(Current Affairs) Economy & Energy | July: 2016

Economy

WPI rose to 0.8 per cent in May from (-) 2.20 per cent

  • Wholesale price inflation rose to 0.8 per cent in May from (-) 2.20 per cent a year ago, driven by higher food prices, making it difficult for the central bank to reduce interest rates in the short-term.
  • This is the second month in succession that the WPI is remaining in positive territory. Last month, inflation as measured by the wholesale price index (WPI) was at 0.34 per cent, its first gain in 18 months, according to data released by the Centre.
  • The acceleration in WPI, coming as it does after a quickening of retail inflation in the same month, makes it even more unlikely that the Reserve Bank of India will cut interest rates shortly, according to economists.
  • The WPI rose due to food inflation which shot up to 7.9 per cent from 4.2 per cent in April. The same trend could be seen in retail inflation as well where only the food category accelerated inflation.
  • Food continued to push the headline print higher while the effect of rising global commodity prices was also larger in the index due to its close correlation with domestic prices.
  • The fuel and power segment in the WPI contracted 6.1 per cent in May compared to a contraction of 4.8 per cent in April.
  • This was led bythe mineral oil segment, which contracted 9.6 per cent in May compared to a contraction of 7.9 per cent in the earlier month.
  • Inflation in manufactured goods rose marginally to 0.9 per cent in May from 0.7 per cent in April.
  • Overall, the view is that rising inflation coupled with poor industrial growth is a worrying trend.

The model GST law brings all e-commerce transactions under GST

  • The model Goods and Services Tax (GST) law, made public by the Centre, has clarified that all e-commerce transactions will attract GST and that the tax will be collected by the service operator as soon as the supplier receives payment.
  • While this has cleared the confusion surrounding the levy of the tax on e-commerce transactions spanning different states, it will also make operations more complicated for the e-commerce platform.
  • The model GST law — with 162 clauses and four schedules — will be applicable for all those with an annual turnover of Rs.10 lakh or more. This limit is Rs. five lakh in the north-eastern states.
  • The provisions of the model GST law that prescribes a GST threshold limit which is so low as Rs.10 lakh (Rs.5 lakh for north east), may be a zero sum game as the administrative cost of compliance on both ends would equal the tax collected.
  • The model law also provides for an Authority for Advance Ruling to be located in every state, comprising one Central GST member and one State GST member to be appointed respectively by the Central Government and the State government.
  • In addition, the law provides for the creation of an Appellate Authority in each state.
  • The GST model law also includes a ‘composition levy’, wherein a person with an annual turnover of less than Rs.50 lakh on the sale of goods and services in a single state will have to pay a tax of “not less than one per cent.

Govt to review prize rise

  • Concerned over food inflation, Finance Minister Arun Jaitley will review the situation and discuss steps to keep prices of essential commoditiesin check.
  • Retail prices of pulses are still ruling high at over Rs.170 per kg even as the government is making efforts to boost supply . Even tomato prices have doubled to Rs.80 a kg due to the crop damage. Potato rates have also been on the rise.
  • As per the WPI data vegetable inflation rose sharply to 12.94 per cent from 2.21 per cent a month ago.
  • The Finance Minister has called tomorrow a meeting with ministers and secretaries concerned to discuss prices of essential commodities.

Consumer Price Index accelerated to 5.76 per cent in May

  • Retail inflation, as measured by the Consumer Price Index (CPI), accelerated to 5.76 per cent in May, its highest level in 21 months.
  • CPI acceleration is driven primarily by rising food prices, making it more unlikely for the central bank to cut rates in the near future
  • The index came in at 5.47 per cent in April 2016. It was 5 per cent in May last year. The last time the retail inflation was higher was in August 2014 when it crossed 7 per cent.
  • Shortage in the sugar market has also moved up prices and could move up further during the festival season.
  • Efficient management of the food basket is likely to become crucial for any monetary easing in the future. Expect easing to commence only when the RBI is sure of hitting the 5 per cent target in March next year.
  • The data, released by the Ministry of Statistics and Programme Implementation on Monday, shows that inflation in the ‘food and beverages’ segment accelerated to 7.2 per cent in May.
  • Overall, only food inflation witnessed acceleration while the other major segments in the index recorded marginal slowdown.
  • The housing segment saw a marginal easing of inflation to 5.35 per cent in May, down from 5.37 per cent in April.
  • Core inflation moved down imparting a downward bias to the overall print. However, this decline could possibly be short lived as the seventh pay commission is implemented and the base effect in certain categories wears off.

Microsoft CEO Satya Nadella outlined his thoughts on the LinkedIn buy

  • In an email to company staff, Microsoft CEO Satya Nadella has outlined his thoughts on the LinkedIn buy, the biggest for the software giant.
  • The key questions that weighed on his were: Does it expand the total addressable market of Microsoft? Is this asset riding secular usage and technology trends?
  • “The answer to all of those questions with LinkedIn is squarely yes,” he said.
  • “This deal brings together the world’s leading professional cloud with the world’s leading professional network,” he said.
  • As these experiences got more intelligent, the LinkedIn and Office 365 engagement would grow, he opined.
  • This would help create new opportunities for monetisation through individual and organisation subscriptions and targeted advertising, he added.

Central Bank revised the norms for banks to undertake debt restructuring

  • The Reserve Bank of India (RBI) revised the norms for banks to undertake debt restructuring if they feel the project is viable in the long run
  • Under the scheme titled ‘Sustainable Structuring of Stressed Assets (S4A),’ at least 50 per cent of the debt should be serviced in the same period as that of the existing loan.
  • The balance can be converted into equity or quasi-equity instruments.
  • Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.
  • The scheme is applicable to projects that have commenced commercial operation and where the banks’ exposure is over Rs.500 crore.
  • According to the norms, an advisory body called Overseeing Committee (OC) will be constituted by the Indian Banks Association (IBA) in consultation with the RBI.
  • Banks have to submit the resolution plan to the OC. The OC will review the processes involved in preparation of the plan, etc. for reasonableness and adherence to the guidelines and give an opinion , RBI said.

Public sector banks have increased their presence across the country

  • Public sector banks have increased their presence across the country—in terms of ATMs and points of sale devices—far faster than private sector banks have, recent data released by the Reserve Bank of India shows.
  • The data—comparing private sector and public sector banks shows that public sector banks have steadily increased their share in most of these parameters over the last four years.
  • There are 27 public sector banks and 19 private sector banks in operation currently.
  • The data shows that there were 142,500 public sector banks (PSB) ATMs as of March 2016, which amounts to 72 per cent of the total number of ATMs in the country.
  • This is a vast improvement over the 58,000 PSB ATMs at the end of March 2012.
  • Private banks, on the other hand, only increased their number of ATMs from 30,300 in March 2012 to 55,600 at the end of March 2016, effectively seeing their share in the total fall 10 percentage points over the period.
  • One common view is that this increase in the number of ATMs by PSBs is due to the government-mandated rural financial inclusion programme.
  • The data supports this, with PSB ATMs making up 86 per cent of all rural ATMs at the end of March 2016, up from 77 per cent in March 2012.
  • Urban non-metro ATMs for PSBs grew from 62 per cent share in March 2012 to 72 per cent by end of 2015, while the share of private ATMs fell from 37 per cent to 27 per cent. Semi-urban India saw almost the same trend.
  • Private banks were the first-movers in POS devices (that allow card transactions), having issued 85 per cent of these as of March 2012.
  • This proportion saw a significant change over four years. PSBs added nearly four lakh POS devices to the market in that time, compared to an addition of about three lakh by the private banks.
  • This saw the share of public sector POS machines grow from 8 per cent in March 2012 to 34 per cent in March 2016. Private banks’ share fell to 62 per cent.
  • The issuance of credit cards and the share in credit card transactions are two areas where the private sector outshines the public sector.
  • There were 195 lakh credit cards in the country as of March 2012, 55 per cent of which were from private banks.
  • The PSBs increased the number of credit card they issued in this time, but the growth in their market share was only three percentage points, to 20.6 per cent.
  • Similarly, the private sector accounted for 45 per cent of credit card transactions as of March 2012, which grew to 55 per cent by March 2016.

Real Estate Investment Trusts

  • REITs are similar to mutual funds. While mutual funds provide for an opportunity to invest in equity stocks, REITs allow one to invest in income-generating real estate assets.
  • REITs raise funds from a large number of investors and directly invest that sum in income-generating real estate properties (which could be offices, residential apartments, shopping centres, hotels and warehouses).
  • The trusts are listed in stock exchanges so that investors can buy units in the trust. REITs are structured as trusts. Thus, the assets of an REIT are held by an independent trustee on behalf of unit holders.
  • The trustee has duties as laid out in the trust deed for the REIT. These typically include ensuring compliance with applicable laws and protecting the rights of unit holders as well.
  • The investment objective of REITs is to provide unit holders with dividends, usually generated from rental income and capital gains from the profitable sale of real estate assets.
  • Typically, the trust distributes 90 per cent of its income among its investors by issuing dividends.
  • REITs originated in the U.S. to give investors an opportunity to invest in income-generating real estate assets. After its introduction in the U.S., several countries such as Singapore, Australia and Hong Kong have implemented REITs.
  • REITs, as a concept, have been on the horizon for a while now. India’sregulations in 2014 for the sector have not been able to attract investor interest. REITs obtained exemption from dividend distribution tax in the Budget, a step towards making them attractive for the investors.
  • A report by real estate consultancy firm Cushman and Wakefield estimates that Indian commercial real estate (like office, retail assets) offers investment opportunities for REITs worth $43 billion – $54 billion (Rs, 2.88 lakh crore – Rs. 3.60 lakh crore) across top cities.
  • The current SEBI guidelines for REITs permitinvestments only in rent-yielding assets.
  • For investors who are averse to investing in physical purchase of property due to the risks involved, REIT is an alternative. Investors purchase units of REITs which are traded on the stock exchange, as against physical purchase of property.
  • Therefore, investors can buy and sell units of REIT on the stock exchange as and when required, making investment easier to liquidate compared to physical property transaction.
  • The minimum required to be put into an REIT is Rs.2 lakh. It could provide an opportunity for investors who, otherwise, do not get the opportunity to invest in commercial real estate because of high capital values.
  • Since 90 per cent of the profit generated needs to be distributed as dividend in REIT, it could provide a stable income for unit holders.
  • Short-term capital gain tax is applicable for unit holders at the rate of 15 per cent. While nterest is tax-exempt for REITs, it is taxable for unit holders.
  • The registration charges for every purchase and sale of property is still applicable. Saraf says such factors can impact the profitability and attractiveness of REITs in India.
  • REITs units are listed on, and are subject to the vagaries of the stock exchanges, resulting in negative or lower returns than expected.
  • As in mutual funds, retail investors in REITs have no control over investments and exits being made by the trust.

Exim Bank looking to disburse $10 billion to Africa in the next three years

  • The country’s premier export finance institution Exim Bank, which is looking to disburse $10 billion to Africa in the next three years.
  • This is a shift from Exim Bank’s credit disbursal strategy to Africa — which was mainly to help build infrastructure and industrial projects.
  • India’s strength is in services, especially in sectors such as healthcare, information technology, education and even agriculture-related services. So we want to help in increasing India’s services exports to Africa.”
  • The change in approach follows the government giving a greater say to Exim Bank in identifying India’s best interests while it promotes economic diplomacy.
  • Exim Bank has been extending credit to Africa through concessional Lines of Credit, Buyer’s Credit (meant to finance imports of overseas buyers, in this case African buyers, from India) and through other lending mechanisms.
  • Exim Bank’s new office in Ivory Coast is to service West Africa. It has an office in Addis Ababa (Ethiopia) for the Eastern and Central African region, in addition to the one in Johannesburg to take care of the needs in Southern Africa.
  • Exim Bank has set up Kukuza Project Development Company (KPDC) in Nairobi (Kenya), along with IL&FS Group, African Development Bank and State Bank of India, to ensure greater Indian participation in infrastructure projects in Africa.
  • The aim now is to kick-start KPDC’s operations by the time Prime Minister Narendra Modi undertakes his African visit in July covering Kenya, South Africa, Mozambique and Tanzania, Mr. Mathur said.
  • Exim Bank has extended around $300 million to finance the setting up of electric transmission lines in West Africa and is ready to give another $200 million for the same, he said.
  • India-Africa goods trade in 2014 was around $75 billion with Africa exporting $40 billion to India and India exporting around $35 billion to that continent, according to International Trade Centre data.
  • This had fallen to about $60 billion in 2015 with Africa exporting $34 billion and India exporting $26 billion, data showed.

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