Kenneth Andrade: Budget Expects The Consumer To Grow The Economy

The mutual fund expert says that the finance minister has left very little room for error by presenting a practical Budget

Kenneth Andrade, Chief Investment Officer at IDFC Mutual Fund, is not a Budget freak. He believes that Indian companies have moved out of the domestic market and are more affected by the global economic scenario than policies announced in the Budget. Some excerpts from an interview with Forbes India.

How do you look at the Budget? Do you see any long-term impact on the market? It was actually a non eventful day. Over the last three years, we have been looking for a fiscal balance. In fact, budgets have not been able to do anything path-breaking for a long time. There have been no big implications on any industry through budgets. This year, there were talks about increasing the prices of diesel cars. That did not happen. I think it’s better to increase the price of diesel than the prices of the cars. I think somewhere down the line we will have a fuel price hike. As growth is coming down, the fiscal deficit is climbing. But as far as the capital markets are concerned, you can say that the Budget is almost becoming a non event.

While there are tax benefits to the middle-class, the excise on various goods has gone up. Do you think that this will increase demand? I don’t think it works that way. It doesn’t necessarily net each other for sure. The FM wants the consumer to pull the economy and put it into proper shape. But I don’t see any point in connecting these two things.

Do you think markets will continue to remain flat for the coming year as the Budget really did not have any incentives for the corporate sector? You have to understand that markets have been flat for the last couple of years. They have been in the range of 15000-20000 for a long time. Whether markets break out of here or not, there are some companies that are increasing their profitability every year. If we keep markets in isolation and look at corporate structures you will see that things are moving. A few years ago we talked about the outsourcing model in the technology sector. But in the last five years India has started to export balance sheets. If you leave out the banking sector, you will notice that India has been a net exporter of balance sheets.

Tata is the largest employer in Britain and IT companies have moved away from off-shoring or on-shoring model and have bought companies abroad and [are] creating jobs abroad. That’s the model that is significantly more value added than any other model. Earlier there was an arbitrage model. But now you are doing business in their countries and at their costs. Many companies have gross block that is higher outside India. These companies are not really dependent on the Budget any more. We all need to understand that we are operating in a market without boundaries. The Budget has largely to do with the economy. Corporate business models are expansive across the globe and are not just in India.

How do you look at the Indian economy now? The high growth of India’s GDP was based on asset creation. Now if we move back to the 6 percent of GDP, it is the representation of the investment economy slowing down. The slowdown is actually the slowdown of capital formation on the ground. There are two ways you can expand the economy. One is through investment and the other through consumers. The third is through outsourcing, but that model has fallen apart. The investment economy creates the job opportunity—taking people into rural markets and then putting them into organised markets and then you have to give incentives so that people spend more. Basically, we are in a cycle where an investment economy leads to employment which leads to demand which leads to capacity creation. We are in that trend. We are in a significant downtrend which won’t last for too long.

How would you sum up the Budget? It was a practical Budget because the fiscal deficit target that they set out to achieve is very much in line. They have given very less room for error. The finance minister had said that he wanted to put more money into the hands of the consumer in the current Budget which he has done by tax breaks to the middle class. The second important thing that has happened is on the infrastructure side. There has been a big shift in terms of policy. This has been done by giving incentives to the cost structure of the investment economy by lowering the cost of various raw materials in the entire system. The import duty on coal and LNG has been brought down to zero. Infrastructure companies can raise ECBs abroad at lower costs. This is all in the right direction. The Budget tried to make operational assets efficient and help generate cash flows to grow the entire economy and expects the consumer to take the lead to grow the entire economy.

Source: http://forbesindia.com/article/india-budget-2012/kenneth-andrade-budget-expects-the-consumer-to-grow-the-economy/32534/1

Fund Managers outlook on key sectors: Quantum Mutual Fund

Quantum Mutual fund has come out with its latest report which foresees markets key instruments like Equity, Gold, Debt performance amidst volatile market.

EQUITY OUTLOOK

Views by Atul Kumar - Fund Manager (Equites) : The month of February was an encouraging one for equities. FIIs continued to show strong buying interest during the month and were net buyers to the tune of USD 5.13 Billion. Indian equities continue to look encouraging in the long run. Irrespective of the global economic problems, India appears well poised to achieve a GDP growth of 7% over the next few years. Investors can consider allocating to equities at this point of time for good returns in the long term.

GOLD OUTLOOK

Views by Chirag Mehta Fund Manager (Gold): During February 2012, Gold continued its upward trend for most of the month. However, the Federal Chairman's speech that avoided signs of further easing triggered a sharp selloff on the last day. To put some numbers to this; gold prices saw an increase of 2.9% based on the London AM Fix price, however, when considering the spot closing prices, it indicated a decline of - 2.3% for the month. Such was the magnitude of the selloff seen on the last day of February 2012.

DEBT OUTLOOK

Views by Chari- Fund Manager (Debt): February 2012 saw 10-year government bond yields trading at lower levels, finally ending at 8.2%. This was good news to Indian Bonds, which continued their positive return trend for the fourth consecutive month. Indian bonds started their bull run back in November 2011, with yields falling and prices rising. During the same time, 10-year yields reversed their upward trend above the 9% mark, as the Reserve Bank of India (RBI) began its Open Market operations to add liquidity by buying government bonds across tenor.

Source: http://www.moneycontrol.com/news/mf-reports/fund-managers-outlookkey-sectors-quantum-mutual-fund-_681701.html

Budget 2012: All you wanted to know about DTC and other taxes

ET's helps readers navigate through the maze of tax jargon:

Direct Taxes: It's the tax individuals & companies pay directly to the govt.

Corporation Tax: It's the tax companies pay (30% at present) on their profits.

Taxes On Income Other Than Corp Tax: It's income-tax paid by individuals or 'non-corporate assessees'. This ranges from 10% to 30%, depending on income.

Securities Transaction Tax ( STT): Applicable if you're dealing in shares or mutual fund units. It was introduced in the 2004-05 budget, replacing the tax on profits earned from the sale of shares held for more than a year (known as long-term capital gains tax).

Minimum Alternate Tax (MAT): Indian companies pay 30% tax on profits as per the I-T Act. But tax holidays could lower the outgo. If a company's tax liability is less than 10% of its profits, it has to pay a MAT of 15% of book profits. This provision is expected to change once the direct taxes code (explained below) proposals are accepted. Under DTC, MAT will be levied on gross assets.

INDIRECT TAXES: It's essentially a tax on expenditure. Considered regressive, this tax does not distinguish between the rich and the poor and hence most governments prefer to raise their revenues through direct taxes.

Customs: Anything you bring from abroad comes at a price. By levying a tax on imports, the government achieves twin objectives: it raises revenues and protects local industries.

Union Excise Duty : Imposed on goods manufactured in the country.

Service Tax: You pay the govt when you eat out or visit your hairdresser -- it is a tax on services rendered. Levied on 119 activities.

Value-Added Tax: State governments levy this on goods at the point of sale, based on the difference between the value of the output and the value of inputs used to produce it. The aim here is to tax a firm only for the value it adds to the inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes.

TAX REFORMS GOODS AND SERVICES TAX: The proposed GST is expected to streamline the indirect tax regime. It contains all indirect taxes levied on goods, including central and state-level taxes. Billed as an improvement on the VAT system, a uniform GST is expected to create a seamless national market. It could also mean lower taxes.

DIRECT TAXES CODE: The I-T Act came into effect nearly half a century ago. To account for the new business and activities that have come since then, the government formulated the DTC. It proposes to simplify tax laws and include a new way to calculate taxes on income.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/et-in-the-classroom-all-about-taxes/articleshow/12241464.cms

Schroders Investment in talks to buy 30% stake in Axis MF

Schroders Investment Management, a UK-based firm managing $ 291 billion worldwide, is in talks for buying 30% stake in Axis Mutual Fund, sponsored by Axis Bank. This will possibly also end company's four-year wait to enter India's mutual fund market.

Axis is said to be negotiating to sell 30% stake at a valuation corresponding to 5% of the mutual fund's assets under management of around 8,600 crore as on December 31. At 5% of its assets, Axis Mutual Fund is valued at almost 430 crore implying that Schroders would play around 130 crore if the deal is consummated

"Axis Bank regularly evaluates partnership opportunities for Axis AMC that will add value to its business either in investment management or distribution, both local and global. When we are able to identify the right partner, we will assess the appropriate partnership arrangement," said a spokesperson for the bank, India's fourth most valuable bank after, SBI, HDFC Bank and ICICI.

A Schroders spokesperson said: "We have a policy of not commenting on market speculation or rumour. We have no further comment."

Source: http://articles.economictimes.indiatimes.com/2012-03-14/news/31168892_1_mutual-funds-axis-amc-axis-bank

Short-term rates of CDs rise to 11.6%

Rates on certificates of deposit (CDs) increased 25-30 basis points on Tuesday, as banks rushed to refinance maturing debt, meet year-end targets and prepare for withdrawal pressure from companies, ahead of the deadline for advance tax payments. A lack of participation from mutual funds also helped raise the rates, said bankers.

CDs are short-term debt instruments issued by banks to raise funds for up to one year. Mutual funds and banks are major investors in these instruments.

Market participants said on Tuesday, banks raised about Rs 6,000 crore through deals that included three Rs 1,000-crore ones. Axis Bank, UCO Bank, IDBI Bank and Indian Overseas Bank were among the banks that issued CDs on Tuesday. CDs maturing in three months were issued at 11.5-11.6 per cent, while those maturing in six months were issued at 11.1-11.2 per cent. One-year maturities had a rate of 10.8-11 per cent on Tuesday.

Bankers said Rs 1.5 lakh crore worth of CDs issued earlier were lined up for maturity this month. T S Srinivasan, general manager (treasury), Indian Overseas Bank, said, "Rollovers are happening at a higher rate, as investors are not keen on participating at this point."

While mutual funds are facing redemption pressures, banks with surplus funds are deploying these to boost credit growth, instead of lending in the money market. Mutual funds are also not aggressive on investing in CDs, owing to recent guidelines by the Securities and Exchange Board of India that mandates these to mark-to-market all debt investments with maturity periods of more than 60 days.

Liquidity in the banking system continues to be more than double the central bank's comfort level of one per cent of net demand and time liabilities. On Tuesday, banks borrowed Rs 1.23 lakh crore from the Reserve Bank of India (RBI) at 8.5 per cent.

Last fortnight, banks' repo borrowings increased, closing at Rs 2 lakh crore. This prompted RBI to announce a cut of 75 basis points in the cash reserve ratio (CRR) on March 9. The central bank is to release the mid-quarter review of monetary policy on Thursday.

Traders said CRR cut would help offset outflows on account of advance tax payments, not infuse additional liquidity. According to RBI, the 75-basis point cut in the CRR would release Rs 48,000 crore into the system. On the other hand, advance tax outflows are expected to be around Rs 50,000 crore.

A senior Union Bank of India official said he expected liquidity to improve next fortnight, as the pressure from advance tax payments fades. However, the demand for funds to meet year-end targets would keep the short-term rates high.

Source: http://www.business-standard.com/india/news/short-term-ratescds-rise-to-116/467652/