ADB expects India will see solid economic recovery in 2010

ADB has urged Indian policymakers to address rising inflation and widening fiscal deficit to insulate the country against future shocks

The Asian Development Bank (ADB) on Friday said that India is poised for a strong recovery this year and urged policymakers to address rising inflation and widening fiscal deficit to insulate itself against future shocks, reports PTI.

Noting that India has quickly regained growth momentum, the bank said the country has emerged from the global financial crisis relatively unscathed, mainly on account of stimulus measures, past reforms, robust domestic consumption and banks' limited exposure to the global financial system.

"India's economy is poised for a solid recovery in 2010 as the global financial crisis fades, but policymakers need to address inflation and the widening fiscal deficit to buffer it against the impact of future global shocks," ADB said. The conclusions are part of the study 'Impact and Policy Responses—India', commissioned by the bank.

India's gross domestic product (GDP) grew 7.9% in 2009’s third quarter. However, the report said positive economic developments were offset by signs of increasing inflation and a worsening trade deficit in the latter part of 2009.

"India was fortunate the crisis was not protracted, which would have tested the government's ability to continue fiscal stimulus measures for a long period, and potentially compromised its efforts to boost the economy.

“Moving forward, India will have to try and improve its fiscal position through more disciplined fiscal management," the study noted.

Emphasising the need for subsidies to be streamlined or replaced by more targeted measures, the bank said a “new fiscal management framework should rectify shortcomings of the Fiscal Responsibility and Budget Management Act (FRMBA) of 2003”.

The multilateral lending agency said that India should provide fast acting social "stabilisers" to help poor communities, which would help in building greater resilience to withstand future crises.

"This could include quick support for workers laid off as a result of a recession. On the monetary policy front, policymakers should make the consumer price index the primary indicator of inflation, instead of the current two-tier measurement system, which leads to inconsistencies and confusion," the study noted.

According to ADB, wide-ranging measures, including reduction of fiscal deficit, bringing down bad loans of banks and lowering dependence on imported oil, are required to shore up the economies in other parts of South Asia. Yesterday, the bank said Asia is set for accelerated growth in 2010.
 

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Exchange platform unattractive for MFs & investors: UK Sinha

With a majority of people going for traditional instruments that are easily available and simple to understand, the investor population is shrinking, says UK Sinha, chairman and managing director, UTI Asset Management Co, in an exclusive interview with Sucheta Dalal. This is the first part of a two-part series

Sucheta Dalal (ML): You were among the first to join the effort to introduce exchange based trading, after the scrapping of entry loads on mutual fund schemes. In your view, how is it working?
UK Sinha (UKS):
There is no alignment of interest. I don't see this move being successful. We were hopeful that it would succeed, but now we are discovering that the interests of the brokers, the stock exchanges, the depositories, the mutual funds and the investors are not aligned.

What is happening is that each broker who is a member of this system is participating in it, not because of the small income he gets from the investor but because he is negotiating a separate rate with the mutual fund. And that rate is the best possible rate that the mutual fund can offer. So to think that trading is happening because of the availability of the platform and is easy to access is not correct. What is also happening is that each large broker has his own mutual fund distribution platform where he has an arrangement with the mutual fund. So if he is charging, for example, 1.25% or even 1.5% in some cases on his distribution platform, why should he charge any less here? After all, it is part of the same family. So there is no compromise on fees or the commission that is paid by the AMC. What they are expecting is that they will also charge something from the investor in the bargain. They hope to charge around 50 basis points (which is the amount paid for delivery-based trades).

The whole culture in the secondary markets is to encourage trading and churning, but to encourage an investor to come to buy and hold is not the culture in a majority of the cases. So unless there is some incentive to the investor through this platform it will not work. There is no advisory service, because the broker has no time to even offer a choice of five or ten schemes which the investor can select.

ML: But many brokers have joined the platform; what persuaded them to do so?
UKS:
What happened was that everybody decided to take a chance and join this bandwagon because if it succeeded, they would be left out. There is a gradual realisation that this is not going to work. There is also a worry about future fees. Stock exchanges are not charging any fee right now, but they have said that they will not charge a fee only for the first few months—they will start charging a fee sometime. Depositories too are not charging a fee today; they too will begin to charge some time. Then there is the issue of Securities Transaction Tax (STT). It is not clear if that is applicable or not.

ML: So an investor is not charged STT today, but may have to pay if it is charged later?
UKS:
Yes, he could be asked to pay, because there are two different interpretations. The stamp duty implication is yet another issue. One view is that stamp duty could be charged because trading is on the secondary market platform. All this has led to a situation where nobody wants to push for exchange trading because there is no clarity on several issues.

ML: But when the exchange traded platform was created, should at least tax implications like STT and stamp duty have been clarified?
UKS:
Yes, they should have been done, but it was not. 
 
ML: We hear that the exit load of 1% that is still permitted may be an incentive to encourage investors to churn, is that a possibility?
UKS:
Not really, because brokers are already negotiating 1.5% as an incentive from the AMC includes a trail commission, so that eliminates the incentive to an extent. It is very simple. Mutual funds today earn just 1%; if they pay more than that, they will make a loss. But they are promising 1.5% hoping that the money will stay with them. This means that the 1.5% will be paid, provided the money stays with them for a year or longer. If the money goes away earlier, the broker loses the trail commission and that is a disincentive of sorts. {break}

ML: The situation today is that money is gushing out of mutual funds since August when loads were scrapped.
UK:
Rs7,200 crore—that is the extent of steady outgo. And in the same period, the insurance industry has got more than Rs15,000 crore and the investments in ULIPs (Unit-linked Insurance Plans) are even more.

ML: You have made the point that there is no level playing field and this decision was taken without ensuring that it applied across the financial sector. Are mutual funds making a representation to SEBI or to the finance ministry to correct the situation?
UKS:
The mutual fund industry through AMFI (Association of Mutual Funds in India) has represented to SEBI and the finance ministry, but there is no positive response. The ministry appears to be taking a view that this is a matter for the regulator. The ministry has also taken this issue to the High Level Coordination Committee (HLCC), which set up a committee under Dhiren Swarup (former chairman of the Pension Funds Regulatory and Development Authority) who has submitted a report which said that the same rules should apply for pensions and insurance. But the insurance regulator is on record in the media saying that the person who wrote the report didn't understand the insurance business and it is not acceptable.

ML: Wouldn't you agree with that? After all, the new pension scheme, which is excellent, has no takers in the private sector because nobody has an incentive to sell it. It is proved again in the mutual fund industry and even the insurance sector would have been destroyed if commissions were reduced to zero. Wouldn't you agree that there must be a cap on commissions rather than no commission?
UKS:
I won't agree with the statement that Mr Swarup didn't understand the insurance industry; he was a veteran in the financial sector for over three decades. He was coming from the standpoint that if a particular yardstick is applied in the name of customers/investors then the same should apply across the financial sector and he was right in that thinking.

ML: Agreed. But understanding that there has to be an incentive to sell, is key to financial products, isn't it?
UK:
But why not apply that to all financial products? Why have it in one and not in the other two? There are two ways to look at it—you either allow the same incentives in pensions and mutual funds or stop them for all three. I think, in the mutual fund industry, the regulator decided that sometime in the future, zero incentives will be the norm. Maybe that will indeed happen, but by the time that day comes what will happen to the industry? Remember, we are in the month of January. The January to March period is when the maximum mutual fund sales used to happen traditionally. In the earlier days a lot of New Fund Offerings (NFOs) happened in this period. Today there are no NFOs and that is another story. But even normal well-performing schemes are not finding investors when the market is doing well, the schemes are delivering and people are getting good returns, because of the changes imposed on the industry. Sales are not taking place.

ML: When you were in the finance ministry (as joint secretary, Capital Markets Division) the discussion used to be about getting retail investors to invest through mutual funds. Today, the lack of recognition that even mutual fund investors need advice has created a situation where they are staying away. The number of retail investors is also shrinking. Doesn't this reflect badly on our aspiration to be seen as an economic super power? Doesn't the market look very hollow?
UKS:
Two things—my understanding is that the business is shifting to insurance industry related products because of the high commission and incentive that a seller of insurance products is getting. He is hence pushing the product whether or not it is in the interest of the investor. This is leading to very large sales in that sector.

Secondly, when we talk about the market as a whole and look at where the money is going, it is important to notice that people have options or alternative investment avenues. A majority of the people are going for traditional, government-owned instruments such as fixed deposits with PSU banks and post office savings. This is happening because these products are available easily and are simple to understand. The net result is that the investor population is shrinking. A McKinsey report had predicted that there would be two immediate outcomes of the no-load policy—one is that penetration of mutual funds into smaller towns—Tier 2, 3 and 4—will be discouraged and smaller IFAs (independent financial advisors) would go out of business and only some high net-worth investors or those who are technically savvy in big cities would continue to buy these products. Other than that, the industry itself will see big players getting bigger while smaller players will find it difficult to survive as operating margins shrink.

(Read the full interview in Moneylife magazine's forthcoming issue). 

 

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COMMENTS

Satish Mistry

7 years ago

If Sebi & AMC still thinking that, this step would beneficial for them as well as investor. But basically MF is a Medium to Long Term Product & It is not for churning & advisory part is necessary in this area. Why should this Exchange Platform not make availbel directly for IFA. It is not possible without indulging IFA. Brokers are not interested to sell MF & Mostly are not wants to go in details with MF Scheme or Analysis. So, all the body should re-think and make this platfrom available to IFA with all facilities, subject to fees. MF business will run with double speed

Zoher Doctor

7 years ago

UTI is was the main amoung the promotion of NO Entry Load and online platform. We regreat to learn that Top Mamangement at SEBI fail to do pre analysis. Same on them & us. Great Interview. Can we have the same of SEBI Chief as he does not even meet AMC to clarify. Industry at large is not aware of how the things would shape out.

China overbuys metals to keep prices up

China has been hoarding ores and not using all the metals it buys, thus creating huge chunk of surpluses of ores, semi-finished shapes and mill products lately. Traders and speculators believe active metals purchasing by China as a good economic gauge that justifies raising world commodity prices.

Read Article...
 

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