Overall, even as the PMI improved in June, the internal factors (rise in inventory, the fall in domestic orders to sub-50, rise in input costs) are not encouraging, said Nomura in its Asia Insights report
After falling for three consecutive months, India’s manufacturing PMI rose to 50.3 in June from 50.1 in May led by an expansion in external demand even as domestic demand remains sluggish. External demand continues to improve: the new export orders index increased to 54.4 in June from 54 in May. However, the new order index fell to 49.7 (the lowest since March 2009) in June against 50.5 in May, indicating a further deterioration in domestic demand, according to Nomura in its Asia Insights report.
Output continued to contract, but it improved slightly to 49.1 in June from 48.6 in May. Finished goods inventories rose to 51.0 in June from 50.6 in May as producers started restocking inventories in anticipation of better external demand. However with domestic demand weak, the new order/inventory ratio fell to 0.97 in June compared to 1 in May, a sign of further weakness, said Nomura.
The brokerage believes that price pressures are rising. The input price sub-index rose to 55.9 in June from 51.3 in May reflecting a weak currency. The output price index also increased to 50.9 from 49.8 as producers passed some of the higher input costs onto consumers. With input costs rising faster than the output prices, the margin ratio (output/input price index) worsened to 0.91 in June from 0.97 in May.
Overall, even as the PMI improved in June, it has averaged 50.5 in the second quarter of calendar 2013, lower than 53.1 in Q1, due to weak domestic demand, said Nomura. The internals are also weak: the rise in inventory, fall in domestic orders, and the rise in input costs. “The external sector remains India’s Achilles’ heel as a weak currency can further raise imported inflation pressures, force producers to raise output prices to protect their margins, and delay rate cuts despite weak demand, said Nomura in its report.
With financial stability concerns (due to a weak currency) far more important, Nomura expects the Reserve Bank of India (RBI) to keep policy rates on hold at its next meeting on 30th July. Beyond that, its forecasts 50bp cumulative repo rate cuts towards end-2013, but the risk is rising that rate cuts may be further postponed. Nomura remains comfortable with its below-consensus GDP growth forecast of 5.6% y-o-y in FY14 as India’s growth recovery is likely to be very gradual at best.
The committee, headed by former cabinet secretary KM Chandrasekhar, recommended that “government may consider bringing more clarity and certainty while prescribing the taxation provisions for FPIs”
A Securities and Exchange Board of India (SEBI) panel has suggested that the government should bring more clarity and certainty in the taxation provisions for the newly proposed overseas investor category—Foreign Portfolio Investors (FPIs).
The committee, headed by former cabinet secretary KM Chandrasekhar, recommended that “government may consider bringing more clarity and certainty while prescribing the taxation provisions for FPIs”.
The suggestion was made after the panel discussed the present taxation framework for various categories of investors.
The panel was formed with an aim to attract larger number of foreign investors to the Indian capital market and it submitted its proposals to SEBI last month. SEBI’s board has approved most of its recommendations, while the regulator has decided to consult the government on some of the issues.
According to one of the key proposals that have been approved by SEBI, various classes of foreign investors, including FIIs (Foreign Institutional Investors), sub-accounts and qualified foreign investors (QFIs), could be merged into FPI to put in place a simplified and uniform set of entry norms for them.
These measures come at a time when the rupee has weakened considerably against the dollar and recently hit its all-time low levels of 60 against the American currency.
Also, FIIs have been pulling out money from the Indian debt market, which has resulted in the hardening of yields on government bonds.
In order to make the entry norms easier, SEBI has also approved doing away with the current practice of FIIs and their sub-accounts requiring a prior direct registration of the regulator to operate in Indian markets.
Besides, market regulator SEBI would adopt a risk-based KYC (Know Your Client) approach in dealing with the overseas investors.
SEBI was of the view that most of the proposals made by this committee were well thought out and they have also been welcomed by the market entities and government departments.
The panel also suggested certain modifications in the present legal framework for evolving an integrated policy on foreign investments.
It said that FII and QFI regulations would be required to be repealed and replaced by a new framework for FPIs. The panel has also suggested various changes in the provisions of the Prevention of Money Laundering Act, Income Tax Act and Foreign Exchange Management Act.
“We have an open mind. We are disinvesting in Neyveli only for one reason, mainly to comply with the SEBI regulations. If there is another way to comply with SEBI regulation why should I shut my mind to that? Finance minister P Chidambaram said
The Centre will consider the Tamil Nadu government’s offer to buy 5% shares of the proposed disinvestment of public sector Neyveli Lignite Corporation (NLC) and sought to assuage employees’ concerns, saying there will be no change in management or staff policies.
“I have read about it (Tamil Nadu government’s offer) in the newspapers. I have not seen the letter (written by chief minister Jayalalithaa),” finance minister P Chidambaram said on Monday.
“The letter, I believe, is addressed to the prime minister. The copy of the letter has not come to me but assuming that is what the letter says, I will ask the Capital Markets division to quickly consult SEBI (Securities and Exchange Board of India) whether that would amount to compliance with the SEBI regulations,” he said.
“We have an open mind. We are disinvesting in Neyveli only for one reason, mainly to comply with the SEBI regulations. If there is another way to comply with SEBI regulation why should I shut my mind to that? I am willing to consider that option but I will have to consult SEBI,” Chidambaram said.
Asked about workers’ threat to go on strike against the disinvestment, Chidambaram said, “But why should they go on strike. There is a suggestion (of the Tamil Nadu government), we have not rejected it. We will consider it (and) if that’s a feasible suggestion we will accept it.”
“Be that as it may, what is the reason for a strike,” he asked.
“We are complying with the law. How can you say that the government should not comply with the law? Even after disinvestment, 89% of the shares of Neyveli Lignite will be held by the Government of India and the remaining bulk of it will be held by some public sector institutions—LIC, GIC, etc. So the character of NLC as public sector navratna does not change,” the finance minister said.
NLC is facing stiff protests over the disinvestment decision and 17 trade unions have already announced they would go on indefinite strike from the midnight of 3rd July till the decision of disinvestment is withdrawn.