Intelligentguess

Situation

Fiscal deficit for the month of May’07 stood at -67.69 bn $

Fiscal deficit as a % of Real GDP stood at - 6.18% at the end of Q1 2007 ( Q1 always tends to have the worst fiscal situation as a % of GDP)

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Background ( click on image for a larger visual)

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Conclusion ( click on image for a larger visual)

• Q2 always tends to have the best fiscal situation (Q2 for both 2005 and 2006 were at a fiscal surplus)
• We can expect the surplus as a % of GDP to be to be towards a 4.50% for Q2 2007.

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Related links

• USA - Record fiscal surplus in Apr’07 (highest since Apr’01)
• USA - Q1 2007 GDP annual growth revised to a lower level (lowest since 2003 Q3)
• USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
• USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
• USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
• USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

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Situation

The impact of large individual tax deposits resulted in budget receipts of $383.6 billion and a
surplus of $177.7 bn for Apr’07

Fiscal deficit as a % of Real GDP stood at - 6.17% at the end of Q1 2007 ( Q1 always tends to have the worst fiscal situation as a % of GDP)

Background ( click on image for a larger visual)

• April always tend to have the largest monthly surplus of the year.
• Within this - this $177.7 bn has been the largest surplus since Apr’01 ( $ 189.8 bn )
• Since 1980 this is the second highest monthly surplus ( after Apr’01) 
• As can be seen in the image the savings rate has steadily improved along with the improvement in the fiscal situation

 Conclusion ( click on image for a larger visual)

1. Q2 always tends to have the best fiscal situation (Q2 for both 2005 and 2006 were at a fiscal surplus)
2. We can expect the surplus as a % of GDP to be to be towards a 4.50% for Q2 2007.

Related links

• USA - Deficit increases in Mar’07 ( on an annual basis)
• USA - Q1 2007 GDP annual growth slumps to its lowest since 2003 Q3
• USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
• USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
• USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
• USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

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Situation

On a monthly basis - production ( IIP)  contracted to a negative -4.8% growth in Feb’07 ( as compared to a 1.3% growth in Jan’07).

On an annual basis - Feb’07 grew at 11%  p.a ( down from 11.4% p.a). Production has had a continuous drop since Nov’06 ( 15.8% p.a)

On a 3 month average basis ( to take out any “adjustments/ re-arrangement” ) - the annual growth was at 11.7% p.a. (13.2% p.a in Jan’07)  The average was growing since Oct’06 ( 8.9% p.a) and peaked in Jan’07.

Background

The Serengeti hosts the largest and longest overland migration in the world, a biannual occurrence. Around October, nearly 2 million herbivores travel from the northern hills toward the southern plains, crossing the Mara River, in pursuit of the rains( 500 miles) . In April, they then return to the north through the west, once again crossing the Mara river.

These herbivores face immense dangers crossing the Mara  river ( crocodiles) , and in the Masai Mara plains.(Lions and Hyenas)

This event is far more organized and efficient than the manner in which the Indian Government (GOI) / Reserve Bank of India (RBI)  has recently gone about in managing India’s monetary policy /  economic policy.

The GOI / RBI has gone on a rampage in the past two months. ( dont know where to begin and have no clue how it will end)

This is the flashback for the past 2 months :

RBI sequence of events and our comments

• Mar  3rd  ‘07 - Liquidity Management - RBI Changes Tack.
• Mar 19th ‘07 - Inflation - Monetary or What?
• Mar 20th ‘07 - Overnight Money Rates - The policy conundrum
• Mar 21st ‘07 - Overnight Rates - The pain continues
• Mar 23rd ‘07 - Monetary Policy Tools - Time for a fresh look
• Mar 28th ‘07 - Indian Money Rates - Pleasure or pain
• Mar 30th ‘07 - Indian money rates jump - CCIL reveals a hidden limit
• April 2nd  ‘07 - Monetary Policy - Old Wine in Old Bottle
• April 11th ‘07 - Lull before the storm….

GOI measures and our comments

• Mar 9th ‘07 - This Government Sucks
• Mar 3rd 07 - Smug, Self-righteous and Regressive

The real Question

RBI - Is it sovereign anymore?

What is clear is that with the current interest rates /polices - dont expect Production to be in great shape for 2007.

Conclusion (click on image for a clearer visual)

1) 3 month rolling average looks like dropping towards 9 % p.a towards Jun’07.

It is now likely that annual IIP calculated on a monthly basis may drop towards Jun’07. This expectancy contradicts last report - please see the note ( in “block quotes”)for the reason.

2) IIP could then range between 10% - 12% p.a towards end ‘07
 

Note : ( another fascinating habit of the GOI )

The Government of India has restated IIP for : 

• Nov’07 from 15.4% p.a to 15.8% p.a
• Dec’07 from 11.1% p.a to 12.5% p.a
• Jan’07 from 10.9% p.a to 11.4% p.a

This results in the 3 month average touching the 13.2% in Jan’07 ( originally data reflected as 12.2% p.a)

The previous report had indicated that the 3 month average would peak out at 13% and then drop.

Further the report went on to explain that , since the average still had space to rise, ( from the 12.2% towards 13%), the monthly growth  would continue to rise.

However having seen the restatement - we now have to assume that the 3 month average peaked out at 13% ( as expected) in  Jan’07. Therefore the monthly growth from here on now looks like its on a decline.    

While the Indian Govt data clearly stated in the Jan’07 report that the the Jan’07 figures are ”estimates ”  - its creative accounting for the Nov’07 - Dec’07 data needs to be noted.  

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                                                  VERSUS

Click  here for a larger visual

Conclusion

Its clear that the the Fiscal situation improves under Democrats and deteriorates under Republicans

Also see ( will give further indications of the fiscal policies of Republicans versus Democrats )

1. USA - Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995)  
2. USA - Relationship between Fiscal Deficit and Savings rate ( since 1981 )
3. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )
4. USA - Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)

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Situation ( click on visual to get an idea of the 12 month rolling trend)

The deficit for the month of Mar’07  was at -96.71 Bn US $ ( as compared to -85.28 Bn US $ in Mar’06). This represents a 12.89% increase per annum

The deficit in Mar’07 dropped by 19.77% as compared to Feb’07 ( but this drop is a normal occurrence between Feb and Mar )

Background ( click on image for a better visual)

Fiscal deficit as a % of GDP  has been on an increasing trend since 2006 Q2.

• The Q4 2006 deficit was -80.40 Bn US $.
• Fiscal Deficit as a % of GDP now stands at -2.39% for Q4 2006.

The Q1 2007 deficit now stands at -178 Bn US $

Conclusion

Even if the GDP grows in Q1 2007 at the same rate as Q4 2006 - the deficit will increase to 5 % of the GDP for Q1 2007.

Related Links

1. USA - Fiscal situation as a percentage of GDP, under the recent four Presidencies ( since 1980 )
2. Fiscal Deficit and Savings rate ( since 1981 )
3. Manner in which the Deficit has been financed since 1995 ( Savings viz external debt)
4. Relationship between Total Debt ( data from 1929) and External debt as a % of the GDP (data from 1995)
5. USA - Relationship between GDP and Savings rate ( Quarterly data since 1985 )

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This is another article by guest author KRG. KRG heads the treasury function of a leading Indian financial institution. He is based at Mumbai, India

P Chidambaram, the Indian Finance Minister, made a few statements (repeated below) recently :

- Inflation is a monetary phenomenon
- Monetary Steps do not have much impact on Fuel, Food prices
- RBI has direct responsibility for price stability
- Current Inflation rate rise driven largely by primary articles
- Govt will take Fiscal, Monetary; Supply side measures to control inflation

If this is looking confusing, let me rephrase it [including what is not said but what I have read, in bold and blockquotes], in my own words:

- Inflation cannot and will not be tolerated especially now

it is fast becoming an electoral issue and so says the powers that are

- Inflation is monetary in nature,

i.e., by and large it always is, Is it not? Everyone knows this!

And therefore…

- RBI has been tightening and higher price of money would hopefully bring down credit

and in any eventuality, they will explain, as they are directly responsible

- But don’t forget the non-monetary nature of inflation and the supply side dynamics…

there are cartels out there and hoarders, the shortages may be cyclical in nature, or may deliberately created by some profiteers

- Current inflation does not seem “monetary” in orientation

hence Govt has to do other things, but this does not mean that RBI can risk easing up its stance, since basically inflation is a monetary phenomenon

…but if inflation has a strong non-monetary nature and the current inflation is non-monetary, is RBI over-reacting? Can we have some serious research from RBI and/or Govt on how much of the inflation is non-monetary in nature instead of these confusing verbal justifications?

- Govt will take whatever steps required on Fiscal, Monetary and Supply fronts…

Will try to cut taxes, will try to curb expenditures and will try other measures such as price controls, export/import controls, subsidies, moral suasion etc….

“etc” means that I can’t think of anything else, but may be you could.

Not that this rephrasing helps much, but here are my two bits on inflation.

To start with, I am not very erudite on the matter of inflation (or for that matter on any other matter!!). But I would like to see RBI and/or Govt economists getting into the nitty-gritty of inflation, i.e., study the individual items in the WPI basket, the relevance of their existing weights, current supply/ demand/price/market factors and then look at the possible policy measures. And perhaps extend the study into bringing out a PPI (I am told that this is more scientific) as an inflation measure. Then may be Govt can assign the whole work of revamping the WPI or building a new PPI to some entity well versed in research and surveying (may be RBI could take over this activity); While we are at it, may be we could shift to a more recent base year and officially introduce a concept of core or manufacturing inflation (excluding food and fuel).

But the extent and the aggressive tone of inflation-speak are making me uneasy. If we assume that there are no skeletons in the WPI cupboard, the base effect itself should start easing the headline number after April. CPI is high, but let us remember that for long periods the CPI was very low, so there could be a predominance of base effects. The strong measure on CRR would start working its multiplier-way on the credit growth etc. Meanwhile, there are signs of a US if not a global slowdown. Then, why all this aggressive talk?

Is this in preparation for a massive revising of the index for some past period (the average revising has been at least +25 bps)? Has some item been missed out (the iron ore episode stands out!)? Or is it a genuine concern on the monetary growth coupled with supply inelasticity coupled with electoral issues coupled with the aggressive tones of ECB/BOJ et al?

Yet another worry is that, whatever be the reason, the heightened concerns of the authorities means that RBI might continue to be defensively “tight”, perhaps even much after it is necessary. This policy risk does not augur well for the domestic asset markets, for this also implies that the interest rates would peak much later than in other markets and also that the cyclical rate cuts would be in huffs and puffs and bits and pieces.

Previous posts by KRG can be found here (1)

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The Economic Times reports that the Indian Government has requested the Reserve Bank of India (RBI) to examine the feasibility of using forex reserves (USD 195 bn at last count) to fund infrastructure projects.

It appears that the decision use a portion of the reserves for infrastructure projects has already been taken and the government is going through the motions of imparting credibility to the whole process by getting a stamp of approval from RBI.

While there is no doubt that infrastructure funding is a priority and all possible sources of funds need to be tapped for this, we better remember that forex reserves are monies that the country ‘owes‘ not ‘owns‘.

RBI would be well advised to proceed on this with caution, remembering fully well that once the ‘reserves’ tap is opened to wet (sic) the government’s needs on infrastructure it would be very difficult to close it.

Locking up reserves in long term projects like infrastructure projects would only leave the country vulnerable in times of financial distress, if ever that were to occur.

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Breaking News reports that the Government of India has managed to arm twist cement companies into submission:

• Companies will not raise prices for the next one year
• The companies have refused to roll back the recent price hikes announced after the government raised duties.
• The Government has refused to give any assurance on tariff reductions.

This raises more questions than answers :

• What price would be used as the benchmark. The price prevailing in Mumbai, Delhi, Chennai or some godforsaken place (Maybe using the price prevailing in Rae Bareli or Amethi would give our government ministers great joy).
• Who would monitor this? Could it lead to black marketing if genuine demand exceeds supply

• If prices can’t be raised, are the companies free to not lower them as well - if demand wanes? Logically, shouldn’t this seem to be a logical (sic) corollary

Coming as it does, on the back of the Government’s move to fix prices in the steel sector, its moves on the sugar industry, and its continued bleeding of the oil marketing companies,  you wonder aren’t we going back to the 70s and 80s. Also think of the knee jerk reaction of banning futures trade in pulses, rice and wheat - without any conclusive proof that futures trading was responsible for the upward move in prices.

How can our Prime Minister and his colleagues talk of 9% sustainable growth when all efforts are taken to ensure that economic agents have no incentive to respond to price signals.

Clearly, this government sucks!

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This is a post by guest author, KRG. KRG is a senior executive in the financial services industry in India. He heads the treasury function of a leading financial institution and prefers to identify himself solely by his initials. The post is his reflection on the measures announced during the presentation of India’s annual budget by the Finance Minister, P Chidambaram (PC).

I was told that a lot of people were expecting a populist budget; and one was kind of prepared for it. But as the budget speech progressed, I started getting a feeling that the underlying tone is not quite normal and certainly not expected of PC. I will list out the things that stood out for me:

-        Growth is given; our job is to make it is inclusive (the smug part…).

-        Futures in wheat and rice are banned (An expert committee will now review the future of commodity futures… FM says that FMC banned this and that he will go by expert recommendations… Already there are arguments on what caused the fall in some of the agri-prices; market men seem to suggest that the price action is in tune with delivery expectations while authorities claim credit through the ban…… Voila, we have a new control measure on inflation… ban futures and primary prices will fall. When they fall too much we can reintroduce trading again).

-        Fiscal deficit contained as per targets (but wait, this is only in percentage terms; actual numbers show slippage despite very strong tax collections mainly on account of non-plan expenditure…. And we thought that the reformist and clean PM/FM combine has started getting a hang on how to control expenditures especially the non-planned variety).

-        MAT made applicable for IT sector. Whatever happened to the Tax-holiday till 2009? Or is it something else?

-        ESOPs are now part of FBT. There seems to be lot of confusion on how this is going to be implemented. My view is that on the difference between option exercise price and Fair Market Value at the time of option exercise (FMV), the company will pay FBT and employee will pay capital gains tax on the difference between FMV and the sale price. Again, the principle that a capital asset will be taxed differentially seems little unpalatable. If the idea is that employee will pay capital gain on full amount (i.e. between sale price and exercise price) and company will separately pay FBT on the difference between FMV and exercise price, then this gets even more confusing. Tax a benefit which is being taxed separately anyways….We have new defining Fiscal Paradigms.  

-        Cement: This takes the cake…..; Dual taxation to control inflation… It is a separate and mute point that the prices actually went up. It is a separate point again that this opens up issues like what is the right cost, quality, margin etc. The more important point is why the logic cannot be extended to others. All manufacturing inflation can be nipped at the source. Lay down specific prices for all inputs as well. And introduce multi-layered taxation for excise and extend the concept to customs duty etc. Yet another defining Fiscal Paradigm that fits the ultra new inclusive-growth-oriented-anti-inflationary-yet-market-determined economic system. Sounds more like the return to command economy

It is quite possible that I got all this wrong or am seeing too much into too little and would therefore love to be corrected. Especially since the present PM/FM combine is easily the most market-friendly set-up that we have got so far and how we hate to lose them to some contrived and contorted economic and fiscal logic

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The Indian Finance Minister presented the annual budget in Parliament today.

Key decisions concerning direct taxes are elucidated below (alongwith some brief comments)

Threshold limit of exemption in the case of all assessees to be increased by Rs.10,000.

• In the case of a woman assessee, threshold limit to be increased from Rs.135,000 to Rs.145,000
• In case of a senior citizen from Rs.185,000 to Rs.195,000

This gives a relief of Rs. 1000 (Rs. 2000 in case of senior citizens) in tax payments. Too miniscule to be of much import.

Surcharge on income tax on all firms and companies with a taxable income of Rs.1 crore or less to be removed.

The surcharge is at a rate of 10%. This would thus benefit companies which qualify as per the eligibility norm.

A five year income tax holiday for two, three or four star hotels and for convention centres with a seating capacity of not less than 3,000; they should be completed and begin operations in National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during April 1, 2007 to March 31, 2010.

This move is intended to incentivise creation of hotel rooms in Delhi and surroundings. Clearly targeted at the Commonwealth games due to be held in Delhi in 2010.

Tax holiday to undertakings in Jammu & Kashmir to be extended for another five years up to March 31, 2012.

The minister could have as well said “indefinitely” instead of specifying the terminal date.

Minimum Alternate Tax (MAT) to be extended to income in respect of which deduction is claimed under sections 10A and 10B.

Secs 10A and 10B deal with profits earned from units located in Special Economic Zones. Perceived to be a negative for small and medium IT companies.

Deduction under section 36(1)(viii) to be restricted to 20% of profits each year.

Section 36 allows deduction for transfer of profits to special reserve upto 40% for banks/ FIs engaged in long term finance. The proposal to reduce it to 20% increases the effective tax rate by approximately 5%. Negative for entities like IDFC, HDFC etc.

Pass-through status to be granted to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development;nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels, and hotel-cum-convention centres of a certain description and size.

An unnecessary attempt at micro management by the Finance Minister

Rate of dividend distribution tax to be raised from 12.5% to 15% on dividends distributed by companies; and to 25% on dividends paid by money market mutual funds and liquid mutual funds to all investors.

Negative for investors in company shares. Effective tax on dividend distribution by “liquid” mutual funds to individuals more than doubles to 28.3% from the current 14.02%. Increase in effective tax rates for corporates investing in “liquid” mutual funds increases by approximately 5.5%.

ESOPs to be brought under Fringe Benefit Tax regime.

A big negative for all those who dream of riches from ESOPs. The government now eyes a share of the pie

Cash withdrawals by Central and State Governments to be excluded from the scope of Banking Cash Transactions Tax (BCTT); exemption limit for individuals and HUFs to be raised from Rs.25,000 to Rs.50,000

Better late than never. BCTT is anyway a controversial measure. Raised a lot of hackles when introduced. Personally, would prefer that this tax be withdrawn.

An additional cess of 1% on all taxes to be levied to fund secondary education and higher education and the expansion of capacity by 54% for reservation for socially and educationally backward classes.

Education cess has been hiked from 2% to 3%. This move is distinctly unpopular. It leads to a cascade increase in all taxes.

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