Could this ease the pressure on govt. finances?

Apr 17, 2012

In this issue:
» RBI proposes rate cuts
» Why should LIC come to the rescue of Air India?
» Gold prices could see a pullback
» TRAI proposes single licensing regime
» ...and more!

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Finances of Indian states have not attracted the same kind of attention as the Centre in the past. A lot of it had to do with perception. Most of them were expected to attend to social obligations such as education and health care. But the resources for this would come from patchy revenue sources such as sales tax, excise duty and stamp duty. This in some sense made the states dependent on the Centre as they would rely on the latter to make up the shortfall. If that too was insufficient, then resource needs would be met through borrowings.

As the Economist points out, things worsened in 2004, when state debt soared to 33% of GDP prompting the central bank to press for some reforms. There seems to have been some progress. For starters, state debt has come down to 22% of GDP. The central government also restructured some debt owed to it by the states and made these handouts based on certain parameters. All states have now agreed to balance their books by 2015. What is more, the states' deficit is expected to fall to 2.2% of GDP in FY12, from a peak of almost 5% a decade ago. This is in sharp contrast to the centre, whose deficit has only bloated and is struggling to put this in order. Infact, it came under a lot of flak for not adequately addressing this issue in the recent Budget as it pegged its deficit at 5.9% of GDP.

Of course, some grey areas still remain for state governments. These are losses at state owned electricity firms, how the goods and sales tax will pan out if it is implemented, the impact of a slowing economy and the like. But it goes without saying that if state governments continue to spruce up their act and depend less on handouts from the centre, some pressure on the central government could ease off. The centre on its part would also be required to be more proactive and appraise the performances of state governments, offering sops accordingly. For starters, governments of under-performing states like West Bengal, UP etc should be brought to book. Of course, it will not let the centre completely off the hook as bigger issues of subsidies and rising non developmental expenditure remain. But it could be one less headache for the central government to deal with.

Do you think that Indian states standing on their own feet will take a lot of pressure off the central government? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
The emergence of the Internet has made a significant change to the way governments and businesses operate. Little wonder then that its importance in terms of contribution to GDP cannot be undermined. Today's chart of the day shows that Britain leads the pack in this regard. This is expected to be the case going forward as well as e-commerce takes over traditional fields such as construction. Although India lags behind, it has not done too badly either as it remains on par with the average contribution for the G20 countries.

* in 2010
Data Source: The Econ0mist

The Reserve Bank of India (RBI) finally succumbed to pressure from the economy and has announced a rate cut after three years of tightening. Inflation has seen moderation over the previous year; but it still remains sticky on account of global commodity prices and supply side constraints. However, growth in the Indian economy has been the major letdown, falling to 6.1% in 3QFY12. This forced the central bank's hand and in the first monetary policy review of FY13, the RBI decided to reduce the rates at which it lends to banks (repo rate) by 0.50%. Thus the repo rate now stands at 8% from 8.5% previously. The rate at which RBI borrows from banks (reverse repo) now stands 7% post the review. The central bank left the cash reserve ratio (CRR) unchanged at 4.75. The central bank's growth forecast for FY13 now stands at 7.3%, moderately higher than that seen in FY12. The RBI has however indicated that the scope for further rate cuts is remote.

If you thought the bailout drama was over with the rescue of Air India, think again! As we had predicted, the restructuring plan for Air India was just the beginning of a long list of bailouts. Any how, does it matter if the government is devoid of funds to rescue the ailing companies? It can always dip into its cash rich PSU holdings. Be it Coal India for power companies or PSU banks and Life Insurance Corporation (LIC) for Air India. In the process this bailout drama not just ensures misuse of tax payer money, it also means putting our insurance policies at stake. What with LIC being forced to buy stocks of Oil and Natural Gas Corporation Limited (ONGC) during its expensive follow on offer? Or now being forced to subscribe to Air India's bond issue at less attractive interest rates? Each time this defeats the purpose with which 290 m policy holders have entrusted their savings with the insurance giant. We wonder how long it will be before the government understands the repercussions of its fiscal mismanagement. If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

By its own lofty standards of the past few years, gold seems to be going through a rough patch currently. And if commodities guru Jim Rogers is to be believed, the yellow metal may well continue to take a breather for the rest of the year. "It is extremely unusual for any asset in history to move higher for 11 straight years," Rogers is believed to have said in a recent interview. And this is the reason he expects gold prices to be in correction mode in the current year.

But what about the longer term? Well, Rogers continues to be bullish on gold's long term prospects. Thus, a pullback of the order of 30%-40% should be seen as an opportunity to accumulate more gold rather than get out of it.

It should be noted that the previous gold bull run of the 70s witnessed a pull back of the order of 50% before another 8-fold jump over the next few years. Since the paper currency problems of the world are far from over, there is every chance that history could repeat itself. Thus, making gold a small part of one's portfolio especially in the current pullback, could certainly yield great results over the long term.

India's telecom regulator, TRAI, has proposed a single licensing regime for new companies wanting to enter the telecom sector. Under the new regime, only one permit will be given to operate in the entire country. The permit will cost Rs 150 m. It may be noted that right now, telecom companies have to take separate licences for operating in each of the 22 telecom circles. The said proposal is currently under discussion and can be a part of the new telecom policy scheduled to be announced in June.

While the move is appreciated we believe that it has come in a little too late. The Indian telecom market is already overcrowded with 13-14 operators. Hence, the chances of new players entering the market appear remote. Secondly, 2G scam has eroded the business confidence in the sector. Thus, new companies might be reluctant to enter the telecom space. Nonetheless, we believe that the move towards single pan-India licence is a step in the right direction. Better be late than never.

After beginning the day on a flat note, the Indian stock markets moved into the positive zone on the back of RBI's rate cut announcement. At the time of writing, the BSE-Sensex was trading higher by about 105 points or 0.6%. Barring stocks from the consumer durables space, all the sectoral indices were trading firm. Stocks from the realty, metal and capital goods sectors were amongst the top gainers. The sentiments in other Asian markets were quite the opposite with Hong Kong, Japan and Singapore ending the day on a negative note. European markets, however, have opened firm.

 Today's Investing mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger

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1 Responses to "Could this ease the pressure on govt. finances?"

Arun Draviam

Apr 17, 2012

Till such time the government does away with permanent jobs in a life that is temporary, fiscal deficit and inflation- the manifestations of inefficiency and appeasement- will continue to bleed any economy. Barring defence services, where every person should be compulsorily retired after certain age, so as to leave the service fighting fit, every other job in the Government and PSU/PSE should be temporary.

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