Category Archives: Economy
Sensex tanks 555 points on China rout, closes at 3-week low
The Sensex fell for the fourth consecutive session on Thursday to close at 24,852, down 555 points (2.2%) with all the 30 Sensex stocks in the red. Thanks to the market rout in China,On Thursday morning as the CSI 300 index in Shanghai tanked 7% and Chinese authorities suspended trading for the day, sensex opened more than 1% lower and lost steam through the session to close at a fresh three-week low.
In the process it also broke below the psychologically important 25K mark. Thursday’s was the second 7% fall in the benchmark index for the Chinese stock market this week which came on the back of signs of further economic weakness in the world’s second largest economy.
In India, the Sensex has now lost over 1,300 points since its New Year day closing at 26,161.
On Thursday, the slide in the domestic market was led by BHEL, Tata Steel, Tata Motors and Axis Bank, with each of the stock closing down 5% or more.
Why is the Indian power sector facing a Supply-Demand gap?
In spite of a total installed power generation capacity of about 223 GW (as of April 2013), India is still struggling to meet increasing power demand. Government of India came up with the Electricity Act in the year 2003 to reform the unorganized power sector in India. EA-2003 has helped to improve efficiency and has brought some much needed order in the overall power sector. However, we are still facing severe power cuts and many regions in India are still lacking something as basic as an electricity connection. Recent structural reforms in the power sector will take some time for complete implementation. In the short to medium term, supply-demand mismatch and limited ability of the financial systems to support subsidies are expected to push consumer tariffs upward.
Following points explain the reasons behind low power generation and hence increasing Supply-Demand Gap;
- Electricity generation in India is predominantly based on coal. India has enough coal reserves in its forests areas. However, due to strict forest clearance regulations, this coal cannot be utilized very often for power generation.
- The quality of coal is not up to the grade which is considered best for power generation.
- Coal India Limited -a public sector company, is the major supplier of coal for power plants in India; hence it has a monopoly in the market. Growth in supply by Coal India has been muted due to multiple factors as discussed earlier i.e. forest clearance regulations, poor calorific value, etc. As shown in the graph above, CIL has almost the same coal production since five years. However, the demand has increased extensively.
- Frequent increase in price of imported coal is not fitting in the cost per unit structure as promised in PPA, resulting in restricted generation. Recently Indonesia has increased the price of coal in international market.
- Production of gas in the Krishna Godavari (KG–D6) basin has also dropped by more than 60% from two years ago. It has resulted in lower or no power generation from gas based power plants.
- Severe droughts/or less rainfall has contributed to less water level in dams which has resulted in less power generation from Hydro power plants.
Key issues faced are Quality of fuel supplied, Evacuation of extracted fuel, Weather (availability of water) and Allocation of limited fuel among sectors competing for the same.
Overall energy demand has been increasing at the rate of just under 7% per annum in the last seven years. Amongst the major consumers, demand of Tamil Nadu, Andhra Pradesh, Karnataka and Rajasthan has grown at a rate of close to 8.5%. Traditionally large demand base of Maharashtra and Uttar Pradesh has grown at a rate of close to 6.5%.
Power has significant growth multiplier effects. Better availability not only boosts immediate economic performance but also investment prospects and business optimism. Recent growth has taken place despite the difficult economic conditions – demand can be expected to show a positive boost in better conditions.
During the last decade, growth in energy demand has consistently outpaced growth in supply. This has resulted in a widening gap over the years leading to implementation of Restriction & Control measures in more and more states.
What is government of India doing?
MoP has proposed debt restructuring scheme for state owned utilities. 50% of outstanding short term liabilities will be taken up by the state governments. Discoms will issue bonds to lenders, backed by state government guarantee. Government will then take over the liabilities in a phased manner by issuing special securities in favour of participating lenders. Balance 50% will be rescheduled by lenders and serviced by discoms with moratorium of 3 years on the principle. Rs. 1.9 lakh crores of liabilities are to be covered under this scheme. Eight states accounting for 70% of the liabilities have given consent for the scheme.
The Ministry of New and Renewable Energy (MNRE) is encouraging growth in solar power installations under the auspices of the National Solar Mission. Close to 2,000 MW is expected to be installed by the end of current financial year. This capacity is expected to make an important contribution in mitigating peak (day time) power shortage. In addition, MNRE encourage other renewable energy generators with their subsidy and other relevant schemes.
What should consumers do?
The gap between supply and demand can be bridged only with structural reforms in the energy sector. These reforms will however take time to be implemented considering the numerous challenges involved. Consumers can mitigate these rises by taking pro-active measures. Energy efficiency, re-scheduling of operations to benefit from low off-peak tariffs and investment in renewable energy are immediate opportunities for mitigating increase in energy costs. Read our article on rooftop solar grid interactive power systems here
Top jobs that will rule in 2016
As 2016 approaches, recruiters expect an increase in demand across sectors, be it e-commerce, financial services or mobile product development. There will be many more jobs for those in product development in particular owing to the sharp growth in the number of mobile devices in the country, besides a surge in entry-level openings for data analysts.Companies across sectors are ramping up their digital marketing teams and the job profile is slowly but surely attracting more attention because it’s seen as relatively stable and talent is as yet scarce
1) DIGITAL MARKETING HEADS
More and more companies are looking to beef up their online presence to meet the growing demand amid a sharp increase in the number of people accessing the internet. It is critical for such companies to have the right person to lead the digital marketing team.
SECTORS: Any sector that is consumer-related. E-commerce and retail firms, FMCG and SaaS companies are prime examples.
PAY: Rs 30-60 lakh per annum, depending on experience and seniority of position.
2) PRODUCT DEVELOPERS
With IT companies ramping up their offerings and startups mushrooming in several sectors, product developers are expected to be in high demand in the coming year. This job profile will particularly be much in demand, with new-age companies targeting the younger segments of the population by building mobile and app-friendly products.
PAY: About Rs 15 lakh for junior levels, going up to Rs 50 lakh for senior positions.
3) SKILLED TECHNICIANS
The demand in the IT sector is expected to slow down a tad since the companies in this sector are not expected to grow as fast as they have in the previous years. However, manufacturing sector will see a higher demand for jobs.Skilled technicians in factories, mechanical engineers, electronic engineers and sector specific locomotive engineers will be in great demand in the coming year.
PAY: Rs 2.5-5 lakh for entry-level jobs, with higher salary for wider skill set. For instance, a locomotive engineer will command a higher entry level salary due to his special skill set. With the Narendra Modi government pushing ‘Make in India’ and ‘Skill India’ campaigns, both state-run and private companies are expected to go on a hiring spree.
4) DATA ANALYTICS
In 2016, entry-level jobs for data analysts are expected to be aplenty since companies across the board, from small firms to larger companies like Infosys are looking to expand their footprint in technology. These jobs will require mathematical and analytical skills.
5) SENIOR MANAGERS: E-COMMERCE
6) MOBILE PRODUCT DEVELOPMENT
With mobile users set to cross 500-million mark by the end of 2015, according to a GSMA report, mobile product development engineers are expected to be in huge demand next year as software products and apps are being developed in droves. A BTech or a bachelor’s degree in engineering, design or related fields is a prerequisite for such jobs. AutoCAD certification, detailed knowledge of applications development on Android/iOS will steer hopeful candidates smoothly along.
SECTORS: IT consulting firms, e-commerce companies and companies building software products and mobile apps.
PAY:Rs 12-18 lakh at the entry level; Rs 35-40 lakh at higher levels.
Will 2016 be better than 2015 for the Indian economy?
India is facing deflationary conditions and that changes the paradigms for both lenders and borrowers. Neither India Inc nor the government has much idea how to deal with them.
Market indices have fallen about 15 per cent from the all-time highs hit after the Budget. Corporate revenue and earnings growth have been negligible. Exports have fallen even though the rupee has lost ground. Sentiment has been hit as the impasse on the legislative front has continued, with session after parliamentary session ending without movement on the goods and services tax bill, among other things.
Most investors are also coming to terms with the fact that the government is apparently not serious about meeting stated aims like disinvestment targets (which will be missed by miles), or ensuring a pullback on harassment caused by retrospective taxation (the Cairns case, for example).
There are also signs of internal dissent with accusations levelled at the finance minister by suspended Bharatiya Janata Party MP Kirti Azad.
Of course, it’s not all doom and gloom.
Indian Railways is being turned around (even if the proposed Mumbai-Ahmedabad bullet train doesn’t make much sense). Coal supplies from Coal India Limited have improved perceptibly, which has helped in power generation (though state discoms are in such a mess that they can’t buy power). The ‘ease of doing business’ indices also suggest some red-tape reduction. So it is business as usual, with the government muddling along as Indian governments tend to muddle along.
The problem with an unimaginative incremental governance strategy (if muddling along may be called “strategy”) is that this government must deal with at least one unprecedented problem that requires original thought. India is now facing deflationary conditions and that changes the paradigm for lenders and borrowers. Deflation implies low or negative nominal growth. This makes it hard for debtors to generate the income required to service loans. If the nominal growth rate drops below the rate at which interest on outstanding loans is payable, defaults start to rise, and rising default can cause a vicious cycle. This is an old problem in textbook terms.
But India has not had to deal with this, within living memory. Neither the corporate establishment nor the government has much idea of how to “muddle along” in this situation. The state, meaning central and state governments taken together, is the biggest borrower. As of now, the interest rate on sovereign debt is quite a bit higher than nominal gross domestic product growth rate. This means tax collections are unlikely to grow fast enough to service debt comfortably. Raising tax rates, as this government has already done, runs into other problems.
Collection buoyancy can be affected as the fabled Laffer Curve turns inimical. The approved method of dealing with this is to generate primary Budget surpluses. Given relatively low growth in tax collections, this means cutting expenditure for the Centre.
Again, no Indian government has ever managed to do this. The Pay Commission handout is also due and that makes expenditure cuts look unlikely. This situation also implies by the way that the GST (which will probably not happen anyway) could trigger chaos if it leads to an initial drop in government revenues. This situation hurts corporate borrowers too. Nominal revenues for India Inc have stagnated in the past 18 months. Operating profits have not grown quickly enough to allow easy debt service. The situation has deteriorated enough for the Reserve Bank of India to repeatedly express concern.
The latest Financial Stability Report flags problems in terms of deteriorating debt-service ratios. If debtors are hurting, creditors start to have problems and the Indian banking sector may now be looking into a deep, dark abyss. The net worth of many of India’s banks could be wiped out if stressed assets go sour at the rates the FSR considered in its latest stress tests.
Since the central government owns the majority of India’s banks, it is in the odd (but common) position of owing money to itself in many instances. Various state governments and their institutions also owe money to banks. So the government must figure out ways of servicing the loans it can, and recapitalising banks that it controls, in the cases where bad debts must be written off. The corporate sector has to cross its collective fingers and hope demand picks up. There’s plenty of slack with 30 per cent of manufacturing capacity is lying idle. Investments won’t pick up until a large part of that slack is absorbed by growing demand.
Perhaps the Pay Commission hikes will spark some revival in consumption? Overseas demand is not likely to be very high — exports show declining trends and global GDP projections for 2016 are muted. Higher H-1 visas will hurt the information technology industry’s margins. Foreign direct investment commitments will translate into actual movement at a stately pace. Foreign institutional investors have been net sellers of Indian equity through this fiscal and they have been sellers of rupee debt in the past two months.
Technically, the Nifty has held at support at 7,550.It may range-trade for a while between 7,700-8,100. Investors will probably wait for the Budget before they take their calls on 2016-17. Given the circumstances, 2016 is more likely to be a highly interesting year, rather than a deliriously happy one.
Still, hope springs eternal and I sincerely hope I’m wrong. Acche din and good governance to all!
India Post payment bank to be operational by March 2017
India Post, which was among the eleven applicants to have received approval from RBI for payment banks in August, will start its service by March 2017, Telecom Minister Ravi Shankar Prasad said.
About 40 international financial conglomerates including World Bank, Barclays and ICICI have shown interest to partner with the Postal Department for the payment bank, the minister said. The Department has 1,55,015 post offices across the country, of which 1,39,144 are in rural areas. MTNL will offer free incoming to all its users when on roaming starting next year, he said. The other state-run operator BSNL already offers free roaming for its users.
Asked about the controversial Free Basics initiative by Facebook in partnership with Reliance Communication, the Minister said he is awaiting the report of Telecom Regulatory Authority of India on the subject of net neutrality.
The Reserve Bank of India had granted in-principle approval to 11 applicants, including Postal Department, in August to set up payments banks.
Other companies to receive an in-principle nod were Reliance Industries, Aditya Birla Nuvo, Vodafone, Airtel, Cholamandalam Distribution Services, Tech Mahindra, National Securities Depository Limited (NSDL), Fino PayTech, Sun Pharma’s Dilip Shantilal Shanghvi and PayTM’s Vijay Shekhar Sharma.
The in-principle nod granted by the RBI was valid for 18 months, when it was issued in August this year, during which time the applicants have to comply with the requirements under the guidelines and fulfil the other conditions as may be stipulated by the Reserve Bank,” RBI said in a statement.
The Payments Bank will be set up as a differentiated bank and shall confine its activities to acceptance of demand deposits, remittance services, Internet banking and other specified services. It will not indulge in any lending activities.
No LPG subsidy for consumers with taxable income of more than Rs 10 lakh
Consumers with a taxable income of more than Rs 10 lakh per annum will be stripped of the benefit of subsidy on LPG cylinders, the Centre said on Monday.
This would be applicable from January 2016 onwards and would be initially implemented on a self-declaration basis, according to a statement issued by the ministry of petroleum and natural gas. This has been initiated as the government felt that consumers in the high income bracket should buy cylinders at market price.
This enables provision of LPG, a clean fuel, to poor households by replacing the conventional fuels such as kerosene, coal, fuel wood, cow dung, etc. relieving the poor of the hardships and health hazards from such fuels.
Petroleum products not to be brought under GST: CEA
Petrol and other petroleum products would not be brought under the ambit of the proposed new indirect tax regime – the pan-India goods and services tax (GST) – for some time after its implementation, Chief Economic Advisor (CEA) Arvind Subramaniam said on Sunday.He also said that Even after GST is rolled out, petrol and other petroleum products would continue to be taxed in the present way both by the centre and states.
India is working towards the introduction of a comprehensive GST covering both the Centre and the States. The rationale for this proposed reform is two fold: one, to expand the tax base available for taxation for each level of government, and two, to reduce cascading prevalent within the economy. The proposed design for GST however keeps crude petroleum, natural gas, some petroleum products, and electricity outside the purview of GST (The Empowered Committee of State Finance Ministers, 2009). Mukherjee and Rao (2014) explores some alternative designs for GST within the constraints with which governments work, i.e., reducing cascading, keeping prices in check and maintaining revenues.
If crude petroleum, natural gas, petrol, diesel, aviation turbine fuel and electricity are kept out of GST, it would result in cascading. Since, petroleum products play an important role in India’s energy use, and are used directly and/or indirectly as inputs in most sectors, the proposed design would result in cascading in sectors of the economy.
However, bringing these goods into the GST regime, without any other changes in the economy, would imply that GST has to be levied at higher rates for revenues to be protected. Introducing GST at higher rates would make the reform more difficult to implement. The solution for this knot lies in making reforms of pricing of petroleum products coterminous with introduction of GST reforms.
In India, crude petroleum is predominantly imported, where imports constitute about 81 per cent of total availability. In the absence of price control, it is expected that volatility in international crude oil prices as well as in exchange rate would put pressure on domestic prices of refined petroleum products. To protect end users from high and fluctuating prices, the government implements some price control measures – the present pricing regime does not allow full and instantaneous price pass through for a few petroleum products (PDS kerosene, domestic LPG, diesel and petrol). This results in under-recoveries for oil marketing companies (OMCs). The government has not been providing compensation to OMCs for such under-recoveries in sales of diesel and petrol.
Given that the country is working towards the introduction of a comprehensive Goods and Services Tax (GST) regime, Mukherjee and Rao (2014) explores alternative configuration of the tax regime, with specific reference to petroleum products and evaluates the extent of cascading under each of these. The study also explores the configuration of revenues and prices resultant from alternative tax/ subsidy regimes to understand whether elimination of price control in addition to streamlining the tax regime could be feasible, given the multiple objectives of reducing cascading, keeping a check on prices and protecting revenues.
Reasons for unstabilized petrol prices in India
India is the world’s fourth largest consumer of energy but with low per capita energy consumption. With the ever increasing number of private vehicles, an overall domestic consumption of petrol and petroleum product is on rise in India. There was a registered growth of 5% of the same in the year 2011-12 and to meet the increasing demand, government has to import more and more petrol. If spending of the country as a whole is considered then 80-90% is done to pay the import bills on petroleum products, which is accounted as country’s expenditure. Hence more demand of petrol than supply is a leading factor of its rising price in India.
But rise in petrol price in turn has a rippling effect. As all the commodities are transported across India on vehicles that run on petrol or diesel, so increase in petrol price results in price rise of these commodities as well. The greatest sufferer of all this is a common man. He is already bearing the pressure of inflation and any increase in petrol price will further reduce his actual household income. Today every Indian spends almost half of his income on food items. If the petrol price in India keeps on increasing then every food item will get costlier. It will result in less of savings and more of expenditure. This in turn will affect the real estate, banking and other sectors in India. Eventually, more and more people will be pushed towards poverty line.
Not only this but the condition of Indian currency is also not favorable at present. India is going through currency crisis where value of Indian Rupee is falling to US Dollar. That is why Oil Marketing Companies (OMCs) like Indian Oil Corporation (IOCL), Bharat Petroleum (BPCL) are paying more for the same quantity of crude oil. Due to this, OMCs have lost near about 4,300 crores in the past six months for selling petrol at low cost.
The price of petrol used to be stable in India but with the deregulation of petrol in 2010, Oil Marketing Companies can increase the petrol price if large variation in cost is observed by these companies. Oil marketing companies do so by linking the domestic price of petrol to international market rates.
Why petrol price is rising in India?
Depreciating rupee is one of the major reasons of the increase in petrol price in India. So we must understand that why rupee is depreciating like a free fall. Economists believe that current euro crisis is one of the fundamental reasons of depreciating rupee. But if this is the main reason then why other currencies like Pound, Brazilian Real, etc are not getting affected to that extent. In fact Yen has moved up against dollar.
So there must be some other reasons as well. Ever increasing fiscal deficit (difference between revenue and expenditure) is one of the factors leading to currency crisis in India. We spend more than what we earn. For the year 2011-2012, fiscal deficit was Rs 5,21,980 and for the year 2012-2013 target was to have it at Rs 5,13,590 crores. Major reasons leading to this fiscal deficit is the financial funding or subsidy offered on petroleum, food and fertilizer. Cost of subsidy on oil for the year 2012-2013 is estimated to be Rs 43,580 crores and when the loss suffered by OMCs is also added to it, the total amount stands at Rs 1,14,000 crores.
Present earning of government is less than its expenditure which means that fiscal deficit of government is increasing. Moreover, fiscal deficit is linked with trade deficit which means more import than export. Major portion of India’s import is oil. Since import of oil is always paid in dollars, so importers need to buy dollar by paying rupees. Present currency crisis means more rupees have to be given for the same dollars leading to more rupees in the market. Applying demand and supply theory, rupee is continuously losing value and OMC’s have to pay more for the same amount of oil imports.
If the price of oil products is not increased, India will keep on facing this deficit. Price increase will decrease the demand which in turn need fewer dollars for oil import. Trade deficit will also be lowered down leading to lesser pressure on rupee-dollar rate. Not only petrol price but the price of diesel, LPG and kerosene will also be increased to have more prominent impact. This will improve the fiscal deficit of the government and lead to economic growth.
On the other hand, price rise of petrol can be controlled if the government reduces its revenue from the taxes on petroleum. 35% of government’s income is generated through petroleum taxes and as there is no other substitute to this so probably this won’t be done by the government. Hence petrol price for sure will increase. But indeed Government has to take strong decision as increasing prices will solve one problem but leads to many other such as poverty, inflating, high cost of living, frustration etc.
How the petrol price is calculated?
Petrol price is calculated on the basis of worldwide supply and demand factors. Foreign suppliers sell crude oil to Oil Marketing Companies (OMCs) in India at benchmark prices. Delivery price at the refinery and Brent crude’s daily price are considered to calculate actual cost of petrol in India.
One barrel of crude oil contains about 160 litres of oil priced in US dollars. To calculate price, US dollars are converted to Indian rupee and then divided by 160.
After buying, crude oil is transported to refineries in India. India at present has about 20 refineries. Crude oil is then separated into various products like petrol, diesel, coal tar, etc in distillation towers of these refineries. Cost of distillation and refining is added to the price of petrol. Also crude custom levy and charges from ports to the refinery is added.
Separated petrol is now ready to be stored in the storage tanks of the oil companies. Oil companies now pay to the refineries and to this added the cost of transporting petrol from refinery to OMC’s tanks. So the actual price of petrol that a consumer pays includes all the above mentioned cost plus commission of a dealer, VAT, excise duty, total duties and taxes.
Thus petrol price is the cost price that includes procuring, refining and marketing plus taxes that include central and state taxes.
Retail inflation at 14-month high of 5.41% in November; food prices spike
Retail inflation rose for the 4th-month in a row in November, accelerating to a 14-month high of 5.41 per cent on sharp pickup in food prices, posing a challenge to further easing of monetary policy by the Reserve Bank.
The rising retail inflation will add to worries of RBI Governor Raghuram Rajan who had left interest rate unchanged earlier this month, targeting to contain retail inflation at 5 per cent in the medium term. The borrowing costs in India are among the highest across major Asian economies.
higher retail inflation will only add to his worries. Besides, implementation of the 7th Pay Commission
recommendations on pay hike for central government employees may further stoke price pressures. The recommendations are to take effect from January.
Industry chamber Assocham said since the WPI and CPI numbers are broadly in line with expectations it gives room to RBI for further rate cut to ensure pick up in domestic investment cycle.