Current Affairs – July 2012 Economic Affairs
- The Reserve Bank of India (RBI), on 31 July, kept the key indicative policy rates unchanged while it cut the gross domestic product (GDP) forecast for the current financial year from 7.3 per cent to 6.5 per cent and raised the inflation forecast from 6.5 per cent to 7 per cent. However, the RBI cut the Statutory Liquidity Ratio (SLR) by one percentage point from 24 per cent to 23 per cent which is expected to provide liquidity of around Rs.60,000 crore. The RBI left interest rates unchanged for the second straight review. It kept the Repo rate unchanged at 8 per cent, and the Cash Reserve Ratio (CRR) at 4.75 per cent. Repo rate is the rate at which banks borrow money from the central bank. CRR is the portion of deposits banks have to keep with the central bank in cash. However, in a move to provide more liquidity in the system, the central bank has reduced the Statutory Liquidity Ratio (SLR) from 24 per cent to 23 per cent with effect from August 11. SLR is the amount of liquid assets or securities that commercial banks must maintain as reserves other than the cash.
- After constituting the Parthasarathi Shome committee in the first week of July to look into the controversial GAAR (General Anti-Avoidance Rules) provisions and address the thorny issues to the satisfaction of foreign investors and all other stakeholders, Prime Minister Manmohan Singh, on 30 July, set up yet another panel to bring about clarity on taxation matters pertaining to development centres and the IT sector. In this regard, the Prime Minister’s Office (PMO) said that a four-member panel headed by former CBDT (Central Board of Direct Taxes) Chairman N. Rangachary would hold consultations with stakeholders and government departments concerned to finalise the approach to taxation of ‘Development Centres’ and suggest appropriate measures.Incidentally, Mr. Rangachary is also a member of the expert committee on GAAR headed by Dr. Shome.
- SEBI tightened Eligibility & Exit Criteria for Stocks in Derivatives Segment: The market regulator, Securities and Exchange Board of India (SEBI) on 23 July 2012 tightened eligibility and exit criteria for stocks in the derivatives segment by increasing the benchmark liquidity level for any scrip to be eligible for trading in the derivatives segments. By doing away with illiquid stocks, SEBI aims to check manipulation. According to the circular issued by SEBI, scrips with a minimum trading volume value of Rs 10 lakh and market wide position limit (MWPL) or market capitalisation of Rs 300 crore cannot be eligible for entry into the Future and Options (F&O) segment. Over 220 scrips trade in the F&O segment on the National Stock Exchange (NSE) at present. Of these 220 scrips only 100 scrips will possibly meet the new eligibility criteria set by the market regulator. The minimum Median Quarter Sigma Order Size, which indicates liquidity/order size in scrip, a requirement for introduction in derivatives segment was revised to Rs 10 lakh, from Rs 5 lakh at present. The MWPL, indicating the size of the company was also raised to Rs 300 crore, from Rs 100 crore. Scrips that fail to maintain a minimum MWPL requirement of Rs 200 crore would cease to be in the F&O segment. The earlier limit was set at Rs 60 crore. SEBI also tightened the minimum conditions for a stock to continue trading in the derivatives segment. As per the circular, a stock’s MQSOS over the last six months ought to be more than Rs 5 lakh against Rs 2 lakh earlier for the stock to continue trading.
- Maruti Suzuki India Ltd announced closing: -India’s leading four-wheeler manufacturer Maruti Suzuki India Limited announced to close down its factory at Manesar,located in Haryana on 21 July 2012. The company’s move came after a scuffle between the workers and senior management of the company broke out at the factory site on 18 July 2012.The scuffle, which left many of the company’s executivesinjured, broke out after the workers’ demand of pay-parity was not accepted by the company.The plant had witnessed 5 workers’ strike in year 2011 itself. In October 2011 the company had witnessed a 14-day-long strike that ended on 21 October 2011, after the company gave in to the workers’ demand to register a trade union.
- 14 foreign FDI proposals approved: The finance ministry declared on 24 July 2012 that the government based on the recommendation of the Foreign Investment Promotion Board approved 14 foreign direct investment (FDI) proposals worth Rs 1584.11 crore. The FDI proposal which received government approval included 225-crore investment in the Indian operations of Asian equity research firm CLSA. Maharashtra based Abhijeet Power’s proposal to invest Rs 674 crore for induction of foreign equity in an investing company to make downstream investment also received approval. The government also cleared the proposal of Pune-based Bajaj Finserv, which sought a nod for issue of equity shares to carry out NBFC activities directly and through subsidiaries. It proposed to bring in FDI worth Rs 100 crore.
- 2G: EGoM recommends lower price for auction
The empowered group of ministers (EGoM) on telecommunications, headed by union home minister P Chidambaram , recommended to reduce the base price for 2G spectrum airwaves by 4000 crore rupees. The EGoM recommended the base price for 2G spectrum at 14000-16000 crore rupees against 18000 crore rupees suggested by Telecom Regulatory Authority of India (TRAI). The EGoM announced a cut in spectrum usage charges (which will be part of the operators’ revenues towards spectrum fee) from 8-10 percent recommended by Trai to between 3 percent and 6 percent. The EGoM’s recommendations will now be sent to the Union Cabinet for its approval. The EGoM also approved the department of telecommunications’ (DoT) suggestion to defer the mode of payment for auction winners. Giving in to demand of telecom operators the DoT had suggested the EGoM that the auction winners should be allowed to pay 25-30 percent of the spectrum fee upfront and rest amount divided in 10 equal installments annually.
- Cabinet Committee on Economic Affairs approved 10.82 Per Cent Disinvestment in SAIL:
The divestment will help the government to raise about 4000 crore rupees. The government holds 85.82 per cent stake in SAIL. In its annual budget 2012-13 the govt. has set the disinvestment target at 30000 crore rupees (300 billion rupees). On the issue of ownership, it made clear that at least 51 per cent ownership and management control of Central Public Sector Enterprises would remain with the Government.
- MCX-SX is now full-fledged Stock Exchange
The Securities and Exchange Board of India (SEBI) granted permission to MCX-SX to operate as a full-fledged stock exchange on 10 july, a development that will bring in more competition in markets.MCX Stock Exchange (MCXSX) was first granted recognition by SEBI in September 2008, but it was allowed to conduct trading only in the currency derivatives segment.With the approval, MCX-SX would be able to offer additional asset classes such as equity and equity F&O (Futures and Options), interest rate futures and wholesale debt segments.At present, Sebi has granted permanent recognition to eight stock exchanges in the country, but only two of them BSE and NSE are operating as active nationallevel bourses across the segments.MCX-SX and USE (United Stock Exchange) are present in the currency derivatives trade only.With Sebi’s latest decision, MCX-SX is likely to become the third major national-level fullfledged stock exchange.
- Euro finance ministers agree on Spain bank bailout
As part of the agreement with Spain, finance ministers from all 27 European Union countries are expected to approve a one-year extension, until 2014, of Spainâ€™s deadline for achieving a budget deficit of 3 per cent. There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened, Mr. Juncker said. ”We are convinced that this conditionality will succeed in addressing the remaining weakness in the Spanish banking sector”he said. Dutch Finance Minister Jan Kees de Jager said the agreement should be finalised soon. ”We have a tentative deal on the bailout conditions for a bailout of Spanish banks,” Mr. de Jager said. ”The total will likely be â‚¬100 billion. Some countries like the Netherlands, Germany and Finland need to get parliamentary approval. We hope this can be wrapped up within a week.” The exact amount of the bailout will likely not be known until September, when individual examinations of different Spanish banks have been completed. Mr. de Jager said Madrid’s partners agree that ”financial sector reforms in Spain must be ruthlessly implemented. These reforms include, notably, a cap on salaries of bank executives and a ban on bonuses.” ”There are still differences over this,” he said. ”The details will be worked out by the end of the year.” As part of the agreement with Spain, finance ministers from all 27 European Union countries are expected to approve a one-year extension, until 2014, of Spainâ€™s deadline for achieving a budget deficit of 3 per cent.
- No Service Tax on remittences from abroad: Setting at rest concerns expressed in various quarters, the Central Board of Excise and Customs (CBEC), on 10th July,, clarified that remittances from abroad would not attract service tax.
- A new service tax regime, based on a negative list of exempted services, will come into effect all over the country on Ist July. With this, all services – except the 38 activities put on the negative list – will come under the tax at the increased rate of 12 per cent, as announced in the Union Budget. As of now, service tax is being levied on 119 services based on a positive list. The switch-over to a negative list-based approach is aimed at aligning the indirect taxation system to the proposed Goods and Services Tax (GST) regime, which is sought to be introduced to unify the levies of the Centre and the States into a composite system. With the services sector now accounting for 60 per cent of the gross domestic product, the Finance Ministry has set a target of Rs.1.24 lakh crore for service tax collection during 2012-13. This is significantly higher than the Rs.97,000 crore mopped up during the previous fiscal.As per the negative list-based approach, services such as metered taxis, auto-rickshaws, betting, gambling, lottery, entry to amusement parks, transport of goods or passengers and transmission and distribution of electricity by distribution companies will not come under the service tax net. Other important services exempted from the levy are solemn activities such as funeral, burial, mutate services and transport of deceased. In the education sector, school and university courses, as also approved vocational studies, have been exempted. Likewise, auxiliary educational services and renting of immovable property by educational institutions in respect of education will not be taxed. However, coaching classes and training institutions will be taxed. Among the other services included in the negative list are those provided to government, local authorities or a government authority for repair and maintenance of an aircraft. Likewise, services provided by advocates to other advocates and business entities up to a turnover of Rs. 10 lakh in the preceding financial year will be exempt from the tax. Services provided by way of public convenience, such as bathroom, washroom, urinals or toilets, are included in the negative list, just as services relating to work contracts for a scheme under the Jawaharlal Nehru National Rural Urban Renewal Mission or the Rajiv Awas Yojana.
- SBI waives minimum balance for savings accounts: State Bank of India (SBI), to attract new customers, has done away with the minimum balance criteria for saving banks account. The bank will not levy any charge for breaching the minimum balance criteria. The facility is available to existing customers also, SBI said in an advertisement. For the normal SBI savings account with cheque book facility, a customer had to maintain a minimum balance of Rs.1,000 in his or her account failing which it attracts penalty. There are certain saving account products of the bank where the minimum monthly balance is as low as Rs.50. Depending on the features and facility, the minimum average monthly balance varies. The waiver would help the bank in improving the customer base, an official said, adding that it would also help the bank in generating low cost deposits as the savings bank account earned interest rate of just 4 per cent.
- According to the World Investment Report 2012 released by United Nations Conference on Trade and Development (UNCTAD) on 5 July 2012, India emerged as the third most preferred Foreign Direct Investment (FDI) destination in the world. The first position was occupied by China followed by US. The report noted that FDI inflows to India had increased by 33 percent in 2011 to 31.6 billion dollar vis-Ã -vis 24.2 billion dollar in 2010. The FDI, however, continue to be much less than that received by China (123.9 billion dollar). The report further observed that foreign investment in India escalated for the first time in three years in 2011, as global business majors reinstated their faith in Indiaâ€™s resilient economy and rapidly expanding middle-class. After receiving 43.4 billion dollar FDI inflows in 2008, which was also the highest received by India in a year the FDI inflow slipped to 35.5 billion dollar in 2009 and 24.2 billion dollar in 2010. Indonesia, Brazil, Australia, UK, Germany, Russia and Thailand were the other countries who made it to the list of top ten investment destinations in the world. The report, was released by United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) chief economist Nagesh Kumar. UNCTAD conducted a survey of 179 top global business houses, where they were asked about their favourite destination for business investment.