Tuesday, May 07, 2013

INTERNATIONAL FINANCE

With President Obama’s re-election, the countdown begins for lawmakers to address the 2013 fiscal cliff and the Treasury’s statutory debt limit. But unless the President and House Republicans agree to change the current law, these crises cannot be resolved.

The other option is that Obama could decide to avoid the fiscal cliff altogether and extend current policy so that there will be no changes to taxes and spending in 2013. The US economy would improve next year as a result, but there would be no progress toward fiscal sustainability. This would force credit ratings agencies to downgrade US Treasury debt, the way Standard & Poor’s (S&P’s) downgraded the government’s credit rating on long-term securities one notch from the highest level of AAA to AA+ in 2011 (It was the first ever downgrade of US government debt). No doubt, S&P’s downgrade of the nation’s credit rating last summer had little material effect on financial markets, but that would not be the case if all the ratings agencies acted together. Further, the move would help the economy in 2013 but would significantly weaken both the fiscal and economic outlooks over the longer term. Running this scenario through the Moody’s Analytics model shows real GDP expanding 3.8% in 2013, but growing about half a percentage point lower per year over the subsequent decade.

Adding to the economic threat posed by the fiscal cliff is the approaching Treasury debt ceiling. The law currently caps federal debt at $16.394 trillion. Based on recent government expenditures and receipts, the Treasury will near that limit late this year and be forced to use extraordinary accounting techniques to avoid crossing it. However, the Treasury can only do this for so long, and by early March the Obama administration will be forced to make some difficult decisions.

While, in the short term, Obama will have to make the required adjustment in the debt ceiling, but, in the long run, the drive to fiscal sustainability needs to be powered by spending cuts rather than balanced between cuts and tax increases. In addition to freezing discretionary spending, the focus should be on putting Social Security on solid financial ground, forever. “This can be accomplished by indexing the retirement age to longevity, reducing benefits for very high income households and increasing future benefits on a more accurate measure of inflation,” says Mark Zandi, the US based Chief Economist at Moody’s Analytics. As far as taxes are concerned, the focus should be on reducing exclusions, exemptions, deductions and credits that riddle the tax code and are costing the Fed more than $1 trillion each year.

One move that perhaps can also solve the problem is the implementation of a nationwide value-added tax (VAT). In fact, B&E has suggested this option at several occasions, most recent being in March 2011 (Read: Can He Read The Writing on The Wall? Published in B&E issue dated March 31, 2011), just a few weeks before the US federal debt limit was raised to $16.394 trillion. As VAT has a broad base, it could generate enough revenue to deflate the ballooning deficit while simplifying the tax code. Considering that US consumer spending totals some $10 trillion annually, or about 70% of GDP, VAT has the potential to generate big bucks for Uncle Sam. In fact, a Congressional Research Service report suggests that each 1% of VAT has the potential to generate $50 billion. Thus, even if it’s started at a low level, say 5-10%, it can generate big money.

While all of this is doable, it won’t be easy. Not until the President and House Republicans agree to change the current law. And without an agreement on federal fiscal policy, the economy will be in recession by spring. Agreed that threat is expected to spur lawmakers to act, but not before some economic damage is done, we would say!


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
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Monday, May 06, 2013

Same old land issue. same old dilemma.

Even after much delay over a controversial bill on land acquisitions, the same questions over the extent of required consent and the scope for resettlement and rehabilitation continue to obstruct the creation of a sound law

The latest intervention of Congress President Sonia Gandhi in the long-pending legislation on land acquisitions has made things uncomfortable for Jairam Ramesh, the Union Minister of Rural Development. A land acquisition bill (rechristened as The Right to Fair Compensation, Resettlement, Rehabilitation and Transparency in Land Acquisition Bill), was recently approved by the Union Cabinet after several rounds of discussions by a Group of Ministers (GoM). The bill has been touted as UPA’s key answer to address investor sentiment and simultaneously address the ongoing conflicts over land across the nation. However, Sonia Gandhi’s reservations and the concerns raised by activists over certain provisions in the bill could cause more delay in the new law being passed.

Earlier this month, Ramesh had managed to avert what could have resulted in a major problem for the government. On October 2, thousands of landless farmers began a foot march from Gwalior to New Delhi demanding land for the landless and shelter for the homeless. The march under the aegis of Ekta Parishad, an NGO, that undertook a first of its kind movement in recent times, was set to culminate in New Delhi by the end of October. However, ten days into the march, Ramesh managed to disperse the movement after he signed a 10-point agreement with the leader of the movement P. V. Rajagopal.

Addressing a gathering of around 20,000 people at Agra’s COD grounds, Ramesh said that a task force in consultation with the state governments and the civil society will try to draft a policy that would ensure agricultural land and homestead rights for the landless and the homeless respectively. “The Centre cannot run away from the political responsibility of bringing about land reforms, but you should continue to put pressure on the state governments,” he said, claiming the Constitution of India has given the responsibility of deciding on land-related matters to state governments.

With the Cabinet having given its nod to the bill, the government is set to introduce it in the Parliament in the coming session.

On October 16, 2012, the GoM headed by Sharad Pawar finalised the draft, that laid down the condition that even if 2/3rd landowners gave their consent to sell their land, the government could acquire it for private projects and public-private-partnership (PPP) initiatives. Interestingly, two days after the draft details were made public, the Congress President made headlines for recommending to the PMO that the number should be necessarily raised to 80%. Only in case of acquisition for PPP projects could the threshold be diluted to 67%, if the ownership of the land remained with the government. The earlier draft of the bill did have this provision, but was later tweaked after certain ministries expressed dissent over it. Sources from the government tell B&E that the land bill is now expected to undergo some changes on the percentage of landowners’ consent, at the insistence of the UPA Chairperson.

The Land Acquisition and Rehabilitation and Resettlement Bill (LARR Bill), 2011 was tabled in the Parliament in September last year. It was referred to a Parliamentary Standing Committee which submitted its recommendations eight months later (May 2012). But due to differences within the government, PM Manmohan Singh constituted a GoM a month ago to decide on the final draft.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
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Saturday, May 04, 2013

Why The Numbers Are Stacked Against The Congress in 2014

It’s an old cliché no doubt, but elections often are about numbers, mathematics and cold calculations. Yes, charisma, ideology, policies and campaigning strategy do matter. But at the end of the day, it really boils down to numbers. That is the reason why the Republican challenger Mitt Romney looks all set to lose badly to Barack Obama on November 6 when Americans vote for a new President. He is losing despite the terrible economic situation in the United States since Obama took over in January 2009. Obama should have lost, but it is numbers that are working for him. Republican ideology, particularly the hard line attitude of the faithful, has alienated huge chunks of voters. Women, students, blacks and Hispanics are overwhelmingly against Republicans and will vote for Obama. The number of these groups of voters will surely outnumber the angry white voters who will vote for Romney.

Of course India is vastly different from US. And of course, elections are still – at least officially – far away in 2014. But even at this early a stage, it is easy to see why the numbers appear stacked against the Congress in 2014. And that is the reason why Sonia Gandhi and her advisors and strategists are a worried lot. I am not talking just about the impact of the serial scams like Commonwealth Games, 2G, airport privatisation, Coalgate and the latest irrigation scam in Maharashtra. I am not talking just about the venomous bite of inflation that is destroying household budgets. I am not talking just about the manner in which Prime Minister Dr. Manmohan Singh has become the butt of jokes and cruel humour despite the recent and futile efforts of some sections of the media to portray him as a decisive leader. I am not talking just about the damage that reluctant allies like Mulayam Yadav, Mayawati, Sharad Pawar and Karunanidhi will inflict during the run up to 2014 even as they prop up the tottering UPA regime. All these things will have an impact on Congress’ fortunes in 2014. No doubt about that. But it is the curse of cold, hard numbers that could have a more dangerous impact.

Before we get into the analysis of the cold, hard numbers, let us first take a cold, hard look at the factors that led to the triumph of the Congress and the UPA in 2009. Everybody talks about how the jholawallah advisors of Sonia Gandhi who comprise the National Advisory Council crafted the Congress victory of 2009 by coming up with schemes like NREGA. Then there was the Rs.600 billion farm loan waiver announced in 2009. If you believe these played a decisive role in 2009, you are misinformed and wrong. Overwhelmingly rural states – where you would expect to find grateful beneficiaries of NREGA and farm loan amnesties – like Odisha, Chattisgarh, Bihar, Jharkhand and Madhya Pradesh did not give a lot of seats to the Congress. Including Uttar Pradesh, the Congress managed just 46 out of 195 seats from these states in 2009. In fact, the Congress and the UPA did amazingly well in urban constituencies in 2009. It won 13 out of the 13 Lok Sabha seats on offer in Delhi and Mumbai. That performance was last seen perhaps in 1984 when Rajiv Gandhi swept India in the aftermath of the assassination of Indira Gandhi. So fact number one is that Congress did fabulously in urban centers.

Fact number two is the massive vote against the Left in West Bengal and Kerala that gave Congress and the UPA 39 out of 62 seats in 2009 in these two states. Fact number three is the strong alliances that gave a lot of seats to the UPA in 2009. In West Bengal, Tamil Nadu, Kerala and Maharashtra, the Congress and the UPA managed to win a massive 98 out of 159 seats in 2009. And who can forget fact number four – YSR Reddy who, along with the Majlis-e-Ittehadul Muslimeen (MIM), gave the Congress a spectacular 34 out of 42 seats in Andhra. In 2009, YSR was clearly the incumbent hero who simply swept aside all opposition despite loud whispers of numerous scams and instances of crony capitalism. The last factor is the suicidal behaviour of the BJP that gave the Congress 20 out of 25 seats in Rajasthan in 2009.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
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Friday, May 03, 2013

“Increased costs will be passed on to consumers”

Rajan Mathews, Director General, COAI, laments that the recent slew of policy decisions is extremely debilitating for an already struggling industry.

B&E: It is being put forward that the incumbents already have enough spectrum and may not bid at all. Won’t this encourage monopoly in the hands of a single operator?
Rajan Matthews (RM):
It is not true. In fact, the scarcity of spectrum is affecting roll-out obligations and the Quality of Service of the operators. Being the 2nd largest telecom market in the world, it is actually ironic that average spectrum availability with Indian operators is significantly lower than in other leading markets in the world. Most operators who have been in the market for some time now have a fairly large subscriber base, which needs to be catered to with appropriate Quality of Service and outreach. Lack of spectrum leads to dearth in capacity for serving subscribers and further roll-outs into rural, semi-urban and urban areas; and leads to a substantial rise on the OPEX. In fact, if the operators did not require more spectrum, there would not have been so many representations made by them to the government regarding the high reserve price being set for the auction. The only reason for operators to shy away from the auction would be the exorbitantly high reserve prices that threaten sustainability.

B&E: What are your thoughts on refarming of spectrum against the high prices that have been set?
RM:
The entire restructuring of an efficient network, by ripping off the existing infrastructure, disconnecting the connected and then deploying an infrastructure, which is more demanding both in terms of capital as well as space and construction, does not bring any sense of benefit to our minds, whether to the industry, or the consumers.

As per an independent study conducted by Analysis Mason, operators with 900 MHz band will need to replace 286,590 base stations and install an additional 171,954 base stations to provide equivalent coverage on 1800 MHz; which will lead to an incremental capex of Rs.54,739 crores, and incremental annual opex of Rs.11,762 crores. Also, operators will have to write-off existing 900MHz assets at an estimated cost of Rs.22,310 crores. At an industry level, additional capex of about INR 26,653 crores will be needed to deploy new towers to support incremental base stations.

In the scenario that operators with 900MHz spectrum are unable to provide equivalent coverage due to business case and operational feasibility, there is a risk of reduction in geographic coverage by as much as 40%. This is estimated to directly affect connectivity to about 70 million subscribers, and consumers trying to reach them. Also, the business case for a new operator acquiring 900MHz spectrum at the proposed prices will not allow for expansion to rural markets. If incremental investment in refarming and the costs of spectrum are passed on to consumers in the form of higher retail voice tariffs, overall tariffs will go up by as much as 64 paise/minute, with much higher impact in non-metro circles.

B&E: What’s the expected impact on the already high D/E ratio?
RM:
It is extremely unfortunate that a slew of policy decisions such as auction of spectrum, one-time fee, refarming etc. are being imposed on the industry when it was already grappling with business viability and sustainability. Such decisions have further increased the financial burden on operators, leaving no scope to absorb the increased costs. It has been brought to the notice of the Government and the ministry that India has one of the lowest EBITDA margins of 29% among emerging Asian economies (36% on an average). Several operators report negative PATs and will not be able to cash break-even in next 5-7 years. Similarly, most operators report a negative or low return on capital employed. Hence, these increased costs will eventually be borne by consumers in the form of higher tariffs for the services.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
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Wednesday, May 01, 2013

Zuck, buy-back your shares!

Facebook shares are trading at less than 50% of their IPO value, and the street seems to have just about given up on the IPO. While Zuckerberg made some money by selling his stock initially, he can make a bigger killing by buying back Facebook’s shares from the market at the current dismally low prices

Facebook is still a success story, but the gross underperformance of its shares post the much hyped IPO has certainly raised some eyebrows. Investor concerns seem to override their enthusiasm for the world’s most popular social network. Facebook, which was initially valued at $100 billion commands a far humbler m-cap of $41.03 billion as on August 27. The share stood at $19.15 on this day compared to the launch price of $41.

Investors are worried about the sustainability of social networking companies. The revenue tap is still not in the best of health with brands unsure about how to leverage these sites. A recent research by O&M and Ipsos covering 153 executives across A-PAC highlights that 66% of executives polled considered social networking sites to be great for buzz building (just 20% in India). However, only 2.6% considered them great for brand building. Facebook, which reported a loss of $743 million for Q2, 2012, has to really look for ways to change perceptions on that front. Co-founder Dustin Moskovitz sold 450,000 Class A shares in three days. Three top executives – Director of Platform Partnerships Ethan Beard, Director of Platform Marketing, Katie Mitic and Mobile Platform Marketing Manager Jonathan Matus have announced their resignations; indicating a major crisis of confidence across the board.

Although, Mark has made a lot of money with the IPO (he sold 30.2 million shares at $37.58 per share in May 2012), his wealth has shrunk drastically. Considering he owns around 503.6 million shares as per estimates (including stock options), his net worth as on September 4, 2012 stands at ‘just’ $9.64 billion. But he also has a great chance to make more money by buying back shares at the current prices, especially if he is certain of the company returning to its promised aura. This will also enable him to retain his vice-like grip over Facebook. To top it all, by betting on Facebook again, he could lead from the front and demonstrate his confidence in the company he founded.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles