growth of 11.1% in December 2006 against the same month the year before. Manufacturing recorded a growth of 11.9% in December 2006. “We are expecting 11% industrial growth this fiscal and a 12% in growth in manufacturing,” Mr Kamal Nath said. The industries that have shown an upward performance in December 2006 include wood and wood products, basic metal and alloy industries, metal products and parts, cotton textiles and leather.

Union Budget 2007: Experts give their views

PH Ravikumar says that India cannot sustain a growth rate of 9-10% unless agriculture grows at 4%. He feels that not much is done to improve investments in agriculture. "There has to be facilitation of private investments in agriculture, nothing has been heard on it" he says.

He feels that lot of positive steps by the FM has been taken but the problem of wheat and edible oils were not addressed because India is commodity inflation. "I believe short selling, setting up of mortgage guarantee companies which should also benefit the rural side housing build up as well as exchangeable bond are very positive for markets" he adds.

Jairaj Purandare welcomes the customs duty peak rates being dropped. "It appears that there is no change to the basic structure of capital gains tax other than one particular change in the context of gains limited to 15 lakh," he says. Though it was a relief to have no change in the service tax the fringe benefit tax on ESOPs (Employees Stock Options) clearly was not quite expected, " I think that the dividend distribution tax going up to 15% is going to be a cause for concern specially because this is effectively a multilayer tax" he adds.

Nimesh Kampani, Chairman, JM Morgan Stanley gives his perspective on the capital gain tax, "On the positive side, I think he (P Chidambaram) has brought in short sales to be allowed which can stabilize the market when the market is in a high gear and people selling it and then they can be natural buyer at lower prices, lending and borrowing of the stock is also allowed now. So I think that the institutional investors will be able to do that very clearly. Hence, for the corporate sector, specially for the large institutions like LIC or institutions like mutual funds and also one of the promoters, the Finance Minister has agreed to do a exchangeable bond."

In his view, this is a fine instrument where the promoters will be able to take a greater risk and put a lot of further money into newer project. So this as a signal for a growth where the funding by the promoter is done simpler because today, Indian promoters are not able to raise resources except outside of India against their shares. So the legitimate way of raising money from capital market through the funding of the promoters’ holding.

On the health front, especially on R&D, the Budget has proposed an exemption for 5 more years. Dr Swati Piramal of Nicholas Piramal responds to this, " It's sunrise for the pharma sector because we are the torchbearers of the innovative economy. India is really becoming the leader in the biopharma sector so that is exempt from service tax, we are delighted with that. Its increased healthcare spending, which is long time coming, we wanted to increase from 1% to 2% and it’s a small beginning, even though it’s a large number, but its still small compare to rest of the GDP. So healthcare spending has increased and we are very happy with that, and clarifications of free samples to doctors in the FBT (fringe benefit tax) that’s the other area where he has clarified things. So thank you Mr. Finance Minister for R&D."

Naseer Munjee, Chairman of the Development Credit Bank gives his view on the infrastructure sector. He says, "As far as the critical element for the future, in my view is public-private partnership and not in the way the government interprets. India needs to privatize, commercialize as well as to look at output-based contracts, those areas in which revenues, user charges cannot be used. I don’t see that strategy at all, it as even emerged while most countries in the world are moving headlock in that direction. We need to be leveraging public money with private. I do not see that happening in the Budget, I was hoping that we would see that. The way government spends money has to change."

Union Budget - Indirect Tax Highlights

FM Chidambaram has announced the Union Budget 2007-08. He has increased the excise duty on cement from Rs 400 to Rs 600 for retail price of over Rs 190/bag. This is likely to affect all the companies as majority of the cement prices are above Rs 190. Excise Duty on petrol and diesel has been reduced from 8% to 6%.

Following are the highlights of Indirect Tax for Service Tax, Excise and Custom Duty:

Indirect Tax

There has been an excise duty hit for cement companies. Excise duty is down from Rs 400 to Rs 300 for threshold Rs 190 retail price and the excise duty has been increased from Rs 400 to Rs 600 for retail price of over Rs 190. This is likely to affect all the companies as majority of the cement prices are above Rs 190. Excise Duty on petrol and diesel has been reduced from 8% to 6%, so petrol and diesel prices can be expected to come down, though the oil minister has ruled out any such move.

Service tax exemption limit has been raised to Rs 8 lakhs. Over 2 lakh small service providers to go out of service tax net. But there is no change in service tax rate, which stays at 12%. 5. Peak customs duty rate brought down to 10% from 12.5. Customs duty on polyster yarns, plastics, medical equipments reduced to 7.5%, gems and jewellery reduced to 3%. But 3% import duty has been imposed on private imported aircrafts.

Cuts central sales tax to 3% from 4%

Service Tax


Service tax exemption for tech business incubators
Drug testing clinical trials exempt from service tax
Service tax on rental of property for commercial use
Service tax on works' contract service

Excise

Excise duty on pan masala without tobacco cut to 40%
Excise duty on pan masals without tobacco cut to 40%
Non-electric water filters fully exempt from excise
To reward cement makers who hold prices of cement
Umbrella, footwear excise duty cut to 8% vs 16%
Bio diesel, food processing exempted from excise duty.
SSI excise exemption raised to 15 mln rupees vs 10 mln.
Excise on plywood cut to 8% from 16%.
Petrol, diesel ad valorem excise duty cut to 6% vs 8%.


Customs duty

General customs duty on medical equipment 5%
Customs duty on animal feed cut to 20% vs 30%.
Customs duty on watch dials, umbrella cut to 5% vs 12.5%
Coking coal exempt from customs duty.
Customs duty on cut, polished gems cut to 3% from 5%
Customs duty on PFY cut to 7.5% from 10%
Crude, refined edible oils to be exempt from customs duty
Customs duty on steel cut to 12% vs 20%
General customs rate on medical equipent 5%
Cut customs duty on DMT/PTA to 7.5%
Customs duty on drip irrigation cut to 5% vs 7.5%
Cut custom on cut and polished gems to 3% from 5%
Customs duty on polyester fibre yarn cut to 7.5% vs 10%
Fully exempts coking coal from customs duty
To cut peak rate for non-farm pdts to 10% vs 12.5%

Union Budget - Direct Tax Highlights

FM Chidambaram has announced the Union Budget 2007-08. He has increased threshold limit of exemption in the case of all assessees by Rs 10,000 to Rs 1,10,000, thus giving every assessee a relief of Rs 1,000.

Following are the highlights of Direct Tax for Individuals and Corporates:

Individuals

The current slabs and rates of personal income tax were introduced only two years ago. They constitute a moderate tax regime. A comprehensive review will await the proposed Income Tax code which will be introduced in Parliament this year. Nevertheless, there was some relief to tax payers.

- the threshold limit of exemption in the case of all assessees be increased by Rs 10,000 to Rs 1,10,000, thus giving every assessee a relief of Rs 1,000; - consequently, in the case of a woman assessee, the threshold limit will be increased from Rs 135,000 to Rs 145,000, giving her a relief of Rs 1,000- the threshold limit of exemption in the case of a senior citizen be increased from Rs.185,000 to Rs.195,000, giving him or her a relief of Rs 2,000.

There will be exemptions under Sec 80 E for benefit on interest paid toward education loans extended to parents of the borrower. RBI Taxable Bonds will attract 10% TDS. The capital Gains Bond investment limit has been capped at Rs 50 lakh. The corporate investments in liquid/money market funds will take a hit as DDT has been hiked from 20% to 25%. Effective DDT will cross 27% due to additional surcharge for liquid money market funds. Liquid and Money Market Funds will loose their sheen.

Short Term FDs will gain due to hike in DDT for corporate investors in liquid/ money market funds. Mutual Funds have been allowed to invest in infrastructure projects directly through Infrastructure Funds. In another major move, MIN has been scrapped and PAN will be the sole identification number for capital market transactions. PAN with prefix or suffix to replace MIN and other identification numbers for capital market transactions. Over 1.8 lakh MINs have been issued from January 2007 till now.

Tax Exemption under Sec 80 D on Health insurance has been increased to Rs 15,000 from Rs 10,000. Tax Exemption under Sec 80 D on Health Insurance for senior citizens will be upto Rs 20,000. This will result in Health Insurance including Mediclaim to get a boost. Health insurance policies for Senior Citizens will be introduced by the general PSU insurance companies. LIC will get a grant of Rs 1000 cr from central & state Govt for Aam Aadmi Bima Yojna. Aam Aadmi Bima Yojna will cover 1.5 crore rural and landless households against death & disability.

The tax concession under Section 80 IB for construction under 1000 sq.ft built up in Delhi & Mumbai & under 1500 sq. ft built up in Bangalore comes to an end. Rental of immovable property for commercial, retail, IT premises to come under service tax net of 12.5%, which may impact rentals of commercial properties upwards. The pass through for real estate Venture Capital Funds comes to an end.

The FM says that the Banking Cash Transactions Tax continues to be an extremely useful tool to track unaccounted monies and trace their source and destination. He has excluded cash withdrawals by the Central and State Governments from the scope of this tax. Further, the exemption limit for individuals and HUFs have been raised from Rs 25,000 to Rs 50,000. There has been no increase in the rates of Securities Transaction Tax and the Capital Gains.

The budget has also allowed delivery-based short selling and stock lending by institutions. TDS rate on domestic royalty/service payments has been increased from 5% to 10%. TDS rate on comm & brok increased from 5% to 10%.

Corporates

MAT has been extended to IT cos and they will now be required to pay 11.22% MAT. This is unlikely to affect big technology companies like Infosys, TCS and Satyam, since they are already paying an effective tax of 12% average in overseas countries on their onsite income. But smaller tech companies could get impacted. A big hint is that the tax exemption for IT companies will not be extended beyond 2009.

There is no change in corporate tax rates, but 1% additional education cess is imposed to be applciable on all taxes. This in turn makes the effective corproate tax rate increase by around 0.3% to 33.9%. The 10% surcharge has been removed for corporates whose taxable income is less than Rs 1 crore, which is expected to benefit thousands of SMEs.

The budget is also positive on the pharma sector. A 150% weighted deduction benefit for R&D expenditure has been extended till 2012. This was a big pre-budget demand of pharma companies. Also free samples have been removed from the FBT ambit, which is a positive for pharma companies. Gems and jewellery companies are to be given option to pay 8% flat tax on their income, so as to make tax compliance easy. But ESOPs could now get more taxing as the FM has brought ESOPs under FBT ambit.

Market Update 2/28/2007

It was disastrous day for the markets on the Budget day wherein it opened on extremely bearish note on the back of negative cues from global markets. Markets were already on its downtrend for last two weak on account of hike in interest rates and untolerable inflationary pressure. It traded extremely subdued throughout the day amidst volatility but lost sharply in late trade and ended in deep red. It was the biggest fall since may 18, 2006. IT, metal, banking and auto stocks were the hardest hit sectors in todays trade. All the index pivotals closed in red and the markets breadth was extremely negative.

The Sensex was down 540.74 points or 4.01% at 12938.09, and the Nifty down 148.60 points or 3.82% at 3745.3. About 564 shares have advanced, 1864 shares declined, and 30 shares are unchanged.

The BSE Auto Index was down 3.69% or 195.69 at 5109.38. Escorts, Tata Motors, Ashok Leyland, Maruti Udyog, M&M, TVS Motor and Bajaj Auto witnessed selling pressure.

The BSE Bankex tumbled 4.28% or 286.81 points at 6408.01. PNB, UTI Bank, Oriental Bank, ICICI Bank, HDFC Bank and IOB closed down.

The BSE Capital Goods plunged 3.40% or 310.90 points at 8834.84. Gammon India, Bharat Elec, Praj Industries, L&T, Carborundum and SKF India ended in red.

The BSE Health Care index was slipped 3.16% or 114.14 points at 3498.93. Orchid Chemical, Glenmark, Divis Labs, Aurobindo Pharma, Nicholas Pirama and Ranbaxy Labs ended down.

The IT index succumbed 5.85% or 302.41 points at 4869.99. HCL Tech, Moser Baer, Satyam, Wipro, Mphasis and Hexaware Tech plunged.

The BSE Metal index was down 4.64% or 414.43 at 8513.55. Sesa Goa, NALCO, Tata Steel, Sterlite Ind, SAIL and Guj NRE Coke meltdown.

The BSE Oil & gas ended down 2.87% or 186.03 or 6297.64. ONGC, Reliance, Reliance Natura and Petronet LNG closed negative

Markets today:

Markets plunge on budget day amid global meltdown
Sensex down 540 points at 12938; Nifty down 149 points at 3745
Biggest fall for Sensex since May 18, 2006
BSE IT Index down 5.85; MAT imposed on IT cos
Satyam down 7.7%, Wipro down 7%, TCS down 5.5%, Infosys down 5%
Cement stocks in focus; excise duty up on sale price above Rs 190/bag
Guj Ambuja down 7.8%, ACC down 6%, Grasim down 5.3%
CNX Mid-cap Index down 3.5%; dragged by construction stocks
Construction stocks slide; sub-contactors not to get benefit under Sec 80 I (A)
Nagarjuna Cons down 19.2%, Hindustan Cosn down 16.26%, IVRCL down 15%
BSE Small-cap Index down 3% on broad based selling
New Listing: SMS Pharma closes at Rs 359.25 Vs listing price at Rs 360
NSE Advance Decline ratio at 1:6
Total market turnover at Rs 67889.95 cr Vs Rs 43918.29 cr

Turnover today:

NSE cash turnover - Rs 12671.46 crore
NSE F&O - Rs 49408.84 crore
BSE cash - Rs 5809.65 crore
Total Turnover - Rs 67889.95 crore

India is fourth largest tourist market for Singapore

India emerged as the fourth largest tourist source market for Singapore with 659,000 Indian tourists visiting the country in 2006.

The Singapore Tourism Board (STB), in its annual appraisal of tourism performance, was upbeat about the influx of Indian visitors in 2007.

STB is the nodal agency for Singapore tourism, one of the country's key service sectors. STB noted in its appraisal that Singapore was well positioned as a lifestyle and entertainment destination.

India, with its increasingly affluent and mobile middle-class, was an ideal platform to float the Singapore value proposition, it added.

STB now plans to strengthen its collaboration with key segments of Indian trade and also extend its overall reach to the tier II cities to target first-time travelers.

In 2006, Singapore exceeded its global targets with a record $12.4 billion in tourism receipts, registering a growth of 14.5 per cent over 2005, and 9.7 million international visitor arrivals.

Apart from India, countries like Indonesia, China, Australia and Malaysia were the other top tourist markets for Singapore in 2006.

Realty ETF high on MF companies’ plans

It seems that the Indian mutual fund companies are not only dazzled by the glitter of gold but also by the shine of an estimated Rs 1,30,000-crore worth realty sector.

Till now, two companies have launched their Gold Exchange Traded Funds (ETFs) and many more companies, including Lotus

India AMC, are planning to launch their gold ETFs within a few months. These companies are also awaiting the Securities and Exchange Board of India (Sebi) guidelines on real estate ETF.

Country’s second Gold ETF after Benchmark AMC’s Gold ETF called ‘Gold BeEs’ was launched in Ahmedabad on February 27 and the company’s next product will be a real estate ETF.

Similarly, many more companies have applied for the ETF of the precious metal. New companies are also eying a share in the gold and realty business. Lotus India AMC, a pretty new MF company is planning to launch its Gold ETF within a couple of months and it is also preparing itself for the real estate ETF pie while waiting for the Sebi guidelines.

Talking to Business Standard, Arvind Mittal, regional sales head (west), UTI MF, said, “After the Gold ETF, the company plans to launch real estate ETF as soon as the Sebi guidelines are announced. Though the business potential in realty is huge, it cannot be compared with gold ETF business. We were quite ready to launch the Gold ETF when Sebi had issued guidelines one-and-a-half months ago. Similarly, we will be ready to launch realty ETF too once the guidelines are out.”

Ajay Bagga, CEO, Lotus India AMC, said, “We will launch Gold ETF within the next couple of months and are ready to enter into the real estate ETF market also once the guidelines are issued by Sebi.”

When asked how much time it might take for Sebi to launch the guidelines, he said, “We expect that the Sebi might launch the guidelines within the next six months. But it might come up even earlier.”

Talking about the enormous potential in the real estate ETF business in India, he said, “According to an estimate, the total real estate market size is near about Rs 1,30,000 crore. Just imagine if one per cent of this investment is converted into mutual fund then what will be the realty ETF market size in the country!”

“The gold ETF also has a bright future in India. Traditionally, the Indian investor has always been investing in gold. Indians will always prefer to invest in Gold as no ups and downs in the stock market can affect the prices of gold. On the other side, Indian MF investors are not so aware of other commodities like silver and oil. But these commodities will also foray into MF market once the gold market grows fully.”

Talking about UTI’s gold ETF, Mittal said,”The company targets an investment of around Rs 600 crore through this product. The total Gold ETF market size in India is projected to go up Rs 2,000 crore by the end of 2008 and by the end of 2009 it will grow up to Rs 7,000 crore. The total gold consumption of India is around 750 tonnes per annum. Of this 35 per cent is consumed as investment. The target of MF companies will be these investors.”

On how the Gold ETF will grow in the Indian market, Mittal said, “Initially five to six per cent of the total 35 per cent of gold investment will be converted into ETFs. After that there is only growth in the sector as Indian investor is traditionally a gold investor and the product has succeeded in countries like Australia, Turkey and many European countries. These countries are not traditionally into gold investment so in India gold ETF will surely be a major success.”

About possibilities of ETF in other commodities like oil and silver, Ravi Bhatia, research analyst of UTI MF, said, “The market will respond to gold far better than other commodities like silver and oil as gold does not have many spot exchanges while other commodities have spot exchanges. However, discussions are on between the Forward Market Commission (FMC) and Association of Mutual Funds in India (AMFI) in this regard. Depending on the outcome of these discussions many more commodities like oil and silver may be added in the country.”

Economic Survey - Domestic savings continue to rise

India can today boast of being among the top nations in terms of savings, which shot up to 32.4 per cent of GDP, but government or public savings declined to make a 'negative contribution'.
The quantum of savings gave the nation a much needed platform to raise the investment level, which touched 33.8 per cent, a fact that helped the economy to "take off from a phase of moderate growth to a new phase of high growth", the Economic Survey presented in Parliament said on Tuesday.

Public savings fell from 2.4 per cent of GDP in 2004-05 to two per cent the following year, despite savings of the public sector being in positive trajectory for the third successive year, the Survey said.

Public sector contributed Rs 71,262 crore in 2005-06 due to higher savings of both non-departmental as well as departmental enterprises, the Survey said.

A dramatic element in the savings profile of the Indian economy has been the sharp rise in the savings rate of the private sector for four years in a row. The private sector rate for 2005-06 has been pegged at 8.1 per cent, the Survey pointed out.

The sector has financed a large part of its investment in the ongoing long capital expenditure cycle from such retained earnings or savings.

Household savings continued to be the dominant contributor to gross domestic savings, accounting for 30.4 per cent of the total 32.4 per cent.

Within domestic investment, difference between gross fixed capital formation and changes in stocks narrowed, indicating a recent pick up in fresh investment for creating additional capacity through fixed capital formation, especially in private sector.

Two forces have been acting simultaneously on the portfolio behaviour of Indian households: A construction boom with residential buildings financed through housing loans from banks and the progressive maturing of the domestic financial markets, the Survey said.

While the construction boom has helped inflate household savings in physical form, the maturing markets have provided incentives for higher financial savings.

There was a perceptible shift in the household portfolio in the three years ending in 2005-06. Physical savings as a proportion of GDP has declined steadily from a high of 12.4 per cent in 2003-04 to 10.7 per cent in 2005-06.

Financial savings, on the other hand, after declining from 11.3 per cent to 10.2 per cent between 2003-04 and 2004-05, more than recovered to 11.7 per cent in 2005-06.

The increase in savings rate is what is to be expected with higher growth rate of the economy and a declining dependency ratio, according to the Survey.

With the proportion of population in the working age group of 15.64 years increasing steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026, the demographic dividend in the form of high savings rate is likely to continue.

With savings rate going up, private final consumption expenditure at current prices as a proportion of GDP has shown a declining trend, particularly from 2001-02.

Indian stocks M-cap touches 91.5 pc of GDP

Sustained investor interest will keep alive the buoyancy in stock market, which peaked to 14,724 points this month, helping India catch up with mature markets in terms of market capitalisation to GDP ratio.

The ongoing financial and regulatory reforms for the capital market, together with accelerated economic growth and macroeconomic stability, sustained the investors' confidence in the country's capital market, said the Economic Survey tabled in Parliament on Tuesday.

India with a market capitalisation of 91.5 per cent of GDP compared favourably not only with the emerging markets but also with economies like Japan (96 per cent) and South Korea (94.1 per cent) and shows signs of catching up with some of the mature economies.

The market value of Indian stocks was second highest among all emerging markets, surpassing those of markets like Thailand, Malaysia, South Korea and Taiwan at the end of 2006.

In comparison, China's market cap was just 33.3 per cent of GDP at the end of 2006.

Market cap in terms of GDP indicates the relative size of capital market, besides investor confidence and discounted future earnings of corporate sector.

"Improved investor awareness and expanding equity cult among the small savers appear to augur well for buoyant stock markets," the Survey said.

The expectations of higher corporate investment and earnings, robust GDP growth and government's commitment to carry forward economic reforms are also expected to scale up FII (Foreign institutional investors) interest to retain India as one of the preferred destinations.

The investors' growing preference toward mutual fund route would further enhance institutional investment in equity markets, which along with regulatory support could cushion and counter-balance the impact of swings in the stock prices.

After scaling new peaks year after year since 2003, the benchmark 30-share index, Sensex, rallied from a low of 8,929 in June to an all-time high of 14,274 this month.

The journey from 13,000 to 14,000 mark that took just 26 trading sessions was one of the fastest ever 1,000-point rallies, the Survey said.

Economic Survey - IT/ ITES sector boosts employment

The growth of the IT/ ITES sector has had a salutary effect on the employment scenario, with total number of professionals employed in the sector growing from an estimated 2,84,000 in 1999-2000 to 12,87,000 in 2005-06.

The Economic Survey released on Tuesday further pointed out that the sector has helped create an additional 30 lakh job opportunities through indirect and induced employment in telecom, power, and construction industries, among others.

Meanwhile, the Survey also pointed out that electronics hardware exports touched Rs 8,500 crore for the fiscal year 2005-06 against Rs 8,000 crore in the previous year, whereas computer software exports rose to Rs 1,03,200 crore from Rs 78,230 crore.

The production of consumer electronics increased to Rs 18,000 crore for the year 2005-06 from Rs 16,800 crore in the previous year, against industrial electronics that grew to Rs 8,800 crore from Rs 8,300 crore last fiscal.

As per the Survey, computer production stood at Rs 10,800 crore for the year 2005-06 from Rs 8,800 crore. Communication and broadcasting equipment production rose to Rs 7,000 crore from Rs 4,800 crore last year.

The Ministry of Information Technology data estimates that while the production of software for exports increased to Rs 1,03,200 crore in the year 2005-06 against Rs 78,230 crore, the domestic software production touched Rs 26,460 crore from Rs 19,630 crore in the previous year.

The annual survey highlights that total electronics exports that includes electronics hardware as well as computer software stood at Rs 1,11,700 crore as on 2005-06 (Rs 86,230 crore) .

Economic Survey - Waiving big money goodbye

Exemptions in income-tax, corporation tax, excise and customs and others incentives would cost the exchequer a whopping Rs 1,00,147 crore in the current financial year, the Economic Survey has estimated.

This is a pointer that Budget 2007-08 may continue with the rationalisation of tax incentives and exemptions, especially on the indirect tax side.

The Survey has highlighted that tax expenditures — exemptions and incentives — distort resource allocation and stunt productivity.

In Budget 2006-07, based on a comprehensive review of the tax exemptions, the Government had withdrawn eight such exemptions in customs duties, 68 in central excise duties and six in service taxes.

On the direct tax side, tax benefits available to certain cooperative banks and for income from investment in infrastructure and certain other eligible businesses were withdrawn.

With revenues remaining buoyant and the economy on a strong growth path, observers reckon that the time may be ripe for the Finance Minister, Mr P. Chidambaram, to take certain "bold steps" on the tax exemptions front.

The Economic Survey has projected gross tax-GDP ratio in 2006-07 (BE) at 10.8 per cent (after the recent upward revision in GDP) as against 10.3 per cent in 2005-06 (prov).

The direct tax-GDP ratio, which was only 1.9 per cent in 1990-91, is expected to improve to 5.1 per cent in 2006-07.

Economic Survey - Slowdown likely in bank credit growth

The Economic Survey for 2006-07 has indicated that bank credit was "unlikely" to grow as fast as it had in the recent past.

It has however predicted that bank credit would continue to outpace the gross domestic product (GDP) in terms of growth in years to come.

This may imply that bank credit growth this fiscal would be lower than the 30 per cent levels recorded in the last two years. In 2005-06, bank credit grew by 30.8 per cent.

At the same time, the Economic Survey has also highlighted that both credit as well as money, as a proportion of GDP, are low in India by international standards.

Rural outreach

It The Economic Survey also said that the inflation-related supply side problem of primary commodities requires a continuation of the move to integrate the rural sector in general and agriculture in particular with the organised financial sector. "Increasing the outreach of the banking system to these hitherto neglected sectors remains a major unfinished task of economic reform," the Survey added.

With buoyant capital flows through the balance of payments, monetary and credit policies would have to steer a careful path of maintaining the international competitiveness of domestic economic activities.

Non-food credit growth

The Economic Survey has noted that higher-than-expected GDP growth, particularly in manufacturing, appears to be driving the demand for non-food credit.

Non-food credit by scheduled commercial banks (SCBs) expanded by Rs 2,59,435 crore during the current year up to January 19, 2007. This represented 22.27 per cent increase to the non-food credit of Rs 2,12,176 crore observed during the corresponding period of the previous year.

In 2005-06, the growth in non-food credit extended by SCBs was 31.8 per cent. This was higher than the growth of 27.5 per cent in 2004-05.

As regards agricultural credit, the Survey has noted that the total flow of institutional credit up to December 31, 2006, stood at Rs 1,49,343.16 crore (provisional). This constituted 85 per cent of the annual target of Rs 1,75,000 crore for the current fiscal.

Economic Survey - `Drumbeats of infrastructure getting louder'

With infrastructure now showing signs of progress and providing impetus to economic growth, the Economic Survey has suggested that insurance and pension funds can be used to meet the massive investment need of $320 billion in infrastructure during the XI Plan.

An indicator of the economy's progress, the document, tabled in Parliament on Tuesday, says: "Outlook in infrastructure will depend on how investment in infrastructure is facilitated".

It injects a note of optimism when it observes that infrastructure — for years perceived as a constraint on growth — is showing signs of progress in areas such as power, roads, ports and airports.

In this contest, it points to the fact that the overall index of six core industries, having a direct bearing on infrastructure and accounting for 27 per cent of weight in the Index of Industrial Production (IIP), registered a growth of 8.3 per cent during April-December, 2006 as against the 5.5 per cent registered a year ago. Referring to the projection of investment of Rs. 14,50,000 crore ($320 billion) required in the core sector during the XI Plan, it said investment in infrastructure required long-term funds with long payback periods, which would be possible if insurance and pension funds were utilised.

The pre-budget Survey goes on to add, "Thus, success on the infrastructure front will be facilitated by the development of a vibrant bond market, and pension and insurance reforms."

"A single, unified exchange-traded market for corporate bonds would help create a mature debt market for financing infrastructure," it says further, recalling that the Committee on Infrastructure, headed by the Prime Minister, has projected Rs. 2,20,000 crore fund requirement for modernising and upgrading highways, Rs. 40,000 crore for civil aviation, Rs. 50,000 crore for ports and Rs. 3,00,000 crore for the railways by 2012.

While acknowledging that short-term problems are unlikely to disappear rapidly without resolute action, the Survey said that provision of quality and efficient infrastructure services is essential to realise the full potential of the growth impulses surging through the economy.

On the power front, it says that enough generation capacity will get added to wipe out the shortages only over the medium term. "Improving the short-term power outlook will critically depend on how fast success in slashing transmission and distribution losses (from near 40 per cent to 15 per cent) is achieved," it underlines.

However, the survey cautions that the progress on the road and highways front will depend on how rapidly constraints such as delays in land acquisition, removal of structures and shifting of utilities, law and order problem in some states, and poor performance of some contractors are removed.

In regard to urban infrastructure, the Survey called for comprehensive planning and effective monitoring. "Outlook on urban infrastructure will depend critically on how fast the finances and functional efficiency of urban local bodies are improved."

The survey notes that there exist strong, well-recognised linkages between infrastructure on the one hand, and economic growth and poverty alleviation on the other.

"Not only will infrastructure give a fillip to economic growth but a robust economic growth in turn by enhancing willingness to pay appropriate user charges, will promote investment in infrastructure", it observed adding that the outlook for infrastructural improvement looks promising.

It further says that given the experience gained in PPP (public private partnership) and concession agreements, infrastructure investments should gain momentum over comings months and years.

The pre-budget document also says that the "drumbeats of infrastructure are gradually, getting louder and in the next few years'' their rumble will be felt all over the country.

Economic Survey - Where have all the high-value notes gone?

Indians may be buying more cell phones, cars and colour television sets with the economy chugging along at nine per cent as the Economic Survey proudly points out.

But that is nothing compared to the market for high-denomination currency notes, which is growing at an even faster clip.

Consider the evidence. The Reserve Bank of India says that individuals and businesses stored Rs 75,691 crore in high-denomination currencies (Rs 500 and Rs 1,000 notes) as of March 2002.

Yet, by close of March 2006 their appetite for such currencies has grown by more than 325 per cent, to touch Rs 2,46,650 crore (RBI Annual Report 2006).

The economy hasn't grown anywhere near this rate - growing only by 45 per cent - during this period.

Far from growing, the currency in circulation, as a proportion of the total money supply, which includes bank deposits, has actually declined from a high of nearly 40 per cent in 1971-72 to a respectable 15 per cent by 2005-06.

In other words, the rise in circulation of high-denomination currency notes is despite a relative decline in the circulation of small denomination notes up to Rs 100.

So, what explains the phenomenal growth of Rs 500 and Rs 1,000 notes? The RBI thinks that the large number of ATMs and the banks' penchant for stuffing them with crisp, brand new notes is the culprit.

Banks may find dispensing cash with smaller denomination to be a logistical challenge, as that would mean frequent replenishment, reasons the RBI.

But senior bank officials have a different take on this.

They told Business Line that their ATMs are stuffed typically with Rs 500 and Rs 100 notes; in any case they do have sorters to identify ATM-quality notes, which come back to them to be sent back.

Also, with average withdrawals in the region of Rs 2,000-2,500 for a medium-sized bank, the need for stuffing the ATMs with Rs 1,000 notes is not all that high, they suggest.

One thing is certain. If these notes were not fed back into the ATMs, the banks would be saddled with a huge hoard of high-denomination notes.

The currency on hand in the banking system is nowhere near the volume of such notes in circulation.

Interestingly, the US, with far greater penetration of ATMs and with a much larger economy in purchasing power parity terms, seems to make do with a much smaller denomination of currency notes.

The $100 note is the highest denomination of the US; when derated suitably for the higher prices and the relatively larger size of its economy, it would translate into a currency denomination roughly the equivalent of Rs 250.

The volume of high-denomination notes in circulation cannot be justified by either the size of the economy or the technology used for banking transactions.

Does it suggest that notes in such denominations are used more for hoarding illegal gains? A former senior official from the banking industry thinks that the growth in the volume of high-denomination currency notes in circulation is a useful proxy for the growth of black money in the economy.

Now, that is something for the Finance Minister to reflect on, as he gets ready to present his Budget for the next fiscal.

Economic Survey - Is `remunerative' fair

The Economic Survey warns against any drastic cut in petroleum product duties or any significant increase in foodgrain subsidy. Saying that there is need to recognise the potential contradiction between `remunerative' price for the farmer and `fair' price for the consumer, the survey indicates that the same contradiction arises in the pricing of petroleum products.

"The reconciliation of such a contradiction ought not to be in terms of an expensive compromise of fiscal rectitude,'' says the survey, thereby hinting that prudent fiscal management should not be given the go-by.

Economic Survey - Economy in high-growth trajectory

The economy seems to have decidedly `taken off' and moved from a phase of moderate growth to a new phase of high growth. That is the prominent theme of the Economic Survey 2006-07, presented to Parliament on Tuesday by the Finance Minister, Mr P. Chidambaram.

Pressing its claim, the survey points to signs of industrial resurgence, with the industrial sector growing from a low of 2.7 per cent in 2001-02, moving up to 7.1 and 7.4 per cent in 2002-03 and 2003-04, accelerating to 9.5 per cent in the next two years to touch 10 per cent in the current fiscal. Also, the growth impulses within industry seem to have spread to manufacturing.
A notable feature in the current growth phase is the high rate of investment, measured in terms of gross domestic capital formation that has steadily climbed from 31.5 per cent in 2004-05 to 33.8 per cent in 2005-06.

There are other positives. The generally laggard infrastructure index grew 8.3 per cent in April-December 2006, up from 5.5 per cent in the same period of the previous year; the public sector turned its dissavings into positive savings and the corporate sector reported a sharp increase in savings at 8.1 per cent in 2005-06, which helped it to finance a large part of its investment in the ongoing capital-expenditure cycle.

Capital inflows into the country have also remained strong and even domestic flows to the capital market have been high. Initial public offerings grew 30.5 per cent in calendar year 2006 to Rs 1,61,769 crore and on an average, there have been six IPO issues per month.

Sustaining factors

According to the survey, this growth in the economy is sustainable for a variety of reasons. First, the high growth from a growing number of the population in the working age group would lead to a rise in savings. Second, efficiency improvements in the economy since 1999-2000 reinforce the confidence in the high-growth phase. Third, opening up of new avenues in services, beyond IT and IT-enabled services, bolster confidence in the high growth rate.

The fourth positive factor is the low possibility of an `overheated' economy, typified by a strained labour force and capital stock. This can be obviated through rapid growth in capacity addition through investments. Moreover, the moderate merchandise import growth rules out indications of overheating.

The incidence of poverty is down to about 22 per cent in 2004-05 from 26.1 per cent in 1999-2000, as per the NSSO's 61st round large-scale sample survey on household consumer expenditure.

On the burning issue of inclusive growth, the survey emphasises that putting more people in productive and sustainable growth seems to be a solution but adds that inclusive growth cannot come without growth itself.

As for the downsides, the survey notes that risks for a sustained high growth could be from rapid unravelling of global macro-economic imbalances, volatile oil prices and delays in the completion of the Doha Round. "But, for the present, they appear to be limited," assures the survey.

Economic Survery - Indian indices record higher volatility

BSE Sensex and NSE Nifty rose by 46.7 and 39.8 per cent respectively in 2006, but were marked by strong volatility, going by the Economic Survey.

Indian indices for volatility of weekly returns were higher than foreign indices such as S&P 500 (US) and KOSPI (South Korea). Also, Indian indices recorded higher volatility on weekly returns during the two-year period January 2005-December 2006 as compared with January 2004-December 2005.

There was increased turbulence in the Indian markets partly owing to a sharp sell-off in May 2006 in line with trends in the global markets.

Larger inflows from foreign institutional investors (FIIs) and larger participation by domestic players during the later part of the year led to buoyant conditions on the bourses post a dull first half. During 2006, on a point-to-point basis, Sensex and Nifty indices rose by 46.7 and 39.8 per cent respectively.

The rise, through the year, has been attributed to growth in the profitability of Indian corporates, overall higher economic growth and other global factors such as relatively soft interest rates and fall in crude oil prices in international markets.

The market valuation of Indian stocks at the end of December 2006 stood higher than most emerging markets of Asia including South Korea, Thailand, Malaysia and Taiwan and was the second highest among emerging markets.

Retail investors

Stock markets continued to be dominated by retail investors accounting for major part of the transactions.

The gross FII turnover at Rs 20.6 lakh crore accounted for only 10.4 per cent of the total gross turnover of Rs 198.6 lakh crore in the spot and derivatives sections in 2006.

Net investment by FIIs in the equity spot market fell by around 22 per cent to Rs 36,540 crore in 2006. The number of FIIs rose by 27 per cent to 1,044 at the end of December 2006.

Going by the number of transactions, the NSE continued to occupy the third position among the world's biggest exchanges in 2006 and the BSE stood sixth slipping one step from 2005. In terms of listed companies, the BSE ranked first in the world.

Investors' wealth as reflected in market capitalisation has increased significantly by over 45 per cent during 2006.

P/E ratio

The fundamental strength of the economy was also reflected in the price-to-earnings (P/E) ratio, which was higher at a little over 20 by end December 2006 as compared to 17-18 as of end-December 2005.

As on January 12, 2007, market capitalisation (NSE) at $834 billion was 91.5 per cent of the GDP.

The NSE and the BSE spot market turnover more than doubled between 2003 and 2006.
In terms of derivatives, the turnover on NSE nearly doubled in a single year between 2005 and 2006.

Assets under management of mutual funds increased by about Rs 1.24 lakh crore to reach Rs 3.24 lakh crore in 2006.

Economic Survey pitches for pension reforms

While pension reforms refuse to make headway in the wake of political opposition, the survey has made a strong case for bringing about a vibrant pension sector in the country and has said that it would be a "highly beneficial force" in the financial system.

"Pension funds are natural vehicles for long-term investments, including equity. A modern, well-regulated pension sector, populated with professional pension fund managers will be a highly beneficial force in the financial system and improve resource flow in the form of long-term debt and equity to sound projects particularly in infrastructure," the survey said.

The Government had notified the New Pension System (NPS) on January 1, 2004, but has not been able to push ahead with a proposed legislation to bring about pension reforms in the wake of the Left parties expressing reservations over the fallout of such a system on the general public.

Insurance sector

The survey feels that pensions reforms could also benefit the insurance sector. "The pension sector can also be a major customer of insurance companies for the purpose of converting a stock of pension wealth at retirement date into a flow of monthly pension in the form of annuities," it said.

Economic Survey - Disbursements for rural infrastructure lag sanctions

Disbursements under the Rural Infrastructure Development Fund continue to lag behind sanctions, according to the Economic Survey, 2006-07. The cumulative amount sanctioned to the State governments up to January 25, was at Rs 58,795.36 crore while disbursements were at Rs 34,643.87 crore.

During 2006-07 (up to January 25) the amount sanctioned and disbursed were Rs 7,810.85 crore and Rs 3,306.60 crore, respectively.

The total corpus of RIDF, with 12 tranches, aggregated to Rs 60,000 crore and was announced by the Government in 1995-96 to boost public sector investment in agriculture and rural infrastructure.

The fund was to be raised from commercial banks defaulting on agricultural lending. The corpus is announced every year during the budget. So far, 11 tranches have been completed and RIDF-XII is on-going in 2006-07.

Initially the fund focussed on irrigation projects, development of rural roads and bridges but soon other activities were included. The activities which can get loans under the RIDF include hydel projects, community irrigation wells, soil conservation, watershed development and reclamation of waterlogged areas, grading and certifying mechanisms such as testing and certifying laboratories, fishing harbour, animal husbandry, public health and education institutions, among others.

Retail exits hit wholesale mode

NEW DELHI/ MUMBAI: The retail sector which led a massive churn in India Inc with its appetite for talent last year, is bemoaning the same fate. As a result of hyper growth plans and rushed hiring, most retail ventures are struggling to keep their flock together even before they roll out nationally.

Last week saw several high profile exits in the retail sector which included the likes of Ved Prakash Arya who quit as Pantaloon COO to consider a private equity fund, and Vijay Kashyap AVB Retail HR head who is said to be relocating to Australia. According to sources, Kashyap was in the process of hiring expats to fill key positions in the AV Birla retail foray.

In another development, retail behemoth Wal-Mart’s Indian entry saw a churn even before it could come to fruition. Two of its top executives, cash-and-carry operations head, Randy Guttery and another key executive, Lance Retig, moved out. Earlier, Abhijit Sanyal, a senior VP with Subhiksha left to join Reliance Retail, as did V Nagaprasad who was heading Subhiksha’s Karnataka operations.

A few months back, Rajeev Karwal quit Reliance Retail in less than a year of joining the retail venture. Similarly, Lifestyle International CEO, G Shankar exited the company late last year. In fact market has been abuzz lately, about a few key executives on the verge of putting in their papers in two big retail ventures although there has not been any formal announcements.

Analysts say much of the rush to retail that happened last year is now taking its toll. “Being a hot sector offering tempting salaries retail carried a high glamour quotient and many professionals got carried away,” says K Sudrashan, MD, EMA Partners International. “But now with reality hitting hard in this highly demanding operations job, they are having a second thoughts.” Industry watchers expect more exits at senior levels in almost all retail ventures.

HR experts point out that while retail is extremely operation-oriented, a lot of the top honchos are not used to the daily rigours of operations considering they have moved upwards to blue sky strategising. Meanwhile, most of the talent for retail was poached from FMCG or expats were brought in, so while other sectors are skewed 60-40 in favour of strategy, retail is 70-30 tilted towards operations.

“There is an absolute dearth of middle management talent in retail which means that the top people can’t delegate much and have to get operationally active. In addition there is a lot of ambiguity and lack of process orientation,” says Vidya Prakash, principal consultant, Stanton Chase, an executive search firm.

For the retail companies, it was trial and error situation last year. And there was no way the retailers could have waited and got the right fit for their operations. “Startups and scale ups have their own challenges which established players may not be ready for,” says Gauri Padmanabhan, partner, Heidrick & Struggles, retail. As a result, many are facing the churn now.

DSCL to tie up with retailers for sourcing

NEW DELHI: In a bid to leverage the anticipated retail boom, DCM Shriram Consolidated Ltd (DSCL) is planning to tie-up with retail majors to source fruits and vegetables from farmers and supply them to retail chains. The company has started doing so for Food Bazaar, Subhiksha and Spencer last year and now wants to scale up rapidly.

The company is working to add value at all levels of the supply chain: procurement, aggregation, grading and transportation. It is also setting up a warehouse at Kota in Rajasthan, which is critical in the business of perishable items like fruits and vegetables.

“We are working at strengthening the supply chain so as to achieve scale in this segment,” DSCL chairman Ajay S Shriram told ET The company is also looking to explore new markets. Last year, its offerings were mostly sold at retail stores in National Capital region.

The sourcing and supply initiative is an extension of DSCL’s Hariyali Kisaan Bazaar initiative and the company hopes to leverage its links with the agricultural community for this initiative.

“We supply agri inputs, goods, and services to the farmers. We want to work with them in helping them sell their output,” said Mr Shriram. DSCL, which has interests in sugar, chemicals and fertilisers, set up its first “Hariyali” store around three-and-a-half years ago and at present has 50 stores in rural areas of UP, Uttaranchal, Haryana, Punjab and Rajasthan.

It has now decided to scale up rapidly and establish a national presence with 200 such stores in the next two years. These stores, generally managed by agronomists, provided agricultural inputs like seeds, fertilisers and farming tools, besides consultancy to the farmers. A Hariyali store attracts around 400 footfalls on an average day.

Hiring on, Bharti-Wal-Mart plans to kick off ops by Sept

NEW DELHI: Even as the controversy over FDI in retail is flaring up, the Bharti Group has informed the government that its joint venture with Wal-Mart would start operations in August or September this year.

Recruitment, negotiations with potential customers and market surveys are now on for the project, the group’s company secretary Vijaya Sampath has said in a letter to the Department of Industrial Policy & Promotion (DIPP).

The joint venture’s activity will be in compliance with FDI guidelines and clearances would be sought for all activities that require government approval, says the letter which assumes significance in view of the directive from Prime Minister’s Office (PMO) for a study on the impact of retail giants on small retailers.

“When our business & funding plans are finalised, we expect to commence operations in August-September 2007,” says Bharti’s letter to DIPP. The Mittal family-controlled group is expected to work on two ventures with Wal-Mart and the details are to be finalised soon.

The first venture relates to a retail network by Bharti which will be supported by Wal-Mart’s expertise in setting up back-end infrastructure like logistics, cold chain, sourcing and merchandising. The second one is a Wal-Mart venture for wholesale trading which is expected to get strategic support from the Bharti Group.

“We reiterate our commitment to the growth of the Indian economy and confirm that our activities will be in compliance to the FDI guidelines and government policy in this sector and suitable approvals will be sought where required,” says the letter to DIPP.

Interestingly, it was on the basis of a communication from the Bharti Group that the DIPP had informed the PMO that the proposed collaboration with Wal-Mart does not flout FDI rules. Nothing prevents a domestic company like Bharti from setting up a retail venture and foreign companies like Wal-Mart are allowed to invest in wholesale trading ventures.

However, the PMO has sought a detailed study on the impact of giant retail on tiny vendors like those who sell fruits and vegetables. The study is also supposed to cover the impact on various aspects like retail prices and employment generation due to the advent of retail in organised format.

The Bharti Group has emphasised that its joint venture with Wal-Mart will create employment, probably in reaction to apprehensions that it may lead to displacement of jobs. “Another focus area is the recruitment and training of personnel for the various positions and tasks.We are confident that the sector will create a large number of direct and indirect employment opportunities as well as entrepreneurial growth for the SME segment,” says the letter to DIPP. Officials of the Group have also been emphasising that the JV will become a good source of supply for small retailers.

Wal-Mart, Tesco are different

NEW DELHI: With the PMO calling for a study to assess the impact of large retailers — be it foreign or domestic — domestic retailers are trying to distance themselves from their foreign counterparts. Clearly not very happy at being tarred with the same brush as international chains, they say they should not be treated at par with the likes of Wal-Mart and Tesco.
Domestic retailers are quick to point out that Wal-Mart, with its ability to scale up can manipulate the consumption pattern in the country. Says Future Group MD Kishore Biyani: “The implication needs to be understood in the long term. In terms of size, Wal-Mart is bigger than the total consumption in India.

Operating at this scale, puts the company in such a commanding position, that it can even manipulate consumption patterns, something which is obviously not in the best interest of India.”

Echoing a similar view, the head of another prominent retail company says that the franchising agreement with Bharti for front end-retail is only the beginning.

“My whole fear is based on the assumption that even if Wal-Mart opens stores in a franchisee model, it will subsequently force the opening of FDI in the country. And once it is able to bring its own equity, it can manipulate the markets on its own terms and conditions,” he said.

These views, are however, not shared by all large domestic retailers. “What’s the big deal if Wal-Mart or other foreign retailer does business in India. If the Indian players are competitive enough, they will survive the war.” On the issue of impact on small retail units, he said, “Let that choice be with the consumer. Everything should not only be judged from a businessman’s perspective.”

Small retailers debunk the contention that a distinction should be drawn between big domestic and foreign retailers. Says Confederation of All India Traders (CAIT) secretary general Praveen Khandelwal: “PM’s intervention, though late, is necessary.

At the same time, the proposed task force, while studying the impact of the likes of Wal-Mart on small shops, should not ignore the fact that Reliance, Birla and Bharti are as big a threat.”
Other Wal-Mart sympathisers also feel that the arguments being extended by the anti Wal-Mart lobby lacks substance. “Even the PM’s letter fails to explain if the debate is between a big retailer versus small retailer, or between a foreign retailer versus domestic retailer.” says a retail expert.

Realty cos ride retail boom, bet big on warehouses

Huge Opportunity Seen In Warehousing, Particularly In Tier II & III Cities.

IT’S not just malls and retail spaces. Real estate firms seem to be equally bullish on warehouses. They see immense business potential, arising from the fact that almost all international retail chains planning to enter Indian retail, including Wal-Mart, Carrefour and Tesco, have simultaneous plans of doing business in the cash & carry format as well.

Various Companies operating in the commercial real estate sector, such as DLF, Unitech, Ansal API, Omaxe and TDI, have started talking to retail chains. According to industry estimates, backend activities in the retail sector, comprising warehouses and cold-storage, will require close to 5 million sq ft of real estate space by 2010.

Says TDI MD Kamal Taneja: "Warehousing and logistics are clearly the backbone for the growth of organised retail in the country and will throw up huge business opportunities, particularly in tier II and III cities. Owing to very limited space in larger cities, retailers will be able to keep the lowest possible stock on shelf. This can only be sustained by a strong backend network." In fact, worldwide, most big scale retailers, including Wal-Mart, thrive on the mantra of smallest possible stock on shelf and a bigger inventory in the warehouse.

Omaxe CEO Arvind Parakh says: "This is inevitable for any retailer. Setting a warehouse and addressing supply chain issues are critical areas, and need to be firmly in place, before a company goes ahead with its frontend retail plans." In the warehouse development business, some also see a logical extension of the relationship that a mall developer has with a retailer. "For the first time, retailing is expected to happen in India at this scale where having warehouses will be mandatory. It’s sure an exciting business opportunity for real estate developers," says Ansal API marketing head Kunal Bannerji.

According to industry sources, even before the deal is formally signed, representatives of Bharti-Wal-Mart have started scouting for locations for their warehouses. These warehouses will be part of the company’s wholesale cash & carry business, which, apart from Bharti, will sell to other interested retailers as well. Reportedly, other international retail chains, Tesco and Carrefour, which are yet to firm their plans for frontend retail in India, have also evinced interest in the cash & carry business, as this is the only way they can bring equity as they enter the market. According to Euromonitor, a Londonbased market intelligence firm, it makes sense as, "when the restrictions on retail in India are lifted, international retailers will be in a prime position to easily convert their cash & carry stores into highly profitable supermarkets and hypermarkets."

Market Update 2/27/2007

The markets ended in deep red on the budget eve due to selling pressure in stocks across sectors. All the BSE sector indices closed in red. Heavy selling was seen in banking, auto, FMCG and IT stocks.

In the auto sector two wheeler majors Hero Hinda ands Bajaj Auto were the top losers and in the banking sector ICICI Bank and OBC were the major losers.

Sensex closed down 170.69 points or 1.25% at 13478.83, and the Nifty down 48.10 points or 1.22% at 3893.9.

About 1274 shares have advanced, 1190 shares declined, and 54 shares are unchanged.

The BSE Small Cap Index closed at 6,918.29 up 24 points or 0.35%.

The BSE Midcap Index ended at 5,706.40 up 10 points or 0.17%.

The BSE FMCG Index lost 1.9% at 1,777.38. United Spirits, Nirma, ITC, Tata Tea, HLL closed in red.

The BSE Metal Index was down 0.8% to close at 8,927.98. NALCO, Jindal Saw, Sesa Goa, Sterlite Ind, Mah Seamless, Hindalco were among the losers.

The BSE Bankex was down 1.6% at 6,694.82. Oriental Bank, ICICI Bank, PNB, SBI, IOB moved downwards.

The BSE Health Care Index was plunged 0.3% at 3,613.07. Divis Labs, Sun Pharma, Ipca Labs, Matrix Lab, Aventis Pharma closed lower.

The BSE Capital Goods Index was down 0.7% at 9,145.74. Greaves Cotton, Lakshmi Machine, Siemens, Larsen, Alstom Projects ended lower

The BSE Auto Index closed at 5,305.07 down 1.13%. Hero Honda, Bajaj Auto, Sundaram-Clayto, Escorts, Tata Motors were among the losers.

The BSE IT Index closed at 5,172.40 down 1.4%. Satyam, Wipro, TCS, HCL Tech, Infosys ended weak.
The BSE Oil and Gas Index closed at 6,483.67 down 0.7%. ONGC, BPCL, Reliance Natura, GAIL ended in red.

The NSE cash turnover was at Rs 8141.93 crore and the NSE F&O turnover was at Rs 31766.48 crore. The BSE cash turnover was Rs 4009.88 crore. Total market wide turnover was at Rs 43918.29 crore.

Market Update 2/26/2007

The markets opened on strong note today but slipped in early trade. It traded under pressure throughout the day on the back of selling pressure across the board and witnessed deep crack of over 200 points in last one hours trade but saw splendid recovery to close in green with moderate gains.

The Sensex ended up 16.99 points or 0.12% at 13649.52, and the Nifty closed up 3.05 points or 0.08% at 3942. About 1203 shares had advanced, 1296 shares declined, and 46 shares were unchanged.

Markets Today:

- Markets bounce back from days low amid volatile session
- Sensex up 17 points at 13650; recovers 267 points from days low
- Nifty ends flat; recovers 86 points from days low
- BSE Metal Index up 2.52%; Tata Steel up 2.12%, Nalco up 2%, SAIL up 1.8%
- BSE Bank Indices up 1.10% each; SBI up 2.85%, PNB up 5.22%
- Cement stocks in focus; Guj Amb up 3.45%, ACC up 3%, Grasim up 3%
- CNX Midcap Index up nearly 1%; IVRCL up 9.4%, Rolta up 5.70%, Century Textile up 5.24%
- BSE Small-cap Index up ends flat; dragged by recent listings
- Recent listings; Pochiraju Ind down 7.34%, GBN down 4.5%
- New Listings: C& Construction close at Rs 241.45 Vs listing price of Rs 279 (Issue Price at Rs 291)
- New Listings: Transwarranty Finance close at Rs 47.45 Vs listing price of Rs 57 (Issue Price at Rs 52)
- NSE Advance Decline ratio at 1:1
- Total market turnover at Rs 47560.86 cr Vs Rs 50895.3 cr on Friday