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More Cloud Bursts to follow as reform tsunami hits the nation and bolts from the blue celebrated!
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Many people have been killed as several houses caved in following a series of cloudbursts in different areas of Rudraprayag district in Uttarakhand.More Cloud Bursts to follow as reform tsunami hits the nation and bolts from the blue triggers celebrations!I am far away from home, the Himalayas and based near the bay of Bengal guarded by mangrove forests Sundarvana, but I continue to bleed with wounds invisible eating my heart, my mind and my existence!The reforms tsunami has to target now the aborigine humanscape most, the Himalayas, central india abundant with minerals and the coastline. The ultimate goal of reforms is exploitation of nature, nothing else. Ecology and environment have to be prime targets. Never do expect any respite from cloud bursts as the nation is hit by the reforms tsunami.On the other hand,transport services in the metropolis and districts of West Bengal were disrupted today with most private bus operators going off the roads in response to an indefinite strike call demanding an immediate fare hike.Builder mafia raj showcased in recent scams and scandals,is boosted as never before.Investment in real estate remains a most profitable proposition in India, particularly in the National Capital Region (NCR) of Delhi, which is growing at a feverish pace. Overall, the returns on long term, say around 15 years, are almost 15% compounded annually. These kinds of returns are hard to come by from any other asset class. In the Himalayas, suicidal push for energy , specifically nuclear energy,big dams, deforestation and construction, all on name of development, urbanisation and industrialisation has made it the clusters of atom bombs which may explode any time. Cloud Bursts are just sounding the alarm bells.Sikkim extends so fasts!The sea coast lines and reserve forest are also inflicted and glaciers may not be spared, too. Holy places as well as core tiger project areas have turned to be popular honymoon resorts.Forset and environment laws are misused against the nature associated excluded, excommunicated communities, but corporate interests are always protected.After subsidy cuts, disinvestment drive, FDI push, all the projects pending because of people`s resistance or environment clearance, have to set off from the blocks in an unprecedented sprint!Overseas investors pumped in nearly Rs 3,000 crore in Indian stock market in the past two weeks amid hopes of government initiatives on policy reforms and easing of monetary policy.
After a series of steps to ease foreign direct investment (FDI) rules, the government has decided not to immediately push for liberal norms for overseas flows into defence production. But it is the set of reforms most waited in Washington for which Indo US Atomic deal has been operationalised despite so many hurdles!
"The issue has been discussed and the defence ministry has some concerns. We will wait until the defence ministry agrees to it," commerce and industry minister Anand Sharma told TOI in an interview on Saturday. Pleas read between the lines!
Nine persons were on Sunday killed and five others injured as several houses caved in following a series of cloudbursts in different areas of Uttarakhand's Rudraprayag district, taking the death toll since Friday to 47.Cloudbursts struck four villages including Kirorimalla, Timli Badma, Dugur Shemla and Simbal on Sunday morning, in which nine persons died and five others were injured, Executive Director of Disaster Management and Mitigation Department (DMMD) Piyush Rautela said.With these deaths, toll in Rudraprayag district in the last two days went up to 47, whereas, five persons were injured and 23 others still missing, Rautela said.A house was flattened in the cloudburst at Kirorimalla village in Jalokhi area, killing five persons, including three women, he said.A temple was washed away in the rains triggered by a cloudburst in Timli Badma village of Jalokhi. The priest and his wife were killed in the tragedy, the DMMD official said.Two persons were killed in the landslide triggered by cloudbursts in two villages - Dugur Shemla and Simbal - in Ukhimath area of Rudraprayag.Meanwhile, the toll due to the heavy rainfall triggered by a serious of cloudbursts in Ukhimath area on September 14 rose to 38.Rautela said that 38 bodies have been recovered in the relief operations with the help of the Army and ITBP personnel.
India will take additional fiscal consolidation measures by the end of October to boost growth, finance minister said, adding he expects the central bank to take more "supportive measures" in its next policy review.
The Reserve Bank of India left interest rates unchanged but cut the cash reserve ratio for banks on Monday, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a spree of reforms to boost growth and improve its fiscal position.
"I am very confident that between now and Oct. 30, since the government is expected to take a number of additional policy measures and also lay out the path of fiscal correction, the response of RBI on Oct. 30 will be far more supportive of growth," P. Chidambaram, the finance minister, told reporters on Monday.
Basking in all-round praise for decisively attempting to rebound after months of paralysis, the government will roll out a series of policy announcements shortly to capitalise on the momentum generated by last week's sudden burst of reforms.Economic Times reports.The government last week unleashed a wave of reforms, notably raising diesel prices and allowing foreign firms into India's supermarkets.The steps, while drawing howls of protests from other political parties, including some UPA constituents, have been welcomed by industry as a serious attempt by a government on the defensive to change tack.Officials said Chidambaram, who replaced Pranab Mukherjee as finance minister last month and has since won high marks from businesses for quickly addressing unpopular tax measures, is likely to speak shortly on the government's plans for fiscal consolidation - a major bugbear of ratings agencies and financial markets.
Meanwhile,Prime Minister Manmohan Singh is expected to speak to West Bengal Chief Minister Mamata Banerjee today. Sources say that the government is expected to reach out to its ally Trinamool Congress, and discuss a compromise over the cap in subsidised LPG cylinders.NDTV reports.The government restricted the supply of subsidised cooking gas to six cylinders per household in a year and raised the price of diesel by Rs. 5 per litre on Thursday, prompting angry responses from Mulayam Singh Yadav and Ms Banerjee, who has demanded a rollback. Ms Banerjee had given the government a 72-hour deadline to roll back the cap on subsidised cylinders and the hike in prices of diesel.Prime Minister Manmohan Singh on Saturday had said that it will take "courage and some risks" to break the policy logjam in the country.On Friday, the government in a surprise announcement cleared 51% Foreign Direct Investment or FDI in multi-brand retail - a move it first approved last year, but suspended after strident opposition by West Bengal Chief Minister Mamata Banerjee. Her Trinamool Congress will meet tomorrow to decide whether it should pull out of the government and provide external support - this means all ministers from Trinamool would quit. Aware that if she exits the UPA, the government will not fall, Ms Banerjee is unlikely to take a more extreme stand.Ms Banerjee has 19 Lok Sabha MPs, making her the second- largest member of the ruling UPA coalition after the Congress. Ms Banerjee's reaction has been taken in stride by the government which has said that while it respects her right to disallow the new retail policy in West Bengal, other states are in favour of FDI in retail and would like to implement it. The government's reforms are based on careful political calculations - Mulayam Singh Yadav's Samajwadi Party has said it does not support the new policy but will not stop the external support it provides to the UPA. Mayawati's BSP has taken a similar stand.
After months of avoidable hesitation and procrastination the Manmohan Singh Government has decided to take the plunge and go in for crucial economic reforms which were waiting for nothing but a little courage and a decision.The decision to go in for FDI in retail and civil aviation is the beginning of a new set of reforms. More decisions are likely to be taken during the next few days irrespective of what political parties like Mamata Banerjee's Trinamool Congress may choose to do politically.
There are two major reasons for Dr Mamnmohan Singh for what he described as "biting the bullet". One is his critics' charge against his Government that there was policy paralysis in the government. Somewhere the charge has stung.
The second is the economic reason and the fear that unless reforms are pushed through fast, economic growth, which not long ago had touched almost nine per cent, will at the end of the financial year be only a little above five percent.
This could lead to fall in employment across the country and the loss of lakhs of jobs. This in turn will have political repercussions for the government which is to face elections in less than two years - 2014.
It is too clear that the government has done its political sums with care and come to the conclusion that even if a majority of the States don't want FDI in retail, it will get away with the decision.
The government, it seems, does not apprehend any threat to its survival even if Mamata Banerjee's Trinamool Congress chooses to walk out of the UPA.
It is difficult to read Mamata Banerjee's mind but at worst she can pull her ministers out of the Manmohan Singh Government and continue to support the existence of the government at the Centre.
The Congress has reckoned that Mamata Banerjee cannot afford to jump on to the BJP's bandwagon, just to spite the Manmohan Singh Government. This is because she cannot afford to lose the 25 per cent of the Muslim vote in her own State by siding with the BJP.
Also, the Congress must have been given assurance in private by Mulayam Singh and Mayawati that the Samajwadi Party and Bahujan Samaj Party will not join those who want to topple the government at the Centre.
Essentially, neither of these two parties wants an early parliamentary poll whose results can be uncertain. Whatever their stand on FDI in retail, these two parties also want to retain their distance from the BJP.
Even the BJP and other opposition parties and groups have a problem in forcing an early election. Their serving MPs in the Lok Sabha simply don't want early parliamentary election and cutting short their own term. They fear the partyleadership may not give them the ticket for the next election. And what is the guarantee that even if they get the ticket from the party they will be elected by the people?
Apparently, Dr Manmohan Singh and the Congrss party have taken into their account that there is no risk to the survival of the government if they go ahed with economic reforms.
The positive reaction from the market to the government's decision to induct FDI in retail and civil aviation has also strengthened the belief that not only economic reforms will boost the economic growth, but it also will help the Congress party win over the middle class which has got alienated from it during the last two years, on the backfoot as the government was on the issue of corruption. By H K Dua
The finance ministry is all set to announce several 'nuts and bolts' policy measures aimed at making it easier for some sectors to raise overseas loans, removing irritants holding up large projects, and prodding industry to press ahead with investments, officials involved in the exercise told ET. Other measures being planned include a relaxation in the cost limit for external borrowings to get capital flows going, more measures to ease foreign flows into stock markets, and increased pressure on state-run companies to deploy their cash hoards.
Finance Minister P Chidambaram's recent suggestion to set up a cabinet-level National Investment Board under the prime minister is likely to be fast-tracked. This board will clear projects involving investments of more than Rs 1,000 crore and ensure that once approved, these cannot be opposed by ministries. At present, final decisions on projects rest with the relevant ministries, leading to delays in project approval. The Planning Commission is expected to include the board in its 12th Five-Year Plan document.
"The idea is to capitalise on the momentum that has built up to push as many things as possible, as the window of opportunity is very limited," said a senior government official privy to the deliberations. Another senior government official said the focus of the next lot of steps would be to improve implementation and address the 'nuts and bolts' issues that irritate investors and discourage investments. "There are a number of procedural issues that pose unnecessary challenges to investors and these need to be addressed along with big-ticket reforms," the official said.
Large farm lobbies are backing the government's decision to allow foreign supermarkets to set up shops in the country, saying the move will shorten the supply chain and get growers a larger share of the final selling price.Most farmers, however, want the government to go a step further and make it mandatory for retailers to buy 75% of their produce directly from farmers, thereby bypassing the "restrictive" mandi auction system.Economic Times reports.
The country's fiscal deficit is likely to exceed budget's 5.1% target primarily because of higher than expected oil subsidy, even after factoring in Rs. 5.63 a litre hike in diesel prices and capping the supply of subsidised LPG to 6 cylinders per household in a year.Thus, more reforms to follow!According to HSBC chief economist for India and Asean (region) Leif Lybecker Eskesen, "the steps will only contain and not prevent fiscal slippage".On the other hand,Standard Chartered Bank has cut India's economic growth forecast for the current financial year to 5.4% from 6.2%, citing slowing consumer spending and a slack in pickup in investment activity in the fiscal first half.The pressure mounts up to speed up reforms faster and faster as despite calling the Indian government's announcements on Foreign Direct Investment ( FDI) as an encouraging development, Takahira Ogawa, Director of Sovereign Ratings at Standard & Poor's said that uncertainty persisted over the implementation of these measures.
"Any benefit from the divestment plan of the state-owned companies also depends on the actual implementation of the plan," he told ET Now. Ogawa also said that the deregulation of foreign ownership of multi-branded retailers is only applicable in those Indian states which have agreed, or will agree in future to allow foreign direct investment in multi-brand retail trading. Therefore, the actual impact of the reform may be less than expected, he opined.
"Nevertheless, if the above measures proposed by the Indian government are implemented, Standard & Poor's would expect medium-to long term positive impact on the macro economy of India," Ogawa opined.
India will miss its best opportunity to fish in troubled international waters and face the spectre of becoming Asia's Greece if coal, fiscal deficit and land acquisition issues are not fixed, said the chief executive of the nation's most valuable bank.Permitting FDI in retail and insurance would help the economy on the margins, but not take India back to 8% economic growth rate; politicians burying differences and parliamentarians getting their act together will, he said. "FDI in retail and insurance is not the big-bang reform," Aditya Puri, CEO of HDFC BankBSE 0.23 %, told ET in an interview ( Address basics & things will fall in Place: Puri) before Friday's announcements.
Even factoring the fuel hikes in, HSBC expects the 2012-13 fiscal deficit to reach 5.8% (as against the 5.1% deficit target).While the price hike is positive and will reduce the under-recoveries (losses by oil companies) by Rs. 20,300 crore, key to note is that retail prices are way below global prices, Citigroup said in a research report.
If there is no change in the current subsidy sharing mechanism, the government's share of losses would touch Rs. 1,00,200 crore -– higher than Rs. 83,500 crore in FY12, it said.
"Accounting for other expenditure and revenue slippages, we maintain our view of the fiscal deficit coming in at 5.9% of GDP as against the government's target of 5.1%," Citigroup economist Rohini Malkani said in a report.
Bank of America Merrill Lynch India economist Indranil Sen Gupta said in a report that "India's fiscal risks are overdone, although the fiscal deficit is the favourite whipping boy for every economic ill - low growth, high inflation, rupee depreciation - today.
"Yet, we do not expect India's fiscal position to improve in the visible future," he said.
The heavy dose of reforms over the weekend may have buoyed sentiments, but most experts believe the threat of a ratings downgrade by international agencies still looms large though chances of any immediate action have receded.
Ratings agencies Standard & Poor's and Fitch have put India's sovereign credit rating on the watch citing poor economic fundamentals, high fiscal and current account deficits and lack of action from the government.
A downgrade would take India's rating to below investment grade, which may force many investors to sell Indian securities or stop incremental investments, depressing capital flows and raising cost of borrowing for the local companies.
Meanwhile,the BSE benchmark Sensex trimmed initial gains but was still trading with a gain of 54.87 points at 12:20pm on buying in realty, banking, capital goods, refinery and auto stocks ahead of the Reserve Bank's monetary policy.The rupee rallied on Monday to 4-month high by gaining a hefty 51 paise at 53.79 against the dollar on persistent selling of the American currency by banks and exporters as well as capital inflows amid strong equity market.Shares of retail, aviation and cable companies soared by up to 33 percent following the government decision to open these sectors to overseas investors.However,the Reserve Bank of India (RBI) on Monday left interest rates unchanged but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a spree of reforms to boost growth and improve its fiscal position.The RBI left the policy repo rate at 8%, in line with expectations in a Reuters poll on Friday before the government unexpectedly announced measures to allow foreign direct investment in industries including supermarkets and airlines. The RBI cut the cash reserve ratio, the share of deposits banks must keep with the central bank, by 25 basis points to 4.5% in a move it said will inject about 170 billion rupees ($3.12 billion) of liquidity into the banking system.
Expressing concern over high rehabilitation and resettlement (R&R) cost to be incurred by industry in the proposed Land Acquisition Bill, Ficci today asked the government to make changes in the provision.
Without such changes it will not be viable for the industry to acquire or purchase land for manufacturing or infrastructure, the industry body said.
"The current R&R provisions of the Bill will put an unfavourable burden on the industry as it will escalate the land cost at least by three to four times if compared with the existing provisions of Land Acquisition Act 1894," Ficci President R V Kanoria said in a statement.
Ficci hoped that the proposed Bill in its current form is not passed as the chamber thinks it would not be in the interest of overall economic development of the country, the statement said.
Kanoria further said the definition of 'public purpose' needs to include industry/manufacturing, industrial zones like National Manufacturing and Investment Zones (NMIZs) and industrial corridors.
By excluding industry and manufacturing from the definition, the objectives of National Manufacturing Policy cannot be achieved, he added.
In a densely populated country like India, the government must necessarily have a facilitating role in land acquisition for the industry, Ficci said.
The Indian government announced a flurry of reforms last week on Friday to revive growth and spur investor sentiment. However, the effect of the announced reforms on the government's credit profile is minimal because they are too small to have material sovereign credit benefits, Moody's said in a note on Monday.
"The announcements will boost investor sentiment, which has sagged in recent months partly owing to the perception that the government would be unable to implement politically-difficult structural reforms to revive growth," the note added.
The measures seek to address specific market concerns about the government's fiscal position and the deceleration of the country's investment rate.
Last Thursday and Friday, the Indian government (Baa3 stable) announced a number of reforms, including a 12 per cent hike in subsidized diesel prices, stake sales in select govt-owned companies, and a liberalization of foreign direct investment ( FDI) regulations in sectors such as aviation, broadcast services, power exchanges and retail.
Indian markets have indeed got more than what they wished for from the UPA government within 24 hours. Most brokerage houses have raised the December 2012 Sensex target to as high as 20,000.
Foreign Institutional Investors (FIIs) investment in the country's equity market has reached Rs 65,954 crore (about $12.81 billion) so far this year.
Market analysts believe that inflows would continue in the coming months as well on account of recent big-ticket announcements by government, including operationalisation of 51 per cent FDI in multi-brand retail, allowing foreign carriers to buy up to 49 per cent stake in domestic airlines.
Further, liberalisation of the broadcasting sector would prove as major sentiment lifter for foreign investors, they added.
"I think FII inflows will continue in the domestic equity market on major policy reforms announced by the government, Rajesh Jain, EVP retail research, Religare Securities, said.
During September 1-14, FIIs were gross buyers of shares worth Rs 20,854 crore, while they sold equities amounting to Rs 17,969 crore, translating into a net investment of Rs 2,885 crore ($521 million), according to data available with the market regulator Sebi.
Apart from equities, FIIs also invested Rs 1,838 crore in the debt market during the period under review.
Geojit BNP ParibasBSE 1.82 % Research Head Alex Mathews said foreign investors have sidelined the concerns of sluggishness in the economy and high interest rates. They have shown faith in the Indian equity market on expectations of the government's fresh initiatives on policy reforms, he added.
FIIs have also put in money in the stock market due to easing of monetary policy by the US Federal Reserve and they also cheered the decision of hike in diesel prices, Mathew added.
Buoyed by strong FII inflows, the BSE benchmark index, Sensex, surged 780 points over four per cent so far this month to close at 18,464.27 points on Friday.
Taking the latest inflows into account, FIIs have infused a net amount of Rs 65,954 crore (about USD 12.81 billion) so far this year and Rs 23,471 crore into the debt market during the same period.
As on September 14, the number of registered FIIs in the country stood at 1,756 and total number of sub-accounts were 6,315 during the same period.
A majority of the 15 brokers and fund managers polled over the weekend by ET have raised their Sensex targets for the year-end despite stocks being 'fairly-valued' or even 'over-valued'.
"Six of our poll participants expect the Sensex to be in the range of 19,000 to 20,000 before December 31 while four are even more optimistic as they see the index reaching 20,000-21,000 levels," ET reported.
"Deutsche Bank and Citigroup raised their targets for the BSE Sensex after the government announced reforms last week, including opening up the country's multi-brand retail sector to foreign direct investment," Reuters reported.
"Deutsche Bank raised its December 2012 target for the BSE index to 20,000 while Citigroup raised its BSE target to 19,900 for June 2013 from its previous target of 18,400 for December," added the report.
However, Moody's is of the view that although reforms are a positive sign for the markets, but they lack the dept to have any material impact on the credit profile.
The diesel price increase, along with a cap on households' use of subsidized cooking gas, will only reduce the government's fiscal deficit by only approximately 0.1 per cent of GDP.
However, the decision is credit positive for the oil marketing companies such as Indian Oil Corporation Ltd.BSE 0.78 % The increase in diesel prices will lower the monthly fuel subsidies by nearly 15 per cent to about Rs 14,000 billion from about Rs 16,500 crore.
The government's decision to sell the stake in the National Aluminium Company, Oil India Ltd, Metals and Minerals Trading Company and Hindustan Copper LtdBSE 1.50 % would fulfill only half of its budgetary goal of generating Rs 30,000 crore.
The government move to allow foreign airlines to buy up to a 49 per cent stake in Indian airlines will have a positive impact for India's private sector airlines. However, since the state-owned airline Air India is unlikely to be allowed to benefit, the measure has minimal sovereign credit implications, Moody's argues.
The UPA stance on retail has already been through muddy water when in December 2011 the government unveiled the same policy, only to back away from it days later.
"Therefore, the credit benefit of the announcement can only be recognized when a major multi-brand retailer actually receives all regulatory approvals to invest," Moody's added.
Indian economy and reforms: How Manmohan Singh got his mojo backSoma Banerjee, ET Bureau Sep 16, 2012, 05.12AM IST
Mon, Sep 17, 2012 at 09:15
Here's the inside story of how the PM led GoI's reform offensive, how Sonia helped him, how Congress is managing political risk, and what's coming next: Rahul No. 2 in party and a new-look cabinet
Self-assuredness...ability to bounce back from a debilitating trauma and negative attitude. That's how the Urban Dictionary — that online barometer of all things dynamic — defines the word 'mojo'. Its editors might as well been talking about another M word: Manmohan.Ironical then that taking Manmohan Singh and mojo — originally standing for a bag with magical, charm-inducing amulets in African folk tradition — in the same breath before Friday the 14th would have evoked only a loud global sneer. Blamed by corporate leaders for a self-inflicted policy paralysis, slammed by Opposition for the corruption scams unfolding under his watch, and pilloried by global media as a failure, Prime Minister Manmohan Singh seemed fated for an unceremonious sunset.
Together they pushed him over the edge, and he flew. Forty-eight hours after the blitzkrieg of reforms unleashed by the UPA II dispensation, corporate leaders are smiling, Opposition is angry and confused, while the global media is still trying to figure out just what exactly happened one Friday evening in New Delhi.
Well, what unfurled on the said Friday night was in the works for almost three months. The complete washout of the monsoon session of parliament and the threat of a ratings downgrade acted as the prime triggers. And a sweeping revamp of the government and Congress party is what lies ahead.
Ladies & Gentlemen, GoI is in the Mission Mode.
It's a Go. Thanks Ms Gandhi
It was the final week of August. Sonia Gandhi was scheduled to leave the country for a routine medical check-up and the lame-duck parliament session was drawing to a close with no legislative business to show for.
Gandhi and Singh had met several times over the preceding weeks since the run up to the presidential elections in June. Confronted by a stubborn Opposition that wouldn't settle for anything less than the PM's scalp, UPA's Top Two decided to take a call. The duo met for a final time a couple of days after the PM's suo moto statement in the House on August 27. A day later, Gandhi met her party leaders and asked them to return the favour. "There's nothing to be defensive about. Let us stand up and fight aggressively," she told her MPs.
In the meeting, Singh is understood to have reiterated his conviction — 'good economics is good politics' — as the only way out of the political morass. Gandhi is understood to have told Singh to go ahead with what it needs to be done rescue the economy. "We are on board," she told the PM, a person in the know told ET Magazine.
A week later, on September 7, a day after the Washington Post noted "India's silent PM had become a tragic figure," Singh, (who wore a hardened look by then) broke his silence in a curt message to the nation outside parliament: "...I am instructing all ministries to accelerate their consideration of critical issues where decisions are needed to get the economy moving again." That was the cue, the rest played out as per the script, says a senior government official.
The Clark Kent Moment
"A man on a mission" is how a close aide described Manmohan Singh while recalling the nuclear deal days in 2004-05, a day after the Post article."Casablanca, torn between his sense of duty and his frustration over personal charges that questioned his integrity...It was difficult for him to continue and the desire to quit may have crossed his mind many a time in the past few weeks; yet his sense of duty to carry on weighed heavily on his mind," says the aide who has known him for years.
For almost the entire part of the Coalgate drama, the PM kept quiet. He gained nothing by remaining silent, yet there was a lot to lose.His friends and close associates, even those who acted as a sounding board on key decisions like C Rangarajan, chairman of the PM Economic Advisory Council or Montek Ahluwalia, deputy chairman of the Planning Commission, had been voicing concerns about the need to arrest the growth decline. The thought was not lost on Singh, who was only too aware of the perils of indecision.
"This is what mattered the most to him; the fact, that the country was being held hostage by political vested interests," another aide recounts. Known to be a man of few words, who prefers to have dialogues within a closed group (he is aware of the limitations of his oratory skills), Singh believes in giving a long rope to his colleagues.
But this time around, Manmohan Singh had reached the end of the proverbial rope with his many cabinet colleagues and a few coalition allies. "He was clear, there was nothing to lose," says the aide.
Oil& Gas: Subsidy sharing still a bigger issue, PLilladher
Prabhudas Lilladher has come out with its report on oil and gas sector. According to the research firm, subsidy sharing mechanism is the key event to watch going ahead. While on the prima-facie GAIL stands to benefit on account of lower LPG under-recoveries, government may retain large part of benefit by change in subsidy sharing mechanism.http://www.moneycontrol.com/news/brokerage-recos-sector-report/oil-gas-subsidy-sharing-stillbigger-issue-plilladher_758477.html
rabhudas Lilladher has come out with its report on oil and gas sector. According to the research firm, subsidy sharing mechanism is the key event to watch going ahead. While on the prima-facie GAIL stands to benefit on account of lower LPG under-recoveries, government may retain large part of benefit by change in subsidy sharing mechanism.
- Acting on ballooning under-recoveries estimates, government has finally bit the bullet by increasing diesel prices (Rs3.5/litre), excise duty on diesel (1.5/litre), resultant increase in diesel prices being Rs5/litre(52bps hike in inflation). Government has also capped the number of subsidy LPG cylinders to 6/household per annum. Capping of LNG cylinders is the structural reform undertaken which should aid in capping LPG under recoveries in the coming years, however we remain sceptical over benefits of the same in the near term. To act on the trend of ‘Dieselization’ of the economy, the government has reduced excise duty on petrol by Rs5.3/litre.
- Increase in prices by Rs3.5/litre is likely to result in saving of Rs240bn on full year basis. Notwithstanding implementation issues, LPG capping of cylinders to ~6 per annum should reduce LPG subsidies by ~Rs113bn (assuming nil leakages in the system). Thus, the cumulative impact of the move stands at Rs355bn. For the first fortnight of September losses on diesel had mounted to Rs 17/litre and consequent under recoveries in the system had mounted to Rs2020bn. Post this action on duty tinkering and price increase effected by the government, the scenario, although improving at the margin, remains grim considering the under recovery for FY13 at current prices is Rs1,809bn, an increase of ~34% on a YoY basis.
- We would like to highlight here that every dollar increase in the crude oil prices increases the under-recoveries by ~Rs44bn (FY14). Ad-hoc increase of Rs3.5/litre in diesel prices, coupled with capping of subsidised cylinder at six per household, could result in reduction in under-recoveries by ~Rs350bn (negated by appreciation of ~US$8/bbls in crude oil prices). Thus, there might be a scope of disappointment if the crude oil prices were to remain strong in Rupee terms in the absence of meaningful reforms. We maintain that the subsidy sharing mechanism is the key event to watch going ahead. While on the prima-facie GAIL stands to benefit on account of lower LPG under-recoveries, however we expect government to retain large part of benefit by change in subsidy sharing mechanism.
While crude oil prices continue to be the biggest variable impacting the overall subsidy estimates for a fiscal, the profitability of the downstream Oil marketing companies is no merely a factor of increasing or decreasing crude oil prices. We believe, government has been milking OMCs via alternative methods to lower its subsidy share and as well as to prevent passing of higher crude and product prices to end users. Following alternative mechanism has in fact led to decline in profitability to the tune of Rs80bn on consolidated basis for three OMCs combined over the last 3-4 years and has led to continuous de-rating in the OMCs stocks. We believe, building an investment case for OMCs will be a challenging task for the investors and OMCs at best continues to be a trading bet for the portfolio hedging in event of global economic slowdown. While the increase or decrease in crude oil as well as product prices does provide a favourable/adverse swing on count of these variables, we believe till a structural solution is evolved, building an investment case in OMCs will continue to lack.
(a) Effective domestic protection to the refineries: There has been a constant decline in the effective protection to domestic refineries as the government has been cutting down the import duties on the petroleum products, which in turn adversely impacts the GRMs of OMCs, in turn adversely impacting the profitability. Effective protection to refineries has been reducing from 10% in FY2004 to 2.5% in FY2013E.
(b) Interest burden on the short term loans: One of the noticeable phenomenon’s for the OMCs is the mismatch between the announcement of the subsidy burden and actual disbursal of the same. Increasing under-recoveries leads to cash drain, which in turn leads to higher borrowing by these companies. To put the recent example in perspective, OMCs lost around Rs 48bn in FY12 on account of interest payout due to mismatch between the announcement and disbursal of the cash support to OMCs.
(c) Lack of revision in marketing margins and costs embedded in subsidy calculation: Marketing margins and costs involved in subsidy calculation of the regulated products were fixed in 2004 and the same has not been reviewed over the period. Comprehensive marketing margin revision of LPG / kerosene and diesel has not been carried out for the last nine and five years respectively. In the interim, the cost increase has significantly outpaced volume growth, while the ad hoc margin adjustments significantly lag the actual cost increase in our view.
(d) Categorization of petrol as deregulated petroleum product: In June 2010 government deregulated the prices of petrol, wherein OMCs were allowed to increase the prices in event of increased subsidy on the same. However, we are still witnessing clutches of regulation in terms of pricing from the government. Three OMCs combined lost around Rs48.9bn in FY2012 itself on account of lack of pricing freedom. Recognizing the fact that categorization of the petrol as deregulated petroleum product leads to OMCs effectively shouldering subsidy burden on the same, there has been a voices raised by BPCL , HPCL and IOC to treat Petrol as regulated product.
We continue to maintain our estimates and Target price for ONGC (Rs301/share), OINL (Rs508/share) and GAIL (Rs355/share) respectively pending clarity over the subsidy sharing mechanism.
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