There were fewer concerns the Goods and Services Tax rollout in India will be inflationary as most essential goods and services have been exempted from the new regime, the Development Bank of Singapore said today. The reform is set to be implemented from July 1 and will subsume most of other levies like exercise and service tax, and bring the country under a single taxation regime. The Development Bank of Singapore (DBS) said in its economic report on India that the tax incidence is “likely to rise mainly on selected service sector categories” after the GST is implemented. “(And) even if price increases lift these service indices by 10 per cent, headline Consumer Price Index inflation will only rise by 20 basis points,” it said adding that if producers pass on partial or full benefits of the reduced taxes inflation might soften by 20-40 basis points over the year. According to the bank, inventory clearances were already seeing prices fall across different segments ahead of the GST rollout. In addition to favourable supply dynamics, the risks of demand-pull inflation appear benign. The bank said the economic impact of demonetisation reduced the Gross Domestic Product (GDP) growth to 6.1 per cent year-on-year in first quarter of 2017, down from 7 per cent in the fourth quarter of last year, and the resultant disinflationary pressures had lowered core inflation from 5 per cent in January 2017 to 4.3 per cent by May 2017.
The prospering monsoon signals revival of rural demand and a rate cut by the Reserve Bank on August 2 amid low inflationary pressures, says a report. According to Bank of America Merrill Lynch (BofAML), good rains support the case for a 25 bps RBI rate cut on August 2 and June CPI is expected to slip below 2 per cent with food prices still falling. The report noted that rains are 10 per cent above normal till mid-June, and this, in turn, has pushed up autumn Kharif sowing by 6 percent over last year. “Good rains should revive rural demand, with MSP hikes, farm loan waivers and interest rate subventions before 2019 polls,” the report noted. The global financial services major noted that if rains are indeed normal, CPI inflation in the first half of the fiscal should average a benign 3 per cent.”Daily data show food inflation is falling further in June on a good summer rabi harvest. This should pull June inflation below 2 per cent from 2.2 per cent in May,” the report noted. “Daily data show food inflation is falling further in June on a good summer rabi harvest. This should pull June inflation below 2 per cent from 2.2 per cent in May,” the report noted. The RBI has cut its inflation forecast to 2.5-3.5 per cent from 4.5 per cent in the first half of this fiscal and 3.5-4.5 per cent from 5 per cent in the second half. In the monetary policy review on June 7, the RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be surer that inflation will stay subdued. Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rates unchanged as a “premature action at this stage risks disruptive policy reversals later and the loss of credibility”.
The government will roll out a new electronic policy to boost electronic manufacturing and create an inclusive ecosystem for promoting digital economy in the country, Ravi Shankar Prasad, Union minister for electronics & IT and law & justice, said at an industry consultation round table to build a $1-trillion digital economy, on Friday. Key areas of priority will also include software product policy, data security and data protection, start-up cluster, and robust dispute resolution mechanism, according to Prasad. The minister emphasised on shortening the timeline of the digital economy to 3-4 year from more than 7 years to create a $1-trillion digital economy in India that will boost digital skilled employment and growth of sectors such as communication, e-commerce, BPO, and IoT. Industry stakeholders added that the government will work toward digital skilling of workforce in India. Increased electronic manufacturing can make India nodal in mobile manufacturing, Prasad added. The new electronic policy will focus on e-health, education and agriculture. The government seeks to more than double the digital economy to $1.12 trillion from $413 billion. Industries such as electronics, telecom and IT will be at the forefront of digital employment with 8.9 million, 8.8 million and 6.5 million jobs respectively. The start-up movement will boost e-commerce and digital payments and push their share to $150 billion and $50 billion, respectively, by 2024-25.
India’s current account deficit is expected to be around 1.4 per cent of GDP in 2017 compared to 0.6 per cent in 2016, owing to stronger domestic growth, says a report. The Japanese financial services major Nomura has revised India’s 2017 CAD forecast to 1.4 per cent of GDP from 1.6 per cent earlier, but still expects current account deficit to be higher than the 2016 figure. Nomura expects India’s CAD to widen in 2017 against last year as import growth should pick up in the second half 2017 due to a stronger domestic recovery, even as protectionist policies will likely hurt services exports. “We are revising our 2017 CAD forecast to 1.4 per cent of GDP (as against 1.6 per cent earlier) but we still expect it to be wider than in 2016 (0.6 per cent) owing to stronger domestic growth,” Nomura said in a research note. The key risks to this outlook are rise in protectionism, weaker global growth or a surge in oil prices. According to Reserve Bank of India, the current account deficit soared to $3.4 billion, or 0.6 per cent of gross domestic product (GDP) in the fourth quarter of fiscal 2017, compared to $0.3 billion a year ago. For the full fiscal 2017, CAD narrowed to 0.7 per cent of GDP compared to 1.1 per cent in the previous fiscal on the back of a contraction in trade deficit. Commenting on the first quarter CAD data, Nomura said it was better than expected and the positive surprise was led by a narrower merchandise trade deficit and moderation in investment outflows.
Foreign investors have pumped in a staggering $3.55 billion in the Indian capital market this month so far due to finalisation of GST rates for bulk of the items and forecast of a normal monsoon. Interestingly, most of the funds have been invested in debt markets by foreign portfolio investors (FPIs). “The differential spread between 10-year bond yields in the US and India is still around 4.5-5 per cent. This, coupled with stable outlook for the Indian currency bodes well for FPI flows into debt market,” Sharekhan Head Advisory Hemang Jani said. According to latest depository data, FPIs have invested Rs 4,022 crore in equities during June 1-16, while they poured in Rs 18,821 crore in debt markets during the period under review, translating into a net inflow of Rs 22,844 crore ($3.55 billion). This comes following a net inflow of more than Rs 1.33 lakh crore in the last four months (February-May) on several factors, including expectations that BJP’s victory in Assembly polls would accelerate the pace of reforms. Prior to that, foreign investors had pulled out over Rs 3,496 crore from the markets in January. “The most prominent reason for FPIs’ net inflow is expectation from the government that it would speed up development and economic reforms in their last two years in office before going for elections in 2019. “The government finalising GST rates and expectation that it will be rolled out on time, in addition to forecast of normal monsoon also led to positive sentiment,” Himanshu Srivastava, Senior Analyst Manager Research at Morningstar India said.
Rising instances of farm loan waivers in many states which are facing elections in the next couple years may affect credit discipline of rural borrowers, a development that weighed on the stocks of NBFCs such as Mahindra and Mahindra Financial ServicesBSE 0.50 % (MMFS), Shriram Transport FinanceBSE 1.28 % (STFC) and micro finance players such as Bharat Financial Inclusion (BFIL) in the last two trading sessions.However, unlike NBFCs for which the loan is secured in nature backed by assets like tractors, and commercial vehicles and the quantum of loans are bigger, the deteriorating credit culture may be a bigger worry for MFIs that have already seen 20% to 35% correction in the consensus earnings expectations for FY18 in this calendar year.The management of rural-focused NBFCs appear confident that farm loan waivers are less likely to impact the credit discipline amongst their borrowers even as some may try to take advantage of the prevailing sentiments.According to Umesh Revankar, MD & CEO of Shriram Transport Finance, even as loan waivers affect rural credit discipline, payment from assets is not a challenge that cannot be handled. He said that while some elements may try to take advantage of the situation, such instances are unlikely to impact the company’s outlook on loan growth (12% to 15% for FY18) and asset quality) for the fiscal.“Borrowers’ expectations of waivers are from the government and not banks and institutions like us. For our business, cyclical factor like a drought that affected Karnataka and Tamil Nadu last year is far bigger a challenge than change in credit discipline due to such waivers,” said Revankar.
Analysts today grew more confident of a rate cut by Reserve Bank of India at the August review, after the headline inflation dipped to a decade low of 2.18 per cent for May.SBI’s economic research department said the RBI cannot “avert a rate cut” at the August policy review.”The expectation of a prominent rate cut would become more pronounced if inflation continues to remain benign for a longer time,” it said in a note.Domestic brokerage Kotak Securities said the retail inflation will come below the 2 per cent mark for June itself and will be at 4 per cent level — the RBI’s medium term target — in March 2018.”Lower inflation and unexciting growth print raises the risk of a rate cut in the RBI’s August monetary policy review,” HSBC said in a note.It said the downward trajectory in price rise was due to a slump in food and fuel and added that the last time inflation had fallen so low was in May 2001.Private sector lender IDFC Bank said even though pressures are building on the monetary policy committee, “an August cut is not a 100 per cent given” due to risks like a reversal of base effect and implementation of 7th pay commission allowances, which can push up the number above 4 per cent by March 2018.The RBI, which is mandated to ensure that inflation is at 4 per cent in the medium-term, chose to go for a status quo in the rates at its review last week, but also lowered its expectations on inflation by up to 1.40 per cent, after the headline number came down to 3 per cent in April.”April inflation print and revised growth estimates have certainly raised difficult policy questions. We will watch carefully over next few months the incoming data on inflation as well as the indicators of real economic activity. I expect that we will remain adequately state contingent and if data so warrant, act for a broader accommodation through the interest rate policy,” deputy governor Viral Acharya had told reporters.
India and South Korea on Wednesday signed agreement for $10 billion assistance for infrastructure development projects in India, including smart cities.The two countries signed agreements to establish $9 billion in concessional credit and $1 billion in Official development assistance (ODA) funding for infrastructure development projects in India,” said an Indian Finance Ministry statement.This implemented a decision taken during the visit of Prime Minister Narendra Modi to South Korea in May 2015. With this, South Korea became one of the first non-G-7 countries to become an ODA contributor in India.The agreements were signed during the visit of Finance Minister Arun Jaitley to South Korea on a four-day official visit to attend the India-Korea Financial Dialogue and the second annual meeting of the Board of Governors of Asian Infrastructure Investment Bank (AIIB).
China needs to further tighten the flow of credit in its economy and funnel lending into economic activities that support real growth, International Monetary Fund deputy managing direct David Lipton told reporters in Beijing on Wednesday. The IMF on Wednesday raised its forecast for China’s economic growth this year to 6.7 percent, citing “policy support, especially expansionary credit and public investment”. After years of reliance on debt-fueled stimulus to meet growth targets, early warning indicators of a financial crisis in China are flashing red, economists at Nomura said in a note this week, echoing the warnings of others such as the Bank for International Settlements (BIS).
China must quicken the pace of reforms and do more to curb rising debt, the IMF said today as it raised its growth forecast for the world’s number two economy. The International Monetary Fund expects China to expand by 6.7 per cent this year, faster than its previous estimate of 6.6 per cent due to expanding credit and investment. That would match last year’s growth rate, which was the slowest in a quarter of a century. The economy is then expected to slow to an average of 6.4 per cent expansion between 2018 and 2020. After years of blistering growth, China’s economy has been slowing as it moves from an investment and export-driven model to one more reliant on consumer spending. However Beijing’s Belt and Road infrastructure project, for which the government has earmarked hundreds of billions of dollars, has raised concerns it may be retreating from the difficult transition. David Lipton, the IMF’s first deputy managing director, said it was “critical” that China capitalises on its still- strong pace of expansion to speed up reforms. “While some near-term risks have receded, reform progress needs to accelerate to secure medium-term stability and address the risk that the current trajectory of the economy could eventually lead to a sharp adjustment,” Lipton told reporters at the end of a two-week visit to China. The IMF also called on Beijing to do more to rein in soaring credit, warning that runaway lending could lead to a bad debt problem if borrowers default on their loans. China’s overall debt liabilities, which include corporate and household borrowing, are above 260 per cent of gross domestic product compared to about 140 per cent before the 2008 financial crisis.