Inflation to hit Indian Inc's growth plans - report

The 13-year-record inflation figures were announced on a day when Hindalco Industries announced its plan to retire loans taken to finance the Novelis acquisition. The Aditya Birla flagship company, which has about $3.03 billion as debt because of a bridge loan taken to fund the acquisition, will be tapping the market soon to meet the bridge payout.

“As long as we can pass on the cost to the market, it is ok,” managing director Debu Bhattacharya told reporters on Friday. “If we can’t, then it will be bad.” Inflation rate surged to a 13-year-high due to high crude and commodity prices, putting a question mark on growth estimates and on the ability of the Indian market to absorb any further increase in input costs.

“It’s (inflation) very unfortunate and certainly a thing that we can do without,” said Tata Sons’ finance director Ishaat Hussain. “But it has been driven by high oil and commodity prices, largely on account of external factors. It will require measures which will impact growth. Borrowing will become costlier and growth momentum will be affected.”

Indian companies, large and small, have drawn up large plans to expand capacities. Since borrowing will become costlier, the future of such expansion plans looks uncertain. However, the infrastructure sector may not be affected as deferring such projects would be even costlier.
India is scheduled to spend $500 billion to develop various infrastructure projects. B Hariharan, group finance director of the Gautam Thapar-controlled Ballarpur Industries, says “The high inflation will slow down the manufacturing sector. Although expansion projects will be affected, those that will be funded by domestic debt will be hard hit, while companies depending on foreign loans may be relatively better off,” he added.

On Thursday, KPMG said India would likely see the largest global investment in the manufacturing sector, with about 25% of large global corporates expected to invest in the country. Investment in other sectors such as in industrial products, will also be large, with India likely to displace the US to gain the second rank after China, said the report, which was based on a survey of 300 corporate investment strategists from 15 economies

Direct Tax collection up 71% then previous year

India's direct tax collections continued to grow at a robust pace to log a 71.28 percent rise in the first two months of this fiscal at Rs.228.4 billion ($5.7 million), against Rs.133.35 billion in the like two months of the previous fiscal.

The growth in personal income tax was the highest with 73.05 percent at Rs.146.9 billion, against Rs.84.89 billion, while the corporate tax mop-up was higher by 68 percent at Rs.81.26 billion against Rs.48.35 billion. "Direct tax collections have been witnessing a high growth due to better tax compliance by the taxpayers and an improved tax administration," a statement issued by the finance ministry said Wednesday.

Finance Minister P. Chidambaram said last week that the Central Board of Direct Taxes (CBDT) would meet soon to revise upward the official estimate on direct taxes for this fiscal, set at Rs.3,650 billion. "For 2007-08, direct tax collection was Rs.3,144.68 billion. This represents an increase of 36.62 percent over the previous fiscal, and 117.56 percent of the original budget estimates," he said. "In four years, this has been tripled - that is from Rs.1,050.88 billion to Rs.3,144.68 billion.

This is a remarkable achievement and I compliment the department for this extraordinary achievement," he added. "The cost of collection has come down to 0.54 percent. For every Rs.100 collected, the department spends only 54 paise. Now, this is the lowest in any jurisdiction in the world."

India second in consumer confidence index

Despite a marginal slowdown in growth, India still ranks second after Norway in consumer confidence and their attitude towards recession, says a survey by a global information and media consultancy. "One market's trash is another's treasure, Norway and India still ride the wave of economic slowdown," says the Nielsen Global Online Consumer Survey conducted among 28,153 Internet users in 51 markets in Europe, Asia Pacific, the Americas and the Middle East.

Aside from consistently high consumer confidence, the two most optimistic nations in the world, Norway and India, share something in common: Their economies are benefiting from the by-products of economic slowdown. The survey says India will see its employment rate rise in inverse proportion to rich nations, thanks to the country's enthusiastic adoption of work-force optimisation practices and the outsourcing bug.

India has established itself as a hub for outsourcing technical and support staff, as belts in the world's leading economies tighten. We may well see India's economy, and the confidence of its consumers, soar. The Nielson survey says 94 percent of Norwegians and 86 percent of Indians were optimistic about their job prospects over the next year, while a staggering 93 percent Portuguese and 89 percent Japanese felt their job prospects were either not so good or downright bad.

The survey says consumers in three of the world's most developed economies - the US, Japan and New Zealand, have taken a serious turn in the last few months. Not surprisingly, consumer confidence has fared badly in the US, the world's largest economy and epicentre of the sub-prime housing and credit crises. The survey says consumer confidence fell in 39 out of 48 countries, with New Zealand, the US and Latvia suffering the deepest declines. "No region or country has been spared the domino effect of the US sub-prime and credit crisis", observed David Parma, global head of customized research for The Nielsen Company.

"The last six months have been the most turbulent period for the global economy in several decades. When the USA sneezed at the outset of the sub prime disaster nearly a year ago, the rest of the world quickly caught a cold," he said. "Consumers around the world are struggling with the same global issues that are impacting their daily lives. It's an unfortunate pendulum." Parma said on the one hand the world was witness to soaring global crude oil and commodity prices and rising interest rates, while on the other there was a fall in property prices, weakening labour markets and falling industrial output.

India not a trade friendly nation - World Economic Forum

Hong Kong and Singapore are the two economies most conducive to global trade, according to a ranking by the World Economic Forum released on Wednesday. The World Economic Forum's new Global Enabling Trade Index survey of 118 economies looked at ten factors impacting trade, such as tariffs, customs administration efficiency and availability of transport and communications infrastructure.

The forum ranked Hong Kong number one thanks to its "very open market" as well as a "secure and open business environment." Singapore's open business environment was also complemented by a "highly efficient and transparent border administration" and a well-developed transport and communications infrastructure.

Third and fourth places were taken by Sweden and Norway respectively, while Canada was ranked fifth. The world's largest economy United States, however, did not figure in the top ten, coming in at number 14, dragged down by its border administration, judged to be "lacking some efficiency." "Customs procedures (in the United States) are seen as comparatively burdensome (ranked 42nd) and there is a relatively high cost to import (ranked 65th)," said the WEF.

Export giant China fared even worse, ranked just 48th, reflecting "underlying weaknesses in its economy and its trading regime." "Above all, China is a fairly closed country. Although its economic success relies heavily on exports, imports are still severely inhibited by tariff and non-tariff barriers, despite the country's accession to the WTO," it said. Fellow Asian giant India ranked even further down the list, at 71st place, due to its market access, which is rated as "severely restricted." Brazil was not far behind India, at 80th place, as its markets remain "fairly closed, with tariffs... inhibiting goods imports."

Finance Minister : Banks to waive farm loans by 30th june

Union Finance Minister P. Chidambaram Monday said state-run banks would waive farm loans by June 30, as outlined in his budget speech Feb 29.

"Yes, they (banks) will implement the farm loan waiver scheme by this month-end. The process is on. The scheme is under implementation by the public sector, regional rural and cooperative banks. The beneficiaries have been identified," Chidambaram told IANS on the sidelines of a bank event here.

In his budget speech, the finance minister had set June 30 as the deadline for waiving bank loans to small and marginal farmers with holdings up to three hectares. The size of the loan waiver scheme was increased in May to Rs.716.8 billion from the Rs.600 billion set initially, as the number of beneficiaries has been estimated to be about 40 million.

The waiver will enable the beneficiary farmers to become eligible for fresh institutional credit for the kharif crop.
Chidambaram Monday visited two Canara Bank and Vijaya Bank branches, as well as a rural bank branch on the outskirts of the city to interact with agricultural borrowers and supervise the debt relief scheme to farmers.

June 13 - Inflation soars to 8.75% on rising prices

Surging food and fuel prices further pushed up inflation to 8.75 per cent for the week ended May 31 from 8.24 per cent in the previous week, its highest in 7 years. Inflation may go beyond a 13-year high of 9 per cent as a result of the steepest-ever hike in petroleum prices, analysts said. "It (inflation) could cross 9 per cent in the near term owing to the hike in petrol and diesel prices," HDFC Bank chief economist Abheek Barua told reporters recently.

In a bid to curb inflation, the Reserve Bank India on Wednesday hiked the repo rate — the rate at which banks borrow from RBI — by a quarter point, from 7.75 per cent to 8 per cent, giving a clear signal that for it inflation is a bigger priority than growth. It may not tame inflation in a hurry, but will discourage spending over a period of time, as banks pass on their higher cost of funds to borrowers. But all is not over yet.

For, a slim majority of economists now expect the RBI to raise its key lending rate once more in 2008 after this week’ssurprise 25 basis point increase to contain inflation expectations, a media poll has showed. Many also expect the RBI to raise its cash reserve ratio (CRR), the main policy instrument used over the past 18 months, by 25 to 100 basis points in coming months to clamp down on inflation-stoking surplus cash.

The government, under pressure to contain prices ahead of state polls this year and national elections due by next year, has also cut import duties on edible oil, curbed rice exports and forced steel and cement companies to cut prices.

US has vital stake in India's rise as a global power

Describing India as an emerging "global power" and an "ally," US Secretary of State Condoleezza Rice says Washington has a "vital" stake in New Delhi's rise.

"India stands on the front lines of globalisation. This democratic nation promises to become a global power and an ally in shaping an international order rooted in freedom and the rule of law," Rice says after noting that Indo-US relations have experienced a "dramatic breakthrough" during the eight years of Bush Administration.

"...the United States has a vital stake in India's rise to global power and prosperity, and relations between the two countries have never been stronger or broader," Rice says in an article in the latest issue of Foreign Affairs magazine published by Council on Foreign Relations, a Washington think-tank.

"It will take continued work, but this is a dramatic breakthrough for both our strategic interests and our values," she says.

Penning her thoughts on foreign policy pursued by the George W Bush administration during the last eight years, Rice says Washington has placed importance to building strong relations with existing global players as well as emerging.

With those, particularly India and Brazil, the United States has built deeper and broader ties, she says.

On Brazil, she says the country's success at using democracy and markets to address centuries of pernicious social inequality has global resonance.

"Today, India and Brazil look outward as never before, secure in their ability to compete and succeed in the global economy.

"In both countries, national interests are being redefined as Indians and Brazilians realise their direct stake in a democratic, secure, and open international order -- and their commensurate responsibilities for strengthening it and defending it against the major transnational challenges of our era," Rice says.

The terror attacks on the US on September 11, 2001 was similar to the attack on Pearl Harbour in 1941, which fundamentally changed the world, she says.

"We were called to lead with a new urgency and with a new perspective on what constituted threats and what might emerge as opportunities. And as with previous strategic shocks, one can cite elements of both continuity and change in our foreign policy since the attacks of September 11."

"What has not changed is that our relations with traditional and emerging great powers still matter to the successful conduct of policy. Thus, my admonition in 2000 that we should seek to get right the "relationships with the big powers" -- Russia, China, and emerging powers such as India and Brazil -- has consistently guided us," Rice says.

Washington's alliances in the Americas, Europe, and Asia remain the pillars of the international order, she says, adding that the Bush administration was now transforming them to meet the challenges of a new era.

"In this strategic environment, it is vital to our national security that states be willing and able to meet the full range of their sovereign responsibilities, both beyond their borders and within them. This new reality has led us to some significant changes in our policy.

"We recognise that democratic state building is now an urgent component of our national interest," she said adding that in the broader Middle East, the US recognises that freedom and democracy are the only ideas that can, over time, lead to just and lasting stability, especially in Afghanistan and Iraq.

India's Fiscal Deficit Higest in World - still increasing

India is one of the fastest growing economies in the world. The foreign exchange reserves reach a new high every week (($314 billion), inflation has not been controlled due to hike in the price of crude oil (nearly $135) and interest rates continue to be low. Indian fiscal deficit is the highest in percentage among the other countries of the world.

What is fiscal deficit?

Fiscal deficit is essentially the difference between what the government spends and what it earns. It is expressed as a percentage of GDP.

India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07. The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09, but looking at the way things are going, economists say, it is unlikely the government will meet its target

India's fiscal deficit continues to be among the highest in the world and underlying pressures are not entirely showing up in headline fiscal numbers, Reserve Bank of India Governor Y. V. Reddy said.

Earlier in the Budget 2008 - 09 document, the government's revenue expectations are realistic, but expenditure appears to be underestimated. This may be because expenditure to the tune of 2.0-2.5 per cent of GDP remains off budget. There is no provision in the budget for the loan waiver of $16.8 billion to the farmers (earlier Rs.60,000 crores and now it is increased to Rs.71,680 crores) and huge amount of $6.36 billion arrears to the Central Government employees (Rs.27145 crores for the Central sixth pay commission recommendations), which is expected to 1.85 per cent of the official GDP for 2008-09. The loan waiver scheme will benefit 3.69 crore small and marginal farmers and 59.75 lakh other farmers. This is the vote bank for the next 2009 general elections to the Congress Party.

The budget 2008 - 09 document also says that the Plan expenditure is going to rise by around Rs 38,000 crores or around 19 per cent. Non-plan expenditure will rise by a much smaller amount, by Rs 64,806 crore or 17 per cent. The actual figure may be much higher.

The fiscal deficit for 2008-09 is forecast at 2.5 per cent of GDP, lower than the deficit for 2007-08 of 3.1 per cent of GDP for 2007-08, and also lower than the 3 per cent of GDP mandated by the Fiscal Responsibility and Budget Management (FRBM) Act. It is highly unlikely that the government will achieve its forecast.

While net borrowings for 2008-09 have been budgeted at Rs 1 trillion and the gross borrowing estimate is at Rs 1.45 trillion. Critically, it does not include oil bond redemptions of Rs 13000 crores. It remains to be seen how the government finances maturing oil bonds. Therefore there appears to be a considerable upside risk to market borrowings for 2008-09. Though aimed populist in nature, many of the announcements made could fuel inflation and put pressure on the fiscal deficit in 2008-09.

Economists point out that all oil bonds and a part of fertiliser bonds are not accounted for in the Budget. This means that the government does not have to include these expenses while calculating the surplus or deficit for the year.

Subir Gokarn, Asia Pacific economist at rating agency Standard & Poor's, says that oil bonds are just liabilities and not real expenditure for the government and hence, technically, they cannot be added to the fiscal deficit.

Tax collections were at a record Rs 5,88,000 core in 2007-08 helped by robust economic growth and corporate profitability. However, with growth likely to slow down in 2008-09, it remains to be seen whether the same buoyancy will be maintained.

Also, not every expert believes fiscal deficit is worrisome. Dr Ashima Goyal, professor at Indira Gandhi Institute of Development Research, believes a high fiscal deficit is an indication that the government is spending more on "productive expenditures."

"We are seeing the centre's fiscal situation is improving but I think there are several underlying fiscal pressures not entirely evident in the numbers," Reddy told a conference in New Delhi on 26 May 2008.

India aims to bring down its fiscal deficit to 2.5 percent of GDP for the 2008-09 financial year, compared to 3.1 percent in 2007-08, but financial analysts fear a $17 billion scheme to write off the debts of millions of small farmers and tax cuts could trip up efforts. According to the Fiscal Responsibility and the Budget Management Act operationalised in 2004-05, the government must reduce its fiscal deficit to 3 pct of GDP and wipe out its revenue deficit by 2008-09.

But it has already missed its revenue deficit target and expects it to be 1 percent of GDP in the year to end March 2009. Reddy said the fiscal deficit as a percentage of gross domestic product continues to be among the highest in the world.

Market borrowings finance more than half of the gross fiscal deficit and the rest of the gap is filled by small savings, provident funds, reserve funds and deposits and advances.

The gross fiscal deficit covering both state and central government is estimated at 5.5 percent in 2007-08, according to official estimates, down from 9.5 percent in 2002-03.

Fiscal deficit will be more in the coming months due to oil prices. Crude oil price of $35 per barrel in BJP government has been increased to $135 in Congress government which is nearly $100 difference per barrel. Congress Government is searching many options to recover the loss of PSUs and trying to reduce other taxes and duties. Increase of each one dollar hike in crude oil will give huge loss of Rs.3000 crore to Public Sector Undertakings. Central Government has no option except to increase the prices of petrol, diesel and gas for recovering some extent of losses

Single FII can invest up to $200 mn in Indian debt Securities

Foreign institutional investors (FIIs) will now have an individual ceiling of $200 million for investment in Indian debt securities. The move is perceived, by many, to be an attempt to avoid concentration of risk in the debt market. Further, the Securities and Exchange Board of India (Sebi) ruled on Friday that the enhanced limits will be allocated to FIIs on a ‘first-come-first-serve basis’.

FIIs wishing to take advantage of the enhanced limit will have to make their applications to Sebi by June 16, 2008, and the first few entities to apply before the total cap of $8 billion is reached will be allocated the debt. There are doubts over the exact impact of the move, especially since the existing limit also has not been utilised. Sebi’s move has come at a time when interest in government securities has waned resulting in the yield on 10-year bonds inching up to 8.25%.

Bonds have come under pressure, following fuel price hike and the government’s decision to issue more oil bonds this year. But while the new limit may not have a short-term impact, market participants feel that it is a positive signal being sent out by the government and regulators.

Last week, the government had reviewed its external commercial borrowing policy and increased the FII limit in debt securities to a total of $8 billion, of which $5 billion would be for government securities and $3 billion for investment in corporate debt. The earlier limit for FIIs in debt stood at $4.7 billion, of which $3.2 billion was allocated for government securities and $1.5 billion for investment in corporate debt. Standard Chartered Bank managing director and regional head for global markets and South Asia Sundeep Bhandari said, "The ceiling Sebi has imposed on companies is probably an attempt to avoid concentration of risk, and broadbase the market.

It is a good move by the regulator, as it will negate the volatility that could have been caused by a lesser number of investors pumping in large amounts." The decision to increase foreign investment in debt securities comes at a time when the market is not doing too well. According Mr Bhandari, the timing could not be better, as it will attract investors with a long term view. "If this move had come when the market was booming, it would have fuelled a number of speculative investors," he added. A senior official at a bond house said, "The appetite for Indian debt securities from FIIs has not been high so far.

Though the signals sent out by Sebi are clear, it remains to be seen how much of an impact it will have." Incidentally, the corporate debt market has not performed too well over the past few months. There was only two new issues in the past month. The other two issues currently open, of Gammon India and Punjab State Electricity Board, have been kept open for a period of over two months due to a lack of investors.
- Economic times

India, China growth cannot offset global slowdown

Emerging economies such as China and India are growing faster than the rest of the world but still lack the firepower to offset weaker growth in the US and European Union, Fitch Ratings said Monday.

The main emerging markets commonly known as BRIC -- Brazil, Russia, India, and China -- remain very dependent on exports to the industrialised economies with a combined trade surplus of 500 billion US dollars, said James McCormack, head of sovereign ratings in Asia for Fitch.

"The trade flows do not support the emerging markets contributing to offset a recession in the US and weakness elsewhere," McCormack said at a Fitch conference in Singapore.

Many economists say the United States, the world's largest economy, is effectively in recession.

also read : Online Share Trading Guide

Some analystts have seen the rapid economic expansion in India and China as reasons for optimism even if the US and other advanced economies weaken.

But Fitch Ratings argues otherwise. "They (BRIC economies) are running very large combined trade surpluses in the order of 500 billion dollars... so if there's weakness in the advanced economies, you are going to see weakness in the emerging markets," McCormack said.

"The trade flows are going the other way, so the conclusion that we reached is that strong growth in the emerging markets is not really going to help offset weakness in the advanced economies."

Both India and China still account for a relatively small portion of global imports which means their economies' influence on international growth is limited, the US ratings agency said.

also read : How to start online share trading

India only accounts for two percent of the world's gross domestic product, said McCormack.

"So in some sense, it doesn't matter how fast India grows and it's not a very open economy," he added.

"It's not really going to contribute to stronger growth in other markets. It doesn't import that much. It's just too small." - Fitch Ratings.

also read : Online Share Trading Guide

Tata Group is world's sixth most reputed business group

Diversified Indian conglomerate Tata group has emerged as the world's sixth most reputed company, but the country's most valued firm Reliance Industries failed to make the grade.Tata group leapfrogged over 100 positions from last year's 124th rank in the annual Global 200: The World's Best Corporate Reputations list, compiled by US-based Reputation Institute.

The global list, which includes 10 other Indian companies, has been topped by Japanese auto maker Toyota, followed by US-based internet search giant Google, Sweden's Ikea, Italy's Ferrero and another American firm Johnson & Johnson.
The Ratan Tata-led group is joined by India's second largest software exporter Infosys Technologies in the Top-50 league at 14th position.


However, at least nine other Indian firms, which were among 600 companies considered in a survey to prepare the list, could not make it to the final 200. These firms include Mukesh Ambani-led RIL, the country's biggest by revenue among private sector firms and overall largest in terms of market value.


Other Indian companies that were considered for the list, but failed to make the cut include the biggest private sector lender ICICI Bank, top private and public sector telecom firms Bharti Airtel and BSNL, IT giant Wipro, Birla group's Grasim Industries, tobacco-to-consumer goods conglomerate ITC as well as two state-run firms -- oil refining and marketing major BPCL and national carrier Air India Ltd.


While releasing its latest Global Pulse report, Reputation Institute said that Tata group and Air India have the strongest and weakest corporate reputations respectively among the companies from India. Besides Tata and Infosys, other firms that made to the top 200 list include, Maruti Udyog (Suzuki) Ltd, State Bank of India, Hindustan Lever Ltd, Hero Honda Motors, Life Insurance Corp of India, Bajaj Auto, ONGC, Mahindra and Mahindra and Indian Oil Corp.


Both Tata and Infosys have gained over 100 spots each to join the top tier of global companies.India's Tata Group and Infosys Technologies saw their reputations increase by over 8 points in 2008, and catapulted over 100 spots in the ranking to join the top tier of global companies in 2008, in recognition of their growing role among the world's business elite," the report said.


However, the highest jump in ranking has been seen by China's Faw Group (ranked 41st with an improvement of 178 spots), followed by Norway's Coop, Canada's Sobey's and Japan's AEON, all of which have gained over 100 spots.


Maruti, the country's biggest car maker, has been ranked at 77th, SBI at 107th, HLL (now renamed as HUL) at 131st, Hero Honda at 147th, LIC at 161st, Bajaj Auto at 169th, ONGC at 186th , M&M at 191s and IOC at 199th position.


Globally, food and beverage giant PepsiCo, headed by a person of Indian origin Indra Nooyi, has been ranked 100th.
Tatas are ranked higher than companies like Walt Disney, Marks and Spencers, Xerox, Colgate-Palmolive, Sony, Honda, General Electric (GE), all of which are in the top-50.


The survey was conducted on 600 largest companies from 27 countries, out of which 200 were selected for the list. Toyota earned the highest ranking with a score of 86.53, followed by Google with 85.23 points.


Reputation Institute said that all the 200 companies earned scores higher than the global mean of 64.2 points, but despite earnings better-than-global average, the companies ranked 51-200 have significantly weaker reputations than the top tier companies.

also read : effect of increase in oil prices on indian economy

Indian exports to non-US markets increasing: Report

The focus of India's exports is shifting from the traditional US market to the UAE, a Dun & Bradstreet report said.

The US has traditionally been India's leading export destination. In FY 2007, US accounted for as much as 14.9 per cent of the total merchandise exports worth an estimated $ 18.9 billion, the report said.

Though US's share in India's merchandise exports declined from 20.7 per cent in FY 2003 to 14.9 per cent in FY 2007, in value terms the shipments increased from $10.9 billion to $18.9 billion.

"This is an indication of India's growing preference for trading with other emerging markets by diversifying its product group and improving its quality," the report added.

The UAE, the second-largest export market, accounted for 9.5 per cent of the country's total exports in FY 2007, while in FY 2003 it accounted for 6.3 per cent only, the report said.

The spurt in exports to the UAE can be largely attributed to a rise in shipments of mineral fuels, mineral oils and products, which constituted almost 30.4 per cent of total exports to the UAE, the report said.

UAE is also an important market for re-export in the entire Middle-East region. In 2005, the total re-export was as high as $26.4-billion.

India's exports to China have also seen a rapid growth from just 3.7 per cent in FY 03 to 6.6 per cent in FY 07.

India's export share to Singapore has gone up from around 2 per cent in FY 2001 to 4.8 per cent in FY 07.

Petrol | Diesel | Home LPG prices Up - Economic Updates

The government hiked petrol and diesel prices by Rs 5 and Rs 3 a litre respectively and that of LPG by Rs 50 a cylinder, while sparing poor man's fuel kerosene from any increase. The hike will be effective from midnight. The price of petrol, currently Rs 45.5 a litre in Delhi, will now cost Rs 50.5 or 11 per cent more, while diesel, which retails at Rs 31.5, will now cost 34.5 or 9.5 per cent more.

The Cabinet also reduced the customs duty on crude oil from 5 per cent to nil, and on petroleum and diesel from 7.5 per cent to 2.5 per cent. The customs duty on other petroleum products has been reduced from 10 per cent to 5 per cent. Inflation following the fuel price hike may rise by 0.5-0.6%.

Customs duty on other petroleum products like ATF and Naphtha has been cut from 10 per cent to 5 per cent.

The Union Cabinet chaired by Prime Minister Manmohan Singh took a slew of measures to offset the surging global oil prices that had put the national oil companies under acute pressure. The increase in prices would be effective from midnight, Petroleum Minister Murli Deora said.

The price hike would help oil companies to earn Rs 21,123 crore more.

As part of measures, the government decided to take a burden of Rs 94,601 crore for which it will issue oil bonds to state-run BPCL, HPCL and IOC which were reporting a daily loss of over Rs 720 crore.

also read : Impact of increase in fuel prices on inflation

In addition, the oil producing PSUs like ONGC would shell out Rs 60,000 crore through discounts to state-owned oil refiners and marketing companies.

Despite all the measures, there would still be a gap of Rs 29,000 crore, Revenue Secretary P V Bhide told reporters briefing about the decisions taken at the Cabinet.

When asked whether states will also be told to cap sales tax on petrol and diesel, the Revenue Secretary said there is no move from the Finance Ministry side on this issue.

However, sources said the Prime Minister's address to the nation later in the day may carry appeal to states in this respect.

With the hikes, India joins other Asian nations like Indonesia and Malaysia that are raising regulated domestic fuel prices as they find they can no longer afford to shield their consumers from the full effect of record global prices.

Petrol and diesel prices were last raised in February when the Indian basket of crude oil was at 67 dollars per barrel. Today it is at 124 dollars per barrel.

State-run Indian Oil, Bharat Petroleum and Hindustan Petroleum were together projected to lose Rs 2,46,600 crore on sale of petrol, diesel, domestic LPG and PDS kerosene in 2008-09 in absence of any price hike or duty cut.

Inflation above 8% mark - government helpless

Inflation touched 8% mark for first time in one year and government has said that it is helpless and inflation is going out of government control.

However inflation has now become a global problem and all the developing as well as developed countries are facing it.

Governments are pretending to respond. In the UK, Mr. Gordon Brown wants to assemble experts to debate solutions. The Indian finance minister says that western nations are diverting land for producing expensive bio-fuels to replace the expensive crude oil. Surely, that is part of the problem. But that does not explain the jump in the price of rice. Rice is not diverted to bio-fuel production.


In India, the response has been to reduce import duties, impose export caps and accuse manufacturers and distributors of collusion and cartel-like behaviour. Different ministers speak in different voices. Together, these pronouncements do not constitute a policy whole.
In simple terms, prices reflect the balance of supply and demand of something. When prices go up, it is a reflection – and not a consequence – of supply going down or of demand going up or both. When it happens for just one or few commodities, it is possible to blame middle-men of hoarding or manufacturers of cartel-like behaviour. When it happens in many commodities, it is futile to blame one industry or a few producers.


Usually, the source lies in some policy measures and their implementation. To make it clear, we are not dismissing the importance of factors like climate change, diversion of land for production of bio-fuels and more importantly, stagnation or even outright decline in agricultural productivity in countries like India and China. Again, they explain inflation in food and agriculture commodities. These factors do not explain inflation in crude oil and copper, for example.


If we have to identify a single or the most important explanation for the recent development in prices of many commodities, the answer lies in examining the behaviour of global central banks.
Of course, in any broad-brush analysis or conclusions, there is the risk that we miss the exceptions who behaved differently and correctly. For example, within the constraints imposed by the political system, Reserve Bank of India has done a very good job of trying to shield the Indian economy from the cycles of boom and bust. Similarly, if the Australian and New Zealand economies still face the risk of boom and bust, it is not because of their central banks but in spite of their best efforts.


The bulk of the blame has to be assigned to the American Federal Reserve and the People’s Bank of China. In the case of China as in the case of India and in many other developing countries, the central bank is not independent. It is subject to political influence. The Federal Reserve Board of America is, in some ways, a similar predicament. It is subject to the oversight and pulls and pressures of the democratically elected Congress members. Further, since it was founded by banks actually, it ends up coming to the rescue of banks sometimes to the detriment of the public.


In 2001-2003, it cut the Federal funds rate to 1.0%. It thus rescued the economy from the collapse of the technology bubble in 2000. Thus, it replaced the stock market bubble with a housing bubble. When the housing bubble appeared to be weakening, it refused to tighten regulations and allowed it to continue. Too many loans were made to people who should not have been lent. That is the root cause of the present problem.


In order to address the resulting loan defaults, stress on banks and their balance sheets, the Federal Reserve has allowed banks to borrow at cheap rates from it. Money is available to banks in the open market but at higher cost. Some of the banks might not have survived. But, that would have also left a lesson for other banks that they would not have forgotten for a long time. Excessive risk-taking would have been curbed. Instead, the cheap money is perhaps being channelled into speculation on commodities prices. After all, banks are not going to create more mortgage loans at least for quite some time.


Somewhat different has been the behaviour of China but it achieves the same result. China has kept its currency cheap. Keeping the currency cheap requires interest rates to remain low, in comparison to other countries but also in relation to economic growth. China has done that. Low interest rates means capital is plenty. So, capital-intensive growth has flourished. That has placed tremendous demand on resources worldwide such as crude oil, coal, steel and other industrial metals. It continues to import rising quantities of iron ore, copper and crude oil. Incidentally, it has also led to China supporting many tyrannical regimes in Africa including that of Zimbabwe. Recently, it sent a shipment of arms to Zimbabwe but faced an avalanche of protest and had to recall that shipment.


Perhaps, it is possible that American banks know that there won’t be any change in China’s demand for commodities in the near future, at least until the end of the Olympics. China may be reluctant to change course fearing unknown and uncertain consequences. If so, it argues for further rise in the price of commodities. Both their behaviour and bets might be feeding off each other. That is not good news for the rest of the world.


After all, we cannot influence the Federal Reserve. So, how should policymakers respond? Unfortunately, the answer is that they should respond differently from what they have done until now. Banning exports of agricultural commodities exposes the hollowness of farmer-friendly policies. Farmers should be allowed, with appropriate guidance, to sell to the highest bidder – local or global – and derive the maximum gains from the global shortage. Such a price signal would also encourage productivity improvement in farmland and hence boost crop production. More land would be brought under cultivation.


At the same time, poor households – rural or urban – could be directly subsidised with cash transfer to be able to pay the higher price.
The same principle can be extended to the price of hydrocarbon products such as petrol, cooking gas, diesel and kerosene. Consumers and producers should receive the price signal. Without that, their respective behaviours would not change and shortages or glut would persist.
At the same time, since supply of food and other commodities would take time to respond to price signals, central banks should be allowed to restrain demand in the short-run with tight monetary policy. That means higher cash reserve ratio or higher interest rates or both. That might be unpopular or politically unacceptable. But, effective medicines never taste sweet. Only placebos do.



The chances of such sound policies being pursued are close to nil particularly as many democratic governments, including India, approach elections soon. Authoritarian governments do not care much for public opinion.
Given such a low chance for sound economic decision-making, prospects for a sustained decline in inflation should be judged remote. That is not good news as it is a stealth tax on the public and erodes their purchasing power. Consequently, it reduces affordability for many assets. As demand drops, inflation affects revenues for companies and squeezes margins through cost pressures. That does not augur well for the stock market.



The stock market in India has performed well in recent times. Many other global markets have staged a similar recovery. That is due to misplaced optimism on the American economy. As discussed above, right policies would be missing and hence the anticipated quick economic turnaround in America would be elusive. Consequently, risky assets globally would retrace their recent gains. Therefore, Indian stocks would fail to build on their recent gains. On the other hand, the likelihood of continued high global and local inflation would result in a resumption of the uptrend in gold price that has been recently disrupted. Therefore, investors who do not expect inflation to recede know exactly what they should be selling and what they should be buying.

Indian economy not likely to slowdown - Lehman Brothers

Anti-inflationary measures are unlikely to turn India into a slow growing economy, while other Asian nations could face the situation of rising prices and economic stagnation, a latest report says. "We do not believe that India would be affected significantly in a stagflation scenario and growth would remain strong in relative terms...," global research firm Lehman Brothers said in a recent research report.

However, even as the economic growth is projected to remain strong, interest-rate sensitive stocks could be adversely impacted during stagflation situation in Asia. Stagflation refers to a situation when inflation is rising and the economic growth is simultaneously slowing down. The negative impact is likely be felt by interest rate-sensitive stocks or by companies that are not in a position to pass on cost pressures to consumers, Lehman said.

Further, investment spending is unlikely to witness a substantial slowdown primarily on account of significant shortages in key sectors such as steel and power. The report pointed out that risks out of a stagflation scenario would be high for the banking sector, infrastructure, automobile and cement firms. "The risks are significant for part of the banking sector, companies with a high proportion of fixed-price contracts and companies with high energy usage without the ability to pass on increased costs," it said.

Lehman noted that in India inflation would remain on the higher side for some more time due to the base effect -- which relates to the inflation data of the corresponding week in the previous year. Given particular prices in the current week, inflation would turn out to be higher, if it was a small number in the previous year, but would be less, if it was high a year ago. In addition, the report said that inflationary headwinds would lead to increased fiscal deficit and negatively impact the country's expansion plans. "One of the major reasons for India's premium expansion has been the reduction in fiscal deficit, a process which could be derailed in the short term due to inflationary headwinds," it added.

The government has initiated fiscal and monetary measures to lessen the effects of inflation on consumers. However, according to the report, some of these measures does not reflect the "true market economics." "If the inflation period is prolonged, we expect the government to start passing on some of the suppressed price increases (especially those relating to crude oil and fertilisers) in small doses. However, we do not expect this anytime soon, given the proximity of the elections, the report pointed out.

- economic times