India Budget 2016: Winners and Losers

Sun capital: India Budget 2016: Winners and Losers

Arun Jaitley, India's finance minister, Jayant Sinha, State finance minister, second right, and other members of the finance ministry in New Delhi, India, on Feb. 29

India’s annual budget is one of the nation’s most closely watched events -- not just for the numbers, but for the political message during a speech that runs for about 90 minutes.

This year rural villagers came away as undisputed winners, with Finance Minister Arun Jaitley announcing plans to "transform India for the benefit of the farmers, the poor and the vulnerable." That was expected: Prime Minister Narendra Modi lost a key state election in November, and faces as many as nine more contests next year. Here are the winners and losers.

WINNERS:

• Farmers -- pledges to double income of farmers by 2020, allocates 360 billion ($5.3 billion) to agriculture and farmers’ welfare; steps to ensure a greater share of retail food prices reach producers; announces 200-billion-rupee irrigation fund and record 9 trillion in credit for farmers. Affected companies include Shakti Pumps India Ltd., Jain Irrigation Systems Ltd.
• Poor families -- 100 percent of households to have cooking gas within three years; 100 percent of villages to have electricity by May 1, 2018.
• State-run banks -- 250 billion rupees to recapitalize government-controlled banks. "If additional capital is required by these banks, we will find the resources for doing so," Jaitley said. “We stand solidly behind these banks." Shares of State Bank of India Ltd. and Bank of Baroda could be affected.
• India’s biggest commodities exchange -- MCX Ltd. headed for a three-week high on the budget’s proposal to expand foreign direct investment in the exchanges.
• Housing developers -- 100% deduction in profits for affordable housing projects approved by March 2019. Projects must be built within three years. Shares of DLF Ltd., Unitech Ltd. could benefit.
• Tax litigants -- one-time dispute resolution scheme for those involved in retrospective tax disputes to pay only arrears; interest, penalty to be waived. Vodafone Group Plc, Cairn India Ltd. could gain.
• Infrastructure projects -- allocates 2.21 trillion rupees in total outlay for roads, railways and ports. Larsen & Toubro Ltd., India’s biggest engineering company, could see a boost.
• Energy industry -- "calibrated" market-based pricing to incentivize deep sea hydrocarbon exploration; 30 billion rupees a year to boost nuclear power investment. Reliance Industries Ltd., Oil & Natural Gas Corp., Oil India Ltd. could benefit.
• Startup Investors -- Profits made after two years of holding exempt from capital gains tax, compared with three years earlier. Move to benefit angel investors, seed funds and other early backers of startups.

LOSERS:

• The High Rollers -- 1 percent cess on luxury cars valued at 1 million rupees or more; surcharge on income tax raised to 15 percent from 12 percent on those earning 10 million rupees or more a year; additional 10 percent tax on those earning 1 million rupees or more in dividend income.
• Coal producers -- tax on coal production to double to 400 rupees per ton. Companies affected include NTPC Ltd., Tata Power Co., Adani Power Ltd.
• Smokers -- taxes on cigarettes to be hiked as much as 15 percent. Affected stocks include ITC Ltd., India’s biggest cigarette maker, and Godfrey Phillips India Ltd.
• Carmakers -- an infrastructure cess ranging from 1 percent to 4 percent on vehicles to help combat pollution. Shares of Maruti Suzuki India Ltd. fell to a 16-month low.
• Jewelry makers -- Excise duty on jewelry and higher threshold for exempt purchases. Companies affected include Titan Co.

Sun Capital Advisory Services

Tax to GDP ratio, redux

Suncapital: In a recent column in this newspaper (“India is an outlier in its tax policy”, 23 February), my IDFC Institute colleague, Praveen Chakravarty, and I peered into the Pandora’s box of public finance in India, arguing that India’s tax to gross domestic product ratio (GDP) is low by any relevant empirical benchmark. That particular trunk was prised open by French economist Thomas Piketty on a recent whirlwind tour of India. Readers will recall that it is he who has argued both that taxes are too low as a share of GDP, and that this contributes to a worsening inequality problem in India.

Now, the Economic Survey 2015-16 has a chapter devoted largely to tax to GDP ratio—for the first time so far as I am aware. Arvind Subramanian, chief economic adviser and architect of the survey, deserves enormous credit for turning what to many might have been an arcane technical issue into a live public policy debate.

The headline finding in chapter 7 of the survey is that, when controlling for GDP per capita, India is not, in fact, a negative outlier, as Chakravarty and I had claimed. Who is right?

Start with a simple statistical argument: an outlier is always relative to a given data set. So while, as we ourselves documented, the data clearly show that India’s tax to GDP ratio is low compared not just to the Organisation for Economic Co-operation and Development but also emerging economies—see table 1 in chapter 7—the report then goes on to argue that this vanishes when controlling for the level of per capita GDP, as presented in figure 2.

However, the report itself then establishes—see figure 3 and table 2—that when democracy is added as an additional control, India re-emerges as a negative outlier in total tax to GDP ratio, as also total government expenditure and especially health and education expenditure as shares of GDP.

Further, I would conjecture that, were an additional control added for resource-rich economies whose public finance is markedly different from other major economies, the survey’s finding would be enhanced further, and India would be even more of a negative outlier in its tax to GDP ratio. Preliminary results by Chakravarty reinforce this conjecture.

One other claim in the chapter needs to be probed further. In section 7.13, it is asserted: “India’s tax to GDP ratio has increased by about 10 percentage points over the past six decades from about 6% in 1950-51 to 16.6% in 2013-14.”

While this is true, it is incomplete and perhaps misleading. As Chakravarty and I documented, this increase occurred almost entirely in the first three decades, whereas the tax to GDP ratio has remained largely flat in the 16-17% range since 1991, the year that launched economic reforms. Further, our analysis demonstrated that there is, in statistical jargon, a structural break in 1991, as even eyeballing the data suggests.

This poses an enormous public policy puzzle, and indeed it contradicts the survey’s claim that tax to GDP ratio tends to rise with per capita income. For, in India’s case, tax to GDP ratio rose during a period when growth of GDP per capita was fitful and slow, whereas, when GDP per capita took off after 1991, tax to GDP ratio did not keep pace!

The bottom line of the empirical research is that, depending on how you slice and dice the data, you can find that India’s tax to GDP ratio is a negative outlier, as Chakravarty and I argue, or that it is not, as the Economic Survey argues. This invites the question, is there any theoretical basis to assert that tax to GDP ratio should rise with per capita income?

As it happens, the survey chapter does not provide a persuasive theoretical counterpart to its empirical findings. There is some suggestion that the state’s legitimacy and taxing capacity may rise with per capita GDP, thereby allowing tax to GDP ratio to increase. But this argument is not rigorously articulated. Nor does it allow for the possibility of reverse causation, such that a rising tax (and government spending) to GDP ratio allows GDP per capita to rise more rapidly, which could confound any causal claims based on the survey’s empirical results.

My own hunch is that, as a baseline, the tax to GDP ratio is likely to remain approximately constant as GDP per capita rises, at least for mature economies, however one defines these. (For the wonkish: this would follow if the income elasticity of government spending is approximately unity, and if government spending is financed, on average, only by current taxes, so that, on average, the government is running a balanced budget.) What this implies is that, once society has decided how much it wants to spend—which fixes the ratio of government spending to GDP—the tax to GDP ratio will be pinned down, and thereafter tax and government spending will rise roughly in proportion to GDP, so that the ratios will remain approximately constant.

In simpler language, in the long run, Indian governments will choose to tax more, if they wish to spend more. That appetite seems lacking at present. There’s the rub.

By Suncapital.co.in

Highlights of Union Budget 2016-17

Suncapital: Finance Minister Arun Jaitley unveiled a budget for the poor on Monday, announcing new rural aid schemes and skimping on a bank bailout, in a strategy shift that seeks to boost his ruling party in coming state elections.

Jaitley reiterated a forecast that India would grow by 7.6% in the fiscal year that is drawing to a close. He said the government wanted to spread the benefits of growth more widely among India's 1.3 billion people, but that he would stick to the government's existing fiscal deficit target for the coming year.

Here are the highlights of Jaitley's budget for the fiscal year that begins on April 1.

INTRODUCTION

1. Growth of Economy accelerated to 7.6% in 2015-16.
2. India hailed as a ‘bright spot’ amidst a slowing global economy by IMF.  Robust growth achieved despite very unfavourable global conditions and two consecutive years shortfall in monsoon by 13%
3. Foreign exchange reserves touched highest ever level of about 350 billion US dollars.  Despite increased devolution to States by 55% as a result of the 14th Finance Commission award, plan expenditure increased at RE stage in 2015-16 – in contrast to earlier years.

CHALLENGES IN 2016-17

1. Risks of further global slowdown and turbulence.
2. Additional fiscal burden due to 7th Central Pay Commission recommendations and OROP.

ROADMAP & PRIORITIES

1. 'Transform India' to have a significant impact on economy and lives of people.
2. Government to focus on –
a)ensuring macro-economic stability and prudent fiscal management.
b) boosting on domestic demand
c) continuing with the pace of economic reforms and policy initiatives to change the lives of our people for the better.
3. Focus on enhancing expenditure in priority areas of - farm and rural sector, social sector, infrastructure sector employment generation and recapitalisation of the banks.
4. Focus on Vulnerable sections through:
a) Pradhan Mantri Fasal Bima Yojana
b) New health insurance scheme to protect against hospitalisation expenditure
c) facility of cooking gas connection for BPL families
5. Continue with the ongoing reform programme and ensure passage of the Goods and Service Tax bill and Insolvency and Bankruptcy law
6. Undertake important reforms by:
a) giving a statutory backing to AADHAR platform to ensure benefits reach the deserving.
b) freeing the transport sector from constraints and restrictions
c) incentivising gas discovery and exploration by providing calibrated marketing freedom
d) enactment of a comprehensive law to deal with resolution of financial firms
e) provide legal framework for dispute resolution and re-negotiations in PPP projects and public utility contracts
f) undertake important banking sector reforms and public listing of general insurance companies undertake significant changes in FDI policy.

AGRICULTURE AND FARMERS’ WELFARE

1. Allocation for Agriculture and Farmers’ welfare is Rs 35,984 crore
2. ‘Pradhan Mantri Krishi Sinchai Yojana’ to be implemented in mission mode. 28.5 lakh hectares will be brought under irrigation.
3. Implementation of 89 irrigation projects under AIBP, which are languishing for a long time, will be fast tracked
4. A dedicated Long Term Irrigation Fund will be created in NABARD with an initial corpus of about ` 20,000 crore
5. Programme for sustainable management of ground water resources with an estimated cost of ` 6,000 crore will be implemented through 3 multilateral funding
6. 5 lakh farm ponds and dug wells in rain fed areas and 10 lakh compost pits for production of organic manure will be taken up under MGNREGA
7. Soil Health Card scheme will cover all 14 crore farm holdings by March 2017.
8. 2,000 model retail outlets of Fertilizer companies will be provided with soil and seed testing facilities during the next three years
9. Promote organic farming through ‘Parmparagat Krishi Vikas Yojana’ and 'Organic Value Chain Development in North East Region'.
10. Unified Agricultural Marketing ePlatform to provide a common e- market platform for wholesale markets
11. Allocation under Pradhan Mantri Gram Sadak Yojana increased to ` 19,000 crore. Will connect remaining 65,000 eligible habitations by 2019.
12. To reduce the burden of loan repayment on farmers, a provision of ` 15,000 crore has been made in the BE 2016-17 towards interest subvention
13. Allocation under Prime Minister Fasal Bima Yojana Rs 5,500 crore.
14. Rs 850 crore for four dairying projects - ‘Pashudhan Sanjivani’, ‘Nakul Swasthya Patra’, ‘E-Pashudhan Haat’ and National Genomic Centre for indigenous breeds

FISCAL DEFICIT

1. Fiscal deficit in RE 2015-16 and BE 2016-17 retained at 3.9% and 3.5%.
2. Revenue Deficit target from 2.8% to 2.5% in RE 2015-16
3. Total expenditure projected at ` 19.78 lakh crore
4. Plan expenditure pegged at ` 5.50 lakh crore under Plan, increase of 15.3%
5. Non-Plan expenditure kept at ` 14.28 lakh crores.
6. Special emphasis to sectors such as agriculture, irrigation, social sector including health, women and child development, welfare of Scheduled Castes and Scheduled Tribes, minorities, infrastructure.
7. Mobilisation of additional finances to the extent of ` 31,300 crore by NHAI, PFC, REC, IREDA, NABARD and Inland Water Authority by raising Bonds.
8. Plan / Non-Plan classification to be done away with from 2017-18. Every new scheme sanctioned will have a sunset date and outcome review.
9. Rationalised and restructured more than 1500 Central Plan Schemes into about 300 Central Sector and 30 Centrally Sponsored Schemes.
10. Committee to review the implementation of the FRBM Act.

SOCIAL SECTOR INCLUDING HEALTH CARE

1. Allocation for social sector including education and health care – Rs 1,51,581 crore.
2. Rs` 2,000 crore allocated for initial cost of providing LPG connections to BPL families.
3. New health protection scheme will provide health cover up to Rs One lakh per family. For senior citizens an additional top-up package up to Rs 30,000 will be provided.
4. 3,000 Stores under Prime Minister’s Jan Aushadhi Yojana will be opened during 2016-17.
5. ‘National Dialysis Services Programme’ to be started under National Health Mission through PPP mode
6. “Stand Up India Scheme” to facilitate at least two projects per bank branch. This will benefit at least 2.5 lakh entrepreneurs.
7. National Scheduled Caste and Scheduled Tribe Hub to be set up in partnership with industry associations
8. Allocation of ` 100 crore each for celebrating the Birth Centenary of Pandit Deen Dayal Upadhyay and the 350th Birth Anniversary of Guru 5 Gobind Singh.

EDUCATION, SKILLS AND JOB CREATION

1. 62 new Navodaya Vidyalayas will be opened
2. Sarva Shiksha Abhiyan to increasing focus on quality of education
3. Regulatory architecture to be provided to ten public and ten private institutions to emerge as world-class Teaching and Research Institutions
4. Higher Education Financing Agency to be set-up with initial capital base of Rs 1000 Crores
5. Digital Depository for School Leaving Certificates, College Degrees, Academic Awards and Mark sheets to be set-up.

RURAL ECONOMY

1. Allocation for rural sector - Rs 87,765 crore.
2. 2.87 lakh crore will be given as Grant in Aid to Gram Panchayats and Municipalities as per the recommendations of the 14th Finance Commission
3. Every block under drought and rural distress will be taken up as an intensive Block under the Deen Dayal Antyodaya Mission
4. A sum of Rs 38,500 crore allocated for MGNREGS.
5. 300 Rurban Clusters will be developed under the Shyama Prasad4 Mukherjee Rurban Mission
6. 100% village electrification by 1st May, 2018.
7. District Level Committees under Chairmanship of senior most Lok Sabha MP from the district for monitoring and implementation of designated Central Sector and Centrally Sponsored Schemes.
8. Priority allocation from Centrally Sponsored Schemes to be made to reward villages that have become free from open defecation.
9. A new Digital Literacy Mission Scheme for rural India to cover around 6 crore additional household within the next 3 years.
10. National Land Record Modernisation Programme has been revamped.
11. New scheme Rashtriya Gram Swaraj Abhiyan proposed with allocation of 655 crore.

BANKING REFORMS

* Government to infuse 250 billion rupees capital into state-run banks in 2016/17; will find resources for additional capital for banks if required

TAXATION

1. Committed to providing a stable and predictable taxation regime and reduce black money.
2. Domestic taxpayers can declare undisclosed income or such income represented in the form of any asset by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income. Declarants will have immunity from prosecution.
3. Surcharge levied at 7.5% of undisclosed income will be called Krishi Kalyan surcharge to be used for agriculture and rural economy.
4. New Dispute Resolution Scheme to be introduced. No penalty in respect of cases with disputed tax up to `Rs10 lakh. Cases with disputed tax exceeding `Rs 10 lakh to be subjected to 25% of the minimum of the imposable penalty. Any pending appeal against a penalty order can also 14 be settled by paying 25% of the minimum of the imposable penalty and tax interest on quantum addition.
5. High Level Committee chaired by Revenue Secretary to oversee fresh cases where assessing officer applies the retrospective amendment.
6. One-time scheme of Dispute Resolution for ongoing cases under retrospective amendment.
7. Penalty rates to be 50% of tax in case of underreporting of income and 200% of tax where there is misreporting of facts.
8. Disallowance will be limited to 1% of the average monthly value of investments yielding exempt income, but not exceeding the actual expenditure claimed under rule 8D of Section 14A of Income Tax Act.
9. Time limit of one year for disposing petitions of the tax payers seeking waiver of interest and penalty.
10. Mandatory for the assessing officer to grant stay of demand once the assesse pays 15% of the disputed demand, while the appeal is pending before Commissioner of Income-tax (Appeals).
11. Monetary limit for deciding an appeal by a single member Bench of ITAT enhanced from Rs 15 lakhs to Rs 50 lakhs.
12. 11 new benches of Customs, Excise and Service Tax Appellate Tribunal (CESTAT).

SKILL DEVELOPMENT

1. Allocation for skill development – Rs 1804. crore
2. 1500 Multi Skill Training Institutes to be set-up
3. National Board for Skill Development Certification to be setup in partnership with the industry and academia
4. Entrepreneurship Education and Training through Massive Open Online Courses

JOB CREATION

1. GoI will pay contribution of 8.33% for of all new employees enrolling in EPFO for the first three years of their employment. Budget provision of Rs 1000 crore for this scheme.
2. Deduction under Section 80JJAA of the Income Tax Act will be available to all assesses who are subject to statutory audit under the Act
3. 100 Model Career Centres to operational by the end of 2016-17 under National Career Service.
4. Model Shops and Establishments Bill to be circulated to States.

INFRASTRUCTURE AND INVESTMENT

1. Total investment in the road sector, including PMGSY allocation, would be Rs 97,000 crore during 2016-17.
2. India’s highest ever kilometres of new highways were awarded in 2015.
3. To approve nearly 10,000 kms of National Highways in 2016-17.
4. Allocation of ` 55,000 crore in the Budget for Roads. Additional Rs 15,000 crore to be raised by NHAI through bonds.
5. Total outlay for infrastructure - Rs 2,21,246 crore.
6. Amendments to be made in Motor Vehicles Act to open up the road transport sector in the passenger segment
7. Action plan for revival of unserved and underserved airports to be drawn up in partnership with State Governments.
8. To provide calibrated marketing freedom in order to incentivise gas production from deep-water, ultra deep-water and high pressure-high temperature areas
9. Comprehensive plan, spanning next 15 to 20 years, to augment the investment in nuclear power generation to be drawn up.
10. Steps to re-vitalise PPPs:  Public Utility (Resolution of Disputes) Bill will be introduced during 2016-17
11. Guidelines for renegotiation of PPP Concession Agreements will be issued
12. New credit rating system for infrastructure projects to be introduced
13. Reforms in FDI policy in the areas of Insurance and Pension, Asset
14. Reconstruction Companies, Stock Exchanges.
15. 100% FDI to be allowed through FIPB route in marketing of food products produced and manufactured in India.
16. A new policy for management of Government investment in Public Sector Enterprises, including disinvestment and strategic sale, 7 approved.

FINANCIAL SECTOR REFORMS

1. A comprehensive Code on Resolution of Financial Firms to be introduced.
2. Statutory basis for a Monetary Policy framework and a Monetary Policy Committee through the Finance Bill 2016.
3. A Financial Data Management Centre to be set up.
4. RBI to facilitate retail participation in Government securities.
5. New derivative products will be developed by SEBI in the Commodity Derivatives market.
6. Amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts. 7. Comprehensive Central Legislation to be bought to deal with the menace of illicit deposit taking schemes.
8. Increasing members and benches of the Securities Appellate Tribunal.
9. Allocation of ` 25,000 crore towards recapitalisation of Public Sector Banks.
10. Target of amount sanctioned under Pradhan Mantri Mudra Yojana increased to Rs 1,80,000 crore.
11. General Insurance Companies owned by the Government to be listed in the stock exchanges.

GOVERNANCE AND EASE OF DOING BUSINESS

1. A Task Force has been constituted for rationalisation of human resources in various Ministries.
2. Comprehensive review and rationalisation of Autonomous Bodies.
3. Bill for Targeted Delivery of Financial and Other Subsidies, Benefits and Services by using the Aadhar framework to be introduced.
4. Introduce DBT on pilot basis for fertilizer.
5. Automation facilities will be provided in 3 lakh fair price shops by March 2017.
6. Amendments in Companies Act to improve enabling environment for start-ups.
7. Price Stabilisation Fund with a corpus of ` 900 crore to help maintain stable prices of Pulses.
8. “Ek Bharat Shreshtha Bharat” programme will be launched to link States and Districts in an annual programme that connects people through exchanges in areas of language, trade, culture, travel and tourism.

BOOST EMPLOYMENT AND GROWTH

1. Increase the turnover limit under Presumptive taxation scheme under section 44AD of the Income Tax Act to ` 2 crores to bring big relief to a large number of assessees in the MSME category.
2. Extend the presumptive taxation scheme with profit deemed to be 50%, to professionals with gross receipts up to Rs 50 lakh.
3. Phasing out deduction under Income Tax:  Accelerated depreciation wherever provided in IT Act will be limited to maximum 40% from 1.4.2017
4. Benefit of deductions for Research would be limited to 150% from 1.4.2017 and 100% from 1.4.2020
5. Benefit of section 10AA to new SEZ units will be available to those units which commence activity before 31.3.2020.
6. The weighted deduction under section 35CCD for skill development will continue up to 1.4.2020
7. Corporate Tax rate proposals:  New manufacturing companies incorporated on or after 1.3.2016 to be given an option to be taxed at 25% + surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.
8. Lower the corporate tax rate for the next financial year for relatively small enterprises i.e companies with turnover not exceeding ` 5 crore (in the financial year ending March 2015), to 29% plus surcharge and cess.
9. 100% deduction of profits for 3 out of 5 years for startups setup during April, 2016 to March, 2019. MAT will apply in such cases.
10. 10% rate of tax on income from worldwide exploitation of patents developed and registered in India by a resident.
11. Complete pass through of income-tax to securitization trusts including trusts of ARCs. Securitisation trusts required to deduct tax at source.
12. Period for getting benefit of long term capital gain regime in case of unlisted companies is proposed to be reduced from three to two years.
13. Non-banking financial companies shall be eligible for deduction to the extent of 5% of its income in respect of provision for bad and doubtful debts.
14. Determination of residency of foreign company on the basis of Place of Effective Management (POEM) is proposed to be deferred by one year.
15. Commitment to implement General Anti Avoidance Rules (GAAR) from 1.4.2017.
16. Exemption of service tax on services provided under Deen Dayal Upadhyay Grameen Kaushalya Yojana and services provided by Assessing Bodies empanelled by Ministry of Skill Development & Entrepreneurship.
17. Exemption of Service tax on general insurance services provided under ‘Niramaya’ Health Insurance Scheme launched by National Trust for the Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disability.
18. Basic custom and excise duty on refrigerated containers reduced to 5% and 6%.

MAKE IN INDIA

Changes in customs and excise duty rates on certain inputs to reduce costs and improve competitiveness of domestic industry in sectors like Information technology hardware, capital goods, defence production, textiles, mineral fuels & mineral oils, chemicals & petrochemicals, paper, paperboard & newsprint, Maintenance repair and overhauling [MRO] of aircrafts and ship repair.

Sun Capital Advisory Services

Indiabulls Real Estate Fund invests Rs125 cr in Mumbai project

Suncapital.co.in: With this deal, the fund has deployed almost 90% of its capital; remaining Rs50 crore to be deployed through another transaction

Indiabulls Real Estate Fund (IREF) has invested Rs.125 crore in an upcoming residential project in south Mumbai, its fourth transaction from the fund.

IREF, the first of the several real estate-focused funds managed by Indiabulls Asset Management Co. Ltd, made the investment in the form of structured debt in a project by the Shree Naman Group. With this, the fund has deployed almost 90% of its capital. It has invested Rs.100 crore each in projects of Supertech Ltd and Vatika Group in the National Capital Region (NCR) and Rs.125 crore in Sheth Creators Pvt. Ltd’s project in Mumbai during the course of last year, after launching its fund in February 2015.

The remaining Rs.50 crore will be deployed through another transaction. In line with its proposed strategy, IREF has invested in approved, under-construction and upcoming residential projects with visible sales, primarily in key property markets.

The investments have been done via the non-convertible debentures (NCDs) route.

“It was a successful first attempt by the fund. In 2016, deployment of capital by fund managers like us will be done with a little more caution. Cost of borrowing of developers have come down with a lot of liquidity in the market and there is a lot of pressure to deploy, but we will invest carefully,” said Ambar Maheshwari, chief executive– private equity, Indiabulls Asset Management Co. Ltd.

Jayesh Shah, chairman of Sree Naman Group, confirmed raising debt for an upcoming project and said the money will be used for project development.

In a month’s time or so, IREF plans to launch a second fund to raise another Rs.500 crore from domestic investors to invest in residential projects this year.

In the last couple of years, India’s real estate sector has witnessed a steady fall in home sales and a rise in unsold inventory.

Private equity (PE) funds and non-banking financial companies (NBFCs) have come to the rescue of many developers who needed capital to refinance loans, kick off projects or for last mile financing for ongoing projects.

“While there are ample investment opportunities in real estate, our measured and calibrated investment strategy of choosing top developers and their quality under-construction projects, has worked and will result in superior returns for our investors,” said Akshay Gupta, group executive head and chief executive officer, Indiabulls Asset Management Co. Ltd.

In 2015, PE funds invested nearly $2.77 billion in real estate projects and companies across 81 deals against $2.1 billion in 2014 through 90 deals, according to data from VCCEdge, which tracks investments. Demand for capital among developers continues to remain high this year as well.

“Fund-raising and deployment are both challenging in tough times. Fund-raising process for most funds has become a longer process as investors carry out a more rigorous due diligence process before committing capital,” said Shashank Jain, partner, transaction services, Pricewaterho\useCoopers India. “Deploying is tough because funds need to choose the best projects and developers, when they give out money when the sector is going through a rough patch.”

by Suncapital.co.in

Arvind Subramanian’s checklist for the Union budget

Suncapital: Governments have usually ignored the advice of their economic advisers. Rumour has it that the finance ministry is haunted by the ghosts of past economic advisers brandishing copies of neglected economic surveys and wailing loudly.

Be that as it may, over the years, thanks to insistent repetition, governments have incorporated some of the reforms championed by the authors of economic surveys.

As John Maynard Keynes put it, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Let’s hope chief economic adviser Arvind Subramanian’s voice, too, is heard by those in authority, in spite of him being neither a “defunct economist” nor an “academic scribbler”.

We shouldn’t look to the Economic Survey to provide hints about likely announcements in the budget. What the survey does is mark the road ahead for the government. It provides a laundry list of things that need to be done for making India a modern and vibrant economy. It is a master plan for building the economy.

The Economic Survey, therefore, also serves as a yardstick with which to evaluate the Union budget. The question is: how far does the budget travel in the direction laid out by the survey? That is the basis on which we should indulge in the traditional practice of giving marks out of 10 to the budget.

What then are some of the key measures outlined in the survey? Listed below are a few of them:

1) Unlike last year, this year’s Economic Survey is rather pessimistic about growth, saying real gross domestic product (GDP) growth will be 7-7.75%, with a downward bias. It’s also pretty certain inflation will come down further, which suggests nominal GDP growth could be even lower than in the current year. That means the assumptions in the budget about revenue growth, if they are to be realistic, must be low.

2) It presents arguments both pro and con about sticking to the fiscal consolidation road map, but there does seem to be a tilt towards relaxing it a bit, especially as public investment needs to be strengthened further. And it calls for a re-look at the medium-term fiscal consolidation targets. This is one argument the finance minister will be tempted to grab with both hands.

3) The survey talks of the twin balance sheet problem of banks and the corporate sector. It says the way out is through the 4Rs—recognition, recapitalization, resolution, reform. Last year’s survey had talked of the 4Ds for banking—deregulation, differentiation, diversification and disinterring for the banking system. We can infer two things from this: a) the prime minister’s preferred style of speech-making seems to be making a strong impression, and b) the budget must have a credible scheme for recapitalizing banks and an indication of what the government plans to do to prevent the problem from arising in future. The survey says the government must sell off its non-financial companies and the Reserve Bank of India (RBI) must also contribute to recapitalization.

4) The survey says the benefits provided on account of small savings schemes and the tax/subsidy policies on cooking gas, railways, power, aviation, turbine fuel, gold and kerosene “provide a bounty to the well-off of about Rs.1 lakh crore”. It says this “represents a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving”. Ending these subsidies will, therefore, be a pro-poor measure. The implication is also that any benefits provided to income tax payers will go to the comparatively rich 5.8% of the population who pay income tax. Will the government be able to bite this deadly political bullet? Rather surprisingly though, there’s no mention of changes in the capital gains tax.

5) The survey points to the damage to the economy caused by the lack of exit policies. The bankruptcy bill is already in Parliament; so what else can the central government do? It could a) reform wasteful fertilizer subsidies, b) allow sick central public sector units to exit, c) disinvest in banks and d) do something to stanch the losses from Air India.

6) It calls for greater government investment in health and education.

7) It calls for greater attention to agriculture, including “the need for reorienting agriculture price policies, such that MSPs (minimum support prices) are matched by public procurement efforts towards crops that better reflect the country’s natural resource scarcities”. It calls for minimum floor prices for crops and price deficiency payments to farmers.

8) On subsidies, it wants the annual cap on household cooking gas cylinders to be pared to 10 from 12 and wants the distinction between commercial and household uses to be removed. But for other subsidies, it says the direct benefits transfer scheme is not yet ready.

9) It warns against protectionism, asking “is India really pro-competition or is it just pro-business?”

10) And it sums up its approach by saying, “the legacy of the pervasive exemptions Raj and corporate subsidies highlights why favouring business (and not markets) can actually impede competition. Similarly, scepticism about the state must translate into making it leaner, without delegitimizing its essential roles and indeed by strengthening it in important areas”.

Sun capital services

Morgan Stanley slashes Flipkart’s valuation by over 25 per cent

Suncapital.co.in :

Is it sanity or is it the beginning of a bloodbath? Morgan Stanley has marked down its stake in Indian e-commerce company Flipkart to $103.97 per share, 27 per cent below the price of its last fundraising round. Last year, Morgan Stanley had valued Flipkart’s per share little over $142 per share. Importantly, the markdown comes just a week after Flipkart’s claimed that it’s valued $15.2 billion. The fall in share reduces Flipkart’s valuation to $11 billion.

Image credit: ShutterStock

Lowering valuation of Flipkart hasn’t come as a shocker to industry observers. Market observers have been anticipating correction in valuation of privately held Internet companies.  Mohandas Pai, ex-Infosys Board Member and founder of Aarin Capital, says:

These downgrades will happen in e-commerce till there is proper business model. The euphoria of fundraising at high valuations have to come to some reality and the current model of business is unviable because of the discount led model and high returns.

As per SEC filing, Morgan Stanley valued its Flipkart stake at $58.93 million in December 2015, as compared to $80.62 million in June 2015. While some see this mark down as only a modest one, analysts forecast that the implications will be bigger for other e-commerce companies as not many can digest a 25 per cent markdown (see this Twitter thread).

Interestingly, Flipkart’s rival Snapdeal witnessed a 30 per cent upward swing in its valuation when it raised $200 million recently. The Gurgaon-headquartered company is reportedlyvalued in the range of $6.5-$7 billion. The valuation of ShopClues also jumped significantly and it became the fourth Unicorn in the fledgling e-commerce market.

Satish Meena, Senior Analyst at Forrester Research, says:

Not many players in Indian eCommerce can digest a 25 per cent markdown. Flipkart’s valuation markdown will have consequences for others as everyone is riding on the same boat and valued based on the GMV number which is neither transparent nor correct but highly over stated.

Besides Flipkart, Morgan Stanley also  marked down shares of Palantir, a SaaS-based data analytic platform by 32 per cent, shares of Dropbox by 25 per cent, and those of Airbnb by 10 per cent.

Morgan Stanley reportedly uses multiple valuation methods for most of its private tech portfolio, including a 20 per cent discount for lack of marketability when using market comparable companies.

A few financial experts opine that investors in  Flipkart, Snapdeal and others would look to exit from these companies in the course of next two to three years (given their fund cycle and  obligation/commitment with limited partners).

“I believe that investors at some point are going to ask questions about e-commerce because certain funds will exit in three to five years. But the opportunity for the business in India is only going to grow,” says R Natarajan, CFO of Helion Ventures.
by Suncapital.co.in