Strong close below today’s low of 5,106 on the Nifty may result in a change in uptrend which started from 4,771on 4th June
The market erased all its gains and settled in the negative as the government's initiatives to boost growth did not meet market expectations. We may now see the uptrend weakening. Tomorrow if there is strong close below today's low of 5,106, we may see a change in the trend. The National Stock Exchange (NSE) saw a volume of 56.86 crore shares.
The market opened on a firm note ahead of the announcement of fresh initiatives to curb the rupee slide after the Indian currency hit a historic low of 57.32 against the dollar on Friday. Meanwhile, markets in Asia were mostly lower in morning trade on concerns about the pace of the global economic growth and unending woes in Europe.
Back home, the Nifty opened 13 points higher at 5,159 and the Sensex added 66 points to its previous close and started off today's trade at 17,039. Banking, metal, auto and capital goods stocks supported the early gains.
Meanwhile, the rupee was trading 71 paise higher at 56.44 against the dollar following a sharp recovery on fresh selling of the American currency by banks ahead of expected measures from the government to arrest the rupee's decline.
In another development, Ratings agency Moody's today retained the outlook on India's rating at stable despite a slowdown in gross domestic product (GDP) growth rate saying that it is unlikely to be even a medium-term feature. Moody's decision comes against the backdrop of two other leading agencies-Standard and Poor's and Fitch lowering the credit rating outlook to negative.
Trading in a narrow range, the indices crawled to their intraday high in late morning trade. At the highs, the Nifty rose to 5,195 and the Sensex went up to 17,131. Profit booking at the highs saw the benchmarks paring part of the gains, but they were still in the positive terrain.
The domestic market dipped further in noon trade as the key European indices opened in the red as investors were wary of any new announcements from the European Union leaders, who are meeting later this week to discuss possible solutions to end the lingering debt crisis.
The indices drifted further southwards and into the negative in the post noon session on a fall in the rupee and the measures announced by the government to push economic growth did not meet the street's expectations.
The market touched its intraday low at shortly after 3.00pm with the Nifty falling to 5,106 and the Sensex retracting itself to 16,853.
Although the market closed in the red for the second straight day, the indices were off the lows. The Nifty closed 31 points lower at 5,115 and the Sensex fell by 90 points to settle below the psychological level of 17,000 at 16,882.
Markets in Asia closed lower on concerns over slowing growth in key economies like China and the US and the worsening debt situation in Europe.
The Shanghai Composite tanked 1.63%; the Hang Seng declined 0.51%; the Jakarta Composite fell by 0.82%; the Nikkei 225 fell by 0.72%; the Straits Times lost 0.45%; the KOSPI Composite dropped 1.19% and the Taiwan Weighted settled 0.77% lower. On the other hand, the KLSE Composite ended flat at 1,603.
At the time of writing, the key European indices were down between 0.70% and 1.67% as Spain officially sought financial aid from its Eurozone partners to boost its banking system. US stock futures were also in the negative following the latest news from Spain.
Back home, institutional investors were net sellers in the equities segment on Friday. While foreign institutional investors pulled out funds totalling Rs174.22 crore, domestic institutional investors withdrew Rs1.27 crore from stocks on Friday.
The maximum retail price is supposed to make consumers better off. However, we learn that using fine prints of the law, retailers are selling above MRP and getting away
The laws related to maximum retail price (MRP) have been carelessly drafted that even shops which sell above MRP cannot be punished. It would seem that legal experts and bureaucrats who draft legislations are ignorant of the basics. More pertinently, it would seem that not printing the MRP on a packaged commodity would attract punishment, but selling above MRP would be allowed! Most people believe that the MRP printed on packaged commodities is beneficial to the consumers, as they cannot be sold above the MRP. It prevents exploitation of consumers. However, defective drafting of the laws has made MRP a meaningless number.
A recent judgment by the National Consumer Commission (NCC) has upheld the order of Bharuch (Gujarat) District Forum imposing a fine on Hotel Nyay Mandir for charging more than the MRP on some soft drinks. In another case, the Delhi State Consumer Commission imposed huge punitive damages of Rs50,000 on a restaurant serving mineral water to its customers at three times the MRP. While these decisions are welcome from the point of view of the consumer, unfortunately it goes against an order of the Supreme Court and is liable to be struck down.
The Supreme Court order (State of Himachal Pradesh Vs Associated Hotels of India, AIR 1972 SC 1131) given in 1972 makes MRP applicable only to retail sales, i.e. goods sold in shops. The Supreme Court held that such food and drinks can not be considered retail sales since they are always accompanied by service. So food and drinks consumed in hotels, restaurants or airplanes may be sold at prices above the MRP. However, it is different for shops, kirana stores, etc. They could charge more than MRP and still get away with it! Let us explore how and why.
The Standards of Weights and Measures Act, 1976, (the Act) only mandates that the price be printed on the package whereas the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 (the Rules) go impermissibly further by stipulating that price charged can not exceed the printed price. The Act always supersedes the rules, and thus the latter would not have any bearing on the former, no matter how sensible or valid. The Act does not forbid selling packaged commodities for a price higher than the printed price much less specify the penalty for selling above the printed price.
According to the Section 39 of The Act, “No person shall—
(a) make, manufacture, pack, sell, or cause to be packed or sold; or
(b) distribute, deliver, or cause to be distributed or delivered; or
(c) offer, expose or possess for sale, any commodity in packaged form
to which this Part applies unless such package bears thereon or a label securely attached thereto a definite, plain and conspicuous declaration, as prescribed, of –
(i) the identity of the commodity in the package;
(ii) the net quantity, in terms of the standard unit of weight or measure, or the commodity in the package; (iii) where the commodity is packaged or sold by number, the accurate number of the commodity contained in the package;
(iv) the Unit sale price of the package;
(v) the sale price of the package.”
According to Section 23(2) of the rules, the retail sale of any packaged commodity at a price higher than the printed MRP is prohibited. It says, “No dealer or other person including manufacturer, packer, and wholesale dealer shall make any sale of any commodity in packed form at a price exceeding the retail sale price thereof.”
Thus it is clear that while the rules state that anything cannot be sold above MRP, sadly it cannot be enforced since the Act supersedes rules. Violation of the Act, I an MRP, would attract a fine of Rs5,000 or a prison term of five years with a fine. Section 63 of the Act states, “Whoever, in the course of inter-state trade or commerce, sells, distributes, delivers or otherwise transfers, or causes to be sold, distributed , delivered or otherwise transferred any commodity in a packaged form which does not conform to the provisions of this Act or any rule made there under, shall be punished with fine which may extend to Rs5,000, and, for the second or subsequent offence, with imprisonment for a term which may extend to five years and also with fine.”
One would expect that legal experts and bureaucrats would notice this and make the change accordingly. However, it seems they haven’t learnt anything and have just simply drafted a new act and rules without bothering to take cognizance of this glaring loophole.
The central government enacted the Legal Metrology Act 2009 (the New Act), which came into force on 1 April 2011 and replaced The Standards of Weights and Measures Act, 1976. The new act rationalizes the units for measurement to be used in India. The Act also specifies the metric system (metre, kilogram, etc.) to be used. It regulates the manufacture, sale and use of standard weights and measures.
According to Chapter V, of the Legal Metrology Act 2009, it appears that the non-conformity refers only to weight, number, etc. and not to the price. So there is no explicit prohibition of sale above the MRP. Several sections in this chapter devote to ‘weight’ or ‘number’ but not price. The only difference in this Act is the quantum of fine is much higher, at Rs25,000 instead of Rs5,000. Section 36 of the Legal Metrology Act states, “Whoever manufactures, packs, imports, sells, distributes, delivers or otherwise transfers, offers, exposes or possesses for sale, or causes to be sold, distributed, delivered or otherwise transferred, offered, exposed for sale any pre-packaged commodity which does not conform to the declarations on the package as provided in this Act, shall be punished with fine which may extend to twenty-five thousand rupees, for the second offence, with fine which may extend to Rs50,000 and for the subsequent offence, with fine which shall not be less than Rs50,000 but which may extend to Rs1 lakh or with imprisonment for a term which may extend to one year or with both.”
Similarly, according to Section 18(2) of The Legal Metrology (Packaged Commodities) Rules, 2011 (which replaced the Standards of Weights and Measures (Packaged Commodities Rules, 1977), it states that, “No retail dealer or other person including manufacturer, packer, importer and wholesale dealer shall make any sale of any commodity in packed form at a price exceeding the retail sale price thereof.”
Basically, the old and the new acts and rules are the more or less the same! It would seem that MRP is just a fiction. Anybody would be able to sell it above MRP.
In fact, there are several Supreme Court orders which prescribe the limits of rules made under an Act. They all say that Rules cannot extend the boundaries of the Act under which they have been made (e.g. Bharathidasan University Vs All-India Council for Technical Education, (2001) 8 SCC 767). They should have included the prohibition of charging a price higher than the printed price in the Act itself and not just in the rules. Unless parliament fixes this lacuna, MRP will continue to remain a paper tiger and not benefit any consumer.
In a country where information is tightly controlled, the size and extent of the underground economy can only be guessed. When this part of the economy goes bust, the landing will be very hard indeed
The Chinese economy, like the economies of the rest of the BRICs, is slowing. Despite some neutral official numbers, other numbers like industrial production and electricity consumption indicate that China’s growth rate may have fallen below the target of 7.5%. In May real estate values have fallen in a record 54 of 70 cities. In the first five months of 2012, real estate sales volume slowed by 9% compared to a year earlier. The central bank cut interest rates for the first time since late 2008, suggesting a weaker economy than forecast.
With all this bad news, China is still growing at a rate that any other country would envy. Business cycles have been part of every market in history. Have the Chinese found a way to prevent them?
Some people certainly think so. The famous Goldman Sachs’ economist, Jim O’Neill, and the creator of the term ‘BRIC’, still sees China as a “beacon of light”. O’Neill no longer believes that indicators like electricity consumption and industrial production, which have been so accurate in the past, still reflect the true level of China’s economic activity. Instead he has switched to indicators of consumption, including monthly retail sales, which seem to support his forecast that China’s economy is in for a ‘softer’ landing. This thesis is quite common among economists and has probably been priced in to global equity markets.
Other economists also do not see a “hard landing” but for other reasons. The excellent economist Andy Xie points out that economic collapses occur only when creditors fear for their loans and try to collect from defaulting debtors. There is a major difference in different economies depending on their legal infrastructures. In countries like the US, when a debt is not paid, the courts will happily enforce the contract. The creditor can satisfy the debt in cash, collect the collateral, foreclose on the real estate or force the debtor into bankruptcy. In other countries like Japan, debts are not collected. The difference is between a sharp crash and protracted slowdown.
Although a crash or hard landing may sound worse than a slowdown or a soft landing, in fact the soft landing is worse. Unless creditors can clear the loans and reallocate capital to more efficient enterprises, the economy cannot restart. The country’s economy becomes littered with zombie banks and mispriced assets. Growth comes to a halt, since the market is not allowed to function. The stagnation can last for over a decade.
This is what is occurring in China. Their 2008 bankruptcy law is unused. Defaulting debtors just leave town. Foreclosures are rare. Banks don’t force developers to repay loans on time, so developers see no need to liquidate inventories at lower prices. Prices do not crash, but sales do.
Most of the loans did not go to developers or private businesses. Instead they went to local governments and SOEs. With slowing real estate sales, the main source of income for local governments is drying up. Rather than trying to collect from another branch of the government, the state-owned banks simply roll the loans over.
Professor Michael Pettis has pointed out these problems for years. He understands the sclerosis inherent in the system, but believes that Beijing will prevent a slowdown by forcing banks to lend more to local governments for infrastructure projects. While this might be sufficient to stimulate the economy for a few months, eventually the loans for these projects or the bonds issued to finance them will end up in default as well.
Despite these predictions, there will in fact be a crash in China. As central banks in the US and Europe are discovering, there are limits to the ability of government to manipulate a market. The Chinese government controls the banking system, but there is a shadow banking system. This system is not only unregulated, its size and extent are unknown.
The concrete business is an excellent example. Families will buy a concrete mixer with vendor financing. Then the owners will double up on their debt by using the equipment as collateral for new loans. Finally mixing companies sell their ready-mixed concrete on credit to developers. This overleveraged pyramid could easily collapse like a house of cards.
Financial reform could make the problem worse. By controlling interest rates for loans and deposits, the government guarantees profits for its banking monopoly and creates a hidden tax on depositors to help clear bad loans. But the monopoly is breaking down. Banks have to offer higher rates to attract depositors.
In a country where information is tightly controlled, the size and extent of the underground economy can only be guessed. In most emerging markets it is over 50% of the regular economy. When this part of the economy goes bust, the landing will be very hard indeed.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)