1.

BETTING ON BUDGET

It should be an election budget. So, expect higher exemption limits for income tax, cuts in corporate tax
and Custom duty, selective cuts in excise duty, and big spending on welfare and social schemes in the
coming budget. Finance ministers are politicians first and economists only second or third. The next
general election is due in May 2009, so Mr Chidambaram will not be able to present a regular budget in
2009. Hence, Budget 2008 will be his last. It will come too long before the next election to really have a
significant electoral impact. Yet, it is politically necessary for him to satisfy Madam that he has done his
bit to get her re-elected.

On 29th of February ’08, the UPA government will unveil what could be its final full-fledged Union
Budget before the next general election. This also means a tough balancing act between pre-poll populist
pressures and a desire to carry forward the reform agenda by the two main architects of this politico-
economic document: Prime Minister Manmohan Singh and finance minister P Chidambaram. And they
have an almost all-new budget team to help construct a blueprint that would attempt to not just win the
hearts of the electorate, but also push growth and reforms.

Heading the team is finance secretary Duvvuri Subbarao, an economist by qualification, who has the
benefit of a previous stint in the Prime Minister’s Economic Advisory Council. Mr Subbarao is an Andhra
Pradesh cadre IAS topper of the 1972 batch. Not only was he part of the finance ministry in the early
1990s when Manmohan Singh initiated economic reforms, he also spearheaded fiscal reforms in AP as
the state’s finance secretary.

To complement him are revenue secretary PV Bhide and expenditure secretary Sanjiv Mishra, besides the
chief economic advisor in the finance ministry, Arvind Virmani (Harvard economist), and the newly-
appointed advisor to the finance minister Shubhashis Gangopadhyay (Doctorate from Cornell University),
who joined less than a month ago. Mr Mishra, incidentally, is the only old hand in the budget team, which
even has new faces at junior levels. Mr Gangopadhyay and Mr Virmani, both economists of repute, have
a particularly crucial role in the Budget exercise with the government facing the dual challenges of a
possible inflation jump and deceleration in key sectors. Nor is news on the global front encouraging, with
the threat of recession in the developed economies looming large.

The Tax Policy and Legislation Division (TPL) and Tax Research Unit (TRU) in the Central Board of
Direct Taxes and Central Board of Excise and Customs work out tax proposals. Incidentally, these
divisions also have new faces, barring TPL joint secretary Arvind Modi and TRU joint secretary R Sekar.

For the gross budgetary support (GBS), according to the convention, ministries put their demands (of fund
requirement in a fiscal) to the Planning Commission. The Commission prunes it and sends the derived
number (GBS) to the finance ministry. The finance ministry which is responsible for doing the balance act
between government’s revenues and expenditures gives its recommendations on the proposed spends. The
final decision on the GBS which in a way lays down the expenditure on various government programmes
is taken by the Prime Minister.

Budget session on February 25

The Budget Session of Parliament is likely to commence from February 25. As per the tentative schedule
presented to the Lok Sabha Speaker by the union government, Railway Minister Lalu Prasad Yadav will
present the railway Budget on February 27, followed by economic survey the next day. The union Budget
will be presented on February 29.
1.1 It’s going to be a dream budget

Four year of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising
by over 40% for two years running. This gives flexibility rarely available before. Finance minister P
Chidambaram might spread cheer all around with the Budget 2008. A hike in the exemption limit for
those under income tax net, a hike in amount of savings you can make to qualify for tax breaks, a wide
range of tax-free instruments for investments and a rejig in tax slabs are being actively considered by the
UPA government. Corporate tax payers can expect some relief in form of removal of surcharge.

This Budget of the UPA government is likely to see an estimated 17% jump in the gross budgetary
support as public expenditure. It is understood that the Prime Minister Office (PMO) has in-principle
approved the final fund allocation from the budget. The focus of the budgetary support will clearly on the
social sector. The allocation of funds assumes significance in the light of elections next year. It is
expected that certain ministries would get the lion’s share. The list includes names of:

• Agriculture and cooperation ministry,

• Ministry of health,
• Ministry of women & child welfare,
• Higher education,
• Ministry of tribal affairs,
• Ministry of urban employment & poverty alleviation.

Sectors like railways, urban infrastructure and power – which are capable to generate their own resources
– would have to bear a cut in their share to enable diversion of funds to priority areas like health,
education and rural development.

New tax regime of reporting income

Individuals will have to start reporting their income from all sources in due course, including tax-free
income. The government is vetting a proposal to shift from an exemption to a deduction-based regime for
reporting income. This means while computing the tax outgo, an individual has to include income from
all sources and then claim a deduction on tax-free income. The objective of the proposal, set to feature in
the new income-tax code, is to establish an audit trail. And help widen the assessee base as more people
will file tax returns. The proposal is also in sync with the goal of linking all transactions to PAN.

Tax on rich: Citu

Reflecting the tone of the left wishlist for the Budget, CPM’s trade union wing Citu, is toeing the familiar
‘tax on rich’ line. In finance minister P Chidambaram’s ritualistic pre-budget meeting with central trade
unions, Citu will seek an end to ‘fiscal profligacy’ of giving incentives or concessions to corporate
industrial houses, MNCs and SEZs. Citu wants the government to stop participatory notes in share market
transactions, enhance the rate of personal and corporate income tax for those in the higher income
brackets and review Double Taxation Avoidance Agreements to curb speculative profiteers evading tax
for resource mobilisation. The Left trade union reiterated the demand for raising the income tax
exemption limit to Rs two lakh per annum. Citu demanded budgetary support for revival of sick CPSUs.
Besides, it wants budgetary support for addressing the problem of sickness and crisis in traditional
industries such as jute, textile, handloom, coir, beedi, khadi and village industries.
1.2 Bigger tax breaks in direct taxes

The finance ministry, which is giving final touches to the tax proposals, is likely to raise the income tax
exemption limit from Rs 110,000 to Rs 125,000. Though, there is a strong pitch from all corners to raise
the exemption limit to Rs 150,000, the fear of a drastic erosion in the tax base may prompt the
government to follow a conservative approach. An increase of Rs 15,000 will give every tax payer a tax
break of Rs 1,500 while a rise of Rs 40,000 in the exemption limit will provide a relief of Rs 4,000.

A final call on the direct tax proposals would be taken at the highest ‘political level’ since this would be
UPA government’s last full budget. The 2009 budget will be a vote on account as a new government has
to be put in office in May 2009. A hike in the current investment limit of Rs 100,000 to Rs 150,000 is also
being looked at with a view to channelise some savings into infrastructure sector. Investments in special
infrastructure bonds and dedicated infrastructure funds could become eligible for tax exemption.

Robust direct tax collections have once again raised expectations of tax rate cuts in the coming Budget.
Exceeding indirect tax receipts for the first time, direct tax mopup looks set to cross Rs 3 lakh crore this
fiscal. The Budget estimates of an 11.8% tax (both direct and indirect) to GDP ratio is likely to be
exceeded. Finance minister P Chidambaram has the luxury to bring on these changes as direct taxes have
shown a buoyant growth of over 40% +.

The government had raised the limit by Rs 10,000 in the last budget. At present, an income slab of Rs 1.1
lakh to 1.5 lakh attracts a 10% tax rate while that of Rs 150,001 to Rs 250,000 attracts 20%. A 30% rate is
levied on income above Rs 250,001. These slabs may be pushed upwards with an income of Rs 150,001
attracting 10% and that over Rs 5 lakh attracting 30%.

The comfort provided by the robust growth in tax collections this fiscal might also prompt the
government to weigh the option of pruning corporate tax rates. India’s corporate tax rate now works out
to 33.99%, after factoring surcharge of 10% and the education cess of 3% on top of the statutory rate. One
option is to slash the statutory rate, which is now 30% to close to 26%, while retaining the surcharge and
education cess. It is clear, however, that a decision on reducing the tax rate will hinge on the elimination
of a host of exemptions which Indian companies now enjoy and acceptance by the government that
effective rate works out to just a tad over 19%, after taking into account these exemptions. Therefore, any
cut in rates would have to go hand-in-hand with the elimination of these exemptions.

Relief from FBT

There is also a view that some exemption limit in terms of turnover should be prescribed for levy of FBT.
Also, the finance minister is toying with a proposal to provide some relief to compensate FBT on Esops.
There is a strong thinking in the government that FBT on certain items like sales promotion should be
pared or done away with completely. Similarly, FBT on dealer meeting could be tweaked. Such meeting,
industry has argued, are crucial in these sectors to promote sales. The move is in sync with finance
minister P Chidambaram’s concern over slowdown in production of fast-moving consumer goods.

Tax relief for senior citizens on rental income

Budget 2008 may bring cheer to senior citizen who let out their property on rent. The government is
considering a proposal to exempt tax on rental income for senior citizens. At present, every age group
enjoys tax exemption of 30% on rental income. Experts feel the move would encourage house owners to
let out their properties, which lay vacant otherwise. According to government estimates around 16 million
houses in the country which are unnoticed can come into circulation.
1.3 Charity for a cause

Charity sees the need not the cause. However, the government now wants to see the cause before
extending tax benefits. It is examining a proposal to narrow the definition of charitable purpose to ensure
that only the trusts that carry out charitable activities are able to benefit from tax exemption. At present
the Income-Tax Act defines “charitable purpose” as relief of the poor, education, medical relief, and the
advancement of any other object of general public utility.

The move follows a recent apex court decision in the case of Gujrat Maritime Board, which ruled that the
public utility was eligible to get registered as a charitable institution. Government sources said the court
ruling had created an anomalous situation, as tax benefit was given to only those institutions, which
carried out charitable work in the nature of public goods, such as providing education or healthcare. They
pointed that the court’s decision could open a Pandora’s Box for the income tax department, with
institutions engaged in infrastructural development or any other such activity claiming tax exemption. The
finance ministry wants to prevent this happening.

1.4 Initiatives to earn carbon & tax credits

Corporates using clean technologies may be in for goods news this Budget. The government is examining
a proposal to provide tax benefits to corporates using clean technologies and generating carbon credits.
The option being at is to incentivise the use of clean technology by giving higher depreciation benefits
against expenditure incurred on such technology. Moreover, the finance ministry is expected to clarify on
the treatment of carbon credits. At present, there is no clear definition in the tax laws about treatment of
carbon credits, which are accounted for by some as capital assets and others as goods. Industry has
pitched for treating them as capital assets and exempting them from capital gains tax.

Under the Kyoto Protocol, companies in developing countries earn certified emission reduction (CER) or
a carbon credit for each tonne of carbon dioxide emission they avoid. These carbon credits can be sold to
companies or governments in developed countries which are under mandatory obligation to reduce
carbon gas emission. They can then offset their own targets against the CERs they purchase from
companies in developing countries under the UN’s clean development mechanism, or CDM. CER is a
growing area which is generating huge interest in the country. According to industry estimates the
industry has already invested close to Rs 60,000 crore into projects that will generate more than four
crore carbon credits by the end of 2012.

1.5 Pass-through status for VC funds in farm sector

VC funds enjoyed the pass-through benefit on their investment across all sectors till the last budget. The
pass-through status allows earnings from VC funds to be exempted from taxes. However, the trustees who
form the fund pay a tax on the income earned through the fund. Last year finance minister decided to do
away with this exemption except for a few sectors like biotechnology; information technology relating to
hardware and software development; nanotechnology; seed research and development; R&D of new
chemical entities; dairy industry; poultry industry; investment in hotel-cum-convention centres; and
production of biofuels. The government consequently restored the benefit for VC funds which invested in
infrastructure sectors enjoying a tax holiday under section 80(I) (A). These include roads, highway
projects, water supply projects, irrigation projects, solid waste management systems, ports and airports.

However cold chains covered under a separate section 80 (I) (B) of the Act, did not qualify for this
exemption. The finance ministry is considering restoring the pass-through status for venture capital funds
investing in the food processing industry and infrastructure facilities such as cold chains and warehouses,
to give a leg-up to the sector. Development of the farm sector weighs heavy on the UPA government
agenda. Building up food processing and cold chain infrastructure holds the key to development of farm
sector in the country. According to industry estimates, the lack of cold chains in the country leads to
wastage of about 40% of the farm produce, causing a loss of about Rs 75,000 crore annually.

1.6 Tax sops for STPI, EOU beyond FY09

In an effort to persuade the finance ministry not to discontinue tax concessions given to software &
technology parks of India (STPI) and 100% export-oriented units (EOUs) in 2009, the commerce ministry
has proposed that Budget 2008-09 should make provisions for extending the sunset clause on the
concessions beyond the stipulated date. STPIs and EOUs, which have been enjoying tax exemption for
over 15 years, are set to lose it in April 2009. The ministry argued, “STPIs have helped a number of small
IT companies in establishing flourishing businesses. The need to continue with the tax sops has become
more intense in the light of the appreciating rupee.”

Small and medium enterprises (SME) in the software export business may continue to enjoy income-tax
benefits for some more time. The Prime Minister’s Office (PMO) is expected to pitch for a special
dispensation to small exporters when the tax breaks available through the Software Technology Parks of
India (STPI) scheme lapse in 2009. An indication to this effect has been given to the information
technology ministry which has been insisting that sunset clause for STPI tax sops should be scrapped. The
concession to SME software exports is to compensate them for rupee appreciation.

1.7 TCS net in defence contracts

The government is toying with a proposal to bring procurement contracts of defence ministry under TCS
(Tax collection at source) net this budget. At present, contractual professional, technical, and other
categories are under the TDS net. TCS is applicable on paper, timber, tobacco etc.

1.8 Customs ceiling of 7.5%

Peak Custom duty on non-agricultural products is likely to be reduced to 7.5% from 10% in Budget 2008.
This is in line with the country’s voluntary commitment to cut duties to the Asian levels, 4.5-5.5% by
2010. This would bring down duties on several items like airconditioners, refrigerators, washing
machines, picture tubes, specified plastics and some other capital goods. If the finance minister decides to
pare peak duties in 2008-09, it would be the fourth consecutive year of the duty cuts. There has been a
continuous annual reduction in Custom duties since 2005-06 when duties were reduced from 20% to 15%.
In the current fiscal, peak duties were bought down from 12.5% to 10% while in the year before; the
duties were reduced from 15 to 12.5%. In the last decade, the government has reduced duties by 30% with
peak Custom duty standing at a high of 40% in 1996-97. The year before, it was higher at 50%.

1.9 Lighter excise load for power companies

In what may be a power booster for companies looking to set up mega power projects, the government
may reduce the excise duty on power equipment and other inputs from 16% to 8%. The lower duty is
intended to translate into lower operational cost for companies.
The lower excise duty for power sector has been considered as electricity cannot have cenvat/modvat on
the finished product unlike with other product categories. The Budget is expected to address this disparity
by reducing excise duty as is being done with other products that cannot have modvat. The proposal also
suggests reducing countervailing duty (CVD) on imports of equipments required for power projects to 8%
level in consonance with the lower excise duty. The move will be a big boon to the power sector as it will
help companies to realise the government’s desire of providing cheap and reliable power to the
consumers. It will also help in faster completion of projects and bring much needed interest of the private
sector into power sector.

1.10 Landholding tax

The government feels that land hoarding by developers should be immediately controlled as it is a device
for gaining market power. The resultant increase in land prices makes affordable housing difficult for the
common man. Hoarding hurts an economy by creating artificial scarcities. Hoarding of unrealizable and
developable lands must be immediately curbed through effective and deterrent taxation mechanism.

Reward for green buildings

Real estate developers constructing energy efficient (green) buildings may get tax breaks in the coming
Budget. The proposal has been mooted by the ministry for environment and forests, urban development
and power and now is under consideration. Energy Conservation Building Code is in process of being
implemented for new commercial, institutional and large-scale residential buildings.

Reward for energy-efficient durables

The budget is likely to make energy-efficient consumer durables cheaper. The finance ministry is
considering reduction in excise duty on air-conditioner and refrigerators from the current levy of 16%
(Cenvat), depending on the level of energy efficiency achieved by the appliances. Gradation will be based
on energy efficiency star rating provided by the Bureau of Energy Efficiency (BEE) for various electric
appliances. Apart from lower excise duty, energy efficiency may also be rewarded in the form of
increased abatement allowance on retail prices. This would further reduce the impact of the duty.

The new proposal has already been endorsed by a sub-committee on financing issues for the power sector
headed by deputy chairman Planning Commission Montek Singh Ahluwalia. The Prime Minster Office
(PMO) is also keen to provide incentive for energy efficiency. The matter has already been discussed with
the finance ministry to their satisfaction.

1.11 Essential medicines set to get cheap

Prices of over 7,000 pharmaceutical brands - classified as essential medicines – are likely to see a sharp
fall after this budget. These medicines belong to 27 different therapeutic classes. The finance ministry is
considering removal of the 16% excise duty on these medicines. Excise is imposed on 57.5% of the
maximum retail price (MRP) printed on these medicine packs. That would mean a reduction of around
10% on the retail price. There are 354 medicines that are classified as ‘essential’ as per health ministry’s
list, which translates to over 7,000 formulation packs of specified strengths or brands in the market. Of
the 354, about 40 molecules are price-controlled by the government, the prices of which may be revised
by National Pharmaceutical Pricing Authority (NPPA) once the government decides to remove the duty.
1.12 Commodity Futures

Gains and losses arising out of commodity futures trading are proposed to be merged with normal
business income. Thos is currently not permitted, though income/losses from trading in stock derivatives
are treated as normal business income. The food & consumer affairs ministry has listed this and 17 other
demands to the PMO. The finance ministry is now looking into the demands.

To promote trading of stock derivatives, an additional proviso was inserted under Section 43 clause (5) of
the Income-tax Act by Finance Act, 2005. It provided that eligible transactions in derivatives on a
recognised exchange would not be deemed speculative transactions. It is entirely logical that such
treatment should be extended to commodity exchanges as well. At present, the onus is on the assessee to
prove that no ‘speculative hedging’ has been resorted to on the commodity bourses. On the ground,
though, the discretion on deciding whether the proof is ‘adequate’ lies with I-T department. Consequently,
there are several legal disputes over whether commex trades represent speculation or not. The solution is
to amend the tax code.

1.13 SSI Products

The stage is set for further liberalisation of the small-scale sector. Small units are being subjected to more
competition with the number of items reserved for exclusive manufacture by them being pruned to 66
from the current level of 114. The number of reserved items stood at 800 till 1997.

The small-scale industries department has proposed the dereservation of stationary goods, electrical
appliances, mechanical equipment and organic chemical products. The total number of items being
knocked off the reserved list is about 50. The process is a part of the policy of progressive dereservation
of the sector to bring in technology and quality to the sector. Once the decision gets notified, large players
can manufacture these items.
2.1 PRIMARY MARKET

For investors who tasted blood with the listing of the Power Finance Corporation (February 2007) and
Power Grid Corporation (October 2007), the expectations from a wave of power stocks, and particularly
the Reliance Power IPO run very high. Power Finance Corporation has risen more than 210% from its
issue price and Power Grid Corporation about 175%. The two stocks had listed on NSE at a premium of
32% and 73%, respectively.

1. Investor frenzy for initial public offer

A company comparable with Reliance Power, NTPC, which listed in November 2004 at a premium of
42% (NSE), has risen about 360%. Thus investor frenzy for the Reliance Power IPO is to be expected,
despite several analysts writing off the issue as very expensive; book value per share at more than seven
times compared to 4.6 times for NTPC.

2. Brokerage funneling funds for IPOs via NCDs

The pipeline for the IPOs and other public offers is full from February to mid-March. So, brokerage firms
have devised a foolproof mechanism to raise funds. Such firms then lend the funds to retail and high net
worth investors. Brokerages are raising money through issuance of non-convertibles debentures (NCDs).

Mutual funds are the largest subscribers to the NCDs as they pocket distinctly higher (11-14%) that what
they normally earn by investing in commercial paper or certificates of deposits (7.5-8%). This implies a
clear arbitrage of at least 350 basis points. Earning an arbitrage of over 350 bps, that too for investing in
papers with a rating similar to alternatives like CPs and CDs is proving to be lucrative.

3. Pull-down effect

The Reliance Power IPO opened on Tuesday, 15th of January ’08 may have generated a tremendous
response but also had a pull-down effect on the stock markets as investors liquidated holdings to
participate in the issue, which led to a fall in BSE’s sensitive index. Market players said corporate as well
as retail investors, in their rush to invest in the IPO, pressed the sale button across the board, leading to a
liquidity drain from the secondary market.

Power on, India on, goes the campaign slogan for Reliance Power. As India’s largest IPO received an
overwhelming response on day one of subscription, it seemed to be a case of ‘Reliance Power On, Dalal
Street Off’. The 22.85-crore share mega issue, looking to raise Rs 10,000 crore, was fully subscribed
within a minute of the start of bidding, making you wonder if there were any early bird prizes on offer.
The electrifying reception to the IPO plunged the rest of Dalal Street into darkness. It was almost as if
every investor was liquidating a part of his profitable trades to deploy the proceeds into IPO.
2.2 SECONDARY MARKET
Blank-point rally

The crossing of a 1000-point milestone on the Sensex has long lost its novelty value. Diehard optimists
may still be talking about how soon the index will hit the 25,000 mark, but euphoria is slowly giving way
to caution. There are reasons: It was a rally with a difference with local players and retail investors
pushing up the market as FIIs, shaken by PN clampdown, were sellers in the 1000-point run.

1. Home strikes lift Sensex to 21,000 points

Make no mistake. Investors will have to be prepared to sweat it out for incremental returns hereon.
Already, the Sensex has taken a little over two months to cover the 1000-point journey from 20,000 to
21,000, perhaps an indication that the process of consolidation may have already gotten underway.

And even as marauding bulls lifted the 30-share Sensex beyond the 21,000 mark on Tuesday (08/01/08),
the broader market was clearly under pressure. Bears reigned supreme in the midcap and small cap arena,
as evident from the near 3% decline in BSE Midcap and Smallcap indices. Trading in roughly 800 stocks
on the BSE was frozen after there were only sellers. Of these, 622 stocks were from the B1, B2 and T-
groups of BSE. The 30-share Sensex scaled a new high of 21,073.53 intra-days, before settling at
20,855.12, a gain of 42.47 points over the previous close. The 50-share Nifty touched a peak of 6,357.10
before finishing at 6287.85, up 8.75 points over the previous close.

Brokers expect another round of profit taking in secondline shares as investors try to cash in on some of
their paper profits before it is too late. They said a correction was inevitable as a majority of stocks had
run up too fast and were quoting way beyond their realistic valuations. Key risks to the market will likely
be any excesses from over-confidence.

1.1 FIIs cashing out of A-listed companies

Foreign institutional investors – the main driver of the raging bull-run at the bourses – seem to be of the
view that it might be a good time to take some money off the table. Holdings of FIIs in many large-sized
companies have fallen substantially in Q3, as can be seen from the early batch of shareholding
information filed with the stock exchanges. FIIs have pruned their stake in 28 out of the total of 116
companies. These are mostly A-group companies in which FIIs had taken large exposure. Indian Hotels,
ACC, ONGC, HDFC, and banks like Axis Banks and Karnataka Banks are few notable examples where
FIIs’ holding has come down between 0.2% and 1.8%. The reduction in FII exposure to these companies
was despite the sustained rally in the broader market.

1.2 Core growth plunges to 5.3% in November ‘07

The decline in growth rate of crude petroleum, petroleum refinery products, cement and carbon steel
pulled down the growth of the six infrastructure industries to 5.3% in November 2007, compared to 9.6%
in the corresponding period of the previous year. According to commerce ministry’s monthly statement:

• Crude oil production rose by 0.3% in November compared to a growth rate of 9.8% in November ‘06;
• Petroleum refinery production grew by 5.2% compared to 16.4% last year;
• Electricity generation grew by 5.8% against 8.8%;
• Cement production registered a growth of 4.5% compared to 11.8%;
• Finished steel output grew by 5.8% compared to 9.3%; and
• Coal production expanded by 7.7% against 4.9% in November 2006.
For the April-November period of the current fiscal, the growth for the key sector – steel, cement, power,
crude oil and refinery – dropped to 6% from 8.9% in the year-ago period. Experts pointed out that since
the infrastructure sector was showing robust growth, the deceleration in the core sector was puzzling.
Further since the six core industries have a combined weight of 26.7% in the Index of Industrial
Production, it would have a negative impact on IIP figures.

1.3 Industrial growth plunges to 5.3% in November

Commerce & industry minister Kamal Nath said the sharp drop in index of industrial production (IIP)
growth rate to 5.3% in November 2007 from 15.8% in November 2006 indicate a deceleration in
industrial growth, but things will improve. However, the sharp deceleration in the growth rate of IIP is a
signal for the government to take a re-look at consumer spending and loosen money supply a bit, the
minister said, indication the need for a possible reduction in interest rates. He stressed on the need to
guard against inflation and said the calibration has to be done carefully. “It is tight-rope walking.”

The massive fall in the index of industrial production during November is cause of some concern though
it’s probably not yet time to press the panic button. Part of this is undoubtedly due the base effect and also
because Diwali fell in November ’07, leading to larger number of holidays. In 2006 Diwali was in
October. The elimination of the Diwali effect is likely to see growth moving back to the 9% average for
fiscal 07-08. Capital goods production grew 24.5% indicating that India Inc is still investing. Industrial
growth will be a couple of percentage points lower compared to 11.5% in 2006-07. One reason for the
slowdown is that many sectors are operating close to capacity. This is true for sectors such as cement and
steel. Massive expansion plans are in the works, but new capacity will take time to come.

Weekly review 04/01/08 11/01/08

Sensex 20,686.89 20,827.45
Nifty 6274.30 6,200.10

2. Sensex slips below 20K

The Bombay Stock Exchange benchmark Sensex nosedived over 380 points on 16th of January ’08 to
close at below 20K level on heavy selling by foreign funds on recession worries on Wall Street, amid
investors liquidating their holdings in secondary markets to invest in mega issue of Reliance Power. The
30-share BSE barometer, which had lost nearly 477 points on 15th of January, fell further by 382.98 points
to end at 19,868.11.

2.1 Bad news from two big global banks

When two of the most venerated financial institutions in the world – Citigroup and Merrill Lynch –
announce big losses in the space of just three days, it is but natural that global markets should wince in
unison. In both cases more worrisome than losses per se is the fear of what might yet unfold. The only
good thing is that there seems to be no dearth of white knights willing to rush of the rescue of troubled
institutions. The US government also seems to be seriously toying with the idea of a fiscal stimulus
package. But whether either or both will stave off the impending crisis remains to be seen.
3. Sensex slumps to 19K

The stock market went into a tailspin on Friday dated 18th of January ’08 with benchmark Sensex falling
by 3.49% on across-the- board selling by both domestic as well as foreign investors. The 30-share BSE
barometer ended the day a notch above the psychological 19,000 level at 19,013.70, a fall of 687.12
points from previous close. The Sensex has fallen by 1,814 points or 8.7% during the third week.

3.1 Markets post steepest weekly losses

After a smart rally in the two initial weeks of the new calendar year, the stock markets came under a bear
shadow, undergoing the biggest weekly correction due to various negative factors. Hedge funds booked
profits to cover up their mortgage-related losses in the US markets and elsewhere. In addition FIIs, which
are supposed to allocate funds for the new calendar year, pulled out heavily in the week. All emerging
markets witnessed heavy sell-off triggered by fears about a likely recession in the US, the world’s largest
economy. Nearly Rs 5 trillion investor wealth was wiped out in the five-days of bear phase during the
third week. The only good news is that the Bush administration is preparing an economic-stimulus
proposal to avert any US recession.

Weekly review 04/01/08 11/01/08 18/01/08

Sensex 20,686.89 20,827.45 19,013.70
Nifty 6274.30 6,200.10 5,705.30

4. Sensex slips below 18K

Monday, 21st January ’08 – A story of bear hugs – The steepest single day fall of Sensex and Nifty and
there’s no telling where the mayhem will end. No one’s sure whether the markets bottomed out? Or is
there more pain left?

4.1 Sensex sheds 1408

Stock exchanges have not seen anything like this in a long time. The great growth story, hyped valuations
and the IPO euphoria were forgotten in a flesh as investors realised their paper fortunes have been wiped
out, brokers found they have no margins to execute orders and smaller players were faced with a grim
prospects of shutting shop. An investor sitting on a profit of Rs 1 crore last week found that he owned the
broker Rs 10 lakh on Monday morning. As the Sensex suffered the biggest intra-day fall of 2,062 points,
many investors found to their horror that the broker, anxious to save his own shirt, has already sold off the
shares they had pledged.

It’s uppermost in everybody’s minds given the ferocity of the crash, which will go down as another
“Black Monday”. Nearly 95% of all traded stocks ended lower, with trading in 1,323 stocks frozen at the
lower end of the circuit filter for want of buyers. Bank of India, the clearing bank, gave Rs 500 crore of
overdrafts to brokers - to help them meet margins with bourses - as several trading terminals were frozen.
Banks and corporates were also unwinding their proprietary positions, as Asian markets fell 3 - 6%.

But the panic isn’t over. Fears are that when the pay-in takes place at 11.30am on Tuesday, many
investors will find it difficult to hand over the cheques for stocks they bought on Friday. If the market
continues to slide, then many investors will not get a chance to exit. And, if brokers default on payment,
then exchanges will be forced to sell the shares, which have been kept as margin.
The Sensex plunged to nearly four-month low of 16,951.50 intraday, before settling at 17,605.35 down
1,408.35 or 8.5% over its previous close of 19,013.70. The 50–share Nifty collapsed below the
psychological 5000-mark intraday – hitting a low of 4,977.10 before inching up to 5,208.80 at close,
down 496.50 points or nearly 9% over the previous close. At one stage, indices were down more than
10% and looked certain to trigger the lower end of the intraday circuit filter, reviving memories of May
17, 2004, and May 18, 2006.

Daily review 18/01/08 21/01/08

Sensex 19,013.70 17,605.35
Nifty 5,705.30 5,208.80

5. Sensex slips below 17K

Tuesday, 22nd January ’08 – No where to hide – Monday mayhem on Dalal Street spilled over to Tuesday;
As markets across the world melted and margin pressures at home played havoc, Sensex and Nifty sank
some more.

5.1 Sensex sheds 875 points more

The mayhem on Dalal Street continued on Tuesday with Sensex recording its biggest intraday fall of
2,273.93 points, but the government’s assurance about the health of the economy helped the benchmark
partially recover the losses. The 30-share BSE index hit the lower circuit of 10% immediately after
opening in the morning, forcing suspension of trade for an hour. The index plunged to the low of
15,332.42 in late morning trade and ended the day at 16,729.94, a net fall of 875.41 points or 4.97% from
Monday’s close. Similarly, the broad-based S&P CNX Nifty of the NSE recovered from its intraday low
of 4,448.50 and closed at 4,899.30 from the last close of 5,208.80, a loss of 399.30 points or 5.94%.

Market players attributed the abnormal behaviour to pressure from marginal calls, which was the main
factor for the huge fall on Monday too, rather than to development overseas. On all past occasions of big
stocks crash, a major culprit blamed to have triggered the fall is margin calls from market intermediaries
like brokers or banks. In such situation, brokers call their clients in case shares bought from borrowed
money fall beyond a certain point. Clients must deposit additional money or sell some of their shares,
which intensify the overall selling pressure.

Daily review 18/01/08 21/01/08 22/01/08

Sensex 19,013.70 17,605.35 16,729.94
Nifty 5,705.30 5,208.80 4,899.30

5.2 Left points finger at FIIs, PNs

The Left on Tuesday slammed the Manmohan Singh government for the turbulence in the stock market
with the CPI blaming the government for the “hyper volatility”. The finance minister should bear the
moral responsibility for the situation. The volatility in the stock market was entirely due to the “unusual
encouragement” that government has extended to FIIs for “inflating its foreign exchange reserves”.

The extraordinary phenomenon reminds about Harshad Mehta’s gamble when Mr Manmohan Singh was
the finance minister. The government should refrain from asking the LIC and UTI to do a salvage
operation. It is a market phenomenon and should be left to market forces. Only malpractices must be
identified for the benefit of small investors.
6. Sensex soared 864 points

Wednesday, 23rd January ’08 – The bullback begins

Stock prices rebounded – almost with a vengeance – on Wednesday, but that seems to have done little to
restore confidence among the badly shaken broking community. Brokers turned many retail investors -
who wanted to take advantage of the recent crash to add shares to their portfolio - away as they did not
have the required credit balance in their account. Just a week ago, the same brokers had relaxed limits
generously to enable their clients’ load up on shares.

The 30-share Sensex soared 864.13 points, or a little over 5%, to close at 17,594.07, nearly erasing all the
previous session’s losses. Retail investors, who were being wooed by brokerages till some days back,
suddenly found out that they were no longer as welcome. Only clients who were able to pay through high-
value cheques or demand drafts were being entertained. Brokers said this was necessary to prevent any
default in the system. They have suddenly become conscious of the creditworthiness of their clients.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07
Nifty 5,705.30 5,208.80 4,899.30 5,203.40

6.1 Fed cuts rate 0.75% after emergency meeting

The US central bank slashed interest rates by a dramatic three quarters of a point to 3.5% on Tuesday in
an effort to prevent the US economy falling into recession. Analyst feel after further heavy losses on
Asian bourses on Tuesday, taking up from where they left off Monday European investors sold off
sharply in early trade, anticipating a bad day on Wall Street.

A public holiday on Monday meant the US markets were spared the rout, which hit Asia and Europe, but
indications were that New York would come under pressure on Tuesday until the Fed dramatically
intervened. “In the end the Fed simply couldn’t wait another week until its next scheduled (rate) meeting.
It chose to act, cutting the fed funds rate by an almost unprecedented 75 basis points to 3.5% in an attempt
to shore up confidence before US stock markets open.

7. Sensex sheds 372 points

Thursday, 24th January ’08 – Sensex slips in choppy trade

The stock market turned weak on Thursday with the benchmark Sensex losing 372 points here after
global concerns worsened amid France’s second largest lender Societe General disclosing one of the
biggest ever bank frauds worth over $ 7 billion. The selling pressure began on Thursday on the domestic
bourses on concerns that worries in the financial markets would only get bigger with SocGen disclosing
one of the biggest ever bank frauds in the world.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08 24/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07 17,221.74
Nifty 5,705.30 5,208.80 4,899.30 5,203.40 5,033.45
7.1 Societe Generale

France’s second largest lender Societe Generale disclosed one of the biggest ever bank frauds worth over
$ 7 billion. SocGen is a major FII investing in India. The speculations are that this development would
affect investment from FIIs as well, due to its major position in markets across the world. Major financial
institutions like Citigroup and Merrill Lynch have already announced huge subprime losses.

SocGen said in a statement on Thursday that it discovered the fraud last week-end in a sub-section of its
market activities, where a rogue trader at futures desk took “massive fraudulent directional positions in
2007 and 2008 beyond his limited authority”. SocGen said the trader, used his knowledge of bank’s
security systems to hide his position through a number of fictitious transactions, but has now confessed to
the fraud. The French bank has dismissed the trader. The French bank said it would raise $ 8.1 billion in
new capital due to losses from fraudulent trading by one of its traders on the bank’s account as well as for
the write-down worth close to three billion dollars related to the US sub-prime crisis.

8. Sensex ends up record 1,140 points

Friday, 25th January ’08 – Bush Push

The stock market on Friday bounched back by 1,140 points, the biggest ever single day gain, buoyed by
several positive developments, including release of solid US employment data on Thursday and the Bush
administration’s $ 150-billion fiscal package leading to a sharp bounce in world markets. The rally was
also credited to firm global cues as well as Prime Minister Manmohan Singh’s statement that India’s
economic foundation was strong enough to sustain 9-9.5% growth despite international situation.
Analysts, however, expect continued volatility until the market bottoms out amid lingering fears of
another majors slide in the near future.

Starting on a strong footing, the Bombay Stock Exchange 30-share index rallied smartly throughout and
ended the day at 18,361.66, a gain of 1,139.92 points, or 6.62% from its previous close of 17,221.74. The
broader S&P CNX Nifty of the National Stock Exchange too posted a record single-session rise of 349.90
points, or 6.95%, to close at 5,383.35 from 5,033.45 previously. Indications that the government would
initiate monetary and fiscal measures if the current global financial turmoil threatens to dampen domestic
economic growth also bolstered market sentiment.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08 24/01/08 25/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07 17,221.74 18,361.66
Nifty 5,705.30 5,208.80 4,899.30 5,203.40 5,033.45 5,383.35

8.1 US economy still strong & open

US secretary of state Condoleezza Rice sought to soothe investor fears about the US economy, saying it
was resilient and sound and that Washington remained open to trade and investment. Rice urged business
leaders to have confidence in the US economy. The US economy is resilient. Its structure is sound and its
long-term economic fundamentals are healthy. The US continues to welcome foreign investment and free
trade. US president George W Bush had announced an outline of a ‘meaningful’ fiscal growth package
that boosted consumer spending and would support business investment this year.
9. Sensex sheds 209 points

Monday, 28th January ’08 – Japan may be amid a recession

A bad news a day keeps buyers away. That’s what global equity markets have boiled down to. A
Goldman Sachs report saying Japan may be amid a recession further rattled investors, already fretting
about an impending global slowdown. But Indian shares were relatively less hurt on Monday as a fresh
selling bout wiped 3-7% off markets in Hong Kong, South Korea, Singapore, Japan, Singapore and
China. Monday’s weakness – coming after last Friday’s spectacular rally – highlights the fragile
sentiment in world markets as investors remain queasy about a US recession and further losses to
companies arising from subprime debt woes.

Daily review 25/01/08 28/01/08

Sensex 18,361.66 (208.88)
Nifty 5,383.35 (109.25)

10. Sensex sheds 61 points

Tuesday, 29th January ’08 – RBI policy rates unchanged

The US and Indian situations are entirely different. The US is on the brink of a recession, if not already in
the midst of one. The Indian economy, in contrast, is likely to grow at close to 9% this year and possibly
at about 8.5% in the next fiscal. That’s hardly the kind of ‘slowdown’ that warrants an easing of monetary
policy. And most important of all, global inflationary pressures have re-emerged; indications of upside
inflationary risk are ‘getting stronger.’

Then monetary policy formulation is really all about weighing one (growth) against the other (inflationary
expectations), and taking a call. The RBI should consider cutting rates if there is a sharp slowdown in
industrial growth. The international situation following the subprime meltdown is still too uncertain; there
is no knowing for sure whether, and to what extent, large-scale dollar inflows will resume. For the
moment, then, it makes more sense to wait and watch. Well, the RBI has done just that.

Daily review 25/01/08 28/01/08 29/01/08

Sensex 18,361.66 ( 208.88) (60.84)
Nifty 5,383.35 ( 109.25) (6.70)

11. Sensex sheds 333 points

Wednesday, 30th January ’08 – Spate of bad news

A month is a long time in finance markets. Not long back, proponents of the decoupling theory were of
the view that Indian markets would continue to outperform on the back of robust earnings and domestic
liquidity. Both assumptions don’t seem to hold for now. Decent earnings from Indian companies have
been overwhelmed by the flow of bad news from the US and other parts of the world. Markets across
Asia remained in a bear grip with South Korean and Hong Kong shares falling nearly 3%.
Indian markets cannot survive and move ahead in valuation in isolation. If global markets correct, it will
reflect in our markets with varying proportion. However, we will be the first to bounce back as global
foreign markets recover. But the flow of bad news in world markets is showing no signs of abating. The
US GDP grew 0.6% in the October-December quarter, lower than most estimates. And UBS AG,
Europe’s largest bank by assets, reported a record loss of $ 11.4 billion for the fourth quarter after raising
writedowns on assets infected by US subprime mortgages to $ 14 billion.

Daily review 25/01/08 28/01/08 29/01/08 30/01/08

Sensex 18,361.66 ( 208.88) (60.84) (333.30)
Nifty 5,383.35 ( 109.25) (6.70) (113.20)

12. Sensex sheds 110 points

Thursday, 31st January ’08 – Fed rate cut by 50 basis point

The lukewarm global response to cut in fed rate by the US Federal Reserve is a telling commentary on
what can happen when central banks allow themselves to be seemingly led by market. Fed chairman, Ben
Bernanke, who is less than two years into his job, faces perhaps the toughest challenge in his career.
Textbook economics says he should refuse to ease the throttle and teach markets and consumers a lesson.
After all, isn’t their over-spending that got them here in the first place? But real life is different. Right
now it is more important to save the US economy from going into a recession and dragging the rest of the
world along with it. Tightening can come later. Once the economy is back on its feet and growth begins to
look up, then the Fed can tighten the screws.

Daily review 25/01/08 28/01/08 28/01/08 30/01/08 31/01/08

Sensex 18,361.66 ( 208.88) (60.84) (333.30) (109.93)
Nifty 5,383.35 ( 109.25) (6.70) (113.20) (30.15)

13. Sensex up 594 points

Friday, 1st February ’08 – Bulls look to fight blues - Bulls bought heavily into beaten-down IT and
automobile shares in a desperate attempt to bolster overall sentiments.

There was a glimmer of hope on stock exchanges on Friday as major indices snapped a four-days losing
streak, rising around 3% over the previous close. The 30-share Sensex ended the day at 18,242.58, up
593.87 points over the previous close. A dramatic recovery considering that the bellwether was down 100
points at one stage during the day. The 50-share Nifty gained 179.80 points to close at 5317.25.

While the main indices surged, the rally lacked both depth and breadth, exposing the nervous mood
among investors. The pointer was the slackness in the BSE Midcap and BSE Smallcap indices, with both
of them closing marginally lower. Brokers said trading terminals at many firm are still inactive as margin
outstandings have not been cleared. Market analysts feel, fundamentally, we are on a sound footing; the
market is only going through a consolidation phase; once sentiments in world markets improves, India
will recover at a faster pace. The market may enter into a pre-budget rally.

Daily review 25/01/08 28/01/08 29/01/08 30/01/08 31/01/08 01/02/08

Sensex 18,361.66 ( 208.88) (60.84) (333.30) (109.93) 593.87
Nifty 5,383.35 ( 109.25) (6.70) (113.20) (30.15) 179.80
The bourses remained in red for third straight week as the RBI disappointed investors who seemed
confused by continued high level of volatility in the past couple of weeks. US Fed had slashed key rates
by 75 basis points on January 22 followed by a 50 basis point cut on January 30. The move, however, did
not have any major impact on the market in the light of the RBI’s decision to keep all key rates steady in
its quarterly review on monetary policy announced on January 29.

31/08/07 (Friday) – 15,318.60

28/09/07 (Friday) – 17,291.10 > monthly gains: 1973.20
26/10/07 (Friday) – 19,243.17 > monthly gains: 1952.07
30/11/07 (Friday) – 19,363.19 > monthly gains: 120.02
28/12/07 (Friday) – 20,206.95 > monthly gains: 843.76
01/02/08 (Friday) – 18,242.58 < monthly loss: (1,964.37)

14. Brokerage facing big NPA crisis

At the beginning of the year 2008, retail brokerage were chasing customers with all kinds of offers, in a
bid to goad them to churn their portfolios more actively. And after the sensational fall in stock prices,
brokers are running after their clients. They are armed with legal notices to recover their dues, known in
broking parlance as uncovered debits. The term is used to denote outstanding on which the brokers do not
have any collateral that they can seize or liquidate to recover the dues from clients.

These disputes could force many high net worth individuals (HNIs) to shift loyalties. Clients who have
defaulted at one place will go to another broker, and chances are that they will be greeted with open arms
there. Many clients – mostly HNIs – are refusing to pay up saying their positions were squared up even
though they had agreed to replenish the margin money by the end of the day.

Worst hit were investors with exposure to the derivatives segments, where prices of stock futures fell as
high as 50% in two sessions. Trading terminals at many brokerages were shut as the firms were unable to
meet margin requirements to exchanges, even after having liquidated a sizeable chunk of their client’s
outstanding positions. As a result many clients were unable to trade when the markets rebounded. These
clients are citing this as a reason to not pay up their obligations, as they claim to have been denied a
chance to recover some of their losses.

14.1 Market meltdown may dash taxpayers’ hopes

If the stock market keeps low for sometime, the total tax collection in Jan-Mar ‘08 could be hit hard; poor tax
collection may lead to no relief to tax payers during Budget; while a bull market encourages people to pay
more tax, a bearish market may impact total tax collection.

The recent market meltdown is widening its net now. The bear phase on stock markets may lead to a
possible slowdown in tax collection between January 1 and February 15, 2008, which, in turn, may dash
tax relief hopes of millions of payers during the coming Budget. In fact, if the stock market keeps low for
some more time, the total tax collection during January-March 2008 could be hit hard.

R Prasad, chairman, Central Board of Direct Taxes said: “I won’t be able to comment anything on the
Budget. But yes, a bull market always encourages people to pay more tax. That’s a global phenomenon.
And by that logic, a bear market should impact the total tax collection. But we have not analysed so far
whether we have been hit by current market situation or not.”
2.3 INDIA
Agriculture need more support from Budget: Sharad Pawar

For the first time this year, farm growth is close to 4%. Breaking through stagnation, wheat production
has gone up to 75 million tonne from 65 million tonne earlier. There has also been substantial
improvement in the production of other crops such as sugarcane and cotton. But even then, high-priced
imports of wheat had to be made to boost our buffer stocks for emergencies. That does not mean there is
not enough wheat to meet domestic demand. Over 60% of the people buy wheat from the open market,
and if the FCI starts buying from the open market, we would distort domestic price badly. Today, there is
no shortage of reasonably priced wheat supply to consumers.

The domestic demand is going up phenomenally because of the 8-9% growth-driven changing food habits
and programmes like the NREGP that give more purchasing power to rural India. We have to work really
hard to make the National Food Security Mission (NFSM) successful to increase rice and pulses
production, too. Strengthening key farm inputs is imperative if we have to once again become self-
sufficient in food. We have big expectations from the Budget on increased investment in irrigation. We
have to provide more funds, as 40% of agriculture depends on irrigation and there is a direct correlation
between irrigation facilities and reduction of hunger and poverty in developed countries. To increase
rainfed area output, we need huge investment in the Budget and beyond.

1. Edible oil

Globally, oilseeds are short on output and are also being diverted to biofuels. In the last two years, we
have achieved record area coverage. But in the Budget, we need to incentivise new higher yield varieties
to reduce import dependency.

2. Land holdings

About 82% agricultural land is small and marginal holdings, and 60% are rainfed farm land. About 62%
of the population is still dependent on agriculture for a living. Unless we relieve pressure on land, we
won’t succeed in increasing production. Non-agriculture income is growing gradually, and that is a good
sign because only that can free large tracts of farm lands and allow the private sector to be incentivised
toward making substantial investments in agriculture.

3. Quality seed

Quality seed is another key input and poor SRR for key crops is a big worry. We need to incentivised
private and public sectors in research. Also, seedling transplants should get a big boost in the Budget in
the form of concessions and tax incentives to greenhouses and nurseries. It saves the farmer two months
of uncertainties and free land for planting other crops.

4. Farm credit

Farmer lobbies have asked for a cut in interest rate from 7% to 4%, but some states underwrite that
further. I would personally prefer inclusion of optimum farmers in the formal credit network. We have to
take conscious decision that will improve the situation, but without disincentivising those that are making
regular re-payments. The Budget has to spell out a new credit direction that will increase farm credit
substantially. Not just production loans, there is urgent need to make a distinction between investment and
consumption credit for the farmer. We have to resolve this definitely.
5. Insurance

The farm insurance issue has not yet been resolved although there is a lot of scope for expansion and new
directions. We need to make the village as the base assessment unit. We have sent a proposal to the
finance ministry on country-wide weather-based insurance coverage, but I don’t think it is coming
through this time.

6. Imperative farm investment

Both contract farming and APMC Act changes are not happening fast enough. I am finding it difficult to
break through the conventional farm sector mindset. But, 18 states and some UTs have begun
implementing the amendments. For the first time, farmers in states such as Punjab and Haryana who
could sell only to the regulated Mandi or the FCI are able to sell directly at their villages to buyers. Both
are happy. The farmer saves on transport costs and the buyer saves on Mandi taxes. But there is a lot to be
done on increasing market opportunities for the farmer, as the producer price reflects the international
price. We have started the process of making warehouse receipts negotiation instruments. That will mean
the producer and not the trader alone; will get a better price for produce.

7. Sops for private sector entry

Harvest losses total more than Rs 50,000 crore annually. There should be significant tax breaks and IT
exemptions for promoting post-harvest technology in the private sector, especially in the North-east and
in backward regions of the country. After all, the private sector has no immediate returns on investment in
this sector. Agro processing should be a focus area for the Budget. The demand for processed foods is
growing in the country, but there have been no major incentives, even for packaging machinery and
materials.

8. Comex, spot & futures

I am keen that the FDI issue in commodities market is resolved at the earliest. It may also be the time to
review the ban on trading of select commodities. Our wheat output is good this year and domestic prices
have been steady despite high global prices.

Shift people from agriculture to industry and service sector

Mr Chidambaram said the government will take necessary steps to ensure a 4% growth in agriculture,
besides raising public expenditure in rural areas. The area and productivity of major crops like wheat and
rice stagnated over the last 10 years. The need is to increase area under cultivation and productivity of
these crops. He also said that inequality is bound to rise in the country with industry and services sector
growing over 10%, something that cannot be achieved in case of agriculture.

To deal with the problem of growing inequality, he said “the government will adopt a two-fold
approach.” This would involve ensuring maximum possible growth in agriculture besides rising public
expenditure in health, education, drinking water and other rural sectors. The government would have to
move, away a large population from agriculture to the industry and services sectors. Country does not
need more than 10-20% population to grow food for the people.
2.4 INDIA INC
Q3 results show acceleration in revenue, profit growth

With market gyration attracting most of the attention, the third quarter results of India Inc has taken a
backseat. The market is agog with talk of the likely slowdown in the world economy and its drastic
impact on India. The corporate results for the December 2007 quarter declared so far, however, have
given no hints of a likely slowdown.

In fact, the early bird results of 427 companies show acceleration in revenue and profit growth.
Surprisingly, the apparent acceleration has come after four consecutive quarters of deceleration in revenue
growth of these companies. The results have fairly met market expectations. A look at the revenue and
profit growth trends over the last six quarters brings out some interesting points. After having been on a
declining trend, total net sales have shown a robust growth in 3rd Quarter. The good thing is that faster
growth in net profits has been supported by an equally robust growth in net sales and operating profits.
Likewise, growth in operating profit, which had been softening since last three quarters, has seen
resurgence in quarter ending December 2007.

Net profit growth has also been helped by deceleration in interest costs. This may be due to recent
softening of interest rates and completion of borrowing programmes of corporates for their capex plans.
The latter is confirmed by a sharp 28% rise in depreciation allowance during the December quarter. In
previous two quarters, depreciation has shown a negative growth. It also points towards the source of
acceleration in revenue growth. It seems many companies have begun to gain from the commissioning of
their expansion projects. If this turns out to be true then we can expect further acceleration in revenue and
profit growth in coming few quarters. The Q3 results have been much in lines with the market
expectations and the current growth in earnings is likely to be maintained for the fiscal year going
forward. Experts are optimistic about the forthcoming quarters.

Economic growth tricking down to India’s poor

Finally, there is some evidence that the benefits of the economic growth may be tricking down to India’s
poor. The ILO’s 2008 Global Employment Trends report shows an “impressive” poverty reduction in
South Asia (largely dominated by Indians). Extreme working poverty (income of less than $ 1 per day)
fell by 20% in a decade (from 53% in 1997 to 33% in 2007), the greatest decrease of any region of the
world. However, the proportion of working poor (income of less than $ 2 per day) remains high, with
eight out of 10 workers, 478 million people, in this category.

South Asia, led by India, created the maximum number of global net jobs (28%) in 2007. East Asia – led
by China, Japan, Korea – generated much lower (16%) of the global net jobs during the same period.
Developed economies and EU created only 4% of the jobs in 2007. For South Asia, however, the bad
news is that most of these jobs were at the very low-end of the job pyramid. And the volume of jobs
merely reflects South Asia’s demographic trend rather than its economic robustness.

Contrary to the visible outsourcing-led boom, it is the industrial sector that has seen the largest increase
in jobs between 1997-2007 from 15.3% to 21.7% of the total pie. In the same period the service sector
grew 25.2 to 30.3%, less than in many other regions of the world. While there has been a rapid decrease
in agriculture employment since 1997 – the fastest decline in the world – agriculture still employs almost
half of all workers in the region.
2.5 FOREIGN INSTITUTIONAL INVESTORS
India Inc deals soar 150% at 70B in ’07: Grant Thornton

India Inc announced deals worth $ 70 billion in 2007, up 150% over the previous calendar year.
Significantly, even though this is a mere 1.5% of the estimated value of global deals struck during the
year, in terms of actual increase, Indian companies were a much bigger contributor. Total M&A and PE
deals in India - which were $ 42 billion more than their 2006 tally- accounted for about 5% of the increase
in value of global M&A deals,- which rose $870 billion last year.

The value of total deals announced in India during the year stood $ 70.14 billion as against $ 28.16 billion
in 2006. The volume of deals involving Indian companies also crossed the 1,000 mark for the first time
last year. Out of the total, $ 51.11 billion was value of strategic M&A involving Indian companies, either
as sellers or buyers, and the remaining $ 19.03 billion was the result of PE deals. These figures however,
may not reflect the actual value of deals completed as some of the transactions will spill over into the next
year, given mandatory regulatory approvals which take time.

India boasts of most PE funds

India has the most number of private equity (PE) funds operating amongst the BRIC markets, considered
the emerging hotbed of PE action. According to Emerging Markets Private Equity Association (EMPEA)
estimates, there are some 89 VC/PE firms managing 153 funds in Brazil, about 28 firms in Russia and
115 in China while India has over 160 firms. About 120 of these India-focused firms are either has raised
money from outside India or are subsidiaries of non-Indian VC/PE firms.

Experts opine that a growing economy, especially on the domestic side, increased entrepreneurial activity
and the IT/ITeS effect is attracting newer investors to the country. The huge number of experienced
techies returning to India and setting up companies has also increased the exposure of Silicon Valley
venture firms to the country.

The increased deal activity is having its effect – “Another 40 firms are in the process of raising money for
investing in Indian market. Analysts expect the country to see PE commitments of around $ 40 billion by
2010-11, as more sectors in India would be open to private fund raising. And a longer history of private
enterprise in India also contributes its bit to the traction in PE play. Besides, there are more mature
companies in India, which are attractive to PE players.

A case-by-case model to screen FDI

The government may not screen FDI based on country-specific concerns. Instead, a case-by-case model
would be followed. To begin with, the trigger would be ‘investors of concern’ to check money
laundering and terror funding. Other triggers would be ‘sensitive sectors’ and ‘sensitive location’ such as
border areas. The department of industrial policy & promotion (Dipp) and home ministry are of the view
that country-specific checks would send out wrong signals to investors in other countries.

The government cannot send out a negative signal to investors that prevent FDI from coming into India.
At present, RBI and the Foreign Investment Promotion Board (FIPB) do FDI screening at the initial stage.
Experts feel that the government should not apply security guidelines at this stage, which could repel
investors. If there is a case to threat after completion of the first level of screening, the government should
implement its checks and balances.
2.6 WARNIG SIGNALS

1. Global market slowdown punctures IPOs

There is always a lull before a storm. And if the global IPO activity in the first month of 2008 is any
indication, the world markets are headed for a tough session ahead. Already, the global IPO volumes
dipped by more than 15% in January 2008; according to Thomson Financial research, if not for India’s
Reliance Power IPO, which raised nearly $ 3 billion, the global IPO market should have experienced a
more significant decline. In January ‘08, IPO volumes reached $ 6.3 billion from 45 deals, while in
January ’07 a total of $ 7.5 billion from 65 issues was raised in IPO proceeds. The January ‘08 volume is
the lowest since January ‘05.

Surprisingly, China and the US did not reach billion-dollar proceeds through IPOs in January ’08. Both
nations experienced huge decline in IPO proceeds – China 72.6% and the US 46.1% - as per research.
According to Thomson Financial, 21 global initial public offerings were withdrawn during January ’08,
up from 16 in December ’07. The withdrawn issues totaled $ 6.3 billion in proceeds, a three-fold increase
from December ’07 when withdrawn IPO proceeds were $ 2.1 billion.

Analysts feel, the slowdown in the global IPO market comes from the recession in the US markets, which
is having a rub-off effect on the other markets around the world. India might also see a slowdown in the
IPO market. However, it is important for the market that Reliance Power IPO listing goes off well. If it
doesn’t open well on the bourses, there are so many investors in leverage position that it can hurt the
market sentiment. In fact the recent volatility seen on stockmarkets has chipped off gray market
premiums. Significantly, many IPOs – which either has hit the market or coming out soon – are getting no
premium in the gray market.

2. Terror funding through share markets

Union Finance Minister P Chidambaram said, “Recently one case has come to my notice. It was
suspected, let me repeat ‘suspected’ that this case may have some links with some persons who are under
watch.” However, Chidambaram did not reveal more details or the identity of the suspect. He said, “This
case is being investigated. But I am not in a position to give any details of the case at this stage.”

3. Speed up framing FDI security norms

The home ministry, which is the nodal agency for security related matters, has been urged to speed up
framing of guidelines meant to screen foreign direct investment (FDI) proposals aimed at ensuring that
national security is not hampered. The national security advisor (NSA) has been drafting umbrella
legislation on security screening for FDI. The umbrella law on security guidelines for FDI has been
pending since some sub-committee reports are awaited. Various panels are working on the details and
they will be put together soon.

4. Subprime credit card crisis

After the subprime mortgage crisis, the US is now staring at a possible subprime credit card mess. The US
banks are now seeing higher number of defaults on credit cards. This may slow down credit card business.
According to industry experts, an impending subprime credit card crisis may lead to a large negative
impact spread over 4-5 months on Indian BPO industry. However, there may be a twist in the tale in the
long run – large number of card delinquencies may lead to offshoring of debt collection processes.
3. COMMODITY MAKET
Teethed watchdog

The Cabinet approved a proposal to issue an ordinance to make changes in the Forward Contracts
Regulation Act, 1952. The amendments would primarily empower commodities market regulator Forward
Market Commission (FMC) and will elevate the FMC from a government department to an independent
regulator. The FMC will be the sole empowered regulator for the commodities market.

1. Pawar for nod to futures trade in wheat, rice again

Agriculture, food and consumer affairs minister Sharad Pawar has said the time is ripe for scrapping the
ban on futures trading in wheat and rice. He also feels that the government should not delay permission
for foreign direct investment (FDI) in commodity exchanges. “There are many things that are required to
be done on the commodities market still,” Mr Pawar acknowledged.

His statements come at a time when the committee headed by Planning Commission member Abhijit Sen
is gearing up to submit its long-awaited report on aspects of commodity futures trading to the food &
consumer affairs ministry. Wheat, rice, tur and urad dal futures were banned in the commodities market
in the wake of high essential commodity prices from end 2006, in response to pressure from left parties.

Mr Pawar stand, therefore, could spell good news for commodity traders, particularly in view of the
prevailing perception that the RBI is meeting out a step-motherly treatment, compared to stock
exchanges, to commodity exchanges as far as FDI policy is concerned. The move is seen to be choking
the growth of Indian commodity exchanges further by denying a level-playing field with stock exchanges.

3. Ordinance to amend Forward Contract (Regulation) Act, 1952 (FCRA)

The commodities market that was weighed down by the number of restrictions on it in the last two years
has finally seen light at the end of the tunnel. The government passed the ordinance. Experts feel a
stronger FMC would pave the way for products like option on futures, index futures and options, and
weather derivatives. More importantly, Indian market will have a commodity index (that may be tradable)
for the world to look at, similar to ones in the developed countries. Experts said that retail investors will
get a platform to play safe by the way of portfolio management that is restricted till now, once allowed.

The government should move quickly to convert the ordinance amending the Forward Contracts
Regulation Act into a law, which would empower the Forward Market Commission (FMC). The
strengthening of the commodities regulator should encourage other regulators – namely RBI and Sebi – to
allow banks, mutual funds and FIIs to enter the market. This will help deepen the market and reduce the
danger of a few participants manipulating it.

In advanced markets MFs either participate in future trading or even invest in physical stocks of
commodities. FIIs can strengthen linkage between Indian and foreign markets. The Indian commodities
markets are already among the world largest in bullion, some non-ferrous and certain agri commodities.
If India’s commodity markets develop in an orderly manner it has the potential to emerge as a major
centre for commodity trading, comparable with London and the US. India is a major consumer and
producer of a wide range of agri commodities (sugar, cotton, wheat) and of bullion and copper. It can
thus emerge as a price-setter rather than accept prices set elsewhere. That is of course if the government
lifts the ban on futures trading in wheat, rice and pulses.
4 FINANCIAL SECTOR: TRANSFORMING TOMORROW

Companies from the finance sector are making maximum number of job offers in campus placements. For
instance, banks are offering roles across all divisions including treasury, M&A, corporate finance, retail
and operations, transaction banking, institutional banking, business banking, financial advisory and
financial markets.

For the first time, Institute of Chartered Accountants of India (ICAI) organised a placement fair ‘Career
Ascent’ for its members working in the industry. With names like HDFC Bank, ICICI Group, Kotak
Group, Reliance Industries, ITC, Patni, GMR Group and BPCL looked at hiring in three digits; it is surely
good times for CAs and tough times for their current employers. It was for the first time that head hunters
got an opportunity to recruit experienced CAs.

Companies that recruited aggressively during the campus placements for the new passouts in February-
March and September-October 2007 participated again for more professionals. ICICI Bank alone had
recruited 414 new CAs; Reliance picked up 138; TCS that recruited 84 CAs in the two placements
rounds; participated in Career Ascent to look for experienced hands. ITC and Morgan Stanley after
recruiting over a dozen fresh CAs in late 2007 placements also participated in the Career Ascent.

1. FINANCIAL ADVISORS:
Weigh impact on investors

Mini-derivatives contracts

BSE’s unexpected early success with the sensex mini-derivatives contracts is good news for Indian stock
markets. Both BSE and NSE launched on January 1 small lot size futures and options contracts with
Sensex and Nifty as respective underlying, to attract retail investors in derivatives. If MSX, the Sensex
mini-futures (marketed by BSE as chotta sensex) manage to sustain interest, it will help improve the
BSE’s position in the derivative segment. It will increase some sort of competition in the derivatives
segment where NSE has a stranglehold over the market.

BSE has one thing going through: the Sensex still connects with retail investors more than Nifty.
Therefore, as things stand, it is spirited attempt by BSE to spur derivatives trading on the exchange and
the initial reaction has been good. If chotta sensex clicks, we could see more product offerings, and BSE’s
international linkages would surely help.

At a larger level, these smaller lot size contracts fill a vital gap in the derivatives segment. Even retail
investors now have an option of hedging their risks, which was not the case earlier because of the large
contract size on Nifty and Sensex. Of course, the smaller contract size could also encourage retail
speculation. While marketing these derivatives contracts to retail investors, stock exchanges should also
highlight the risks associated.

Introducing SENSEX mini Contracts in a market of five

o Market lot of Five: Lower investment for one contract

o Easy access for retail investors to India’s most popular index
o Arbitrage possible between SENSEX futures and SENSEX mini Futures
2. WEALTH MANAGERS
Map out the details to translate into benefits

Public spending must translate into expenditure on the ground

Indicating that public spending by ministries under the UPA government may not have been efficient,
finance minister P Chidambaram asked financial advises to refrain from spending more than 33% of the
Plan expenditure in the last quarter of the fiscal. Financial advisers are representatives of the ministry of
finance’s expenditure department and are responsible for managing the finances of the ministry or the
department they are attached to. Mr Chidambaram monitored the progress with regard to flagship
programmes of the government including Bharat Nirman that encompasses rural telephony, rural
electrification, rural roads, rural housing, drinking water and irrigation. According to finance ministry,
expenditure has to be spread throughout the fiscal, and not more than 33% of the Budget estimates may be
spent in the last quarter of the financial year. Once allocated, funds should not be parked in a bank
account but must translate into expenditure on the ground. Fresh funds cannot be released till such time.

MoF moots 34% cut in ministries’ demand

The Finance Ministry has suggested a drastic cut of 34% in the financial resources demanded to meet the
2008-09 targets. The finance ministry’s pruning exercise is not across all sectors in the same proportion.
Certain ministries or departments are likely to get what they desired. Given how inefficient government
spends its money, all right-thinking people must support the finance ministry’s suggestion that the
demands made by various ministries be pruned sharply. The mantra must be two-fold. One, the Planning
Commission must go through the demands with fine-toothed comb, through out/prune all demands where
there is the slightest doubt regarding efficacy in delivery and then go to the finance ministry with a
reasonable wish list.

3. FINANCIAL PLANNERS
Value unlocking for investors

Why some stocks defy the law of gravity

Mind you, we are talking about stocks that languish at extremely low levels. These scrips had marched to
a different tune on the bourses. Even as frontline went into a free-fall, these shares were hitting the upper
circuit amidst the most bearish trading session in the history of the BSE. The reason for low volume-high
price stocks may be because these shares have not been dematerialised as of now. Promoters or investors
(who are tapped in the stock) might be trying to generate interest in these shares by trading them on odd-
lot counters (specifically set for paper shares). So, investors still prefer to hold them in the physical form.

Companies that are showing spurt in share price, but lesser trading activity are generally closely held
companies. No one really knows why stock prices shoot up on lower volumes. In most cases, it is pure
speculation. In general, a price change on relatively low volume for a stock suggests an aberration.

An important point is that most of these stocks are traded in the trade-to-trade segment (or the T group) on
account of the surveillance action imposed on them. T-segment implies that all transactions in the scrip
are delivery based in a bid to curtail excessive speculation. The exchange’s trading system also displays a
pop-up caution message at the time of order entry in these scrips. All scrips under T group attract 100%
margin while trading. It is best in the interest of investors to stay away from stocks that have very low
volume. Unless there is sufficient volume to support the new price, it will fall, possibly faster than it rose.
4. INCLUSIVE CEOs
Innovative responses to problems

Reduction of share capital

A company normally reduces its share capital:

• To return excess capital to its shareholders (company is overcapitalised);

• Extinguish capital, which is lost or underpresented by available assets; or

• To improve financial ratios of the company (e.g. return on equity) and enhance shareholder value.

Under section 100 of the Companies Act, 1956, reduction of capital requires shareholder and High Court
approval. Further it also gives rise to tax implications in the hands of company and its shareholders.

Tax impact on company

Under section 2(22) (d) of the Income-tax Act, 1961, any payment by a company to its shareholders on
reduction of capital would be considered as “deemed dividend” to the extent to which the company has
accumulated profits. The company would be liable to pay tax at the applicable rate (currently 16.995%).

Tax impact on shareholder

The amount distributed by the company on reduction of its share capital has two components viz.
distribution attributable to accumulated profits of the company (deemed dividend) and distribution
attributable to capital. The deemed dividend is exempt in the hands of shareholders under section 10(34)
of the Income-tax Act. Distribution over and above the accumulated profits (after reducing the cost of
shares in the hands of the shareholder) would be taxable as capital gains or business income.

Case study

Colgate Palmolive India Ltd recently implemented a reduction of capital to return Rs 122.40 crore to its
shareholders, which was in excess of the company’s operational needs, after obtaining requisite
approvals. The company reduced the face value of the existing shares from Rs 10 to Rs 1 per share and
refunded Rs 9 per share to the shareholders.

Correspondingly, shareholders would get new shares at the reduced face value of Rs 1 per share. The
Share Capital of the company will reduce from Rs 136 crore to Rs 13.6 crore. The company said that
shareholders are benefited by the receipt of Rs 9 per share tax-free cash which would be available for re-
investment. There would be no change in the shareholding (number of shares) or shareholding pattern.
Also it would not impact the future dividend.

Buyback

Another alternative of returning excess cash to the shareholders is the company buying backs its shares
from the shareholders. However, under section 77A of the Companies Act, 1956, a company can buy
back only 25% of its total paid-up share capital and free reserves by fulfilling a host of other conditions.
In the buyback there is no tax implication in the hands of the company.
5. RISK MANAGEMENT CONSULTANTS
Educate – Engineer and Enforce

India Development Foundation

The ministry of overseas Indian affairs is set to launch India Development Foundation, a charitable not-
for-profit trust, to help channel philanthropic capital into India for developmental activities. There is huge
interest among NRIs and PIOs across the world to give back to their country of origin through the
philanthropic and small investment route.

Creating the foundation will be a very important step in providing an organisation framework that will
involve overseas Indians at the front-end and credible NGOs and self-help groups at the backend. The
main target sectors where the diasporic philanthropic capital will be channeled by the foundation include
rural development, health, education and uplift of women and the girl child. The foundation will not
receive donations directly but act as a single window to help channel philanthropic funds from NRIs to
developmental activities in the areas that they are interested in.

Investment -banking services to MFIs

In the first-of-its-kind venture, Washington-based Grameen Foundation promoted by Mohammed Yunus’

Grameen Bank and Chennai-based IFMR Trust announced the launch of Grameen Capital India (GCI).
GCI has a total capital base of Rs 5 crore. Grameen Foundation and IFMR Trust have a 43% stake in the
company, and Citicorp Finance owns the balance 14% stake.

As of now, many microfinance institutions (MFIs) in India are heavily dependent on banks to raise funds.
GCI plans to offer MFIs an opportunity to access low-cost funds through capital advisory services. MFIs
lack access to mainstream source of finance. If they directly deal with an investor, they find it difficult to
negotiate on the terms and conditions and often have to bow down to the investor’s wishes. However, in
such a situation, the presence of an intermediary could help improve matters.

The company plans to offer MFIs a wide range of solutions, including pooling and securitisation of assets,
lone syndications, hitting the equity market with public offers, etc., through an active interaction with
rating agencies, on one hand, and investors, on the other. Royston Braganza, CEO, GCI said that while
the total demand for funds could be as high as $ 50 billion in the domestic microfinance space, the current
availability is only around $ 5 billion. After playing the role of an arranger, GCI may also look at
establishing a wholesale fund which caters to the microfinance sector in India.

GCI would help local and global investors identify the right kind of MFIs in which they could invest,
depending on their risk profiles. This could bring in a wide range of investors into the microfinance
industry. On a global scale, there are several commercial investors like private equity, venture capital and
even socially-responsible funds are interested in investing in this sector, apart from non-resident Indians
(NRIs). In the domestic market, potential investors could include commercial banks, insurance
companies, and pension funds etc.

One critical issue in the local microfinance industry is that there are several fragmented MFIs located in
far-flung areas, which makes it imperative to have an aggregation of these disaggregated portfolios.
Enhancing the quality of assets owned by MFIs also makes it economically viable for banks to invest in
these papers, thus helping them meet their targets for priority sector lending.
6. MICROFINANCE PROFESSIONALS
Developing alternative credit delivery models

No-frill accounts for workers enrolled for job guarantee programme

The government has started roping in public and private banks to open no-frills accounts for workers who
enroll for the flagship job guarantee scheme. The move to directly credit wages to the worker’s account is
aimed at checking contractors swindling taxpayer’s money. Workers who enroll for the National Rural
Employment Guarantee would be able access their accounts through ATMs.

The idea is to plug leakage in the system. Technology can be effectively utilised to make the programme
efficient. The bank will use the technology to reach out to the beneficiaries of the scheme. The funds from
the government will be directly credited to the accounts of the beneficiaries depending on the wages
earned. Banks will act as a payment gateway for government’s funds. The government also wants
competition among banks to reach out to the bottom of the pyramid and private banks would be
encouraged to participate. The move is in line with the government commitment towards financial
inclusion which fits into the rural expansion strategy of many banks.

The decision to bypass contractors in the payment process comes in the wake of the Comptroller &
Auditor General of India (CAG)’s six-month performance audit of the scheme, which said only 3.2% of
registered households could get the mandatory 100 days of employment. The average employment
provided under the scheme has been merely 18 days.

7. CREDIT COUNSELORS
Resolve convertibility and recompensation issue

BSE issues show cause notices to 800 companies

Bombay Stock Exchange, the world’s biggest bourse in terms of listed firms, has issued showcause
notices to 800 companies for violating the listing agreement that also includes corporate governance
norms. BSE MD & CEO Rajnikant Patel said a large number of companies were yet to comply with
Clause 49 of the listing agreement on corporate governance. He added that since BSE did not have the
authority to impose penalty on companies, it has recommended Sebi to take action in many cases.

8. TECH SAVVY PROFESSIONALS

Take first step to ensure efficient and reliable system

RBI ropes in HCL Comnet for IT overhaul

It’s the RBI’s largest IT implementations in the recent times. The central bank is setting up two large data
centre and completely overhauling its IT infrastructure to move to modern, more robust systems. The
exercise will cost RBI close to Rs 100-crore, and the contract has been awarded to software exporter HCL
Technologies. Under the terms of the contract, HCL will set up the two centres and maintain them for the
RBI for seven years. A part of the contract also involves the different applications that are running across
locations and consolidating them at a single place on web and Java-based platforms. Of the two data
centres, one would be located at Navi Mumbai and the second will function as a disaster recovery centre,
will be based at Nagpur. HCL Comnet will handle the implementation and maintenance of the project.
9. ONE-STOP-SHOPS
Dedicated to offer related services under a roof

Global Advisory Council of PIO

Prime Minister Manmohan Singh has announced setting up of ‘PM’s Global Advisory Council of People
of Indian Origin’ (PIO) that would serve as a platform for the PM to draw upon the experience,
knowledge and wisdom of the best Indian minds across the globe. He said, “This council would comprise
of people of Indian origin from a variety of disciplines who are recognised as leaders in their respective
fields, not only in their country of residence but globally as well.”

People of India Origin University

Last year, PM had announced a proposal to establish a ‘People of India Origin (PIO) University’ for the
benefit of children of overseas Indians from across the world. Dr Singh said that the India would soon
establish PIO University. He added, “I am happy to inform you that the government has approved the
basic policy framework for this university. This university will be established in a public-private
partnership with active participation of credible overseas Indian trusts or societies.” The University will
have the autonomy and flexibility in the disciplines that it offers and in its academic governance.

Overseas Workers Resource Centre

PM also announced the launch of an ‘Overseas Workers Resource Centre’ (OWRC) which would provide
relevant information and assistance to potential migrant workers, and also operate a multi-lingual help
line for grievance redressal and interventions for overseas workers in distress. “I hope this centre will in
the long run expand the scope of services to promote legal migration.”

10. GLOBAL OUTLOOK

International Financial Reporting Standards

A Step towards convergence of Gaap into IFRS

In a move that has far-reaching implications for Indian companies listed on US stock exchange, US
regulators scrapped the requirement that foreign companies with US stock market listings reconcile
financial statements prepared under International Financial Reporting Standards (IFRS) with US
accounting standards. The decision is expected to benefit close to 1,100 overseas companies listed in the
US, including Indian blue chips. Henceforth, Indian companies will no longer have to publish two sets of
accounts, both of which say essentially the same things, but differ on matters of details.

US exchanges have reason to celebrate, as the requirement of preparing two sets of accounts had become
a damper for companies wanting to list in the US. Together with stringent disclosure requirements
mandated under the Sarbanes-Oxley Act, the net effect was to detract foreign companies from US listings.
Not surprisingly, the New York Stock Exchange has been loosing grounds to European exchanges,
especially the London Stock Exchange. The decision marks a major step towards resolving the vexed
issue of convergence of global accounting standards – US accounting standards or Gaap with IFRS, the
standard used in more than 100 countries, including the European Union, China and India, albeit with
country-specific variations. Given how integrated global capital markets have become, there can be no
escape from moving to a single unified set of rules for drawing up accounts. High quality information is
integral to high quality decision-making and that is possible only if we have standardised reporting.
11. CONTINUING LEARNING CENTRES
Take informed decisions

Monitoring the impact of Free Trade Agreements

The government may take a cautious approach while negotiating free trade agreements (FTAs) with
countries such as China that do not have market economy status and a market-driven exchange rate
policy. The move follows fears expressed by India Inc that free trade with such economies may not leave
them with a level playing field.

The government may formulate a policy for negotiating FTAs to safeguard the domestic industry from
possible disruption due to various factors, including market-driven exchange rate. India has implemented
five FTAs namely with Singapore, Nepal, Bhutan, Sri Lanka and Safta; and half-a-dozen preferential
trade pacts with Thailand, Chile, Mercosur, APTA, and Afghanistan. Efforts are now being made to
monitor the impact of these pacts on a continuous basis.

Singapore bilateral comprehensive economic cooperation agreement (CECA)

Under the existing trade in goods agreement, about 83% values of India’s imports from Singapore are
covered under products for which tariff is being eliminated or reduced. After the proposed additional
tariff concessions, the coverage would go up to 93%.

The proposed tariff cuts announced on December 20, ’07 mainly on items related to machinery,
mechanical appliances, chemicals and textiles, would be spread over an eight-year period starting January
15, 2008. For products in normal track –I list; tariff cuts would happen within the first four years while for
products in normal track-II list, the tariff cuts would be spread over eight years.

India’s decision to eliminate or reduce tariffs on 539 additional products was contested by the ministry of
chemicals and petrochemicals, which said the industry was not prepared to face duty-free competition
from Singapore. Unless infrastructure costs and cost of utilities in India is reduced, further reduction of
the already low tariff will prove counterproductive.

Other sections of the Indian industry are also complaining of disproportionate gains to Singapore from the
CECA. The prime minister’s office (PMO) has sought the finance ministry’s views on the impact of the
concessions granted to Singapore under the bilateral comprehensive economic cooperation agreement
(CECA). PMO wants to see if these sops go against the domestic industry’s interest.

The finance ministry has been asked to look at the fallout of tariff cuts on 539 products, especially in light
of the free trade agreement (FTA) being negotiated with the 10-member Asian. It would also look at the
possibility of products flowing into India from other Asean countries through Singapore.

12. ISSUES OF THE PRESENT

Freedom to get & fail in the system of free enterprise

EXCHANGE RATE FLEXIBILITY

The RBI governor YV Reddy said India was moving gradually towards greater flexibility in the rupee
exchange rate. But the economy’s response to exchange rate movements was unlikely to be as flexible as
in the advanced countries. “Policy makers have to encourage the real sector to become more and more
flexible to cope with the exchange rate dynamics. At the same time, the pressure for change cannot be to
such an extent that volatile exchange rate movements seriously disrupt the business environment.”
Exchange rate movements are not a one-way street

The rupee has surged by over 12% against the dollar in 2007, impacting bottom-lines of exporters. Mr
Reddy said encouraging outflows to manage surging inflows might not work in the short run because a
more liberalised regime tended to also attract more inflows. The RBI governor was, perhaps, cautioned
players against assuming exchange rate movements are a one-way street, though he did not elaborate.

Reversal in capital flows cannot be ruled out

Mr Reddy cautioned that the strong fundamentals of the Indian economy alone do not preclude a change
in the international sentiments about India. I believe that it will not be prudent to exclude the possibility
of some change in course due to any abrupt changes in sentiments or global liquidity conditions, despite
the strong fundamentals in the Indian economy.”

Managing an unexpected turn of events would normally be quite different

Mr Reddy said the strategic management of the capital account would warrant preparedness for all
situations and the challenges for managing the capital account in case of an unexpected turn of events
would normally be quite different. The RBI will continue to analyse different scenarios and possible
contingencies so that capital account and monetary management continue to facilitate high growth, while
maintaining price and financial stability. The focus has been on the proper sequencing of liberalisation of
capital with other policies. While appropriate management of the capital account is critical for both
growth and stability. He admits there are dilemmas and tradeoff in managing capital account.

Interventions in the forex market over a long time could make it less effective

The judgment on excess volatility will depend not just on the quantity of the flow, but also on the quality
in terms of the components of the capital flow. Overall portfolio investments could be expected to be less
stable than FDI. Lumpy or large inflows also tend to disturb the market. Further, interventions in the
forex market over a long time to contain volatility could make it less effective.

EMEs need to follow a pragmatic and contextual policy

Moreover, emerging market economies (EME) like India face several constraints. So, they need to follow
a pragmatic and contextual policy in managing the external sector because international financial
markets do not treat such economies as full-fledged market economies.

Since self-correcting mechanism in financial markets operate more efficiently in advanced economies, the
solution for EMEs is to look to other suitable policy interventions.

Mr Reddy reckons that a continued focus on financial market development would mitigate the challenge
of capital flows in the medium term. But capital flows have to be managed through other tools in the short
term. Another mitigating factor could be enhancing the absorptive capacity of the economy, though it may
be tough to do this in the short-run.

Despite several challenges, India and China, who do manage their capital account rather actively, have
performed well in terms of many parameters including growth and stability, said MR Reddy.
5. BANK’S THIRD QUARTER REVIEW
The RBI has done well to mark time

It’s not easy to swim against the tide. But the Reserve Bank of India governor, Yaga Venugopal Reddy
showed that he is made of sterner stuff. He chose to look at the specifics situation and act accordingly and
kept policy rates unchanged in its third quarterly review of the annual monetary policy on Tuesday dated
29/01/2008. As indeed any prudent central banker in his place should have done. For the moment it
makes more sense to wait and watch. Well, the RBI has done just that.

1. Price stability

Reserve Bank of India Governor YV Reddy said the review of the monetary policy was influenced by
concerns of price stability, to ensure which the apex bank is keeping a watch on global development.
“Inflation is broadly in line but not as comfortable that we lift our vigil on stability.” He said while
growth in 2008 had moderated to 8.5% and inflation rate below 5%, the apex bank aims at maintaining
the same growth in 2009 and inflation to go towards 4.5%. RBI, in its credit policy review, kept all key
rates unchanged so as to ensure price stability, while keeping an eye on global uncertainties. The
Wholesale Price Index based inflation had apparently come down but there are underlying issues of
incomplete pass-through of oil prices which has kept it suspected.

2. Dollar free fall

One major concern of Reserve Bank of India (RBI) is that of the US dollar going into a free-fall on the
back of a possible recession in the US economy. Last year, the dollar weakened against most of the world
currencies. According to RBI, the Indian economy faces “exogenous shocks such as a disruptive decline
in the US dollar”. Taking cognisance of the fact that the dollar has been depreciating since 2006, RBI has
indicated that valuation changes due to a weaker dollar against major international currencies added $ 7
billion to the stock of external debt and this in turn, accounted for one-third of the increase in external
debt. The Indian rupee has grown stronger by more than 12% over the calendar year 2007. The central
bank pointed out that the US dollar had a dominant share of 52.8% in India’s external debt where as
rupee-denominated debt accounted for 17.6% only.

3. Capital flows

The Reserve Bank of India said, “In the context of a more open capital account and the size of inflows
currently, public policy preference for a hierarchy of capital flows with a priority for more stable
components could necessitate a more holistic approach, combining sectoral regulations with broader
measures to enhance the quality of flows and make the source of flows transparent.” As far as inflows
were concerned, the central bank has always been comfortable with foreign direct investments and
remittances. It has been against private equity inflows, especially into sectors like real estate. It has also
against inflows through P-Notes into the stock markets as it feels that the flows are not transparent.

The build up of foreign currency assets of close to $ 100 billion in 2007 alone had forced the hand of
monetary and fiscal policy makers. To curb surging inflows they first imposed severe restrictions on
foreign borrowings which were followed by new norms for issuance of participatory notes. Inflows have
distinctly slowed down since November ’07 (less than $ 10 billion was added in two months) but both the
government and the central bank have now decided that no policy measures which will be interpreted as
encouraging inflows will be unveiled until atleast the end of this fiscal (07-08).

Traditionally, it is the finance ministry which has pushed for opening up of the finance sector while the
central bank has preferred a more conservative stance saying that the ground realities on the real
economy front ought to be taken into consideration. It has often said that until the quality of the
government’s balance sheet improves it would not be prudent to open up further.

Against this backdrop, the government has now come around to the Reserve Bank of India’s views and
has decided not to push for any fresh policy initiatives on the foreign investment front in the near term.
Both the monetary and fiscal policy managers will revisit this policy only in the first half of April well
after the next review of the monetary policy and the annual budget.

4. Forex loans

Rising turbulence in global markets, coupled with a weaker dollar, has caused the RBI to tell banks to be
cautious while lending foreign currency loans to corporates. Banks have been told to review the foreign
currency exposures of their corporate borrowers, with heightened focus on forex positions kept open. The
RBI has also urged banks to monitor the trading and treasury activities of corporates, at the time of
lending forex advances.

5. Interest rates

Finance minister P Chidambaram has said he hope banks would cut lending and deposit rates by 50 basis
points to spur investment and consumption to boost growth. In a meeting with chief executives of public
sector banks on January 4,’08 he asked them to go bullish on the consumer finance sector. At least we
should aim for stable interest rates and hope to moderate them in the medium term. His comments
triggered speculation of an interest rate cut by the central bank at its policy review on January 29, 2008.

Home loan seekers and corporate borrowers fishing for lower interest rates may bank on some tough talk
by RBI governor. Mr Reddy has almost told bankers that have no business to keep rates so high. His
message is clear: the central bank‘s topmost priority is to contain inflation, and thus it can’t afford a rate
cut that could push up demand; but there’s enough room for banks to take a relook at rates. What we are
trying to say is it should be possible for banks to be more proactive in extending credits.

RBI governor said that while money supply has increased in the system, credit has not grown at the same
pace. He urged banks to extend loans to sectors that are employment-intensive rather than parking access
liquidity in the government securities market. Indicating this in its third quarterly review, the central bank
has said that going forward the overall policy would focus on credit delivery for employment-intensive
sectors and which would also help in pursuing financial inclusion.

Political pressure is building on the banks to cut home loan rates. Banks are likely to oblige on loans
below Rs 20 lakh, particularly as deposit growth has been robust and liquidity is ample. The FM cannot
give a diktat to public sector banks and any such ‘request’ will have to be made informally.

Endorsing the Reserve Bank’s monetary policy stance, Finance Minister P Chidambaram said he will discuss
with the RBI governor what further measures could be taken to contain capital flows.

When asked about RBI Governors views that appropriate and decisive policy actions were required to
manage capital inflows consistent with macro fundamentals, the FM said, “I will discuss what further
policy actions need to be taken.” He added that the gap between interest rates in India and the US have
indeed increased due to cut announced by that country’s Federal Reserve. However, there is no surety that
capital flows would increase due to the US central bank’s move. The finance minister added: “We do not
what will happen yet. As I had said the cat can jump either way. There could be increased capital flows…
Let us wait and watch.” There are no instant answers to these difficult questions.
6. MISCELLANEOUS UPDATES

1. Collection of Statistics Bill, 2007

The bill empowers the government to seek sensitive corporate data. Industry chamber CII has said
confidentiality of such data should be maintained. CII pointed out that under the provisions of the
proposed Act, an informant asked to furnish any information would be bound to furnish such information
and the statistics officer or any person authorised by him in writing is permitted to enter any premises for
the purposes of collection of statistics, inspecting and taking copies of it.

The chamber said that the power to collect information should be amplified through guidelines to include
the communication of purpose behind collecting information. The guidelines should also limit the
collection to macro-level information and exclude confidential information, personal identifiable
information, sensitive industry or competitive information, third party information and economic value
attached information. In case, where corporates are bound under confidentiality agreements with outside
parties, or in case of price-sensitive information that cannot be disclosed before making a disclosure to the
stock exchange under the Listing Agreement, corporates should be entitled to seek additional time to
submit the requisite information.

The chamber recommended that a formal request for collection of information should be made in writing
since other methods are unreliable and can be misused. It added that sufficient time should be given for
submission of such information and an extreme step like entering the premises should be backed by
justifiable reasons and resorted to only when information required is not submitted even after lapse of a
reasonable time. The government should not outsource the collection of statistical information to any
agency without prescribing adequate safeguards and governance process and liability/responsibilities of
such agency in the event of misuse or any breach.

2. Administered Price Mechanism (APM)

Though the APM has been dismantled, there is little hope for oil companies to enjoy marketing freedom
in the country. The oil ministry has told the National Security Council (NSC) that the government’s
intervention in pricing sensitive petroleum products – petrol, diesel, cooking gas and PDS kerosene –
would continue to protect the economy from inflation and, more specially, benefit the common man.

Petroleum ministry to a quarry from the NSC relating to the government steps to ensure energy security
replied: “Private sector oil companies such as Reliance Industries, Essar and Shell – that have made huge
investments in fuel retail – are the worst victims of the government’s policy. The government’s policy to
keep the prices of the petrol and diesel artificially low by refusing to allow public sector oil companies
like Indian Oil Corp, Hindustan Petroleum Corp and Bharti Petroleum Corp to raise prices has not only
checked private fuel retailers’ expansion plans but also forced them to shut down several outlets.

Arguing in favour of the government intervention, the ministry said, “International oil prices have been on
a consistent uptrend since 2003-04. Each year; annual oil prices have averaged more than those prevailing
during the previous year. The Indian basket of crude oil, which averaged $ 23 per barrel at the time of
dismantling APM in March ‘02 and $ 36 per barrel in May ‘04, averaged $ 62 per barrel during 2006-07.
The average price of crude oil of the Indian basket during 2007-08 is $ 72.90 per barrel. It is in the light
of abnormally high international oil prices that the government has been forced to continue its
intervention in the pricing of sensitive products.
7.1 INSURANCE

1. Bancassurance

Insurance sold by bankers are termed Bancassurance. According to survey conducted by Weston Wyatt
World-wide –a global insurance consulting firm, bancassurance is likely to generate approximately 35%
of private insurer’s premium by 2008, and 40% by 2010. In its first survey of the Indian insurance market,
the study indicated, “Share of bancassurance as a percentage of total premium income has in fact been
rising over the last three years. It was 11% in 2003-04 and has steadily increased to 21% in 2006-07”.
Insurers who are long known to depend on the traditional agency channel are now keen to engage
alternate channels including banks to lower the cost of customer acquisition and build volumes quickly.
Insurance sold through banks are turning out to be more cost effective and are yielding better profitability
margins. Banks on the other hand are eager to enhance their fee-based income as Base II norms are
putting pressure on bank’s capital and forcing them to seriously look at business models that focus on
high value addition. With Indian banks investing in IT and core banking solutions, they are being forced
to divert surplus staff to selling covers.

2. Banks may not get to sell multiple insurers products

The Insurance regulator is of the view that banks cannot be distinguished from other corporate insurance
agents that are allowed to sell products of only one insurer. This stance could be a setback for banks
which have been lobbying to forge relationships with multiple insurers. At present only three entities can
sell insurance – an individual agent, a corporate agent or a broker. Agents, whether individual or
corporate, are by regulation tied to one insurance company and are recognised as representatives of the
insurance company. Brokers, on the other hand, are perceived to be representing the buyer and can offer
products from a host of companies. Broking companies can do only insurance and banks cannot become
broking companies. At best, they can float a broking subsidiary after obtaining permission from the
regulators. The regulator, however, does not have any problems granting insurance licences to banks.

3. Giving new life to insurance penetration

Selling risk policies through grocery stores and telephone booths could well be answer to the country’s
low insurance penetration in rural areas. Both the ministry of finance and the insurance regulator are in
favour of introducing alternate distribution channels to deepen the insurance market, especially its rural
penetration. A separate committee at the Irda is already working to explore alternate, cost-effective
avenues to take insurance to the rural population.

Servicing insurance policies of ex-agents: Policyholders whose agents have dropped out of the
profession can look forward to their policies being serviced by new agents. An IRDA constituted panel
has recommended this change, which would need changes in existing laws to come into effect.

4. Investors in Ulips don’t use switch option

Life insurance companies are making the most of the stock market fall to buy the fundamentally strong
shares whose valuations turned attractive. Puneet Nanda, chief investment officer, ICICI Prudential Life
Insurance said, “Our experience has been that most of our investors do not exercise the option to shift to
debt when the markets are down. We have been through three major market crashes. In all three our
experience is the same that policyholders do not exercise the option to switch investment to debt. We
have infact seen investors using the opportunity to put more money in equity during such sharp dips”.
7.2 KNOWLEDGE RESOURCE
It’s all in the game

Gaming indeed is becoming serious business. And who better takes it more seriously than the Anil
Dhirubhai Ambani Group (ADAG), owner of one of the leading online gaming portal in the country,
Zapak.com. But when a game at Zapak asks its players to activate Reliance towers and bar “Podafone’
and “Hairtell” towers – an obvious dig at ADAG group owned Reliance Communication’s key telecom
sector competitors, Vodafone and Airtel – is it just another game or is there a case involving a
competitor’s brand disparagement here?

Recently on the ADAG group’s gaming portal, a game called Baatman was launched where the players
have to activate all Reliance Mobile towers and bar, as the game states, “useless Podafone and evil
Hairtell towers.

Rohit Sharma, COO of Zapak Digital Entertainment said: “We are simply a platform. If a brand wants to
use it, we provide space. We’ll remove the game if any company or organisation has any problem with
the same.” There was no disclaimer in the game at the time of going to press. Brand specialist and CEO of
Harish Bijoor Consults, Harish Bijoor gives a perspective beyond the legalese: “I think, today more than
85% of people on the net are under the age of 25 years. They like this ‘in the face, kind of a brand and
Reliance Mobile will promptly catch their attention.

In fact, Reliance Communications very up front on the fact that though in a subliminal way, it has surely
taken digs at its competitors. Sanjay Behl, head, brand and marketing, Reliance Communications said:
“We are number one in the telecom industry when it comes to connectivity or any other aspect and we’ve
used all possible channels to make this fact known to our consumers.”

Mr Pawan Duggal, owner of law firm, which actively in the field of cyberlaw, intellectual property rights
and information technology believes that both (Vodafone and Airtel) companies can easily file a law suit
against this. It is purely a case of taking pot-shots on established brands and these companies can take it to
court, which in turn can grant an injunction. He explains that though Zapak can feign ignorance and the
author of the game can say that it’s an act of fantasy, however, the court has the power to see beyond what
is visible. An injunction can be granted and the website can be sued and asked to pay damages.

Corporate intelligence

Detective agencies call it ‘corporate intelligence’ and say it has become a necessity in the business world
where companies routinely track their rivals’ products and services, keep an eye on their employees and
even prospective alliance partners or takeover targets. Detective agencies dealing in this area say that
there are primarily three kinds of corporate intelligence in India – a company gathering competitive
intelligence such as information on the firm’s product, strategy and human resources, monitoring
employees before and after joining an organisation and due diligence before a joint venture, partnership or
other business deals.
 BLUE IS THE NEW GREEN
Emerging spirit of good-citizen ethics

Alka Agrawal
Promoter of Mi7 & SAFE

Financial Literacy Mission

A crash course of literacy

Missions Seven Charitable Trust

120/714, Lajpat agar, Kanpur - 208005
Phone 0512-2295545

Safe Financial Advisor Practice Journal: February 2008