February 28, 2013

indian government's obsession with curbing physical gold investments

India's finance minister, Chidambaram, in today's budget, reiterated his dismay at the widening current account deficit. Imports of gold, along with crude petroleum imports and coal imports, were touted to be the drivers of a ballooning import bill of the country.

My blog post of January 3, this year (2013), dwelled on the adverse effects of subsidising gold purchases. The link to that post is here -->    

Early this month (February 2013) I contributed another editorial, in the newspaper I presently work for, on the issue of gold imports. This time, I wrote about RBI's effort to curb investments in physical gold. I believe it should be the government of India which should raise the import duty (customs tax) on gold and related products further (it is at an absurdly low rate even currently notwithstanding a recent marginal hike) and bring it at par with the average customs duty imposed on all non-gold imports. Additionally, it is not investments in gold which is a problem but the Indian culture of buying gold during marriages which is a problem. Much of that buying is through black money. The finance minister should get his Income Tax department to do far more than they are doing to tax those gold purchases.

Here is what I wrote in the editorial:

Who is more obsessed with gold?

RBI is desperate to curb gold imports so that rupee fall can be stemmed. But ad-hoc measures do not help in long term.

One only hopes that the central bank of our country is not feeling nostalgia over an old legislation called Gold Control Act, 1968, which was repealed in 1990. If RBI is indeed feeling so, it is for the wrong reasons and as a knee-jerk reaction to sustained weakening of the country's currency against the US dollar. With the alarming rise in the gap between exports and imports caused in part by rising imports of gold, and its consequent weakening impact on the Indian rupee. 

Alarm bells at RBI and other quarters have been ringing for the past several months. Now, a RBI working group has come out with its comprehensive report on issues related to gold imports and gold loans NBFCs (non-banking financial companies) in India. As expected, all its major recommendations have one objective -- prevent or deter further imports of gold into the country. But this single-point obsession of RBI has now begun to jar. Of course, reduced gold imports will curtail the existing high level of current account deficit, but RBI's most primary concern is that of stemming any further fall in the rupee. 

So, the question which needs to be asked whether, if global events change dramatically in the near future or medium term leading to an intense strengthening of the rupee, the various gold import-stemming products and ideas being hard sold now will be reversible. One, therefore, hopes RBI is not missing the wood for the trees. To the extent gold imports are aided on account of very low custom duty rate, even after it was recently hiked a little, there is a strong case to raise it the levels other imported goods face. 

Coming to the RBI working group's report, it began by stating that the basis of its central message was Indians’ obsession for large investment in physical gold. This could be half-truth because the obsession to acquire gold is there but it is not so much for investment purpose as for owning it in the form of jewellery for cultural reasons such as giving it in dowry during marriages and passing it down to future generations. It is also a form of holding black money. To the extent such acquisition is based on illegitimate or illegal grounds the objective is better served by a far better enforcement of the laws, including the taxation law, to deter future violators and bring to account existing ones. 

Going after investors in gold alone is not a smart thing to do. Investors, here and worldwide, include many who are vulnerable to wrong understanding of price movements. The price of gold has appreciated rapidly in the past few years and many investors tend to believe that this trend will go on forever, like they tend to do when equity markets are in the grips of bulls, and so they pump in more investments into it. Asset classes see cycles of bull and bear phases and gold is no exception. Even if gold is seen to be immune, at times, it is mainly on account of heavy instability in world economies and gold is seen to be a safe asset to hold. 

Why should RBI or anyone deny that freedom to an investor to hold what he perceives to be a safe asset regardless of whether his perception is sound or not? To be sure, some of the measures proposed by the RBI panel are progressive, regardless of RBI's motive. For instance, the proposal to allow banks to buy back gold coins is a step in the right direction. On a stand-alone basis, whatever progressive measures need to be taken with regard to gold-based acquisition, holding and financing should be taken and those specific recommendations of the panel should be adopted. 

But RBI needs to learn some lessons from the past. When the equity market was highly pumped up in 2007-08 thanks primarily to massive FII net inflows, the rupee had strengthened to such a level that RBI had pressurised Sebi to restrict the FII flows by banning participatory notes. At that time, exporters were getting hurt due to a strong rupee. The P-note ban was reversed later on. 

But can some of the not-so-progressive and desperate measures being mooted now to curb gold imports and stem net outflow of rupee be that easily reversible when the tide turns later? Ad-hocism by any financial regulator is never wise. 

understanding india's budget & its ingredients

During India's annual budgets of 2011 and 2012 I contributed for the newspaper I presently work for a primer on the country's budget and its various statements. Here is what I wrote in the primer last year (March, 2012):

Decoding India's budget

Here's a helping hand to make you understand the most important economic policy tool of the government in which we have a big stake

The elected governments at the Centre and the states run our country through the framing of laws and policies and their implementation. Money is inevitably required to do all this. The Union budget is, therefore, an annual exercise in financial planning and financial accounting by the central government (state governments have their own annual budgets). It is the government's most important economic policy tool.
Budget directly or indirectly affects the life of every citizen, including you and me. There is a lot at stake in the budget and to know how the country is being run is highly important on its own right. The budget is also important because as a taxpayer you are paying for services that the government  provides.

Budget matters to you if you are a bank depositor because your bank is investing at least 24 per cent of your deposits in government securities whose proceeds are used to run the government. Or you could be an investor in a debt scheme of a mutual fund which also invests a portion of its corpus directly in government securities or indirectly through investment in bank deposits. You get returns from these investments and you would like to see it maximised in a safe manner, not unlike to what you would as an investor when you invest in the shares of a listed company or the units of an equity fund.
As a consumer too you have a stake in the budget. The tax you pay on income, the service tax you pay on your lunch or dinner at a restaurant, the excise duty that is built into the retail price of consumer goods you buy, all these are parts of the most sought-after item by the government – revenue receipts.
It becomes imperative for you to know where this revenue is going and how it is being spent; and for that you have to look at the expenditure statements of the government.
To get a proper hang of revenue and expenditure as well as the government's strategy to manage them, or fiscal policy, you have to sift through budget documents. The budget follows a format similar to the one companies use in financial statements. They are segregated based on the provisions mandated by the Constitution. Budget documents of the past 15 financial years (FYs), from FY 1996-97 onwards, can be downloaded from the government's union budget website (http://indiabudget.nic.in).
An annual budget comprises different statements (see accompanying box). The government provides some help to understand them via explanatory notes and summary statements. Use the 'Budget at a Glance' document to quickly know the main items that use much of the government's expenditure and revenue. For instance, you can get a neat break-up of receipts into revenue and capital receipts and further into revenue from taxes and other categories.
If you want to dig deeper, the annual financial statement is a good place to start. It will tell you the names of funds that are used to collect and disburse money. The expenditure budget is another area of importance, which usually comes in two volumes. It not only gives you the latest year's details but also the trend over the past few years. For instance, it will tell you that a fairly large portion of government receipts is spent on defence forces and subsidies.
A subsidy is the money that is paid by the government to companies to reduce the cost of services or of producing goods so that their prices can be kept low. Fertiliser is highly subsidised in India. You can get a clear picture of various subsidies and their total by going through an annexure 'Details of subsidies included' in volume one of the expenditure budget.
Taxes are covered in an elaborate and separate document, the finance bill. To help understand it better, there is a separate document called 'Memorandum explaining the provisions in the finance bill'. A significant aspect of taxation that is important to everyone is the differential rates in indirect taxes such as excise and customs. Concessions are given in excise and customs to many industries and items, lowering the receipts of the government, which can be found in detail in the 'Revenue foregone statement'.
Government expenditure happens through ministries. As per the procedure specified in the Constitution, each ministry has to give a 'demand for grants', which is its expenditure estimate. In the end, it is important to note that all demand for grants, the finance bill and other budgetary statements have to be passed by the Lok Sabha. 

Annual financial statement
Emanating from Article 112 of the Constitution of India , the AFS is nothing but the profit and loss account of three different Funds controlled by the government of India -- Consolidated Fund of India, Contingency Fund of India and Public Account of India. Interestingly, the receipts and expenditure are given separately for capital account, and revenue account, items.

Consolidated fund of India.
Article 266 of our Constitution describes it most articulately, "... with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund."

Contingency fund
An imprest placed at the disposal of the president to meet urgent un-foreseen expenditure pending authorisation from Parliament. The current corpus is Rs 500 crore.

Public account of India.
It is the expenditure and receipts statement of the corpus that the central government manages on behalf of the people akin to a fund manager of a mutual fund. Majority of the corpus comes from the small savings schemes launched by the government and the state provident funds.

Demand for grants.
It is an accounting of the utilisation and estimated requirement of the funds taken out of the Consolidated Fund of India by every ministry of the central government and is subject to approval of Lok Sabha.

Finance bill.
The term is misleading. Only taxation part is covered in the Finance Bill. It is one of the definitions of a Money Bill under Constitution's Article 110 (1) dealing with "imposition, abolition, remission, alteration or regulation of any tax". It covers direct taxes such as corporation tax and income tax and indirect taxes such as excise duties and customs duties.

There are three kinds of deficits -- revenue, fiscal and primary -- of which the first two are critical. Revenue deficit is the excess of revenue expenditure over revenue receipts. Fiscal deficit is the excess of total expenditure (revenue plus capital) over total receipts minus the capital receipt in the form of borrowings.

Revenue receipts and expenditure.
Revenue receipts are primary tax revenues coming from income tax, corporation tax, securities transaction tax, customs duties, union excise duties, service tax, etc. There is also a little bit of revenues coming from dividends from public sector companies and other areas such as interest received and grants. Examples of revenue expenditure are money spent on the running of the central government and its various ministries, money spent on operating and maintaining the vast military of the country, interest paid on government's borrowings from the RBI and others and money spent on other services provided by the government.

Capital receipts and expenditure.
Capital receipts are predominantly the loans taken by the central government from the market through the issue of government securities via the RBI. Capital expenditure includes the expenditure on all services which includes, among others, the cost of acquiring assets and cost of laying out new, or upgrading existing, infrastructure such as rail and road networks. Purchase of equipment for the Indian military is the largest capital expenditure.

Macroeconomic framework statement
Started from Budget 2005-06, this statement provides a nice glance at the economic performance of the country. In one place, you get to see the absolute value figures of GDP, money supply, imports, exports and foreign exchange reserves, as well as the average index figure (during April to December of the current financial year) of index of industrial production, wholesale price index and consumer price index. It also provides a summary financial picture of the government's finances that is otherwise also given in annual financial statement.

Revenue foregone statement.
It was first introduced in Budget 2006-07 as an annexure in the receipts budget. From the following year, it was given as a separate document. It brings into light the impact of reduced tax rates, exemptions, deductions, rebates, deferrals and credits that affect the receipts from tax.

Fiscal policy strategy statement.
Available from 2005-06 buget, it, according to government's own words, "outlines the strategic priorities of the Government in the fiscal area for the ensuing financial year" and "gives the rationale for any major deviation in key fiscal measures."

government of india's economic survey for 2012-13

Even as the India's finance minister presents the country's annual budget today, the Economic Survey for 2012-13 was released by the finance ministry yesterday (Wednesday, February 27, 2013).

I contributed an editorial yesterday for the newspaper I presently work for dwelling on the Economic Survey for 2012-13. Here is what I wrote in it:
Exuberant in troubled times

The government is being daft in its excessively optimistic growth projections for next year
This is a time when seasoned economists and analysts are convinced the various economy-related figures of the past one year point towards a floundering economy. So, if the current government gets very optimistic, and overtly at that too, about the immediate prospects of the domestic economy, as its Economic Survey for 2012-13 clearly seems to suggest, then it would have most likely broken into a exuberant jig had the economic growth indicator of gross domestic product for the current financial year been growing at a rate just a little more than the previous year's 6.2 per cent. 

But the fact remains that the government's advance estimate points to only a 5.0 per cent growth in GDP at factor cost 2004-05 prices. The hearty optimism of the government is seen in its GDP growth estimate of 6.1-6.7 per cent for the next financial year of 2013-14. Such a bounce back is not impossible but given the recent past track record of wide gaps between advance estimates and future actuals it can not be taken be casually accepted. 

One just has to look to last year's Economic Survey of 2011-12, where the government's advance estimate for GDP growth in 2011-12 was 6.9 per cent and estimated growth for 2012-13 was given as being between 7.35 per cent and 7.85 per cent. The first revised estimate for 2011-12 growth rate has turned out to be lower at 6.2 per cent and the new advance estimate of 5.0 per cent growth for 2012-13 is 2.35-2.85 percentage points below the earlier estimate. 

What makes it worse is that the Economic Survey for 2012-13 presented no real evidence for making its 2013-14 projection of 6.1-6.7 per cent growth rate except for stating assumptions such as normal monsoon, futher moderation in inflation and mild recovery of global economic growth.

The consequences flowing out of the post-2008 crisis period have tended to vex even the most experienced in the economists fraternity and cause them to make circulatory arguments. It is, therefore, not surprising to read, in the government's Economic Survey for 2012-13, that the fiscal stimulus given in the immediate aftermath of the 2008 financial crisis is a key factor behind the current economic slowdown. It says this boosted consumption so much that it led to strong inflation even as it also pumped up the GDP growth rates to 8.6 per cent and 9.3 per cent in 2009-10 and 2010-11 respectively, up from 6.7 per cent in 2008-09. Consequent monetary tightening measures by RBI (Reserve Bank of India) led to reduced consumption and reduced corporate and infrastructure consumption. 

Well, no one in the government or economist fraternity thought it fit to anticipate this during the 2009-11 two year period, basking as they were in the high growth rates. The interesting aspect in all this is that much of the stimulus package, particularly sharply-lowered excise tax rates, continues till date, and there is no satisfactory answer as to why this did not sustain the production growth rates as indicated by the GDP measure. Higher interest rates can not be sole factor behind reduced production nor was there anything stopping the government from stimulating investment in infrastructure to reduce the much-touted supply bottlenecks if it really wanted to provide a stimulus to the economy. 

There can never be an ad-hoc economy-pumping policy-driven measure which will not have its adverse side-effects. Going forward, in the much-needed efforts to revive economic growth, this lesson must not be lost and ad-hocism should be avoided. The Survey does, however, seem to recognise this when it boldly recommends reduction of fiscal deficit through slashing of subsidies on diesel and other similar measures. Today's budget presentation by the finance minister will provide more details of the government's handling of the economy and the next one year will be a challenging one for everyone concerned.

February 07, 2013

who owns bombay stock exchange (bse)?

Here is a story I did, 2-3 months back, in the newspaper I work for, on the shareholders of BSE (Bombay Stock Exchange):

Shapoorji Pallonji & Company picks stake in BSE

BSE saw minor but interesting changes in its shareholders in the period between June 2011 and August this year

Even as its proposed initial public offer has been in the offing for the past few years, BSE, or Bombay Stock Exchange as it was legally known as earlier, its non-broker shareholders are staying put. BSE is the second largest stock exchange in the country after the National Stock Exchange of India.

A FC Research Bureau analysis of BSE's shareholding structure, as available in the exchange's filings with the Registrar of Companies (RoC), revealed that while the list of shareholders had about 1,000 new faces with the number of shareholders climbing from 5,762 as of June 17 last year to 6,797 as of August 31 this year, the largest 23 shareholders who together continue to account for 53.92 per cent stake in the stock exchange, made absolutely no change in their holdings.

This effectively meant the dramatic rise in shareholder numbers took place in the 40-odd per cent holdings by over 6,700 shareholders, a vast majority of whom would be BSE's broker-members who were given shares in the exchange when the trust-run exchange converted itself into a corporate body a few years ago as per the Securities and Exchange Board of India's demutualisation norms for stock exchanges.

Beyond the largest 23 shareholders, the largest and the most interesting change was in the entry of construction major, Shapoorji Pallonji and Company, which took a 0.24 per cent stake in the period between June 2011 and August this year. While the price at which this stake was got and from which it was purchased was not immediately known, it made Shapoorji Pallonji the 24th largest shareholder in BSE.

The company's co-managing director, Cyrus Pallonji Mistry, was picked up recently by Ratan Tata to succeed him as the chairman of Tata Sons. Cyrus' elder brother, Shapoor Pallonji Mistry is the other co-managing director of the company which besides it recent stake purchase in BSE, had investments, at cost, in subsidiaries and non-subsidiary companies to the tune of Rs 1,105 crore at the end of March 2011 (up sharply from previous year's level of Rs 762 crore).

The only other significant change gleaned from RoC filings of BSE was the entry of more than one venture capital firms as stakeholders with an aggregate stake of 0.51 per cent in the stock exchange. One of them was clearly seen to be a Mumbai-based firm, A R Venture Funds Management, which had a 0.14 per cent stake as on August 31.

The largest shareholding in BSE continued to be held jointly by Singapore Exchange and Deutsche Borse who hold 4.92 per cent stake each in BSE. The other large shareholders include Life Insurance Corporation of India and State Bank of India (see table). 

Owning a stock exchange
These 24 largest shareholders owned 54 per cent of BSE

Singapore Exchange; Deutsche Boerse
4.92 each
LIC; State Bank of India 4.84 each
Argonaut Ventures 4.74
Quantum (M); Acacia Banyan Partners; Atticus Mauritius; Caldwell India Holdings 3.87 each
Bajaj Holdings & Inv. 2.90
Blue Star Investments 1.47
MSPL 1.16
Nadathur Estates 1.09
Isheta Realty; Bank of India; Central Bk. of India; Bennett, Coleman & Co; S. Gopalakrishnan 1.02 each
Caldwell Investment Management A/c Urbana Maur 0.76
Aditya Birla Pvt Eq Fund-1 0.51
Bang Equity Broking 0.38
Edelweiss Finance & Inv 0.29
Kotak Securities; Shapoorji Pallonji & Co 0.24 each
Others 46.11

Figures in per cent, represent stakes held in BSE as on August 31 2012

In the previous year-to-year period, a US-based private equity firm, Argonaut Ventures, had increased its stake in BSE from 2.54 per cent at May-end of  2010 to 4.75 per cent in mid-June of 2011. At that time, Argonaut Ventures was a Sebi-registered foreign institutional investor sub-account operating under main FII, US-based George Kaiser Family Foundation.

The other major change in that period involved Dubai Financial Group selling its entire 3.88 per cent stake to a George Soros Group hedge fund, Quantum (Mauritius), in August 2010, for a reported sum of $35 million (about Rs 163 crore at that time).

Some large shareholders in BSE also hold relatively large stakes in
its rival, NSE. LIC and SBI, for instance, were the largest two
shareholders in NSE as of September-end last year with respective
stakes of 10.51 per cent and 10.19 per cent. At that time, on NSE,
Quantum (Mauritius) held 0.86 per cent stake, MSPL along with it
Baldota brothers promoters held 0.94 per cent and S Gopalakrishnan
(then executive co-chairman of Infosys Technolgies) held a 0.38 per
cent stake.