6 Jan 2017

More revenue for government

In the period April to November, the government recorded an increase of 15.1% in revenue from direct taxation to $60.6bn and in indirect taxation of 26.2% to $81.2bn. The recent mobile spectrum auctions added a further $4.7bn in revenue from upfront payments. November CPI was 3.6%, well below expectations as prices for key food items continued to soften: food inflation is running at 2.6% compared to a twelve month trailing average of over 6%.  WPI also receded slightly from 3.4% to 3.2%.

5 Jan 2017

TCS has been shortlisted

As the year ended, the pace of USFDA approvals picked up, especially for LUPIN. The company received approval for its generic versions of Diclofenac for osteoarthritis pain management, Desoximetazone anti-inflammatory ointment and Voricanazole tablets and oral suspension for the treatment of fungal infections in children. Lupin expects its investments in injectables, inhalers and dermatologicl treatments to accelerate between now and 2020. Indraprashtha Gas may see a slowdown of about 5% in sale volumes due to shortage of cash in the third quarter. It also faces a shortage of CNG converter kits as well as a slight slowdown in industrial demand. Expansion in retail outlets continues, however, as does demand for conversion of vehicles in the Delhi Capital are. TCS has been shortlisted to handle the creation and management of an online interface for taxpayers in the GST rollout.

4 Jan 2017

Expanding tax base

Demonetization had three key objectives: reducing the 'black economy', attacking tax evasion amongst the rich and expanding the tax base boost collections. There is increasing evidence that the first is being achieved, though the second is beset with problems; including evidence that note hoarders have been able to circumvent the exchange rules. Late evidence implies, however, that the third objective will be achieved: December quarter advance tax payments for individuals have increased by 38%. An increase of this scale is sufficiently big to suggest a connection with demonetization. At the end of December, the RBI raised the limits available for note exchanges at banks, with a final exchange date now set at March 31st.

Distribution proceeds to states

Earlier in the year, foreign investors began to doubt the reform credentials of the Modi government, as it struggled with the politics of passing necessary enabling legislation. At the close of the year, we have three significant reforms to measure: first a new Bankruptcy Act which is expected to ease the recovery process for non-performing loans, particularly at state-owned banks. Second, the GST Constitutional Amendment Act is in the process of implementation through a GST Council, which by now has established many necessary operating rules and procedures. One major decision remains to be addressed at the next Council meeting in early January: the distribution of the proceeds between the centre and states. Finally, we had demonetization, implemented quite decisively without any leakage but perhaps with the unintended consequence of seeing off RBI Governor Rajan who is believed to have opposed the idea.

3 Jan 2017

Demonetization left the market exposed

Negative investor sentiment arising from the demonetization move left the market exposed to the sustained liquidity drain towards the US in the absence of clarity on the outcome of the policy. What is clear is that GDP growth in the third quarter of FY17 will be reduced by some 1-2%, dragging the year’s outcome to somewhere in the 6.5-7% range. The outcome depends on how quickly a recovery develops when the availability of new currency notes catches up with demand and deferred purchases of discretionary items are completed. Meanwhile, non-cash transaction volumes continue to rise.

2 Jan 2017

#nifty at premium to cash

Since our last commentary global markets have been mesmerized by the Trump phenomenon with liquidity continuing to be drawn towards an increasingly overvalued US dollar and US equity markets. Notably thee is no sign yet of earnings forecasts for US companies being upgraded to match the resulting multiple expansion. In India, FPI withdrawals have continued, to be replaced by domestic buying as investors took advantage of the demonetization selloff to capture value. As a consequence, the Nifty gained just 97 points to close the year at 8186 while trading in a range of 4.8%. Average daily trading volumes subsided gently over the period, ending at $1.9bn a day compared to a twelve month average of $3.2bn. Direction was largely driven by the FPI action which resulted in a net sale of 4865mil in cash equities; domestic institutions bought a net $360ml. Volatility tended also to the downside, with the India VIX starting out at the high of 18 for the period and declining to a low of 13 before closing at 16 for fall of two points. Market breadth was weak with declines just ahead of advances with downside concentration continuing in cash dependant consumer stocks. Nifty futures closed at a narrow premium to cash.

Continuing overhang of uncertainty

We go into 2017 with a continuing overhang of uncertainty. Expectations as to the impact of Trumpenomics on global markets are a major concern, as are the implications for global trade policies. In India, the overhang of demonetization may be much less enduring. The pace of production of new notes suggests that a major turning point may come after about mid-January. Whether is leads to a hockey-stick recovery in consumer demand is not certain. At the last minute banks have started to announce sharp interest rate reductions for loans as the attempt to recycle the exceptional liquidity accumulated during demonetization. The Indian government is hopeful that this will help boost consumer demand as well as private sector investment, as it accelerates public sector investment.