Into 2010 —Views on Sustainability of Recovery

Into the new decade beginning 2010 much of the Global economy is technically out of recession, thanks to the unprecedented synchronized monetary and fiscal stimulus provided by governments across the globe, even though major economic indicators continue to see-saw. The combination of improvement in the functioning of financial markets, higher prices for risky assets and the recent slower pace of tightening bank lending standards are expected to increase the chances for sustainable recovery according to the Global Economic Forum of Morgan Stanley. A slower pace of inventory liquidation and a gradual shift to inventory accumulation should add to growth. Past aggressive payroll cuts may now give rise to an increase in demand for labour and help to strengthen recovery. GEF points out that inflation risk will be a crucial factor for markets henceforth; as (particularly due to rising commodity price inflation) market-based inflation expectations are gradually rising. The end of easing and beginning of exit can be expected to cause wobbles in financial markets pushing inflation premia and thus bond yields significantly higher. The aggressive provision of stimulus has also theoretically led to significant increase in sovereign fiscal balances and default risks, which also pushes up bond yields.
Another threat to the nascent recovery in the form of existing global imbalances of distortionary /risky nature has been discussed in an IMF policy note, which points out that crisis induced changes in saving and investment patterns across the world have narrowed previously rising imbalances considerably. However, policy measures are required to correct for distortionary effects of — large current account deficit in the US, high oil prices and the large savings of oil exporters, high and rising saving rates in China, the investment boom driven by asset prices in peripheral Europe, the collapse in investment in emerging Asia (excluding China) and in Japan. An increase private and public US saving, an increase in social insurance, strengthening corporate governance, and implementation of reforms to increase access to credit for households and SMEs in China, a move from export-led towards more domestic-demand led growth in a number of emerging market countries, room for higher domestic demand and more spending on social infrastructure needs in some oil-exporting countries would help global rebalancing and ensure sustainability of recovery.
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Happy New Year 2010

The SurgeRS (Surge Research Support) wishes all friends and visitors a very Happy New Year.

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E-UpDates the monthly statistical bulletin by EcoFin-Surge is a comprehensive compilation of Indian data covering Macro-economic variables like GDP, Industrial Production indices, Inflation and Banking & Financial market indicators like Monetary developments, Interest rates and yields in the Govt. and Corporate debt market, Stock & Commodity market indices. It also gives you snapshots of the global economy by providing crucial indicators for economies like the US, Euro-zone, UK, Japan and some of India’s major trading partners. Previous month’s data reaches your inbox by the 9th of each month. Our sample bulletin for June-09 Issue of E-UpDates (visit our website) includes the Indian Union Budget highlights. For more Data and Indicators visit our Website.

FDI Focus

The OECD’s Investment Policy Review of India, 2009 lauds India for the policies to encourage investment as part of market-oriented reforms since 1991. However, according to OECD further reforms are needed as India’s policy framework for FDI still remains restrictive compared with most OECD countries and particularly as India’s investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity. In its first investment policy review of India, the group of 30 developed countries, OECD has recommended further easing of restrictions on foreign investment flows to India, in areas such as banking, insurance and retail distribution where productivity levels are low and greater foreign investment could help raise incomes.

However, one cannot help but question whether it is the opening up of these particular sectors, or a policy thrust towards directing FDI to focus areas, which is the need of the hour, in order to actually promote growth with equity. In retail, the OECD has pointed out that local laws are aimed at protecting small shops and has argued in favour of opening up the sector, but given India’s socio-economic backdrop, it would only probably lead to more of inequality with employment focused more on the educated youth, for whom a lot of opportunities have already been opened up. Looking at the cumulative FDI flows between Apr-’00 to Sep-’09, in different sectors we see that the services sector already accounts for about a fourth of total FDI(21.94%). Probably the government should now concentrate more on designing policies to attract industry-specific FDI to select focus areas in the manufacturing sector, which would generate higher number of jobs while improving technology and technical skills and also on the education (now accounting for 0.35%) and health (0.67%) sectors, where long term developmental benefits would be significant. Drawing higher FDI to industries like food processing (now at 0.90%) for example could also bring greater benefits to the agricultural sector, whose growth rate has been suffering in recent times.

On the hand, in the OECD report more attention-worthy is the review’s stress on the need to expedite the judicial process in the country pointing out that for investors, significant delays in justice can mean bankruptcy and strengthening the capacity of the judicial system could make a big difference to investment.

The report has rightly pointed out that while the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level.

The OECD has also proposed to undertake joint future work on green growth, promoting infrastructure development through public-private partnerships, developing nationally consistent regional FDI statistics and launching a review of the regulatory policies of India, all of which should be extremely beneficial for the economy.

A Check on Indian & Global Recovery

India's industrial output jumped by a higher-than-forecast 9.1% in September from a year earlier with 9.3% growth in manufacturing output. Production of consumer durables, that was particularly hard hit as India suffered the fallout from the international slump, grew by 22.2 percent in September underpinned by robust consumer spending fuelling hopes that Asia's third-largest economy is firmly on the up-trend. Emerging market leader China recorded industrial production expansion of 16.1 percent in October. US industrial production figures for October showed a mixed picture; manufacturing output eased after several strong months as auto production fell 2.0 percent, reflecting some of the volatility from the end of a government incentive program. With the U.S. unemployment rate at 10.2 percent, U.S administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction. In fact, the US president has again reiterated the need to contain rising U.S. deficits, saying that if government debt were to pile up too much, it could lead to a double-dip recession — two issues we have written about in two previous posts to this blog.

India’s Merchandise shipments dropped 11.4 percent from a year earlier to $12.5 billion after sliding 13.8 percent in September. September's figures for several Asian economies including China showed weakness in outbound shipments. In India the continued decline in heavy-weight sectors like engineering goods or readymade garments is a cause for concern, as much of the boost has come from high value sectors like pharma and electronics and also from a diversification to new markets. The improvements in recent months, compared with earlier slides like a 33-39% drop between March-May this year, suggests that the global demand slump may finally be easing. Indeed, U.S. imports rose by $9.3 billion in September to $168.4 billion; the 5.8% increase from August was the largest one-month percentage gain in 16 years and is a sign of improvement in US domestic demand. In UK too, overall imports rose by 7.5%, due to an increase in auto exports of 29.2% over the month. In the Euro zone, Germany’s economic recovery accelerated in the third quarter as government stimulus programs fueled company spending and a rebound in global trade boosted exports, helping the 16-nation euro area return to growth in the third quarter. German imports also rose strongly in the quarter. The Euro zone's main consumption-driven economy, France, is growing but at a slower-than-expected pace. Japan’s Q3 growth at 1.2% is almost double that of market expectations, however, deflation is back to haunt the economy as the domestic demand deflator fell by 2.6% recording its steepest fall in over half a century not boding well for global economic recovery.


FII flows of Rs 73,440 crore so far this year in India’s bourses is the highest ever investment made in rupee terms in a single year. Measured at about $15 billion, flows are likely to exceed record levels of close to $17.65 billion seen in 2007. This is perpetuated by the fact that FIIs are able to borrow money at near zero per cent interest rates in the developed markets and park such capital into Indian equities made attractive by the country’s growth potential. Such heavy inflows has become a concern for policy makers and exporters alike and a Brazil style tax on short-term cross border flows has been suggested to discourage USD carry trades. However, the Finance Ministry is not considering any immediate curbs on foreign portfolio flows, probably as the stock market recovery is nascent and domestic investors may not have enough drive to keep the bullish sentiments going in the secondary capital market. (More on this issue in our next post.)

India's annual food inflation, which has been the key inflation driver, jumped to 13.68 percent in the last week of October and further to 14.55% in the first week of November; as we have detailed in the previous post to the blog, the central bank has already turned somewhat hawkish to control inflationary pressures which are mounting (Click here to see summary of latest RBI policy). The government may set out the time frame for the withdrawal of stimulus measures in the Union Budget presented before the next fiscal, if global recovery remains on track. The interest rate tightening cycle could begin if the WPI based inflation rate, which was at 1.3% for October, crosses 5%.

As countries around the world recover from the crisis, unanswered questions about the necessary restructuring of the global economy require urgent attention, according to leaders from business, academia and society. Speakers at the World Economic Forum's Summit on the Global Agenda expressed the view that the crisis has focused the minds of governments, particularly the G20, on what you need to do to rebalance globalization; it means rebuilding economies, balancing exports with domestic demand and investing in jobs and social protection. Some also opined that, while global efforts to address the crisis have stopped the downward spiral of the broad economy and sparked renewed confidence in the financial markets, there are acute worries that the momentum for reform might be ebbing.

RBI commences the exit process

The central bank of Asia's third-largest economy, the Reserve Bank of India, has begun the unwinding of its loose Monetary Policy; though it has kept key rates unchanged the RBI has signaled the end of fiscal stimulus by withdrawing some of the emergency liquidity support measures that were implemented during the peak crisis period. To read a summary of the Macro-economic review and policy measures taken please visit this link.

The Indian stock markets have reacted violently as the feeling is that tightening bias comes a tad earlier than expected. However, RBI, analysts and bankers have expressed the view that the changes implemented so far will not have any impact as much of it constitutes reversals of measures no longer being used. The SLR change really will have no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent, so there is no immediate impact on liquidity. Discontinuing the support to Mutual funds could have an impact on the Net Asset Values of the funds, if they face large scale redemptions; to prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption. Withdrawal of two repo facilities, one for banks and one for the funding needs of mutual funds, non-bank finance companies and housing finance companies are unlikely to affect liquidity levels as both these facilities had not been used for more than a couple of months. Lowering the limit of export credit refinance facility to 15 percent from 50 percent, and discontinuation of a forex swap facility for banks, is unlikely to have much impact on market conditions as a review had found use of the facilities was low.

Central banks in all the major developed economies, barring Australia, are continuing with easy monetary policy and have held policy rates steady in recent months. They have also continued with measures to provide liquidity and other support to alleviate stress in the financial markets following the crisis. In the current cycle, the Reserve Bank of Australia has been the first G-20 central bank to raise its policy rate (Cash Rate) by 25 basis points to 3.25 per cent on October 6 on the back of diminished risk of serious economic contraction. The Reserve Bank of New Zealand has withdrawn some temporary emergency liquidity facilities put in place during the financial crisis of 2008. China has reiterated its commitment to proactive financial policies and moderately loose monetary policies amid market speculation that it might be preparing an exit strategy. Despite the fact that the country's economic growth is likely to speed up in the fourth quarter (from an average of 7.7 per cent in the last three quarters), the Chinese government has said that it will stay on course of its fiscal stimulus spending.

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Recovery and Government Debt

US
The US Federal Reserve has said economic activity is picking up but it expects to keep interest rates close to zero for an extended time. US interest rates were cut to the current level of between 0% and 0.25% in December last year, and have been left unchanged. The 0.7% fall in second-quarter US GDP was better than market expectations and an improvement from the first quarter's 6.4% contraction; importantly, business investment which had slumped 39.2% in the first quarter, fell at a 9.6% rate in the second quarter. Conditions in financial markets have improved further, and activity in the housing sector has increased, though household spending remains constrained by ongoing job losses. The Fed also pledged to continue a program with $1.45 trillion to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and debt. Meanwhile, US jobless rate hit 26-year high of 9.8%, underscoring the fragility of the economy's recovery from its worst recession in 70 years as businesses remain cautious about the future. The IMF said it now expects the US economy to grow 1.5% in 2010, up from its July forecast for 0.8% growth, however, it warned that the financial crisis had contributed to a high and rising debt trajectory that could become unsustainable without significant medium-term measures. The IMF estimated that US debt would reach almost 110% of gross domestic product by 2014, and called it a worrisome deterioration given looming healthcare and pension pressures. The US budget deficit topped $1 trillion for the first nine months of the fiscal year that began in October and totalled $1.1 trillion, as individual and corporate tax receipts are sliding because the jobless rate continues to rise and companies have yet to see a sustained increase in demand; the shortfall is also widening as the government ramps up spending. For the fiscal year that ends in September, the Office of Management and Budget has forecast the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

India
The Reserve Bank of India feels that choices with regards to policy changes like revision of monetary policy are becoming increasingly complex for India's central bank as signs of economic recovery continue to be tentative while inflation is firming up. Several indicators are pointing to an economic recovery, such as better-than-expected economic growth numbers, improvement in industrial output during April-July and higher relative growth in infrastructure industry or core sector performance, revival of capital flows and strong recovery of the stock markets. Indeed, the bellwether Sensex broke the 17,000-mark this week — a level first reached two years ago in September 2007 and last seen 16 months ago in May last year — on sustained capital inflows. Yet, there are downside risks on account of the impact of poor monsoons on agriculture, slowdown in exports and sluggishness of global recovery. On the other hand, rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance; WPI-based inflation for mid-September rose to 0.83% from 0.37% in the previous week on costlier food items.

The country’s fiscal deficit—the gap between receipts and spending that is usually financed through borrowings—rose 35% in the first five months of the fiscal compared to the same period a year ago as the government continued with tax cuts and higher public spending to boost the economy. Fiscal deficit in the April-September period stood at Rs 1,82,290 crore, which is 45.5% of the budget estimate for the current fiscal. In the same period a year ago, it had scaled 87% of the budget estimate and the government had to revise the annual fiscal deficit from a target of 2.5% to 6% as the economic downturn prompted it to step up spending and cut taxes. The government had set an annual gross borrowing target of Rs.4.51 trillion for 2009-10 (April-March), and has already sold Rs 2.95 trillion of bonds until September; it will sell bonds totalling Rs.1.23 trillion ($25.6 billion) between October and March as part of its borrowing schedule. Expenditure curbs are being put in place so that the fiscal deficit target of 6.8% of GDP would not be exceeded. For the first time, RBI is offering more flexibility to state governments to rein in their market borrowing costs and has allowed West Bengal to borrow funds by selling state government securities with a put option after four years, which means investors can redeem these securities prematurely after completion of the fourth year of maturity; states, typically, borrow from the market by selling 10-year securities called State Development Loans (SDLs) through RBI s auction window.

Will it be ‘W’ ?

A year has gone by since the collapse of US investment bank Lehman Brothers sent major shock waves across financial markets and eventually dragged the global economy into a severe synchronised recession. Signs that the global economic recovery is strengthening continue to emerge over the past few weeks, as increasingly more key indicators, such as business sentiment, trade, manufacturing and industrial production indices, are turning positive and more or less maintaining their uptrend from the trough, helped by enormous spending by governments over the globe. While there are risks associated with a prolonged expansionary monetary and fiscal stance – such as rising government debts, inflation, and the encouragement of new bubbles to develop in the stock and real estate markets – the consensus view is that unwinding the stimulus measures too soon could derail the global recovery process. This is particularly so as, amidst the recent optimism, warning bells are being sounded on the shape of the global economic recovery giving rise to concerns about a W-shaped recovery or a double-dip- recession. (A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession, when (GDP) growth slides back to negative after a quarter or two of positive growth.

India’s Recovery Wobbles?

RBI has warned that the Indian economy is unlikely to revert to its trend growth rate soon, as recession in advanced economies would eat into global growth and world trade. A drought like situation through most of the monsoon season has also led to concerns on the agricultural economy. Consumer spending on the other hand has been very positive, as indicated by the double digit growth of consumer durables in the IIP numbers for July. Easier availability of credit coupled with higher consumer confidence and the festive season did wonders for car sales in August; while market leader Maruti Suzuki posted a 42 per cent growth, Mahindra & Mahindra, showed a 42 per cent rise in sales of its multi-utility vehicle range, while Hyundai Motor India and Tata Motors showed 11 per cent increase over the same month last year.

India, who had to resort to IMF loans on a few occasions till the early nineties, will now take part in a global effort to make resources available to the International Monetary Fund (IMF) for lending to countries in need. India will invest up to $10 billion of its reserves in Notes issued by the IMF; such investments would be treated as international reserves.

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Indian Foreign Trade Policy (FTP 2009-14)

In the last five years India’s exports witnessed robust growth to reach a level of US$ 168 billion in 2008-09 from US$ 63 billion in 2003-04. India’s share of global merchandise trade was 0.83% in 2003; it rose to 1.45% in 2008 as per WTO estimates. India’s share of global commercial services export was 1.4% in 2003; it rose to 2.8% in 2008. India’s total share in goods and services trade was 0.92% in 2003; it increased to 1.64% in 2008. On the employment front, studies have suggested that nearly 14 million jobs were created directly or indirectly as a result of augmented exports in the last five years.
As the export sector has been a major casualty in this downturn the Indian Government has set in motion strategies and policy measures which will catalyse the growth of exports. The short term objective of the Foreign Trade Policy (2009-14) is to arrest and reverse the declining trend of exports and to provide additional support especially to those sectors which have been hit badly by recession in the developed world.

The Policy Objectives are as follows:

a) Achieving an annual export growth of 15% with an annual export target of US$ 200 billion by March 2011.
b) In the remaining three years of this Foreign Trade Policy i.e. upto 2014, the country should be able to come back on the high export growth path of around 25% per annum.
c) By 2014, the policy aims to double India’s exports of goods and services.
d) The long term policy objective for the Government is to double India’s share in global trade by 2020.

HIGHLIGHTS OF FOREIGN TRADE POLICY 2009-2014

Higher Support for Market and Product Diversification

1. Incentive schemes have been expanded by way of addition of new products and markets.
2. 26 new markets have been added under Focus Market Scheme. These include 16 new markets in Latin America and 10 in Asia-Oceania.
3. The incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%.
4. The incentive available under Focus Product Scheme (FPS) has been raised from 1.25% to 2%. 5. A large number of products from various sectors have been included for benefits under FPS.
6. Market Linked Focus Product Scheme (MLFPS) has been greatly expanded.
7. MLFPS benefits also extended for export to additional new markets for certain products.
8. A common simplified application form has been introduced for taking benefits under FPS, FMS, MLFPS and VKGUY.
9. Higher allocation for Market Development Assistance (MDA) and Market Access Initiative (MAI) schemes is being provided.

Technological Upgradation

1. To aid technological upgradation of our export sector, EPCG Scheme at Zero Duty has been introduced.

EPCG Scheme Relaxations

1. To increase the life of existing plant and machinery, export obligation on import of spares, moulds etc. under EPCG Scheme has been reduced to 50% of the normal specific export obligation.
2. Taking into account the decline in exports, the facility of Re-fixation of Annual Average Export Obligation for a particular financial year in which there is decline in exports from the country, has been extended for the 5 year Policy period 2009-14.

Stability/ continuity of the Foreign Trade Policy

1. To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB) Scheme is extended beyond 31-12-2009 till 31.12.2010.
2. Interest subvention of 2% for pre-shipment credit for 7 specified sectors has been extended till 31.3.2010 in the Budget 2009-10.
3. Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A of Income Tax Act, has been extended for the financial year 2010-11 in the Budget 2009-10.
4. The adjustment assistance scheme initiated in December, 2008 to provide enhanced ECGC cover at 95%, to the adversely affected sectors, is continued till March, 2010.

To read more about the FTP click: Foreign Trade Policy

India Budget 2009-10

The Union Budget of India for fiscal year 2009-10 was presented on July 6th. The Budget aims to regain a growth momentum of 9% at the earliest and is aimed at inclusive growth for the economically weaker sections of the population. The Budget initiates the process of rationalizing the tax structure in the country and bringing it at par with international practices. It delays the date with fiscal prudence as the need of the hour is to boost domestic demand given the adversities in the external scenario which is expected to continue for some time more. Most of the policies are addressed to the twin benefits of boosting domestic demand and reducing inequality within the country’s population.

Following are the highlights of the pre-Budget Economic Survey 2008-09.
1. Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08).
2. Per capita GDP growth, a proxy for per capita income, which broadly reflects the improvement in the income of the average person, grew by an estimated 4.6 per cent in 2008-09.
3. Investment remained relatively buoyant, growing at a rate higher than that of GDP. The ratio of fixed investment to GDP consequently increased to 32.2 per cent of GDP in 2008-09 from 31.6 per cent in 2007-08, reflecting the resilience of Indian enterprise, in the face of a massive increase in global uncertainty and risk aversion and freezing of highly developed financial markets.
4. A decline in all major elements of private demand, including exports and consumption, necessitated a compensating widening of the fiscal deficit above the Fiscal Responsibility and Budget Management Act (FRBMA) target. The new, higher expenditures announced during the 2008-09 budget, had to be supplemented by an additional fiscal expansion, leading to an increase of 20.2 per cent in government final consumption expenditure during 2008-09. The effect of this and subsequent fiscal stimuli (e.g. excise and service tax reduction) on private demand would be expected to appear gradually with a lag.
5. The Budget for 2008-09, which marked the terminal year of the achievement of the targets under FRBMA, had envisaged fiscal deficit of the Centre at 2.5 per cent of GDP, which was lower than the 3 per cent mandated level; but the other key target, namely elimination of revenue deficit was put off by a year, with the level of deficit estimated at 1.0 per cent of GDP. As the year 2008-09 progressed, the Indian economy was seriously impacted by the twin global shocks – unprecedented increase in the global commodity prices in the first half of the year and the ripple effects of the deepening of the global financial crisis in the second half. As per the Revised Estimates (RE) for 2008-09, fiscal and revenue deficits of the Centre were placed at 6.1 per cent and 4.5 per cent of GDP, respectively.
6. Inflation, which was rising but which was in single digit up to end-May, reached double digits from June to mid-October , with the price of crude touching US$ 147 in July 2008, and remained above 8 per cent up to end-November. While overall inflation as at end-March 2009 registered merely 0.8 per cent, the group-wise inflation rates varied.
7. In 2008-09, the value of merchandise exports reached US$ 168.7 billion with a growth of 3.6 per cent despite global recession, thus achieving 96.4 per cent of the revised export target of US$ 175 billion. While export growth was robust till August 2008, it became low in September and turned negative from October 2008 to March 2009. The negative trend continued in April 2009 with export growth at -33.2 per cent.
8. The exchange rate was Rs.51.2 per US$ in March 2009, reflecting 21.9 per cent depreciation during the fiscal 2008-09. During fiscal 2008-09, out of the decline of US$ 57.8 billion in foreign currency assets (from US$ 299.2 billion on 31.3.2008 to US$ 241.4 billion on 31.3.2009), the fall of US$ 39.7 billion (69 per cent) was due to valuation change and only US$ 17.9 billion (31 per cent) was on account of net sale of dollars by the RBI.

Following are the highlights of the Indian Union Budget for FY2009-10:

>> Real and Nominal GDP growth assumed at 6.5 and 10.05 per cent respectively in 2009-10
The fiscal stimulus provided in 2008-09 at 3.5 per cent of GDP at current market prices amounted to Rs.1,86,000 crore
>> FRBM targets for the current year and for fiscal 2009-10 relaxed to provide much needed demand boost. However, medium term objective is to revert to fiscal consolidation at the earliest.
>> Total tax receipts expected at Rs 641079 crore.
>> Total budgetary allocation (expenditure) increased by 36 per cent over 2008-09 (BE) to Rs 1020838 crore; out of this Rs.6,95,689 crore is under Non-plan and Rs.3,25,149 crore under Plan; increase in plan expenditure is 34 %, while non-plan is 37 %.
>> Interest payment consists of 36% of non-plan expenditure.
>> Net market borrowing seen at Rs 398000 crore.

>> IT exemption limit raised: Limit raised by Rs 15,000 for sr.citizens (65 yrs & above to Rs 2,40,000); Limit raised by Rs 10,000 for general tax payers to Rs 1,60,000 & women to Rs 1,90,000; 10% surcharge on personal income tax eliminated
>> Corporate Tax unchanged; Minimum Alternate Tax hiked from 10% to 15% of book profits.
>> Fringe benefit tax (FBT) to be abolished.
>> Commodity transaction tax (CTT) to be removed.
>> Goods and Services Tax (GST) to meet its deadline in April 2010 The goods and services tax (GST) is a comprehensive value-added tax (VAT) on goods and services. Internationally, GST is based on supplies of goods/ services, rather than on manufacture and sales, and there are fairly elaborate rules governing the time and place of supply. In India, a dual GST is being proposed wherein a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on the taxable value of a transaction. This reduces the burden of multiplicity of customs, excise and some other taxes presently levied.
>> Direct tax proposal would be revenue neutral Govt to gain Rs 2000 crore from indirect tax proposals

>> While retaining at least 51 per cent government equity stake in PSUs, disinvestment proceeds for 2009-10 estimated at 1120 crore
>> PPP projects particularly in Infrastructure to be given priority: IIFCL to refinance 60 per cent of commercial bank loans for PPP projects in critical sectors involving total investment of Rs.1,00,000 over the next 15-18 months.

>> Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) increased by 23 per cent over 2009 (BE); allocation to railways also increased over the Interim Budget allotment.
>> Allocation under Jawaharlal Nehru Urban Renewal Mission (JNNURM) stepped up by 87 per cent to Rs. 12,887 crore:
>> Allocation for housing and provision of basic amenities to urban poor enhanced to Rs.3,973 crore
>> Allocation under Accelerated Power Development and Reform Programme (APDRP) increased by 160 per cent to Rs.2,080 crore.
>> Target for agriculture credit flow set at Rs 3,25,000 crore for the year 2009-10 (actual credit flow had been at Rs 2,87,000 crore in 2008-09); interest subvention to be continued in 2009-10 to ensure that farmers get short term crop loans upto Rs.3 lakh at 7 per cent per annum; rebate for farmers paying loan on time at a lower of rate 6 per cent; 75% hike in allocation to irrigation projects.
>> Allocation under National Rural Employment Guarantee Scheme (NREGS) increased by 144 per cent to Rs 39100 crore.
>> Allocation for Bharat Nirman increased by 45 per cent Rs.40,900 crore: Allocation to rural housing (Indira Awaas Yojna) hiked by 63% to Rs 8,883 cr. ; Rs 7000 crores allocated for rural electrification scheme.
>> Allocation under National Rural Health Mission (NHRM) increased by Rs 2057 crore over the allocation in Interim Budget 2009-10 to Rs 12070 crore.
>> The overall Plan budget for higher education is to be increased by Rs 20 billion over the Interim Budget
>> Defence outlay up 34% to 104703 crore; grants for securing borders etc and for the State Polce forces enhanced over the Interim Budget allocations
>> A provision of Rs.120 crore in the Annual Plan 2009-10 made for Unique Identification Authority of India to set up online data base with identity and biometric details of Indian residents and provide enrolment and verification services across country.
>> Export Credit Guarantee scheme extended till March 2010 ; Market development assistance schemes allocation up by 180% to 124 crore ; 2% Interest subvention for exporters; interest subvention extended to March 2010 for employment extensive export sector; special fund for Small Industries Development Bank of Rs 4000 crore

>> Expert group to be set up petroleum product pricing to bring domestic oil prices in sync with global crude as 75% of our oil basket is imported.
>> Rs.100 crore set aside as one-time grant in-aid to ensure provision of at least one centre/Point of Sales (POS) for banking services in the unbanked blocks; Government to recapitalize the public sector banks over the next two years to enable them to maintain Capital to Risk Weighted Assets Ratio (CRAR) of 12 per cent.

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Development of the Indian Debt Market

India's corporate bond market remains underdeveloped despite strong economic growth and significant financial system reforms, the Asian Development Bank said in a report last April. The report found that corporate borrowers continue to depend on bank loans, equity markets and private placement to meet their requirement of funds. http://aric.adb.org/pdf/workingpaper/WP22_India.

The secondary market activities in corporate bonds have started to pick up; efforts of Securities Exchange Board of India (SEBI) and the stock exchanges to bring the trading to electronic stock exchange platforms have started to yield desired results:

Date	BSE		NSE		FIMMDA		Grand Total
---	No. of Trades*	Amount(Rs. Cr.)*	No. of Trades*	Amount (Rs. Cr.)*	No. of Trades*	Amount (Rs. Cr.)*	No. of Trades*	Amount (Rs.Cr.)*
2007-08	27697	41186.73	3787	31453.14	4089	23479.01	35573	96118.88
2008-09	417376	38057.92	4902	49505.39	9585	61535.15	429642	148751.96

Indian financial markets regulator SEBI has recently issued simplified rules governing corporate debt paper, thereby making it possible to raise debt funds quicker on domestic capital markets. Companies that have already floated one debt or equity issue can now cut through several layers of paperwork when issuing another tranche. The long-winded vetting process that accompanied each issue made companies reluctant to use this route and they prefer private placement, often arranged by bankers Rs 2 lakh crore in corporate debt raised in fiscal 2008-09 has been through private placement, though this is, incidentally, a huge jump over the Rs 1.28 lakh crore raised in the previous year through the same route, it is not yet an indication of a healthy debt market which needs public issues and liquidity in the secondary market for efficient price discovery to take place. The new listing agreement, though, stipulates that an issuer must maintain 100% security cover for listed secured debt securities at all times and ensure that charges on the assets are registered. Disclosure norms have also been made more stringent to draw in investors; the issuer is required to separately mention the debt service coverage ratio and interest service coverage ratio after the item earnings per share while submitting half-yearly or annual results. Currently, institutions that invest in corporate bonds mostly prefer short-term maturity paper rather than long-term ones, high liquidity and long-term players like pension funds and insurance companies are crucial to the development of the corporate bond market in India. http://ssrn.com/abstract=421440

A long standing proposal to improve liquidity in buying and selling of government bonds .through introduction of Separate Trading for Registered Interest and Principal of Securities (STRIPS) is likely to be introduced in the current fiscal year. While initially only select identified G-Secs will be converted into STRIPS, it is expected to provide institutional investors an additional instrument for asset-liability management. A detailed explanation of STRIPS and its benefits may be found in the following article: The Strips Programme and its Implications for the Indian Gilts Market-A Note
http://www.icra.in/files/pdf/MoneyAndFinance/aprsep2002gilts.pdf

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