The growth in IIP reflects a clear dichotomy between export-led growth and domestic slowdown, points out SBI Research
IIP growth at 0.1% for January 2014 was a pleasant surprise, even as CPI (Consumer Price Index) declined to 8.11% in February 2014 largely in consonance with street expectations.
The growth in IIP reflects a clear dichotomy between export-led growth and domestic slowdown, points out SBI Research. For example, at 2-digit level, positive sectors are textiles, apparels and chemicals and finished leather products, carry combined weightage of 19% in IIP index, appear to have benefited from rupee depreciation as these are export oriented.
However, on the downside, sectors like food product & beverages, communications and motor vehicles with a combined weightage at 12.3% are witnessing a significant slowdown. Also, going by CSO projections, manufacturing sector need to log in a growth rate at 1.1% in Feb-Mar 2014, which looks difficult, given that export growth is now slowing down.
In the table below, we give the IIP and components growth:
In the graph below, we plot the moving average growth in IIP:
In conclusion, CARE Research analysis is as follows: Weak domestic demand, higher raw material costs on account of high inflation, interest rate hikes; supply side bottlenecks, low business sentiment and slow movement in implementation of reforms have impaired the performance resulting in weak industrial activity. It is quite evident, that the persistent volatility in the industrial output is likely to delay the expected revival in growth. Hence, achievement of the projected economic growth of 4.9% appears to be less optimistic. Hence, the biggest challenge is to revive manufacturing for overall growth to pick up.
Domestic steel and sponge industry is not able to obtain raw materials; export of low grade iron fines from Goa cannot take place until legal issues are resolved while the little shipments of pellets now cannot be exported due to additional duty
Indian iron ore exports, prior to the mining ban, due to illegal mining activities in both Goa and Karnataka, was valued $7 billion. Subsequently, the ban in Karnataka was lifted. The Supreme Court had appointed an expert committee, consisting of ecologist CR Babu, geologist SC Dhiman, mineralogist BK Mishra, forest officer S Parameshwarappa and Goa Secretary Parimal Rai to study the matter and submit their report. The panel, headed by retired judge MV Shah to set a limit on the production of iron ore in Goa, is expected to submit its report by 15th March.
It appears that the Committee has opined that only 20 million tonnes of metal ore should be mined in Goa, as against opinion expressed from stake holders. According to demand made by stake holders a more realistic figure (metal ore mining) should be between 45 and 50 million tonnes.
It may be recalled that, Moneylife has carried a full coverage on this iron ore issues recently, and readers are aware that work in Goa, as such, in the mining industry has come to a stand still. Manohar Parikkar, Goa's chief minister, while awaiting the final decision on the matter, does not plan to permit mining in the State till the panel's findings are "adequately dealt with". Final report of Shah panel has not yet been tabled in Parliament.
During April 2013 to February 2014), iron ore exports from India have fallen to 12.5 million tonnes, due to continuation of export duty. And, according to Rajiv Kher, Commerce Secretary, it is very unlikely that the export target of $325 billion will be reached during the current fiscal, and "it is doubtful, if we can manage to reach $315 billion". Many exporters have blamed the poor export performance due to blocking of duty reimbursement payment by the Finance Ministry for the last four months.
Echoing this, it is reported that Anupam Shah, chairman of Engineering Export Promotion Council has pointed out that cash crunch due to pending duty drawback worth over Rs10,000 crore have also affected the exports. In case of iron ore, as mentioned earlier, China and Japan were the principal importers of fine low grade ores from Goa, which, particularly China managed to adopt a technique of blending with both Brazilian and Australian ores to use in the steel industry. Chinese economic slow down has resulted in lower off take, and, it is reported that they have as much as 105 million tonnes of iron ores lying in the port! The market feeling was that there is "over supply in the very near term and may prompt further drop in ore prices"; ore with 62% content delivered to Tinjin has fallen down to a price level of $ 104.70, the lowest in the last four years!
Our iron ore exports, from Goa alone, had reached a staggering $5.8 billion (about Rs34,940 crore) and the entire industry in that state is in doldrums. In the meantime, the domestic steel industry has also been facing various troubles, particularly from the supply front. Indian steel makers have been showing a marked preference to use lumps, rather than the low grade fines, and these were consumed by the recently established pellet industry on a large scale, involving, a reported investment of Rs35,000 crore. The recent decision by the government to slap a 5% export duty on them has also affected the export.
These beneficiation and pelletization plants, employing over 80,000 people, directly and indirectly, and paying an excise duty of 12% on the production has also come to a standstill. Many of these plants are now practically shut down and miners like NMDC cannot overnight increase their ore production. In other words, the domestic steel and sponge industry are not able to obtain their raw material needs; export of low grade iron fines from Goa cannot take place until legal issues are resolved; the main buyers are slowing down their purchase due to general economic slow down, but at the same time, also anticipating lower prices to be obtained in the months ahead, while the little shipments of pellets now cannot go for export due to export duty being slapped on them.
What a fine mess to be in! It is sad to assume that the international iron ore situation did not make much of dent in the concerned ministries! We do hope that the Supreme Court would consider the plight of the industry and at least give a conditional revival for mining to commence again in Goa, as this will enable miners to re-employ the workers and plan their marketing campaigns.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
It is absolutely necessary for the I-T department to come out with clear guidelines as to whether this LPG subsidy amount deposited in the bank accounts of some consumers is exempted from income tax. People who received LPG subsidy in their Aadhaar linked bank account are confused
Much water has flowed under the bridges since the controversial Aadhaar project was launched and reams of paper would have been consumed writing about the pros and cons of this project for the last nearly five years. As per the statistics placed before the Parliament, the government has issued 57.62 crore Aadhaar numbers till 31 January 2014. This means nearly 48% of the country’s population has been issued with this identity number, which has several ramifications on people of this country as unearthed by a series of articles published in Moneylife so far.
As an offshoot of this project, the union government has been aggressively pursuing for crediting the subsidy due on the liquefied petroleum gas (LPG) to consumers directly through their bank accounts linked with Aadhaar with the stated objective of curbing leakages and preventing black marketing of cylinders.
Till the end of last year, 66 million consumers in 184 high Aadhaar coverage districts, in 18 states, have been covered under the scheme. Till 31 December 2013 about 40 million cash transfers amounting to Rs2,000 crore to consumers’ bank accounts have taken place since the launch of the scheme in June 2013. And from 1 January 2014, it was proposed to cover gas consumers in Delhi and Mumbai who will get cash subsidy through their bank accounts, as the direct benefit transfer for LPGs (DBTL) scheme would be extended to 105 more districts. When this roll out is completed almost half the country covering 289 districts would get covered by this scheme.
Then on 30 January 2014, bowing to political pressure and hue and cry from common citizens, the Indian government put on hold its scheme to transfer subsidy money into bank accounts of consumers through Aadhaar. Explaining the reasons behind the move to put on hold a scheme that was dubbed game-changer, oil minister M Veerappa Moily said there were complaints about the implementation of the scheme, and a committee has been formed to look into them.
At present, in Delhi, the price of non-subsidised cooking gas is Rs1,080.50 and for subsidised LPG cylinder, it is Rs414.
How does the direct benefit transfer scheme for LPGs work?
As per the direct benefit transfer for LPG (DBTL), consumer will get her cylinder at full market price and the difference between subsidised price and full market price i.e. the subsidy will be refunded to her by crediting directly into her bank account. It was initially announced that this subsidy is restricted to only six cylinders in a year, where after, the consumer will have to pay full market price for every cylinder supplied. This cap was increased to nine cylinders and later to 12 cylinders per year for every consumer.
To start with, this scheme was made available only to those who have obtained an Aadhaar number and submitted these details both to her bank and to the gas supplier/dealer, for linking the Aadhaar number to the DBTL scheme. The consumers in that district where the scheme was introduced were given three months’ time to enroll themselves into this scheme, failing to which they would be denied the benefit of subsidy and they will have to pay market price for all the cylinders required by them, as they will be ineligible for the subsidy from the government.
Subsequently, under the Supreme Court order, the government announced that it is not mandatory to have Aadhaar number to be eligible for LPG subsidy and those who do not have Aadhaar number will continue to get the cylinders at the subsidised rates as before. There was however, considerable confusion as many banks and oil companies were not prepared with the logistics to credit the amount to beneficiaries’ accounts, and complaints started pouring in from the consumers, who did not know how to go about it if the subsidy was not credited to their account promptly. Due to the hue and cry from a large number of consumers, the government on 30 January 2014 decided to put on hold its scheme to transfer subsidy money into bank accounts of consumers through Aadhaar.
Read: Following articles in Moneylife:
As per the latest report dated 7 March, 2014 in the Indian Express, the Ministry of Oil and Petroleum has scrapped the ambitious Direct Benefit Transfer system for LPG subsidy with effect from 10 March 2014. A communication regarding this has been reportedly sent by the ministry to oil marketing companies (OMCs) and gas agencies a few days ago. Consumers will now get their twelve cylinders till the end of March 2014, and get the benefit of 12 subsidised cylinders in the next financial year from April onwards.
Though there is still no clarity as to whether the DBTL scheme will be revived at all, what is agitating the minds of many of the consumers, who have received the subsidy in their bank accounts during this financial year, is whether the amount so credited by the OMCs to their account would be considered as ‘income’ for the purpose of payment of income tax on such receipts. This is because, a number of consumers, who have received the subsidy through their bank account, are tax payers, who will have to take a view on this matter, before filing their return of income for the current year. This confusion arose because of an article that appeared in Economic Times on 12 December 2013 under the headline “Direct LPG subsidy payouts may be taxed: Experts”. The media story in short reads as under:
“The money that the government transfers directly to consumers' bank accounts as LPG subsidy may well be considered as an income and taxed, say tax experts. There are no guidelines currently on taxing this type of subsidy payouts, and the income tax department may take a view on whether or not to claim a part of it. "
This subsidy is a new development which will accrue in the bank accounts of individuals starting from this year. There is no circular on whether this income should be taxed or not," a senior income tax department official is reported to have said. “
The subsidy that gets deposited in the bank account is likely to be treated as an income and be taxed accordingly although the amount would be small, said a partner at KPMG,” as per the media report.
One of the affected consumers wrote to local office of Indian Oil Corporation seeking clarification on this matter, and he received a reply that states, “This subsidy is paid by government of India; hence, we will not be able to satisfy your query, you may ask any tax consultant.”
Will the Income Tax department clarify this matter before it is too late?
It is preposterous to treat LPG subsidy as income, as it is contrary to reason. It is only a refund of the excess amount paid by the consumer to the gas dealer, which the oil company refunds to the beneficiary to comply with the government order to sell the LPG cylinder at the stipulated price to the users. It is therefore, impetuous for tax authorities to take a view that this amount is taxable at the hands of beneficiaries.
Besides, now that linking of Aadhaar is not mandatory for receiving the gas cylinders at the subsidised rates, and the whole scheme of direct benefit transfer has been scrapped for the time being, any decision to tax the subsidy received through bank accounts during this financial year would tantamount to penalising those who faithfully complied with the government instructions, leaving all those who have abstained from doing so unaffected by this decision.
The onus, therefore, is on the Central Board of Direct Taxes (CBDT) to clarify this matter well in advance of the date of filing the tax returns for the current financial year, to enable the tax payers to file their returns correctly. This, however, does not apply to those not coming under the tax bracket, and who are not required to file their tax returns. But since this subsidy is given to a large number of tax payers, it is absolutely necessary for the tax department of the government to come out with clear guidelines as to whether this subsidy amount is exempted from income tax, so that this matter is settled once and for all and all the tax assessing officers take a uniform view through out the country.
(The author is banking analyst and he writes for Moneylife under the pen name ‘Gurpur’)