Is Rs 7.5 enough to help government finances?

May 24, 2012

In this issue:
» Outlook for the infra sector still bleak?
» Proof of government imprudence continues
» Goldman Sachs completes a massive office space deal
» Top Indian blue-chips face an adaptability challenge
» ...and more!

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Global crude prices have slid to a 7-month low, falling below US$ 90 per barrel. Greater supply, the Greek crisis and positive news out of Iran helped crude prices to weaken. But, back home in India, the middle-class Indian got a rude shock when petrol prices were hiked by a steep Rs 7.5 per litre.

Not surprisingly a slew of comments immediately came in from the opposition. They called the hike unreasonable, inflationary and disastrous. Yet, we believe that this bold move is a step in the right direction for the Government. Although petrol prices have been deregulated since 2010, oil companies cannot go in for a big hike without support from the Union oil ministry. In this case the government had little or no choice. Under-recoveries are mounting, and according to Finance Minister, Pranab Mukherjee, could be in the region of Rs 1.4 trillion. While the hike in petrol will help reduce the burden to some extent, it is a mere drop in the ocean.

Under-recoveries in case of diesel are Rs 14.50 per litre, kerosene is Rs 31.9 and in case of LPG it is Rs 412 per 14 kg cylinder. The current level of subsidy on these essentials is unsustainable and is putting a big dent in government finances. So will the government hike these fuels? Well, these fuels are necessary for the daily living of a large chunk of India's population. And this is the class of people that the political parties need to please in order to secure its vote bank. Any spike in these fuels will heighten inflationary pressure in the country.

But, why should the Indian consumer be forever shielded from global headwinds. The government has made a headline grabbing move by steeply hiking petrol prices. But the question is whether will it bring the economy back on track by hiking other fuels? Or at least reduce the quantum or taxes the various states charge on these essentials.

Will the Government bite the bullet and hike other fuels including diesel, LPG and kerosene? Or is India going to face a prolonged deficit on a continued subsidy burden. Let us know your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
House prices may be skyrocketing as daily news reports show. But, have they actually gotten more affordable. According to today's chart of the day, house prices have actually reached their most affordable levels and have been on a declining trend for the past two decades. This data has been compiled by leading mortgage player, HDFC. This affordability ratio, which takes into consideration the annual income of the home buyer along with the price of the house, declined to 4.6 in FY12, from as high as 22 in 1995. This means that a house cost an amount 22 times his annual income. This has come down to around 5x in 2012. Annual incomes have been rising over the years, and now the tax benefits of purchasing a property have also increased. As long as this ratio remains in the 4.2-5.5 range loan demand will continue to be robust.

Data source: HDFC Presentation

Reliance Industries, Infosys and Bharti Airtel. Each, a proven performer in its industry and until recently, hot favourites for investors looking to invest in blue chips. Of late though, great deal of uncertainty seems to be staring them in the face. As per reports, each of these companies has lost nearly twice as much as the BSE-Sensex over the last one year or so. And things aren't looking any better either. There are certainly quite a few factors responsible for the below par performance of these heavyweights.

As far as we are concerned, adaptability seems to be the biggest problem staring them in the face. All the three are part of industries that is undergoing rapid technological change. Thus, unless they quickly come to terms with it, things are not going to improve we believe. Warren Buffett famously said that if a good management tackles a bad business, it is the reputation of the business that remains intact. Whether these three companies go on to prove Buffett wrong will only be known with time we believe.

After being touted as the fastest growing economy in the world, China is showing signs of moderation. As per World Bank's forecast, China's economic growth is expected to slow to 8.2% in 2012 from 9.2% in 2011. The export advantage, that catapulted the country to an economic powerhouse, is proving to be its bane now. As developed economies struggle to come out of slowdown, China's exports have taken a beating, adversely impacting its growth. The U.S. economy grew at a snail's pace of 1.7% in 2011. Bogged down by sovereign crisis, 11 European countries are already in the grips of recession. Thus, with export demand on a decline, its manufacturing has slowed down in recent months. According to the World Bank, China needs to put in more efforts to reduce its dependence on exports by spurring domestic demand. But as this may take a while, China is staring at slowdown that could affect the global economic recovery.

If the recent developments in the infrastructure sector are any indication, things are set to get worse in the coming times. Take the road sector. Compared to the past, it is likely that the current year will see fewer road projects being awarded. What's the reason for that? One, not many detailed project reports (DPRs) have been completed. Secondly, several projects are likely to find it quite challenging to achieve financial closure. It is observed that new entrants into the sector bid very aggressively without measuring the risks appropriately. So, banks are reluctant to fund these projects. Moreover, banks have exhausted their infrastructure fund and are also nearing their exposure limit for road projects. Thirdly, 70% of the NHAI (National Highway Authority of India) projects whose concession agreements were signed last year have not achieved financial closure yet. All in all, it seems that the outlook for the infrastructure sector is likely to remain bleak for at least a couple of years.

No one sympathizes with an inefficient and corrupt government. But one that has allowed the country's resources to be fleeced deserves more than just harsh words. Readers would agree that most of the government's fiscal woes are of its own making. Over the last few years the government kept replying on blockbuster spectrum auctions. Disinvestment of profitable PSUs was also its cash generating tool. It hoped that the windfall gains to relieve its cash crunch. However; meanwhile key resources were given away nearly free to private parties. This is not just about 2G telecom licenses or coal mining licenses. As per the Comptroller and Auditor General's (CAG) latest claim, revenue loss from Delhi International Airport runs into billions. It is shocking to note that land for the one of the most profitable airport has been leased out for 60 years at a princely sum of Rs 100 per annum. This is when the airport is expected to earn Rs 1.6 trillion over the next 6 decades. Hence there is ample proof on the government's imprudence in tackling public resources. And the common man has to pay for bad governance and policy making.

Plagued by issues such as slowing business activity and overcapacity, the commercial real estate space has been going through a difficult phase of late. So much so, that many real estate players have reduced focus or even exited this segment entirely. With such glumness, developers could only wish for the sentiments and scenario to improve. But what could be that one changing factor? It would definitely be difficult to pinpoint one aspect. However, the following development would certainly have some impact on the current dull market perception. US banking major, Goldman Sachs has agreed to take on lease office space to the tune of a whopping 1.6 m square feet in Bangalore. This is the largest recorded commercial property deal in India till date. To put things in perspective, the size is equivalent to nine football fields. In fact, the size of the deal is so big that it is more than double the previous recorded single location office space deal in India.

While this property is still under development and is expected to be ready in about five years, the fact that it has come at a time when the overall market situation is so grim is a big deal. But whether this deal could be the much required factor that could change sentiments remains the key question.

In the meanwhile, the Indian stock market has been very volatile today and are presently trading in the green. At the time of writing, BSE-Sensex was up by 218 points (1.4%). All sectoral indices were trading in the positive, with FMCG and consumer durable stocks seeing the least gains. Oil and Gas stocks were the top gainers on the back of the Rs 7.5 hike in petrol prices. Asian stock markets were a mixed bag.

 Today's investing mantra
"If a business does well, the stock eventually follows." - Warren Buffet

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    Equitymaster requests your view! Post a comment on "Is Rs 7.5 enough to help government finances?". Click here!

    14 Responses to "Is Rs 7.5 enough to help government finances?"


    May 28, 2012

    I do not agree with your comments on the government's decision to hike petrol prices so much. We should never be forgetting that when they hike Rs 7 , Rs 3.5 is going in for taxes while its only 3.5 which will reach the oil companies (at least in Bangalore). Every time the govt has to raise petrol prices the only reason they say is that oil companies are making a loss hence they need it, they have never ever said that our coffers are empty and so we need to raise petrol prices. If they dont say it , the public would assume that the deficit problem is being solved by other tax means not by the petrol tax. so why should we then justify this price raise?



    May 28, 2012

    The rate at which the Indian Government is working on subsidies will turn India into another Greece. Everyone is fooling the Indian Public especially the vote banks who are mostly illiterate. Government funds the subsidies by either taxing us or borrowing now and taxing us latter. So let them reduce taxes and stop subsidising the essential commodities. Let anyone who come to power do that. Next time when opposition comes to power they also follow the same safe path of appeasment. No politicians speak sensible economics but only populist economics. So why blame the ruling party alone. The opposition is also jointly responsible and answerable to the voters.



    May 26, 2012

    It is basically poor governance which is responsible for all this. The taxes on fuel have to be reasonable. Both Central and state Govts. are trying to raise incomes by increasing taxes on fuel. More taxes are generated when the prices go up.
    It is the love of office for those in power to increase subsidies and take other populist steps. All this harms the public and the Country. Wasteful expenditure and exceedingly high corruption do fantastic damage to the Nation. Another problem though not so serious is desire to travel abroad with as many family members as can be managed. This exposes the mind set. Wasteful expenses on excessive security managed by various means, things like Lal Batti, etc. The ordinary citizen has no place. Election time they try to garner votes of poor people mostly semi-literate by various methods.


    Dr. SSN Raju

    May 26, 2012

    The problem is whom we have elected to take care of us is taking care of themselves and National robbers. If they are willing to do, for what they have elected most of the our problems will be solved in no time. Petrol subsidy for that matter any subsidy will not be a problem.


    Vivek Dewedi

    May 25, 2012

    Raise in price is only due to weak and tottaly failed economic policies of current congress government which fails not only this section but in all sections......... even of world famous ous econmomist is our Prime minster.......Mr. Manmohan Singh ji....



    May 25, 2012

    I say remove all subsidies deregulate pricing on petrol, diesel, LPG, kerosene so that the oil companies can set their own prices and actually compete (not collude) against each other. At the same time, remove all excise/customs duties and central/state taxes on petroleum products. These are essential commodities. Why are we being taxed to death on these as if they are luxuries? Once the taxes are gone, petrol prices will automatically fall to the neighborhood of Rs. 45-50 per liter.



    May 24, 2012

    All these statemnent of Under recovery are bull shit. The petrol cost 44 and we pay 81, so the loot to Govt is 41 per litre. Rob the middle class to finance Scams of Raja and Kalmadi. Bill the President pleasure trips around the world in a siniking national Airline and give it thousands of crore. To whom the Govt and Politicians are telling the stories. Even if they sell perrol at Rs 1000 a litre still they will sal loss!!

    Like (1)


    May 24, 2012

    Yesterday’s hike in Petrol price and thereby reduction in subsidy is one of the finest moves in the last one year. I have always felt sorry while using these subsidised products, on one hand sorry for those who are not using these, but are still indirectly paying for these and on the other for the adverse impact of all these subsidies on the fiscal deficit. People who have been opposing reduction of subsidies are hitting on their own legs. But of course, this does not undermine the importance of their reservation on duties (and their better utilisation) on these products.

    Like (1)


    May 24, 2012

    In the context of price of petroleum products, use of the phrase "under recoveries" is inappropriate. This is because a BIG part in the prices that the consumers pay is taxes. When the tax component is properly accounted for, there will be very little "under recovery"!

    Like (1)

    Radheshyam Sharma

    May 24, 2012

    Isn't it ironical that the Congress which swears by the supremacy of Parliament should increase the price of only after parliament has shut down after the budget session.

    This is the contempt that the congress holds parliament and MPs.

    India's payment condition is only going to get worse.

    We are increasing the number of cars produced and the car companies and banks are competing with each other to make the customer buy their products.

    Driving additional cars requires more fuel.

    We do not produce much fuel in India, so we have to import the fuel by using scarce foreign exchange.

    So, the more cars we produce, the more the outgo of our foreign exchange.

    What is the solution?

    Make the car companies export ten cars for every one made for home use in India.

    This will earn us foreign exchange for running our cars.

    There should be a differential petrol price.

    The higher price for cars and a subsidized price for two-wheelers.

    Similarly there should be a differential price for diesel.

    For Trucks, public buses and taxis, there should be a subsidized rate.

    For cars used for company purpose and private purpose the diesel should not be subsidized.

    Like (1)
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