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C r i p p l e d d e c i s i o n m a k i n g …
The Parliament in the Monsoon session (eighth session of 15
th
Lok Sabha)
has worked for 26 days/104 hours. Amid street protests for anti
corruptions law, time lost due to forced adjournment or interruptions was
almost 51 hours. However, many important legislations have been
introduced and passed in the monsoon session with important debates
including Sense of House on ‘Lokpal draft’, Cabinet approval for Land
Acquisition Bill, etc. Still, we await major reforms in terms of GST
implementation, FDI in retail and policy reforms to aid infrastructure
funding, which could be a game changer for the government.
ƒ Bills introduced and passed
The government has introduced certain important Bills like Land
Acquisition Bill, Lokpal Bill, The Narcotic Drugs and Psychotropic
Substances (Amendment) Bill, 2011, The Damodar Valley Corporation
(Amendment) Bill, 2011 and passed important amendments like The
Indian Medical Council (Amendment) Bill, 2011, The State Bank of India
(Subsidiary Banks Laws) Amendment Bill, 2011
ƒ GDP growth… Where are we heading?
The government’s 12th Five Year Plan GDP growth target is 9%. To
achieve that it has to push the reforms agenda to the forefront. Despite
a few policy initiatives like petrol prices decontrol, the overall economic
reforms process has remained on the backburner. We have seen first
quarters GDP growth at 7.7% as against 8.8% in the previous year. This
has been against its full year target of ~8%, which now looks difficult to
achieve. Consequently, further downward revision by the government
is expected. With a delay in policies like diesel price decontrol, allowing
49% FDI in retail and delay in disinvestment process already proving to
be deterrent to the growth, elections in major states like UP and Punjab
in 2012 could act as another spoiler in terms of implementation of these
reforms.
O u r v i e w
Marred by the disruption on account of Jan Lokpal issues and
government delayed action, the monsoon session of Parliament proved
to be another washout. Out of the 32 Bills, which were due to be
introduced, only 13 have been introduced in the monsoon session. In
terms of major bills introduced and taken up, the focus stayed mainly on
populist measures such as giving in to the demands of the Jan Lokpal Bill,
farmers friendly Land Acquisition Bill and Mines and Mineral
(Development & Regulation) Bill aimed at inclusive growth, which would
provide a consumption boost to rural India.
The more prominent supply side issues such as coal and gas shortage,
inflation, crude price and regulatory clarity on various infrastructure and
its funding has still stayed unanswered. The need of the hour is to
expedite the reforms machinery. However, given the strong macro
headwinds, elections slated across states in the next year and sluggish
regulatory reforms, challenges remain ahead for the government.
L o k p a l B i l l
Parliament has adopted the Sense of the House on the three clauses
under Draft Lokpal (i) Citizen Charter, (ii) lower bureaucracy under Lokpal
through an appropriate mechanism (iii) establishment of Lokayukta in the
states. The Lokpal Bill has been sent to the standing committee, which
would look into the draft clause by clause and give its recommendation.
We believe the Bill is likely to be introduced in the winter session of
Parliament.
There were differences between the government’s Lokpal draft and civil
society’s draft on various issues
Exhibit 6: Government’s Lokpal Draft vs. Jan-Lokpal Bill
Lokpal Bill Jan-Lokpal Bill (JLB)
The government Bill includes the Prime Minister
after he demits office
The JLB includes a sitting Prime Minister
The Bill deals only with offences under the
Prevention of Corruption Act
It also includes offences by public servants under the
Indian Penal Code, victimisation of whistleblowers and
repeated violation of citizen's charter
The Bill provides for an investigation wing under
the Lokpal
The JLB states that the CBI will be under the Lok Pal
while investigating corruption cases
In the Bill, the Lokpal may initiate prosecution in a
special court. A copy of the report is to be sent to
the competent authority. No prior sanction is
required
In the JLB, prosecution of the Prime Minister, Ministers,
MPs and judges of Supreme Court and high courts may
be initiated only with the permission of a 7-judge bench
of the Lokpal
It provides for a prosecution wing of the Lokpal The CBI's prosecution wing will conduct this function
It does not deal with grievance redressal. However,
the government agrees on the issue under the
sense of Parliament
It deals with grievance redressal of citizens and a
process for prosecuting corruption cases. It requires
every public authority to publish citizen's charters listing
its commitments to citizens
The Bill does not include Judiciary under Lokpal.
However it wants to introduce a separate Judicial
Accountability Bills
JLB includes Judiciary under Lokpal
Source: IBNLive.com, ICICIdirect.com Researc
T h e L a n d A c q u i s i t i o n , R e h a b il i t a t i o n a n d R e s e t t l e m e n t
B i l l , 2 0 1 1
The Cabinet approval for Land Acquisition (LA), Rehabilitation and
Resettlement (R&R) Bill, which aims to safeguard the interest of land
owners and those who lose their livelihood as a result of land acquisition,
was a major regulatory decision during the monsoon season of
Parliament. While the Bill was tabled in the Lok Sabha on September 7,
2011 the discussion on the same is expected to be held in the winter
session of Parliament.
Scope of the Bill
ƒ As per the bill, both LA and R&R provisions will apply when land is
acquired by the Government for its own use, hold and control or
with the ultimate purpose of transferring it for the use of private
companies for stated public purpose or for immediate and declared
use by private companies for public purpose. The abovementioned
land acquisition can take place provided the consent of at least 80%
of the project affected families is obtained
ƒ Only R&R provision will apply when private companies buy land for
a project of more than 100 acres in rural areas, or more than 50
acres in urban areas
ƒ Multi-crop irrigated land will be acquired only as a last resort
measure and equivalent area of cultivable wasteland needs to be
developed if it is done so
Comprehensive Compensation Package
ƒ The compensation is set at 4x and 2x of the market value of the land
in rural and urban areas, respectively
ƒ Beside this, the belowmentioned comprehensive R&R package is
also proposed for both land owners and livelihood losers
ƒ Additionally, special provisions for scheduled castes and scheduled
tribes have been envisaged by providing additional benefits of 2.5
acres of land or extent of land lost to such affected families. One
time financial assistance of | 50,000: 25% additional rehabilitation
and resettlement benefits for the benefits of families settled outside
the district and free land for community and social gathering and
continuation of reservation in the resettlement area, etc
ƒ Twenty five infrastructural amenities such as schools, health
centres, roads and electricity connections, etc are also proposed to
be provided in the resettlement area
The introduction of the bill will be a positive move for land owners and
livelihood losers enabling them to command better compensation for
their land. This, in turn, will be a boost to our consumption driven story,
which has been a key driver in resilience of our economy, despite global
uncertainty. It will also be a major step towards inclusive growth through
compulsory development of infrastructural amenities in remote areas.
Putting it from an industry perspective, we believe it may lead to a delay
in the process both in terms of negotiation and procedural delays due to
elaborate administrative mechanism involved. Industry has also reacted
negatively to the Bill as it believes that it will lead to considerable increase
in land costs. Assocham has stated that it would lead to a hike in land cost
by 60-80%. This may not create a conducive economic environment for
developers or companies to take up a project. We expect the projects
relating to industrial capex, SEZ, private power projects and possibly
large townships (due to R&R package) to get impacted by the Bill.
G o o d s & S e r v i c e T a x ( G S T )
The Goods & Service Tax (GST) was introduced in Lok Sabha through the
Amendment Bill on March 22, 2011. Introduction of GST is considered to
be one of the most significant economic reforms in India. GST, an
extension of VAT, aims to cover all goods and services. GST will merge
all the indirect taxes into one head. The taxes will be collected by the
Centre, which will then be transferred to the states via an agreed formula.
Salient features
The GST will have two components: one levied by the centre (centre
GST) and the other levied by the states (state GST).
Exhibit 8: Minimum R&R Entitlement
Taxes merged under Centre GST Taxes under State GST
Central Excise Duty, Additional Excise Duties VAT/Sales Tax
Countervailing Customs Duty, Special Additional
Customs Duty
Tax on Inter-state CST: This has to be phased out with
introduction of SGST.
Service Tax Local Taxes-Entertainment Taxes, Luxury Taxes, Tax on
Lottery, betting etc
Cess & Surcharges Service Tax
Entry Tax not in lieu with Octroi
Source: Ministry of Rural Development, ICICIdirect.com Research
Some goods/taxes have been kept outside the purview of GST like
purchase tax, tax on alcohol, tax on petroleum products, land electricity
and others. These items will be charged at a different rate, which the state
government will be free to decide. However, tobacco products would
come under the purview of GST but additional excise duties would be
levied on tobacco products. The proposed GST rate is 20% in the first
year, which will be progressively reduced to 16%.
ƒ There will be two tax rates for SGST – lower rate for necessary and
basic important items and a standard rate for all other goods.
Further, there will be a special rate for precious metals and a list of
exempted items. For services there would be one rate for both
CGST & SGST.
ƒ A GST Council will be formed with representation from both Centre
and state governments. This council will have the power to set tax
rates
ƒ GST revenues will go to the state where the goods are consumed
rather than the state where they are produced
The impact of GST on Indian economy would be:
ƒ According to the Thirteenth Finance Commission, GST could
increase India’s GDP somewhere within a range of 0.9% to 1.7% in
the medium-term. The long-term GDP gain would range between
$325 billion and $637 billion, which accounts for 30-60% of the
Indian economy currently
ƒ GST will lower the overall tax inputs in supply chain of goods and
services leading to lower prices of Indian goods and services. This
will increase the competitiveness of Indian goods and services in the
international market and provide a boost to Indian exports. The
increase in exports can be between 10% and 14%
ƒ We believe implementation of GST could result in initial inflationary
pressure due to the inefficiencies in supply chain. Simultaneously,
this would also result in a shortfall of tax revenues of state
governments. The Central government has proposed a fund of |
50,000 crore to help curb this shortfall
Currently, the Standing Committee of Finance is reviewing the Bill. The
Bill still has a long way to go before being included in the Constitution.
Hence, the chances of it meeting the April 1, 2012 deadline of its
introduction as proposed by the Finance Minister are slim. Though most
of the state governments agree to GST Implementation, some
disagreements are there on account of denial of power to state
governments to impose additional cess at the time of natural calamity.
F D I i n r e t a i l
India currently allows 51% foreign direct investment (FDI) in single-brand
retail and 100% in the wholesale cash-and-carry stores that can only sell
to other retailers and businesses.
In July 2010, the Department of Industrial Policy and Promotion (DIPP)
decided to float a discussion paper regarding opening up the retail sector
to FDI in multi-brand retail. Addressing some of the political concerns
relating to the opening up of the sector, DIPP suggested in the discussion
paper that the sector would be opened up to foreign firms in a calibrated
manner. DIPP invited views of various ministries on the same. While
various ministerial groups supported the opening up of the sector, some
of them were even against the opening up of the sector stating concerns
that the local kirana (mom and pop) stores would be at the receiving end
of this move.
In July 2011, the Committee of Secretaries (CoS) approved a proposal to
allow foreign direct investment (FDI) up to 51% in multi brand retail,
clearing the decks for the final approval from the Union Cabinet.
However, the approval does not automatically open the doors for the
global retail majors as the recommendations are yet to be approved by
the Commerce Ministry and then the Cabinet. Hence, there is still a long
way to go but this approval is certainly a positive step in that direction.
Some of the riders suggested by them were as under:
• A minimum investment of $100 million by overseas retailers
• Total 50% of the above investment should be made in back-end
infrastructure
• Initially, only cities with a population of 1 million and above will be
eligible
Some other riders like 30% of the sourcing should be done from SMEs,
30% of the sales should be made to wholesalers, etc. was also on the list.
Over and above this, the state governments are free to add their set of
riders and also accept/reject proposals from investors.
While the fine print of the guidelines is yet to be released, we believe that
the opening up of the sector to foreign investment will be beneficial for
listed players like Pantaloon Retail, Shoppers Stop and Trent as it will
provide them an easier access to funds to fuel growth. Increased foreign
participation will further fuel the growth for organised retailers.
Also, due to investment in back-end infrastructure, modern retailers with
efficient cold storage chains could minimise wastage of fresh produce
and ease food inflation. India currently lets around | 1 trillion of fresh
produce go waste. More than half of this can be brought to market if the
proper farm-to-fork infrastructure is in place.
From the stock perspective, retail stocks have appreciated in the range of
20–40% in the last three months in anticipation of positive developments
on the opening up of retail sector further. While we remain positive about
the benefits accruing due to increased foreign participation we opine that
the stock prices have already discounted the same and are trading at fair
valuations.
M i n e s a n d M i n e r a l ( D e v e l o pm e n t & R e g u l a t i o n ) B i l l
In July 2011, the Group of ministers (GoM) had approved the draft Mines
and Mineral (Development & Regulation) Bill. The new approved draft
made a distinction between companies mining coal and other minerals.
The Bill proposes that coal mining companies share 26% of profits with
the locals. Furthermore, for non-coal mining companies, the Bill proposes
an amount equal to 100% of the royalty to be shared with locals. If the Bill
is implemented it would impact companies like Coal India, Hindustan
Zinc, Sesa Goa, SAIL, Tata Steel, etc.
However, there are few key points on which clarity is needed such as:
ƒ Methodology to be adopted to determine the profitability of captive
coal mines
ƒ Will CSR expenses that the company incurs be allowed as a
deduction/offset?
ƒ Tax shield available if any?
N a t i o n a l F o o d S e c u r i t y B i l l 2 0 1 1
National Food Security Bill (NFSB) is aimed at protecting all children,
women and men in India from food deprivation. The main motivation
behind the proposed NFSB is to provide adequate nutrition derived from
the right to food as an aspect of right to life under Article 21, which is a
fundamental right of all citizens. Supply of food at affordable prices
becomes a policy priority when 32% of the population is living below the
poverty line (there are far more food insecure families than those
currently categorised below poverty line).
The draft bill prepared by the Department of Food & Consumer Affairs has
been approved by the EGoM and Law Minister. In the next step it needs
to be sent to all state governments for their opinion. After that, the Prime
Minister will call a meeting of Chief Ministers to give final shape to the Bill.
NFSB is likely to be introduced in the winter session, which makes its
implementation likely in FY12. It means that it may cause an additional
subsidy burden of | 13,000 crore and take the total subsidy bill on food to
| 95,000 crore in FY12E.
Features of the Bill
ƒ Subsidised food grains to be provided to 75% of below poverty line
(BPL) population and 50% of the urban population (68% of total
population) under NFSA
ƒ Beneficiaries (each person) under BPL will be provided 7 kg of food
grain per month. Rice will be provided at | 3 per kg and wheat at | 2
per kg. General category (above poverty line) will receive 3-4 kg per
person per month at half the minimum support price
ƒ The proposed Bill provides for a cash transfer or a food coupon
based system using the unique identification scheme (UID) for
proper targeting of food entitlements
ƒ An additional subsidy burden at | 13000 crore will take the total
subsidy bill on food to | 95000 crore
If the Bill is passed into an Act in winter, it will not be fully implemented
before 2012-13. However, given the slowdown and NFSB’s potential
impact on inflation, it may not be fully implemented before 2013-14- last
year before the general elections in 2014.
The downsides of the proposed NFSB are:
ƒ The procurement of 65-70 million tonnes (MT) of food grains will
absorb all marketable surpluses and may push up open market
prices
ƒ In the bad agricultural years, the country may have to import food to
meet the target. The international prices, being higher than the
domestic prices, may cause a further increase in the subsidy bill
ƒ The NFSB does not seem to have made provisions for logistics and
infrastructure, which works out to | 15,000 crore annually
D a m o d a r V a l l e y C o r p o r a t i o n ( A m e n d m e n t ) B i l l 2 0 1 1
The proposed amendment shall broad base and professionalise DVC by
bringing outside professional independent experts. The company has a
current operational capacity of 3604 MW. In FY11, it would commission
1773 MW of capacity. This would enable it to allocate resources optimally
and help it for fund raising in order to take up new projects. By new
capacity addition programmes as well as fund raising, it could become
one of the major power producers in the country. Going forward, we
believe this would be a prime candidate for disinvestment over the next
two years (on the lines of SJVN, NHPC, etc.)
S t a t e B a n k o f I n d i a ( S u b s i d i a r y B a n k s L a w s )
A m e n d m e n t B i l l
The Parliament approved the State Bank of India (Subsidiary Banks Laws)
Amendment Bill on August 30, 2011. The amendments are technical in
nature, which will enable the central government to effectively manage
the affairs of these associate banks. The Bill will not have any material
impact with regard to strategic intent of the bank or the government.
D r a f t G u i d e l i n e s f o r “ L i c e n s i n g o f N e w B a n k s i n t h e
P r i v a t e S e c t o r ”
The RBI released the Draft Guidelines for “Licensing of New Banks in the
Private Sector”. The draft guidelines come after a year after the RBI put
out a discussion paper in August 2010. The RBI has sought
views/comments on the draft guidelines from banks, NBFCs, industrial
houses, other institutions and the public at large. Final guidelines will be
issued and the process of inviting applications for setting up new banks in
the private sector will be initiated after receiving feedback and
suggestions on the draft guidelines, post the amendments to the Banking
Regulation Act, 1949.
The RBI has always been very selective in issuing new bank licenses as it
issued 12 new bank licenses in the last two decades, with only two
licenses issued the last time (based on 2001 guidelines). The guidelines
do not specify the number of licenses but given the past record and RBI’s
cautious approach, we believe a maximum of three to four licenses would
be granted.
We believe this process would take a long time (1.5-2 years). Moreover,
political pressure and lobbying over selecting eligible proposals
(especially promoter groups) may delay the process further.
India Post – A candidate for banking license
‘India Post’ has touched the lives of every citizen for more than150 years,
be it through mails, little banking services, insurance, money transfer or
retail services. Its operations are currently funded by the Public
Exchequer and come under the Ministry of Communications and
Information Technology, currently handled by Kapil Sibal. The Indian Post
Savings balance is | 5828 billion, which is the second largest asset size
post RBI in India. Total employment generated is huge at 4,75,454
employees working for India Post at various designation levels.
India Post provides last mile delivery to important government schemes
such as Mahatma Gandhi National Rural Employment Guarantee Scheme,
UIDAI related services, old age pensions, scholarships to weaker sections,
etc. These programmes directly impact the common citizen of the
country. In the rural areas, where 85% of the post offices are located, the
workforce is mainly local and is therefore known to the community
served by the Post Office.
The strategic plans of post office envisage introduction of CBS, online
collection of premium i.e. PLI premium and RD Deposit to be made online
through net banking, debit card or ECS, e-Commerce tie ups, online
shopping sites for home delivery products, etc. It is working towards
converting post offices to become places of choice for customers to do
business, improved ambience and quality of service. It aims to leverage
its strengths to become Post Bank of India for promoting financial
inclusion. Mr Sibal said that 22,360 district post offices (DPOs) in the
country have been provided computers while 1308 DPOs have been
provided with wide area network (WAN) connections and 10,530 DPOs
have been provided with broadband facilities. The India Post Technology
Project 2012 aims to upgrade the technological infrastructure across post
offices in India.
We believe the computerised large branch network can make it a full
fledged financial services company over time. India Post may not face
difficulties in financial inclusion criteria satisfaction of RBI and other
banking licence parameters can get fulfilled via some shifting in
shareholding portfolio. The two years time frame for listing also seems
meant for Post Office as other major industrial houses looking for licence
are already listed.
Our analysis suggests that India Post can be one of the major
candidates for the banking licence to be issued by the RBI this time.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
C r i p p l e d d e c i s i o n m a k i n g …
The Parliament in the Monsoon session (eighth session of 15
th
Lok Sabha)
has worked for 26 days/104 hours. Amid street protests for anti
corruptions law, time lost due to forced adjournment or interruptions was
almost 51 hours. However, many important legislations have been
introduced and passed in the monsoon session with important debates
including Sense of House on ‘Lokpal draft’, Cabinet approval for Land
Acquisition Bill, etc. Still, we await major reforms in terms of GST
implementation, FDI in retail and policy reforms to aid infrastructure
funding, which could be a game changer for the government.
ƒ Bills introduced and passed
The government has introduced certain important Bills like Land
Acquisition Bill, Lokpal Bill, The Narcotic Drugs and Psychotropic
Substances (Amendment) Bill, 2011, The Damodar Valley Corporation
(Amendment) Bill, 2011 and passed important amendments like The
Indian Medical Council (Amendment) Bill, 2011, The State Bank of India
(Subsidiary Banks Laws) Amendment Bill, 2011
ƒ GDP growth… Where are we heading?
The government’s 12th Five Year Plan GDP growth target is 9%. To
achieve that it has to push the reforms agenda to the forefront. Despite
a few policy initiatives like petrol prices decontrol, the overall economic
reforms process has remained on the backburner. We have seen first
quarters GDP growth at 7.7% as against 8.8% in the previous year. This
has been against its full year target of ~8%, which now looks difficult to
achieve. Consequently, further downward revision by the government
is expected. With a delay in policies like diesel price decontrol, allowing
49% FDI in retail and delay in disinvestment process already proving to
be deterrent to the growth, elections in major states like UP and Punjab
in 2012 could act as another spoiler in terms of implementation of these
reforms.
O u r v i e w
Marred by the disruption on account of Jan Lokpal issues and
government delayed action, the monsoon session of Parliament proved
to be another washout. Out of the 32 Bills, which were due to be
introduced, only 13 have been introduced in the monsoon session. In
terms of major bills introduced and taken up, the focus stayed mainly on
populist measures such as giving in to the demands of the Jan Lokpal Bill,
farmers friendly Land Acquisition Bill and Mines and Mineral
(Development & Regulation) Bill aimed at inclusive growth, which would
provide a consumption boost to rural India.
The more prominent supply side issues such as coal and gas shortage,
inflation, crude price and regulatory clarity on various infrastructure and
its funding has still stayed unanswered. The need of the hour is to
expedite the reforms machinery. However, given the strong macro
headwinds, elections slated across states in the next year and sluggish
regulatory reforms, challenges remain ahead for the government.
L o k p a l B i l l
Parliament has adopted the Sense of the House on the three clauses
under Draft Lokpal (i) Citizen Charter, (ii) lower bureaucracy under Lokpal
through an appropriate mechanism (iii) establishment of Lokayukta in the
states. The Lokpal Bill has been sent to the standing committee, which
would look into the draft clause by clause and give its recommendation.
We believe the Bill is likely to be introduced in the winter session of
Parliament.
There were differences between the government’s Lokpal draft and civil
society’s draft on various issues
Exhibit 6: Government’s Lokpal Draft vs. Jan-Lokpal Bill
Lokpal Bill Jan-Lokpal Bill (JLB)
The government Bill includes the Prime Minister
after he demits office
The JLB includes a sitting Prime Minister
The Bill deals only with offences under the
Prevention of Corruption Act
It also includes offences by public servants under the
Indian Penal Code, victimisation of whistleblowers and
repeated violation of citizen's charter
The Bill provides for an investigation wing under
the Lokpal
The JLB states that the CBI will be under the Lok Pal
while investigating corruption cases
In the Bill, the Lokpal may initiate prosecution in a
special court. A copy of the report is to be sent to
the competent authority. No prior sanction is
required
In the JLB, prosecution of the Prime Minister, Ministers,
MPs and judges of Supreme Court and high courts may
be initiated only with the permission of a 7-judge bench
of the Lokpal
It provides for a prosecution wing of the Lokpal The CBI's prosecution wing will conduct this function
It does not deal with grievance redressal. However,
the government agrees on the issue under the
sense of Parliament
It deals with grievance redressal of citizens and a
process for prosecuting corruption cases. It requires
every public authority to publish citizen's charters listing
its commitments to citizens
The Bill does not include Judiciary under Lokpal.
However it wants to introduce a separate Judicial
Accountability Bills
JLB includes Judiciary under Lokpal
Source: IBNLive.com, ICICIdirect.com Researc
T h e L a n d A c q u i s i t i o n , R e h a b il i t a t i o n a n d R e s e t t l e m e n t
B i l l , 2 0 1 1
The Cabinet approval for Land Acquisition (LA), Rehabilitation and
Resettlement (R&R) Bill, which aims to safeguard the interest of land
owners and those who lose their livelihood as a result of land acquisition,
was a major regulatory decision during the monsoon season of
Parliament. While the Bill was tabled in the Lok Sabha on September 7,
2011 the discussion on the same is expected to be held in the winter
session of Parliament.
Scope of the Bill
ƒ As per the bill, both LA and R&R provisions will apply when land is
acquired by the Government for its own use, hold and control or
with the ultimate purpose of transferring it for the use of private
companies for stated public purpose or for immediate and declared
use by private companies for public purpose. The abovementioned
land acquisition can take place provided the consent of at least 80%
of the project affected families is obtained
ƒ Only R&R provision will apply when private companies buy land for
a project of more than 100 acres in rural areas, or more than 50
acres in urban areas
ƒ Multi-crop irrigated land will be acquired only as a last resort
measure and equivalent area of cultivable wasteland needs to be
developed if it is done so
Comprehensive Compensation Package
ƒ The compensation is set at 4x and 2x of the market value of the land
in rural and urban areas, respectively
ƒ Beside this, the belowmentioned comprehensive R&R package is
also proposed for both land owners and livelihood losers
ƒ Additionally, special provisions for scheduled castes and scheduled
tribes have been envisaged by providing additional benefits of 2.5
acres of land or extent of land lost to such affected families. One
time financial assistance of | 50,000: 25% additional rehabilitation
and resettlement benefits for the benefits of families settled outside
the district and free land for community and social gathering and
continuation of reservation in the resettlement area, etc
ƒ Twenty five infrastructural amenities such as schools, health
centres, roads and electricity connections, etc are also proposed to
be provided in the resettlement area
The introduction of the bill will be a positive move for land owners and
livelihood losers enabling them to command better compensation for
their land. This, in turn, will be a boost to our consumption driven story,
which has been a key driver in resilience of our economy, despite global
uncertainty. It will also be a major step towards inclusive growth through
compulsory development of infrastructural amenities in remote areas.
Putting it from an industry perspective, we believe it may lead to a delay
in the process both in terms of negotiation and procedural delays due to
elaborate administrative mechanism involved. Industry has also reacted
negatively to the Bill as it believes that it will lead to considerable increase
in land costs. Assocham has stated that it would lead to a hike in land cost
by 60-80%. This may not create a conducive economic environment for
developers or companies to take up a project. We expect the projects
relating to industrial capex, SEZ, private power projects and possibly
large townships (due to R&R package) to get impacted by the Bill.
G o o d s & S e r v i c e T a x ( G S T )
The Goods & Service Tax (GST) was introduced in Lok Sabha through the
Amendment Bill on March 22, 2011. Introduction of GST is considered to
be one of the most significant economic reforms in India. GST, an
extension of VAT, aims to cover all goods and services. GST will merge
all the indirect taxes into one head. The taxes will be collected by the
Centre, which will then be transferred to the states via an agreed formula.
Salient features
The GST will have two components: one levied by the centre (centre
GST) and the other levied by the states (state GST).
Exhibit 8: Minimum R&R Entitlement
Taxes merged under Centre GST Taxes under State GST
Central Excise Duty, Additional Excise Duties VAT/Sales Tax
Countervailing Customs Duty, Special Additional
Customs Duty
Tax on Inter-state CST: This has to be phased out with
introduction of SGST.
Service Tax Local Taxes-Entertainment Taxes, Luxury Taxes, Tax on
Lottery, betting etc
Cess & Surcharges Service Tax
Entry Tax not in lieu with Octroi
Source: Ministry of Rural Development, ICICIdirect.com Research
Some goods/taxes have been kept outside the purview of GST like
purchase tax, tax on alcohol, tax on petroleum products, land electricity
and others. These items will be charged at a different rate, which the state
government will be free to decide. However, tobacco products would
come under the purview of GST but additional excise duties would be
levied on tobacco products. The proposed GST rate is 20% in the first
year, which will be progressively reduced to 16%.
ƒ There will be two tax rates for SGST – lower rate for necessary and
basic important items and a standard rate for all other goods.
Further, there will be a special rate for precious metals and a list of
exempted items. For services there would be one rate for both
CGST & SGST.
ƒ A GST Council will be formed with representation from both Centre
and state governments. This council will have the power to set tax
rates
ƒ GST revenues will go to the state where the goods are consumed
rather than the state where they are produced
The impact of GST on Indian economy would be:
ƒ According to the Thirteenth Finance Commission, GST could
increase India’s GDP somewhere within a range of 0.9% to 1.7% in
the medium-term. The long-term GDP gain would range between
$325 billion and $637 billion, which accounts for 30-60% of the
Indian economy currently
ƒ GST will lower the overall tax inputs in supply chain of goods and
services leading to lower prices of Indian goods and services. This
will increase the competitiveness of Indian goods and services in the
international market and provide a boost to Indian exports. The
increase in exports can be between 10% and 14%
ƒ We believe implementation of GST could result in initial inflationary
pressure due to the inefficiencies in supply chain. Simultaneously,
this would also result in a shortfall of tax revenues of state
governments. The Central government has proposed a fund of |
50,000 crore to help curb this shortfall
Currently, the Standing Committee of Finance is reviewing the Bill. The
Bill still has a long way to go before being included in the Constitution.
Hence, the chances of it meeting the April 1, 2012 deadline of its
introduction as proposed by the Finance Minister are slim. Though most
of the state governments agree to GST Implementation, some
disagreements are there on account of denial of power to state
governments to impose additional cess at the time of natural calamity.
F D I i n r e t a i l
India currently allows 51% foreign direct investment (FDI) in single-brand
retail and 100% in the wholesale cash-and-carry stores that can only sell
to other retailers and businesses.
In July 2010, the Department of Industrial Policy and Promotion (DIPP)
decided to float a discussion paper regarding opening up the retail sector
to FDI in multi-brand retail. Addressing some of the political concerns
relating to the opening up of the sector, DIPP suggested in the discussion
paper that the sector would be opened up to foreign firms in a calibrated
manner. DIPP invited views of various ministries on the same. While
various ministerial groups supported the opening up of the sector, some
of them were even against the opening up of the sector stating concerns
that the local kirana (mom and pop) stores would be at the receiving end
of this move.
In July 2011, the Committee of Secretaries (CoS) approved a proposal to
allow foreign direct investment (FDI) up to 51% in multi brand retail,
clearing the decks for the final approval from the Union Cabinet.
However, the approval does not automatically open the doors for the
global retail majors as the recommendations are yet to be approved by
the Commerce Ministry and then the Cabinet. Hence, there is still a long
way to go but this approval is certainly a positive step in that direction.
Some of the riders suggested by them were as under:
• A minimum investment of $100 million by overseas retailers
• Total 50% of the above investment should be made in back-end
infrastructure
• Initially, only cities with a population of 1 million and above will be
eligible
Some other riders like 30% of the sourcing should be done from SMEs,
30% of the sales should be made to wholesalers, etc. was also on the list.
Over and above this, the state governments are free to add their set of
riders and also accept/reject proposals from investors.
While the fine print of the guidelines is yet to be released, we believe that
the opening up of the sector to foreign investment will be beneficial for
listed players like Pantaloon Retail, Shoppers Stop and Trent as it will
provide them an easier access to funds to fuel growth. Increased foreign
participation will further fuel the growth for organised retailers.
Also, due to investment in back-end infrastructure, modern retailers with
efficient cold storage chains could minimise wastage of fresh produce
and ease food inflation. India currently lets around | 1 trillion of fresh
produce go waste. More than half of this can be brought to market if the
proper farm-to-fork infrastructure is in place.
From the stock perspective, retail stocks have appreciated in the range of
20–40% in the last three months in anticipation of positive developments
on the opening up of retail sector further. While we remain positive about
the benefits accruing due to increased foreign participation we opine that
the stock prices have already discounted the same and are trading at fair
valuations.
M i n e s a n d M i n e r a l ( D e v e l o pm e n t & R e g u l a t i o n ) B i l l
In July 2011, the Group of ministers (GoM) had approved the draft Mines
and Mineral (Development & Regulation) Bill. The new approved draft
made a distinction between companies mining coal and other minerals.
The Bill proposes that coal mining companies share 26% of profits with
the locals. Furthermore, for non-coal mining companies, the Bill proposes
an amount equal to 100% of the royalty to be shared with locals. If the Bill
is implemented it would impact companies like Coal India, Hindustan
Zinc, Sesa Goa, SAIL, Tata Steel, etc.
However, there are few key points on which clarity is needed such as:
ƒ Methodology to be adopted to determine the profitability of captive
coal mines
ƒ Will CSR expenses that the company incurs be allowed as a
deduction/offset?
ƒ Tax shield available if any?
N a t i o n a l F o o d S e c u r i t y B i l l 2 0 1 1
National Food Security Bill (NFSB) is aimed at protecting all children,
women and men in India from food deprivation. The main motivation
behind the proposed NFSB is to provide adequate nutrition derived from
the right to food as an aspect of right to life under Article 21, which is a
fundamental right of all citizens. Supply of food at affordable prices
becomes a policy priority when 32% of the population is living below the
poverty line (there are far more food insecure families than those
currently categorised below poverty line).
The draft bill prepared by the Department of Food & Consumer Affairs has
been approved by the EGoM and Law Minister. In the next step it needs
to be sent to all state governments for their opinion. After that, the Prime
Minister will call a meeting of Chief Ministers to give final shape to the Bill.
NFSB is likely to be introduced in the winter session, which makes its
implementation likely in FY12. It means that it may cause an additional
subsidy burden of | 13,000 crore and take the total subsidy bill on food to
| 95,000 crore in FY12E.
Features of the Bill
ƒ Subsidised food grains to be provided to 75% of below poverty line
(BPL) population and 50% of the urban population (68% of total
population) under NFSA
ƒ Beneficiaries (each person) under BPL will be provided 7 kg of food
grain per month. Rice will be provided at | 3 per kg and wheat at | 2
per kg. General category (above poverty line) will receive 3-4 kg per
person per month at half the minimum support price
ƒ The proposed Bill provides for a cash transfer or a food coupon
based system using the unique identification scheme (UID) for
proper targeting of food entitlements
ƒ An additional subsidy burden at | 13000 crore will take the total
subsidy bill on food to | 95000 crore
If the Bill is passed into an Act in winter, it will not be fully implemented
before 2012-13. However, given the slowdown and NFSB’s potential
impact on inflation, it may not be fully implemented before 2013-14- last
year before the general elections in 2014.
The downsides of the proposed NFSB are:
ƒ The procurement of 65-70 million tonnes (MT) of food grains will
absorb all marketable surpluses and may push up open market
prices
ƒ In the bad agricultural years, the country may have to import food to
meet the target. The international prices, being higher than the
domestic prices, may cause a further increase in the subsidy bill
ƒ The NFSB does not seem to have made provisions for logistics and
infrastructure, which works out to | 15,000 crore annually
D a m o d a r V a l l e y C o r p o r a t i o n ( A m e n d m e n t ) B i l l 2 0 1 1
The proposed amendment shall broad base and professionalise DVC by
bringing outside professional independent experts. The company has a
current operational capacity of 3604 MW. In FY11, it would commission
1773 MW of capacity. This would enable it to allocate resources optimally
and help it for fund raising in order to take up new projects. By new
capacity addition programmes as well as fund raising, it could become
one of the major power producers in the country. Going forward, we
believe this would be a prime candidate for disinvestment over the next
two years (on the lines of SJVN, NHPC, etc.)
S t a t e B a n k o f I n d i a ( S u b s i d i a r y B a n k s L a w s )
A m e n d m e n t B i l l
The Parliament approved the State Bank of India (Subsidiary Banks Laws)
Amendment Bill on August 30, 2011. The amendments are technical in
nature, which will enable the central government to effectively manage
the affairs of these associate banks. The Bill will not have any material
impact with regard to strategic intent of the bank or the government.
D r a f t G u i d e l i n e s f o r “ L i c e n s i n g o f N e w B a n k s i n t h e
P r i v a t e S e c t o r ”
The RBI released the Draft Guidelines for “Licensing of New Banks in the
Private Sector”. The draft guidelines come after a year after the RBI put
out a discussion paper in August 2010. The RBI has sought
views/comments on the draft guidelines from banks, NBFCs, industrial
houses, other institutions and the public at large. Final guidelines will be
issued and the process of inviting applications for setting up new banks in
the private sector will be initiated after receiving feedback and
suggestions on the draft guidelines, post the amendments to the Banking
Regulation Act, 1949.
The RBI has always been very selective in issuing new bank licenses as it
issued 12 new bank licenses in the last two decades, with only two
licenses issued the last time (based on 2001 guidelines). The guidelines
do not specify the number of licenses but given the past record and RBI’s
cautious approach, we believe a maximum of three to four licenses would
be granted.
We believe this process would take a long time (1.5-2 years). Moreover,
political pressure and lobbying over selecting eligible proposals
(especially promoter groups) may delay the process further.
India Post – A candidate for banking license
‘India Post’ has touched the lives of every citizen for more than150 years,
be it through mails, little banking services, insurance, money transfer or
retail services. Its operations are currently funded by the Public
Exchequer and come under the Ministry of Communications and
Information Technology, currently handled by Kapil Sibal. The Indian Post
Savings balance is | 5828 billion, which is the second largest asset size
post RBI in India. Total employment generated is huge at 4,75,454
employees working for India Post at various designation levels.
India Post provides last mile delivery to important government schemes
such as Mahatma Gandhi National Rural Employment Guarantee Scheme,
UIDAI related services, old age pensions, scholarships to weaker sections,
etc. These programmes directly impact the common citizen of the
country. In the rural areas, where 85% of the post offices are located, the
workforce is mainly local and is therefore known to the community
served by the Post Office.
The strategic plans of post office envisage introduction of CBS, online
collection of premium i.e. PLI premium and RD Deposit to be made online
through net banking, debit card or ECS, e-Commerce tie ups, online
shopping sites for home delivery products, etc. It is working towards
converting post offices to become places of choice for customers to do
business, improved ambience and quality of service. It aims to leverage
its strengths to become Post Bank of India for promoting financial
inclusion. Mr Sibal said that 22,360 district post offices (DPOs) in the
country have been provided computers while 1308 DPOs have been
provided with wide area network (WAN) connections and 10,530 DPOs
have been provided with broadband facilities. The India Post Technology
Project 2012 aims to upgrade the technological infrastructure across post
offices in India.
We believe the computerised large branch network can make it a full
fledged financial services company over time. India Post may not face
difficulties in financial inclusion criteria satisfaction of RBI and other
banking licence parameters can get fulfilled via some shifting in
shareholding portfolio. The two years time frame for listing also seems
meant for Post Office as other major industrial houses looking for licence
are already listed.
Our analysis suggests that India Post can be one of the major
candidates for the banking licence to be issued by the RBI this time.
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