This bill could be expensive for India Inc. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This bill could be expensive for India Inc. 

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In this issue:
» Gold smuggling has resurged
» 'Helicopter Ben' in no mood to give up yet
» VAT to weigh heavy on property buyers
» Bleak outlook for the Japanese economy
» ...and more!

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It was a fact well known that India's land acquisition bill was due for a major overhaul. In an economy where investments are greatly needed to spur growth and provide employment, problems relating to land acquisition and red tape have often been cited as main hurdles. Frustrations for developers abound in the form of lack of property deeds leading to prolonged legal battles, difficulty of bringing together scattered small holdings of land and the cost of servicing project debt as they wait for acquisition clearances.

Hence, the government's decision to revamp the land acquisition law is certainly the step in the right direction. But what it will also need to do is maintain a balance between the interest of India Inc as well as the social activists fighting for those whose land is being sought. Although India Inc's grouse is that land issues have stalled various projects in the infra space, those owning land tracts have claimed that they have been displaced without being given adequate compensation.

Hence, in light of both points of view, the new law is bound to make the cost of land much higher for businesses. According to Firstpost, it could make corporate India pay four times the market price for land in rural areas and twice the market price in urban areas, besides giving displaced people homes, jobs, monthly stipends and even a share of their profits in some cases. Whether it will be sufficient to appease those millions of people about to lose their land is another matter altogether.

From a business perspective, higher land acquisition costs would render quite a few projects unviable and possibly dent financials of companies. But it is a reality that India Inc will have to deal with. Protecting the interests of the poor while forming this law will be uppermost in the mind of the government which has already received brick bats for failing to bolster the economy. This means that any future projects considered by India Inc will have to factor in higher land costs while determining their feasibility.

Do you think that the new land acquisition bill will impact the viability of future projects in the country? Share with us or post your comments on Facebook page / Google+ page.

01:26  Chart of the day
Demand has dampened, growth has slowed down but consumer prices in India have failed to signifcantly cool down. Infact, today's chart of the day shows that when compared to its peers, consumer prices in India are quite high at 9% plus. Over the years, higher food prices have been the main culprits for fuelling inflation. This despite having bumper crops as the government let goodgrains rot on account of insufficient storage facilities. Now with monsoons playing truant this year, fears abound that inflation will continue to remain high. And as long as inflation is high, the Reserve Bank of India (RBI) will be in no mood to cut down interest rates.

Data Source: The Economist

One of the worst fears of the government have come true! No it has nothing to do with the coalgate scam. Nor is it about corporate and investor frustration about policy paralysis. Instead, it is one of the few policies that the government has acted upon that has backfired! The government curbed gold imports in a bid to cap ballooning trade deficit. Not that it was a great idea to do so in the first place. But the government's efforts to reduce import bill have resulted in the collateral damage many feared. It has resulted in a resurgence of gold smuggling. Something that had almost died down after the economic liberalisation of the early 1990s.

As per Economic Times, cases involving gold seizures at airports have risen 10-fold in recent months. This has confirmed the fears of critics that the strategy to raise duties to control imports of the precious metal would backfire. It is true that gold has disproportionately contributed to India's current account deficit problem. The country imported US$ 60 bn worth of gold in FY12, accounting for nearly 50% of the deficit. In fact, the deficit widened to an all-time high of 4.2% of GDP. Its impact on the rupee-dollar rates caused the government and the RBI to take some drastic steps. However, it clearly does not seem to be sustainable. Probably the government should now take a more liberal approach to the yellow metal. Making it a victim for its own shortcomings cannot help the economy.

A massive US$ 2.3 trillion have all but gone down the drain. But 'Helicopter Ben' is in no mood to give up just yet. We are indeed referring to the massive monetary stimulus that the Fed Chairman Ben Bernanke has already injected into the US economy. However, if reports are to be believed, plans are being finalized for even more quantitative easing. And this time, it is likely to shatter all previous records. In fact, it is quite possible that the easing will not be bound by any fixed amount or time frame. Instead, the target is more likely to be economic in nature such as bringing down the jobless rate to a certain percentage.

Well, this really takes the cake as far as we are concerned. No one has ever gotten rich by printing money and if the amount involved is limitless, like the Fed is planning to do, there is a very high probability that hyperinflation will be the final outcome. Thus, the importance of having a part of one's portfolio invested in gold is perhaps getting stronger by the day.

Aam aadmi or the common man has become a prime focus for all political discussions. But discussions apart he has also been at the receiving end of nearly all of the government's policies. And now the poor guy has to suffer yet again. After doling out more for food and clothes his third necessity - housing, has also become more expensive. This is after the introduction of the Value Added Tax (VAT) on properties constructed between June 2006 to March 2010 in Maharashtra. The state has sent notices of VAT payments to all the builders. But there is a hitch which the Maharashtra government can use to save its own image. The hitch is that the notice is on the builders or sellers and not for the buyers. In essence, the builders have to dole out the tax payment. But thanks to the cartelization of property builders, they have happily passed on this burden to the buyers. In the absence of a proper regulator, the poor buyers cannot even contest this additional burden. This highlights a serious flaw in the real estate sector of the country. There is no constitutional law. Each state can pass whatever law it pleases and whenever it pleases. And with the existence of the seller cartel, it is always the aam aadmi which bears the brunt of it.

The global economic slowdown is still far away from recovery. And the proof is right here. Japan's government has downgraded its economy assessment. Why would Japan's bleak economic outlook indicate global slowdown? The reason is that the world's third largest economy is heavily dependent on exports. As if the Eurozone crisis was not enough, the slowdown in the US and China has further exacerbated its problems. Japan's growth paled down to a meagre 0.3% during the April-June quarter. The situation is no better in the other parts of the developed world. In fact, Japan's growth is likely to be better than most other G7 countries. It must be noted that the other G7 countries include the US, the UK, Germany, Canada, Italy and France.

The PSUs in India's power sector have hardly made enough strides in sticking to deadlines. Particularly so when it comes to setting up capacities. Of course the fact that the key coal supplier Coal India has failed to meet demand is a key reason. But the private sector players had chosen to become proactively independent. For the same they even bought coal mines in Indonesia and Australia. However, even that has backfired, with the countries in question changing regulations to suit their interest. Australia and Indonesia have made regulatory changes that have made coal imports unviable for Indian companies that own mines there. Rising demand at home prompted Indian and Chinese companies to invest in the coal sector in Australia and Indonesia. This caused prices of coal to rise and lead governments there to seek a greater share of revenue.

Indonesia has not only asked for higher royalty but also income taxes, which are pegged to the price of coal. Australia has imposed a minerals resource rent tax, a 30% levy on profits from mining of iron ore and coal. As if this was not enough, the Indian government's policies have been hardly accommodating for private players. They are not allowed to raise tariffs or change bid documents based on such unforeseen rises in fuel costs. At the end of it, it is the private sector players and their lenders that are likely to suffer. Not to mention the overall economy that was relying heavily on the quick commissioning of the power projects.

In the meanwhile, the Indian equity markets traded in the negative for most part of today's trade. At the time of writing, BSE Sensex was down by 73 points (0.4%). Sectoral indices traded weak led by metal and consumer durable stocks. Barring China and Hong Kong, all Asian stock markets too ended in the red.

04:56  Today's investing mantra
"There are two times in a man's life when he should not speculate - when he can't afford it and when he can." - Mark Twain
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4 Responses to "This bill could be expensive for India Inc."

anil mehta

Aug 29, 2012

Higher land cost would defiinitely be a concern for industries but when we compare higher cost of land vis a vis cost overruns and cost of delay of projects, increase in the land cost would be much lower. At least quick land acquisition make it sure that projects can be implemented in time and that would be big relief for enterprenuers.


Prof. N K Jain

Aug 28, 2012

Our government is the enemy of common man. The policy of land acquisition is either going to make projects nonviable or make the final product expensive to render it uncompetitive in the market. In recent times most of the government policies are directed to attract or retain their vote banks. This government will make our economy a high cost economy and uncompetitive in the world.


Ragini Ghanekar

Aug 28, 2012

government has been shielding people from all walks of life with its benevolent schemes and subsidies with money it does not have and which do not reach in entirety to the targeted people and spawns corruption. Though it is hard on aam aadami he has to accept reality of life and get used to higher prices for petrol, diesel, fertilizer, electricity etc. Though what can be done is to do this at gradual pace so the shock will become bearable.That will solve a big problem of government i.e budget deficit After more than 60 years of subsidy raj which has benefitted unscruplous people rather than the needy government should keep itself restricted to its basic duties in addition to quality healthcare and education for the needy free of cost. Similarly India Inc also should get used to reality of land prices and frame their projects around it rather than milking ordinary hapless people in the name of development and prosperity (India Shining) and actually lining their pockets.


George Elava

Aug 28, 2012

This bill would not be expensive for India Inc. But we should have strong active government. Govt. should give new licenses to young business entrepreneurs in the rural villages where a huge quantity of land still available in a very cheap prices. If this is happening then India can become No.1 in the world very soon!

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