Market may extend recent surge on government's bold reforms

The market may extend recent strong gains on bold reforms announced by the government after market hours on Friday, 14 September 2012. Trading of S&P CNX Nifty futures on the Singapore stock exchange indicates a surge of 78 points at the opening bell. Shares of organised retailers will surge after the government after trading hours on Friday, 14 September 2012, announced that the Union Cabinet has approved the proposal of the Department of Industrial Policy & Promotion for permitting foreign direct investment (FDI) up to 51% in multi-brand retail trading (MBRT). The permission for 51% FDI in MBRT is subject to specified conditions. A statement issued by the government said that retail sales outlets can be set up in those states which have agreed or agree in future to allow FDI in MBRT under this policy. The establishment of the retail sales outlets will be in compliance of applicable state laws/ regulations, such as the Shops and Establishments Act etc. The policy provides that it would be the prerogative of the state governments to decide whether and where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the state. Therefore, implementation of the policy is not a mandatory requirement for all states, the government said in statement. Retail sales outlets can be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking At least 50% of total FDI brought in shall be invested in `backend infrastructure` within three years of the induction of FDI, where 'back-end infrastructure' will include capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. A high-level group under the Minister of Consumer Affairs may be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms, a government statement said. A three year timeframe has been fixed for setting up the back-end infrastructure, which includes capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. This condition will bind the foreign investors to invest in critical back-end infrastructure, which is a felt need across the country. It would also make the foreign investors accountable for proper implementation of the condition, the government said in a statement. Shares of aviation firms are likely to surge after the government after trading hours on Friday, 14 September 2012, announced that the Cabinet Committee on Economic Affairs has approved the proposal of the Department of Industrial Policy and Promotion for permitting foreign airlines to make foreign investment, up to 49% in scheduled and non-scheduled air transport services. Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic investors into the civil aviation sector, the government said in a statement. Higher foreign investment inflows are necessary at the present juncture, in order to strengthen the sector, the government said. Introduction of global best practices, concomitant with the induction of FDI from foreign airlines, is expected to lead to higher service standards, international best practices and induction of state-of-the-art technologies, in the air transport sector, the government said in a statement. The decision to allow foreign airlines to make foreign investment up to 49% in scheduled and non-scheduled air transport services is subject to certain conditions. A scheduled operator's permit can be granted only to a company that is registered and has its principal place of business within India, the government said. The Chairman and at least two-thirds of the directors of the company should be citizens of India, and the substantial ownership and effective control of the company is vested in Indian nationals. The Reserve Bank of India (RBI) is scheduled to undertake a mid-quarter review of the monetary policy today, 17 September 2012. The RBI is expected to maintain status quo on short term lending rates in its policy review today, 17 September 2012, as per the poll of economists carried out by Capital Market. RBI last cut rates by 0.5 percentage point to 8% from 8.5% in April, its first move to reverse a 20-month rate-tightening cycle. It then held rates steady in June and at its last rate-setting meeting on July 31, saying that a cut would exacerbate inflationary pressures. Interest rate sensitive stocks like banks, auto and realty will also remain in focus ahead of the RBI's monetary policy review today. Financial sector companies, led by private lender HDFC Bank, have reportedly posted a healthy increase in their second quarter advance tax payout, belying sluggishness in the economy. HDFC Bank's tax payment increased to Rs 1,100 crore from Rs 800 crore last year, while its larger rival ICICI Bank saw its second quarter advance tax outgo jump to Rs 815 crore from Rs 650 crore. State-run lender Bank of Baroda's second quarter tax outgo went up to Rs 620 crore from Rs 600 crore. Among other sectors, FMCG giant Hindustan Unilever's tax outgo rose to Rs 300 crore from Rs 190 crore while for Ambuja Cement, it jumped to Rs 160 crore from Rs 95 crore in the corresponding period last year. Auto major Mahindra & Mahindra saw its advance tax payments increase to Rs 200 crore from Rs 176 crore. The Full Planning Commission, chaired by Prime Minister Manmohan Singh on Saturday approved the 12th Five Year Plan document. The plan which extends from 2012 to 2017 has lowered the economic growth target across five years to 8.2%. Besides other things, the 12th Plan seeks to achieve 4% agriculture sector growth during the Plan period. The growth target for manufacturing sector has been pegged at 10%. Key benchmark indices logged smart gains for eight straight session of trade on Friday, 14 September 2012 after the government signaled pushing long pending reforms on the fast track after hiking steeply diesel prices by Rs 5 per liter on Thursday. The BSE Sensex was up 443.11 points or 2.46% to 18,464.27 on that day, its highest closing since 26 July 2011. Foreign institutional investors (FIIs) made heavy purchases of Indian stocks on Friday, 14 September 2012 as per the provisional data. FIIs bought shares worth a net Rs 2833.72 crore on Friday, 14 September 2012, as per the provisional data from the stock exchanges. India's wholesale price index (WPI) rose to a higher-than-expected 7.55% in August 2012 from a year earlier, mainly driven by higher food prices due to deficient monsoon, government data showed on Friday, 14 September 2012. This compares with provisional figure of 6.87% for July and 9.78% during the corresponding month of the previous year. The government also revised upwards June inflation to 7.58% from 7.25%. The Cabinet Committee on Political Affairs (CCPA) raised price of heavily subsidised diesel by Rs 5 per liter on Thursday, 13 September 2012 to balance its fiscal deficit situation. The diesel price hike will reduce the projected massive under-recoveries of Rs 1,87,127 crore by about Rs 20300 crore of oil marketing firms for the financial year 2012-13 in the wake of high international crude oil prices and sharp depreciation of rupee against dollar. PSU OMCs had suffered under-recovery of Rs 1,38,541 crore during 2011-12. The CCPA left the petrol and kerosene prices unchanged. It also restricted the supply of subsidized LPG cylinders to each consumer to six cylinders (of 14.2 kg) per annum. Government data released on Wednesday, 12 September 2012, showed the index of industrial production (IIP) grew at 0.1% in July 2012 as against 3.7% in the same month last year. The index, a key measure of industrial output, contracted by 1.8% in June 2012 after growing at 0.1% in April 2012. The Reserve Bank of India (RBI) on Tuesday, 11 September 2012 eased the external commercial borrowing (ECB) rules and hiked the maximum limit to $3 billion for one company. RBI also hiked the overseas borrowing cap to 75% of the company's last three-year average forex earnings. The foreign loan cap has also been raised to 75% of last three-year average forex earnings. ECB refers to commercial loans in the form of bank loans, buyers' credit, suppliers' credit, securitised instruments availed of from non-resident lenders with a minimum average maturity of three years. Last month, the Finance Ministry had liberalised the norms for raising funds through ECBs by domestic firms, particularly those in the realty sector. The High Level Committee on ECBs also permitted FIIs to invest up to $5 billion in rupee bonds within the overall corporate bond limit of $45 billion. India's gross domestic product (GDP) rose 5.5% in Q1 June 2012, data released by the government on 31 August 2012 showed. The services sector grew 6.9%, industry grew 3.6% and agriculture sector grew 2.9%. Manufacturing output rose 0.2% while mining sector grew 0.1% in Q1 June 2012. India's economy has slowed sharply over the past year due to weak industrial activity as high interest rates crimped demand and made it hard for corporates to finance expansion plans. Finance Minister P. Chidambaram early this month said that India is making consistent efforts to check the abuse of a double-taxation-avoidance pact it has with Mauritius. India has in the past said it is considering a review of the treaty in an effort to boost tax revenue. An India-Mauritius joint working panel was set up in 2006 to put in place adequate safeguards for preventing the misuse of the double-taxation-avoidance agreement between the two countries. India, in the past, has said that Mauritius was unwilling to cooperate on this issue. Mauritius says it has taken India's concerns seriously. Traditionally, Mauritius has accounted for nearly 40% of India's foreign investment. Under the avoidance of double taxation treaty, companies that invest through Mauritius do not have to pay tax in India but only have to pay tax in the island. But capital gains tax is close to zero in Mauritius, making it a popular investment hub. India wants to renegotiate the double taxation treaty with Mauritius to check round-tripping, in which money is moved out of one country to another and brought back under the garb of foreign capital, taking advantage of tax breaks. Meanwhile, a committee appointed by the government to review the controversial general anti-avoidance rules (GAAR) early this month suggested deferring the implementation of anti-avoidance rules by three years. "Where Circular No. 789 of 2000 with respect to Mauritius is applicable, GAAR provisions shall not apply to examine the genuineness of the residency of an entity set up in Mauritius," the committee said. The committee has also recommended that the government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents. The panel has said the government might consider increasing the rate of Securities Transaction Tax (STT) appropriately to make the proposal tax neutral. At present, short-term capital gains on equities are taxable at the rate of 15%. Holding period of less than one year is considered as short term. There is no long term capital gains tax on sale of shares. Business income is taxed at 30%. Distinguishing capital gains and business income depends on several factors, and disagreements have resulted in numerous litigation cases between the Revenue Department and taxpayers, the committee said in its report. Reserve Bank of India (RBI) governor D Subbarao last month said India's inflation is still a challenge, but its growth story remains intact. "India has no space for a policy response to a crisis, we are more vulnerable," Subbarao said at an event in Cornell University in the United States. The country, he said, had room to react through monetary policy to the 2008-09 crisis, but this time around a litany of challenges--including moderating growth, persistent and high inflation, stress on balance of payments and twin deficits in the country's current account and fiscal budget--have left the central bank little room to negotiate the global slowdown. He noted that despite the depreciation of the Indian rupee by nearly 20% since last August, there has been no improvement in the country's current account deficit. He blamed the government's policy of fuel subsidies for protecting consumers from the effect of global commodity price rises. He noted despite higher prices, imports of oil into the country continue to increase due to rise in consumption, as consumers are protected from these price hikes. He added investors still should be confident of India's growth story and look at the positives including its attractive demographics, its growing middle-class and high savings rate. But he acknowledged there was a lot left to be done by various stakeholders to make the growth story happen. "India needs to grow at 10% for the next 15 years just to catch up," he said. A late pick-up in monsoon rains in August month will lead to a recovery in yields in summer-sown crops including rice and oilseeds, lessening the severity of a drought in several parts of the country following scanty rains for much of this year's June-September monsoon. Prolonged rains would also improve the prospects for winter-sown crops due to better soil moisture. An El Nino weather event, which usually disrupts rainfall, is expected to emerge at the tail-end of the monsoon in September. Farm Secretary Ashish Bahuguna late last month said the El Nino may not impact rainfall in September due to build-up of another weather phenomenon called the Indian Ocean Dipole. The monsoon rains--which make up around 70% of India's annual rainfall--are crucial to the nation's agriculture sector and broader economy. More than 60% of the country's farmland is rain-fed. The timing, distribution and quantity of rainfall are all important for crops. The four-month southwest monsoon season that starts from June accounts for almost 70% of total annual moisture that Indian soil receives in a year. Finance Minister P. Chidambaram last month said that the goods and services tax (GST) is a more effective and efficient substitute for a plethora of indirect taxes. The Finance Minister said that he is hopeful that the GST Bill would be passed before the end of the current financial year. The Finance Minister further said that though there are still some issues relating to GST and its Network (GSTN) to be resolved, yet they are not insurmountable. Union Minister of Commerce, Industry & Textiles Mr. Anand Sharma said 16 August 2012 that the government will come out with announcements pertaining to industrial environment that will address the subdued sentiment in the industry. Speaking after the fourth meeting of the Government-Industry Task Force Mr. Sharma said that there is a shared concern over the declining industrial production, particularly the manufacturing sector. Most Asian stocks rose on Monday led by mining stocks, amid speculation additional stimulus measures from the U.S. Federal Reserve will boost global demand for raw materials. Key benchmark indices in Hon Kong, Indonesia, Singapore and Taiwan rose by between 0.11% to 0.36%. Key benchmark indices in China and South Korea fell by between 0.3% to 0.55%. Japan's central bank, Bank of Japan, holds two-day policy meeting on interest rate in Japan on 18 and 19 September 2012. Singapore's exports fell more than economists estimated in August as shipments of electronics dropped and companies sold fewer goods to Europe. Non-oil domestic exports slid 10.6% from a year earlier, after a revised 5.7% increase in July, the trade promotion agency said in a statement today. Global stocks rallied on Friday after US Federal Reserve announced Thursday to buy $40 billion worth of mortgage back securities per month to keep borrowing rates low and would keep its benchmark interest rates "exceptionally low" until the middle of 2015. Concluding its two-day meeting on Thursday, the Federal Open Market Committee (FOMC) said that it will closely monitor incoming information on economic and financial developments in coming months. In particular, the FOMC also decided to keep the target range for the federal funds rate at 0 to 0.25% and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Election for a new president in the United States, the world's biggest economy, is scheduled on 6 November 2012.