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Economy round-up: Inflation slows, factory output shrinks, stocks slump

12 September, 2016

The week began on a pessimistic note on Monday with renewed fears of a rate hike in the US dragging stocks and the rupee lower while an easing in inflation at home wasn’t enough to raise hopes for a looser monetary policy in the near term.

India’s consumer price inflation eased to an annual 5.05% in August from July’s 6.07% as monsoon showers helped control food prices. But inflation remained slightly above the central bank’s 5% target for March 2017, making an interest rate cut unlikely next month when the Reserve Bank of India reviews monetary policy.

Another set of data showed India’s industrial production contracted 2.4% in July from a 1.9% expansion in June, raising growth concerns.

Meanwhile, stock markets slumped on fears of a possible rate hike by the US Federal Reserve later this month. Indian markets followed global cues, with the BSE Sensex falling 1.5%. The rupee weakened against the dollar.

In some bit of good news, the Union cabinet on Monday cleared the formation of a Goods and Services Tax (GST) council, which will be the primary decision making body once the new indirect tax structure comes into force.

The GST council will be headed by the Union finance minister and will comprise finance ministers of all the states. Not only will it decide on the tax rate, it will also play a key role in ironing out differences between the Centre and the states on the matter.  

Even as the government races ahead to implement the new indirect tax structure, it still has some way to go when it comes to upping its direct tax collections via disclosures of unaccounted wealth.

Few people seem to have come forward to take advantage of the Union government’s scheme to get people to voluntarily declare their untaxed money. According to a Business Standard report, till mid-August, people had declared untaxed assets only of Rs 4,000 crore as against a target of 10-12 times that amount.

A four-month amnesty window to declare previously untaxed and unaccounted for assets closes on 30 September. Prime Minister Narendra Modi had said in July that those evading taxes by not declaring black money will face strict action.

Meanwhile, in what could potentially hurt local brokerages, the Securities and Exchange Board of India (SEBI) is reportedly set to allow foreign portfolio investors (FPIs) trading via local brokers to become members of stock exchanges. The Mint newspaper on Monday reported that the capital markets regulator is also considering asking companies to seek minority shareholders’ approval to grant special rights to private equity (PE) investors.

Citing unnamed SEBI officials, the newspaper said that the proposals will likely be taken up at a board meeting on 23 September. If FPIs are indeed allowed to become members of stock exchanges, it could significantly affect the revenues of brokerages that get a major chunk of their incomes from them.

On the PE front, the proposal before SEBI seeks to ensure that protective rights and vetoes given to PE firms are approved by shareholders, Mint said. Simply put, the regulator wants to ensure that PE firms do not end up controlling the management of companies despite not having majority stakes in them.

In another development, the government has reportedly shortlisted bankers for a stake sale in the so-called ‘SUUTI companies,’ an exercise the government hopes will fetch it around $10 billion. The Economic Times reported that three merchant bankers—Citi, Morgan Stanley and ICICI Securities—have been shortlisted to sell the government’s minority stakes in listed and unlisted companies held via the Specified Undertaking of the Unit Trust of India (SUUTI).

The report also said that three more bankers—JM Financial, HSBC and SBI Capital Markets—have been selected as stand-ins, should there be any conflict of interest issues with the first three. The government plans to use the proceeds from the SUUTI stake sales to fund some of its marquee projects. SUUTI holds minority stakes in 51 entities, with Axis Bank Ltd, ITC Ltd and Larsen & Toubro Ltd being its top three holdings.

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Economy round-up: Inflation slows, factory output shrinks, stocks slump

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