Indo-China relations: Steps to watch and take!

It is clear that both India and China are keen on attaching greater emphasis to bilateral trade and are putting the geopolitical issues on the back-burner

It may be a mere coincidence, but in the last few weeks, India received two special envoys, Russian Deputy Premier Dmitri Rogozin and Wang Li, Foreign Minister of China, representing President Putin and President Xi Jinping, respectively. Both had different agendas, but, at the same time, there was a common link with India as a likely partner in the emerging energy alliance!

Russia's giant gas pipe line - called the Altai gas pipe line and West-East gas pipe line - starting at Novi Urencoy and Purpeiskaya, will cover a total estimated distance of 2600 Kms and supply Russian gas to far flung cities like Shanghai and Nanchang in China. This project is valued at $ 400 billion, and, by the looks of it may eventually cover other prospective consumers like Mangolia, Nepal and India. Already, during his visit, Dmitri Rogozin has appraised the details and have sought India to join the energy alliance. This pipe line needs a southern diversion to serve India.

Last year, in October 2013, Chinese President Xi Jinping unveiled plans to set up the Asian Infrastructure Investment Bank, with a registered capital of $ 100 billion, and broadly outlined that this Bank would be able to provide a new financial channel to developing nations in Asia Pacific region. In fact, it is reported, as many as 22 countries have shown interest in this project.

Last month, China invited India to participate in the Bank. Such a move, in the long run, would facilitate access to infrastructure funding. At the moment, India has neither accepted or declined the invitation, and considering the pros and cons.

At the moment, the Asian Development Bank (ADB), with a capital of $165 billion, is dominated both by Japan and USA. China firmly believes that the setting up of AIIB (Asian Infrastructure Investment Bank) would reduce dependence on western backed lenders, such as the World Bank and ADB.

In a separate press report, it has been stated that, according to a study made by ADB, Asian nations would require funding of $800 billion every year till 2020 for developing infrastructure. India's partipation in AIIB would enable its easy entry into the Shanghai Cooperation Organization where, India, Iran and Pakistan have "observer" status now.

It is said that Shanghai Cooperation Organization (SCO), principally moved by China and Russia would be central in defining the "balance of economic and political power" in Eurasia!

It may be noted that, recently Russia and China signed the $ 400 billion gas pipe line, as mentioned above, and Dmitri Rogozin, deputy prime minister, stated in Delhi, that extension of this pipe line to India would be "one of the largest infrastructure projects that could be conceived".

In the meantime, India's vice president, Hamid Ansari joined Chinese president Xi Jinping and Myanmar President Thein Sein in the commemoration ceremony of the Panchsheel at the great hall of China, in Beijing, highlighting the achievements of the last 60 years, of adhering to the territorial integrity and sovereignty, mutual non-aggression and non interference in internal matters and peaceful coexistence.

The developments in Indo-China relations, in the recent weeks, have come to show the importance attached by both sides in trying to move on by establishing greater emphasis on trade and putting the geopolitical issues on the back-burner.

While India wants to set up technical parks in China, mainly in Pharmaceutical and Information Technology sectors, there is growing interest in setting up similar parks in India, in UP, Andhra Pradesh, Gujarat, Maharashtra and Karnataka. A 20-member delegation from China have already visited India and shortlisted three locations near Sanad in Ahmedabad district, Gujarat, to set up their units in the industrial park, with an initial investment of $1 billion.

It is reported in the press that Dr Nirmala Sitharaman does not consider China as a "threat", but rather views it as an "opportunity" as many things that China presently exports to India could be easily produced here whereby employment potential would increase. Already Chinese firms like Huawei and ZTE have invested in India but security clearances have not been easy. China has shown interest to fund 30% of India's infrastructure requirements.

In a separate development, China's foreign minister Wang Li has confirmed during his recent visit to India that President Xi Jinping would plan a visit to India. Wang, as reported above, has come as a special envoy of President Xi Jinping and has stated that "China stands by your side throughout your efforts of reform and development and in your pursuit of dreams". He expressed confidence that both sides could address differences over the boundry disputes" and insist on "managing differences through dialogues instead of confrontation".

These assurances are extremely pleasing to hear and it is hoped that both sides settle their differences and strictly adhere to the principles enshrined in the Panchsheel. China needs to give up its territorial extension in claiming Aruna Chal as its territory and show their integrity in returning the occupied Indian lands illegally surrendered by Pakistan.

(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.)


Budget: Nomura expects solid intent (talk) and strong steps (walk)

Nomura suggests that expectations need to be realistic as not all reforms can be announced in the budget and a number of policy changes will happen outside the budget

The Narenda Modi-led National Democratic Alliance (NDA) government is set to present its first budget on 10th July. People do have a lots of expectations from the budget of finance minister Arun Jaitley. "Expectations need to be realistic as as unrealistic expectations such as dismantling of subsidies in the budget itself have led to disappointment. Not all reforms can be announced in the budget and a number of policy changes will happen outside the budget; nevertheless, our bias is for a good budget," says Nomura.


Nomura says, the finance minister likely to present the government's strategy in the budget. "Hence, we expect the budget to contain a mix of statements of intent (talk) and actual announcements (walk). We do expect the fiscal deficit to be higher in FY15, but medium-term fiscal consolidation backed by a plan for lowering subsidies and GST implementation along with stable tax policies, a focus on boosting investment and lack of unnecessary populism should make this a good budget, in our view," it added.

"More importantly, " Nomura said, "the pace of activity outside the budget is picking up. Approvals are likely to pick up pace given the government's intention to approve environment, forest and other applications online going forward. Firms have started to raise equity capital, enabling them to de-leverage their balance sheet. Sentiment has turned positive and the pick up in May and June auto sales indicates that discretionary consumer demand is starting to see a gradual revival. Meanwhile, the government's decision to raise minimum support prices by around 2%, much lower than the last five-year average, along with moderating nominal rural wages suggests that the process of disinflation is gradually getting under way, notwithstanding the bumps caused by monsoons. Therefore, we believe that India is at an inflection point and we are positive on the medium-term economic prospects. We expect real GDP growth to rise from around 5% in FY15 to 6.5% in FY16."


Promise a stable tax regime

Given concerns about “tax terrorism”, Nomura says, it expect the government to postpone the implementation of General Anti-Avoidance Rules (GAAR ) by another year to April 2017, annulling the previous government's decision to implement it retrospectively and exempting transactions made up to March 2013. The rules are aimed at minimising tax avoidance by entities based in tax havens. "Further, we expect the government to rationalise the tax-filing procedure for small and medium-sized enterprises (SMEs) in order to ease tax compliance," it added


Encourage household financial savings

Nomura expects the tax deduction limit under section 80C to be raised to Rs2 lakh from Rs1 lakh. "This will raise households' disposable incomes, but also encourage household financial savings. Additionally, specific tax breaks could be announced to encourage retail investment in infrastructure bonds," the research note added.


Here are sector-wise expectations of Nomura from the Budget...



Excise duty cuts in February 2014 have already been extended by the government until December 2014. We do not have any other major expectations from the budget. However, the government may introduce some duty incentives on Electric/ Hybrid vehicles which may be minor positive for M&M's Reva electric vehicles. Further, if the government decides to increase Income Tax slabs or increase benefits under Section 80C, this would lead to an increase in disposable incomes which would be positive for auto demand, in our view.



We expect a significant hike in cigarette taxation. With the government focused on health and the target being to cut tobacco consumption, we believe this is fairly likely. A drastic version could be either a multiple times increase or ad valorem duty being imposed. Stock impacted is ITC.



We expect a higher allocation for capital infusion for PSU banks – the interim budget had an allocation of Rs112 billion. Tax breaks on instruments to raise long-term financing for infrastructure. The government has withdrawn the Rs20,000 exemption it had provided earlier.


Apart from the above, overall bond yields imply that fiscal consolidation should continue with a meaningful reduction in subsidy related expenditure.


Industrials/ Infrastructure

We expect the government to stress the importance of infrastructure creation from a long-term perspective. In terms of actual measures, we believe the government could:

  • Announce changes in pension funds' exposure towards equity markets and/or infrastructure assets that could bring in long-term funds for the sector.

  • Announce the creation of an umbrella national fund for infrastructure projects, which in turn could source funds from China or Japan – such a body could in turn award projects on an EPC basis thereby reducing PPP need.

  • Spell out norms for attracting long-term debt for infrastructure projects and reduce mismatch between project life and debt maturity.

  • Remove SEZ units from MAT purview and/or provide incentives to manufacturing-based SEZ developers/units to incentivise domestic manufacturing facility set up.

  • Stress on railway capex – new tracks, rolling stock.

  • Allow REITs and/or Business Trust listings in India that could allow long-term funding for infrastructure projects.


IT Services

We have no major expectations from the budget. A long-shot possibility is that Minimum Alternate Tax (MAT) on SEZs could be removed, which would be a minor positive.



The DTH (Direct to Home) industry is burdened with multiple taxation, including entertainment tax to the state government and service tax to the central government. DTH companies have raised this concern in meetings with the Minister of State for Information and Broadcasting, Prakash Javadekar, and expect abatement of the service tax. DTH companies also expect reduction in license fee from 10% to 6%. Depreciation of the INR vs the USD has put huge pressure on MSO (Multi System Operator) and DTH companies as they import set-top boxes (STB). So DTH and cable companies have requested that the government reduce customs duty on STB, which was increased from 5% to 10% in the 2013 budget. DTH companies have been requesting for tax rationalisation and reduction in license fee before budget over the past 2-3 years but no positive steps have been taken by the government. So, we are not too optimistic on the budget 2014, but any tax rationalisation would be positive for DTH companies including Dish TV.


Oil & gas

Since this is the first budget for the new government, and there has been less time to prepare and understand key issues, we believe the government may not make many concrete announcements too soon. But, it may give a positive spin saying that it will take steps to encourage investment in the oil & gas sector, and take more steps to reduce fuel under-recoveries.


The government will likely announce in the budget:

1) that diesel hikes will continue and diesel will soon be deregulated;

2) that direct benefit transfer for LPG will restart; and

3) a credible number for budgetary subsidy. It is likely that the government will do away with the previous government's practice of deferring subsidy pay-outs to the next year.


Items that we believe would be favourable for the O&G sector but which the government will likely leave out of the budget might include:

1) nominal monthly price increases for kerosene and LPG;

2) removal of the 5% import duty on LNG – this has been a long-standing industry demand, but the previous government had exempted only LNG imports by power producers; and

3) declared goods status for natural gas (similar to coal, crude oil).



For the pharma industry, the key incentive is a 200% deduction allowed on R&D expenditure. It is possible that this deduction will be increased to 250%. Currently only in-house R&D is allowed deduction. Since increasingly a large part of the R&D is outsourced, expenditure incurred on outsourced activities may also get the benefit.


Expenditures related to bio-equivalence studies, clinical trials which are generally outsourced may get the benefit of the 200% deduction. Increasing tax exemption for setting up hospitals is an industry demand which may be considered. Currently five years tax holiday is allowed under section 80-IB. This may be extended to 10 years. Further currently Hospitals set up in Metros are excluded from this benefit which may also be addressed in the budget.



Arguably, expectations from the budget have been raised following Piyush Goyal (Minister for Power, Coal and Renewable Energy) commenting that “There are a lot of innovative things in the new budget” in a recent media interview and the Government's mission to provide “24x7 electricity”. In our view, while the government's intent on augmenting domestic coal availability and facilitating higher capacity utilization (State Discoms to seek long-term PPAs) would likely require changes/ tweaks in various laws (Acts), which would typically be outside the purview of the Budget, directional statements towards the same may well be included in the FM's Budget Speech.


Specifically, the following issues could be addressed in the upcoming Union/ Railway Budget, in our view:

  • Extension of Section 80-IA tax holiday for new power generation/ transmission projects for 2-3 years

  • Sops (tax concessions / grants / incentives) to promote investment into renewable energy, particularly Solar Power. In tandem, utilization of National Clean Energy Fund (which entails an Rs50/ton cess on coal consumed) could be reviewed.

  • Directional statement on policy relating to utilization of surplus captive coal, coal block auctions, rationalization of coal linkages, incentivizing States to ensure reduction in T&D losses, extension of the Financial Restructuring Package (FRP) for State Discoms. Land Acquisition

  • Setting up of a funding facility to provide last-mile financing for projects stranded due to paucity of funds / pending project clearances

  • Railways – procurement of wagons / augmentation of rolling stock / specific timelines + milestones for build-out of the three trunk railway links (one each in Jharkhand, Odisha and Chhattisgarh) critical to expand coal evacuation capacity.

  • Customs duty on import of equipment and fuel (coal / gas)

  • Disinvestment targets and candidates for listing / sell-off.



Spectrum auctions: we expect estimates of how much the government is looking to raise from spectrum auctions of 800MHz/ 900MHz/ 1800MHz bands.


Telecom infrastructure: given broadband growth was highlighted in the BJP's manifesto, we expect the government to outline some plans – expecting colour on how much it looks to spend on broadband network development.


Taxes/ duties on devices: this is another area which the government could look to tweak.


Govt approves minimum Rs1,000 monthly pension under EPS-95

This decision would immediately benefit 28 lakh pensioners including five lakh widows getting less than Rs1,000 as pension every month under the EPS-95 scheme of EPFO

The union government has approved minimum monthly pension of Rs1,000 under Employees Pension Scheme 1995 (EPS-95) run by Employees' Provident Fund Organisation (EPFO).


In a written reply in the Lok Sabha on Monday, Vishnu Deo Sai, minister of state for steel, mines, labour and employment, said, "Yes, Government has approved minimum pension of Rs1,000 per month to the pensioners under the EPS-95".


This decision would immediately benefit 28 lakh pensioners including five lakh widows getting less than Rs1,000 as pension every month. In all, there are 44 lakh pensioners under the EPS-95 scheme.


According to the Minister, several representations have been received for enhancement of pension under EPS-95 and based on those, "government has approved minimum pension of Rs1,000 to pensioners under the EPS-95."


Earlier, Labour Minister Narendra Singh Tomar had discussed the proposal with trade unions on 24th June and assured the government will take a decision within two weeks.


As per the proposal, pensioners were to get the benefit with effect from 1st April this year. The government would have to provide an additional amount of around Rs1,217 crore to ensure a minimum pension of Rs1,000 for 2014-15.


A senior official said the new government did not want to provide this entitlement merely for one financial year and wanted this to be implemented for all times to come. That is why the proposal was reviewed.


The proposal was already approved by the United Progressive Alliance (UPA) government for the current financial year but could not be implemented as it was not notified.


However a senior EPFO official, when contacted, said that the body has not yet received any notification or official order in this regard from the Labour Ministry.


According to him, the government could formally announce this entitlement in the forthcoming budget on Thursday.


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