Ashika Monthly Insight Flip July 2016

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JULY <strong>2016</strong> MARKET OVERVIEW seen disappearing and La Nina is seen developing. According to an analysis by Deutsche Bank, there is a strong positive correlation between La Nina and India’s key macro/rural indicators. Agri GDP in La Nina years grew at an average 7.8% YoY as against an average of 2.3% YoY in non La Nina years. According to the analysis, broader economic indicators like—GDP, private consumption and investments growth also exhibit similar trends in La Nina years, averaging 8.9%/7.4%/10.4% YoY growth—significantly higher than average growth of 5.8%/5.2%/7.2% respectively in non La Nina years. Considering that ~50% of the country’s workforce depends on agriculture for a living and over half of India’s farmland lacks assured irrigation, monsoon is of paramount importance. Besides, the food inflation has failed to be tamed over the last two years mainly on account of two failed monsoons barring the issues with hoarders or middlemen. The Government also recently unleashed latest set of reforms probably to alleviate attention from the stepping down of Raghuram Rajan from RBI governor’s post effective September. In the second tranche of reforms of the country’s Foreign Direct Investment (FDI) rules in less than a year, the government has announced further relaxation in the norms for nine sectors, including civil aviation, pharmaceutical, defence, food products, single brand retail trading, animal husbandry, broadcasting carriage services private security agencies and establishment of office. This is the second major reform after the last radical changes announced in November 2015. Prime Minister Narendra Modi tweeted: “In two years, Govt. brings major FDI policy reforms in several key sectors. India is now the most open economy in the world for FDI; most sectors under automatic approval route.” He added: “Today’s FDI reforms will give a boost to employment, job creation & benefit the economy.” In defence, the government has dropped the condition of access to ‘state-of-the-art’ technology for allowing foreign investment beyond 49 per cent, which is permitted through the government approval route, in cases resulting in access to modern technology in the country or for other reasons to be recorded. In civil aviation, the rules now allow 100 per cent FDI under the automatic route in brownfield airport projects as opposed to 74 per cent at present. In scheduled air transport service/ domestic scheduled passenger airline and regional air transport service, the FDI limit has been raised to 100 per cent, with FDI beyond 49 per cent through the government approval route. In the pharmaceutical sector, where FDI in brownfield (existing) projects was allowed only through the government approval route, the Centre has now decided to permit up to 74 per cent FDI under the automatic route. For greenfield (new) projects, 100 per cent FDI through the automatic route is already allowed. In food processing, it has been decided to permit 100 per cent FDI under the government approval route for trading, including through e-commerce, in respect of food products manufactured or produced in India. This is in line with the Budget announcement made by the Finance Minister. In the broadcasting sector, a decision has been taken to allow 100 per cent FDI through the automatic route for teleports, direct to home, cable networks, Headend-in-the Sky Broadcasting Service as well as mobile TV. In singlebrand retail, the government has tweaked the rules to exempt investors from the mandatory domestic sourcing of 30 per cent inputs, by extending it to all entities for three years and for a further five years for retailers selling products with ‘state-of-art’ and ‘cutting-edge’ technology. The requirement of ‘controlled conditions’ for 100 per cent FDI in animal husbandry under the automatic route has been dropped. In private security agencies, the FDI limit has been enhanced from 49 per cent to 74 per cent, with 49 per cent under the automatic route and higher under government approval. These reforms if accepted will help in attracting strong foreign funds apart from creation of employment and boosting GDP. However, there are impediments towards the path and it will not be easy since any notification issued by the government can be challenged in either House of Parliament within 30 days of the Cabinet clearing it. So, anyways it will require permission from members of either House of Parliament for implementation. Markets seem to be building strong expectation of a better than expected earnings for the forthcoming earnings season. However, on the contrary corporation tax for 1QFY17 (April 1 to June 18) witnessed tepid growth of 2% yoy at Rs 55,000 crore, portraying a sluggish economic recovery. Poor corporation tax collection growth reflects persistently weak profitability and output for corporate amid sluggish demand in the economy. On the other hand, 2
FDI - WINDOW OF OPPORTUNITY direct tax collection during 1QFY17 posted a 22% growth at Rs 1.2 lakh crore led by buoyant growth in personal income tax because of change in the advance tax collection rules. Personal income tax witnessed a growth of 48% yoy at Rs 64,000 crore on account of the new rules which require non-corporate to pay 15% advance tax by June 18, against 30% by September 15. Of the total direct tax collection, Rs 52,000 crore came from advance taxes, of which personal income tax stood at Rs 6,000 crore. Post change in income tax compliance, individuals have to estimate income tax payable for full financial year and have to pay 15% of that in Q1, or else pay 1% interest for each month of delay. Overall advance tax collections in the 1QFY17, which are expected to be about 15% of the full year tax liability, reported 18% yoy growth. Corporation tax growth during the first quarter was unusual low which hints that all the macro factors are still not well with the corporate side of economy and corporate profitability numbers are yet to pick up. Other macro indicators also do not reflect bright picture with Industrial production index contracted by 0.8% in April, largely due to 3.1% yoy decline in manufacturing sector. However, such grim performance from macro indicators do not support the strong GDP growth of 7.6% which the country posted during FY16 and the numbers have come under scanner for disconnect with other economic indicators. Further, government expects GDP for the current financial year would be in the range between 7.75% which indicates that economists and the government might not be in same page. The government has targeted direct tax collections at Rs 8.47 lakh crore for FY17 which would be 15% high over actual mop up in previous financial year. Corporation tax is targeted to grow 8.8% to Rs 4.93 lakh crore over revised estimate (RE) of 4.52 lakh core in FY16. Personal income tax, on the other hand is budgeted to rise over 20% at Rs 3.53 lakh crore over RE of Rs 2.99 lakh crore during FY16. The larger saving grace could rest with better than normal monsoon thus boosting Agri and thus overall GDP and boost rural consumption. Moreover, the recommendations of the 7th Pay Commission also got the Cabinet nod and will provide a fillip towards consumption in the economy. T h e c a b i n e t a l s o a p p rove d t h e M o d e l S h o p & Establishment Act, which enables states to choose to keep shops and other such establishments open 24x7 all through the year. The move, which is likely to prove highly beneficial for restaurants, malls, movie theatres and other entertainment entities and help to garner higher taxes for the government. The Cabinet also cleared the new mining policy thus boosting mineral exploration by private companies, unlike earlier, by allowing them to bid for mineral blocks. The intent is again growing strong and the government seems to be pushing the pedal for gas reforms. The monsoon session which would start on <strong>July</strong> 18 and conclude on August 12 is expected to be keenly watched and would be an eventful one considering that the government will try to push for the all important GST bill to get passed. The government seems to be garnering support from other regional parties for GST and there is a strong consensus estimate and chance for passing of the same in the monsoon session itself. However, there could also be debate with regards to the recently announced FDI reforms. In all, there are 11 pending bills in the Lok Sabha and 45 bills in the Rajya Sabha. The government aims to pass atleast 25 bills in the monsoon session itself and thus promises to be packed with action and higher productivity. Paras Bothra Vice President - Equity Research Email - paras@ashikagroup.com Phone : 022 6611 1704 3
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Ashika Monthly Insight Flip July 2016

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