Tag: economy

Land Bill: Landing a right note?

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill, 2013 (formerly known as the Land Acquisition, Rehabilitation and Resettlement Bill, 2011), has quite understandably, created a stir. Ever since the bill was passed in the Lok Sabha last week, the debate has largely centred around the negative impact on India Inc but it is too early to call it as a victory for landowners. On Thursday, the Parliament passed the amended version of the Bill wherein the proposed law would not apply to irrigation projects where environmental impact assessment is required under the provision of any other law already in place. The government also agreed that farmers whose land was acquired for irrigation projects will either get compensation or be given resettlement package.

 

INVESTMENT TREND

One of the key proposals of the Bill is the rehabilitation and resettlement (R&R) of not just landowners but also project-affected people.

People whose land and habitation have been taken over without their consent by the state government or companies have resorted to protests, as a result of which all development projects are viewed with suspicion. The examples of acquisition of Singur land in West Bengal by the Tatas or the Reliance SEZ in Maharashtra are stark examples of this growing discontent.

Let’s quickly scan through key proposals before assessing its impact on stakeholders-

  • Private companies to provide for rehabilitation and resettlement if land acquired through private negotiations is more than 50 acres in urban areas and 100 acres in rural areas.
  • When land is acquired for use by private companies or public private partnerships (PPP), consent of 80% and 70% of landowners is required
  • Compensation up to four times the market value in rural areas and twice in urban areas
  • Companies can lease the land instead of purchasing it, but the decision is that of the state rather than the land-owner.
  • If the land is sold to a third party, 40% of the profits will have to be shared with the original owners.
  • Affected “families” would include farm laborers, tenants and workers who have occupied the area for up to three years before the land acquisition. Such persons will have to given a job or compensation of Rs 5 lakh, an allowance of Rs 3,000 a month for a year.

land for sez

Infrastructure companies are crying hoarse that higher compensation could delay projects, spike property, infra costs and in some cases also make land acquisition for industrial projects nonviable.

Kisan Maha Panchayat: No land acqusition

They further argue that buying land for large projects like integrated townships will become difficult and contend that bigger government role in the whole process is a throwback to the Licence Raj era.

A quick look at some of the big-ticket projects will throw some insights into land acquisition costs as a component of overall project costs.

The mega Delhi Mumbai Industrial Corridor is a $90 billion project. The mega infrastructure project between the Japanese and Indian government has set aside Rs 1,200 crore for land acquisition under Phase-1 of the project cycle. Of course, going ahead, the costs would multiply several times. But what is the big fuss about this? Once the project is up and running, the operators would recover the money, much higher than their investments, from their customers.

 

ORISSA CASE

Similar is the case with Posco’s much-hyped $12 billion steel plant in Orissa. The project, that has run into trouble with locals over alleged forceful eviction against project opponents, initially required over 4,000 acres of land near Paradip in Orissa but was later scaled back to 2,700 acres. According to latest reports and data available in public domain, the state claims to have acquired about 2,700 acres of land and paid compensation to 1,132 people. So far, ‘Rs 21 crore has been paid to the affected farmers for demolishing their betel vines ’. No compensation has been paid towards land as these vines and tree were planted by the villagers on the government land. In Posco’s case, land acquisition costs and Rehabilitation and Resettlement expenses are nil or very minuscule as entire land is government owned.

However, it sounds childish and laughable on the part of India Inc, setting up projects worth thousands of crores, to keep fuming at compensation costs and arguing that land acquisition costs alone would make projects nonviable. What should really worry corporate India is the lengthy process in securing possession of the land. The Bill calls for appointing several committees of activists and “experts” as part of social impact assessment. This would be followed by the Rehabilitation and Resettlement Committee. The multiplicity of agencies would only lead to bureaucratic red-tape and delay the whole process.

 

approval time

As for landowners, their rights have largely been protected. Only when 70% of project-affected land owners give their consent, can companies go ahead with the acquisition process. Since land prices shoot up substantially when industrial projects come up in an area, it is only fair that landowners are paid more than the ‘market price’. Due to lack of clarity on land holdings and titles, involvement of the state government would facilitate the transfer.

The bill will eliminate the trust deficit between land owners and corporate India and ensure that the benefits of development on the acquired lands accrue to land owners and others dependent on the land. Instead of bemoaning the provisions of the bill, India Inc should welcome the legislation as it eliminates uncertainties and lays out clear guidelines for land acquisition without which setting up projects was next to impossible.

 

Rotation into debt continues

Indian institutional flows into debt has been relentless this year. DIIs have pulled ₹ 12,511 crore from equities and pumped ₹ 2,31,965 crores into debt during Jan-May 2013. It appears that as though the entire market has made a one-way bet that rates are going to fall this year… or have they gone so risk-averse that they have decided to ditch equities completely?

DII fund flows Jan-May 2013

 

FIIs however continued to hoover up equities. Pumping in ₹ 83,206 crores during the same period. Their interest in Indian debt was only a fraction of the domestic appetite.

 

FII flows Jan-May 2013

 

This is interesting because of the questions it raises. Do FIIs think Indian debt is too expensive compared to equities? Are they taking a contrarian stance to domestic institutionals? Is there something wrong with the way our policies are setup that incentivizes foreign investment in equities over debt?

Whatever it maybe, equity investors better pray that FII tide doesn’t turn too quickly.

Previously: The Great Rotation into Debt

 

 

The Great Rotation into Debt

It used be that news about increasing FII flows brought cheer to the markets. However, in spite of them bringing in close to $10.3 billion dollars since the beginning of this year, the market has been in an interminable funk.

FII Investments - IndiaMarket action doesn’t seem to concur with FII bullishness. Are FII faith misplaced? At first, the market expected a whiz-bang budget and capitulated once that turned out to be a damp squib. And now it appears that investors have latched on to the political goings on to feel depressed about.

CNX 500 Chart

Underneath it all is the exodus of domestic investors out of Equities. Since July 2012, Indian mutual funds pulled out more than $3.6 billion out of equities and piled into debt.

Domestic Investors - India

For every single month since July 2012, domestic investors have rotated out of equities and into debt to a grand total of $58.2 billion. Given the recent volatility in the stock market, it would be no surprise if domestic investors continue to herd into debt funds. The big question on my mind is how long will FII flows continue into equities if domestic investors continue to sell into them?

India’s subsidy trilemma threatens growth

The subsidy hole that India has sunk itself deep into threatens to kill its famed growth story. The major subsidies in the system at present are on fuel, fertilizer and food that corner 95% of subsidy share.

Reducing subsidies is critical from the resource point of view, as, subsidies have been very high as a percentage of GDP. The subsidy bill in the current financial year is expected to rise to 2.4% of GDP from 1.9% estimated in the budget, Finance Minister P Chidambaram said last month.

The government’s major subsidy burden has ballooned over the years from Rs 67,498 crore in 2007-08 to Rs 208,503 crore in 2011-12.

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According to the budget proposals, the government’s subsidy bill on food, petroleum and fertilizers is estimated at Rs 179,554 crore for 2012-13 fiscal, which is sure to be surpassed.

High crude oil prices, pending reforms in the fertilizer space and the proposed National Food Security Bill are further expected to swell subsidies.

In 2011-12, the revised estimates (RE) and budget estimates (BE) highlight the government’s failure to rein in subsidies. Petroleum subsidy rose from Rs 23,640 crore in BE to Rs 68,481 crore in RE. The RE for food and fertilizer stood at Rs 72,823 crore (against BE of Rs 60,573 crore) and Rs 67,199 crore (Rs 49,998 crore), respectively.

Apart from the size of such subsidies, other factors like strains on government finances, target group of such subsidies and their after effects on economic growth have dominated the discussion around subsidies.

clip_image001The food subsidy has swelled in recent years due to widening gap between the central price of wheat and rice and the economic cost of delivering these food grains. Huge stocks and the carrying costs associated with it have driven subsidies further.

The LPG subsidy is completely unfounded as bulk of it benefits people in the middle and upper income classes. Only about half the kerosene distributed through the PDS actually reaches the farmers or the poor and the massive under-pricing is only leading to large scale diversion for adulteration with diesel and petrol.

The cost of India’s agricultural input subsidies as a share of agriculture output almost doubled from 6.0 per cent in 2003-04 to 11.6 per cent in 2009-10, driven largely by subsidies to fertilizer and electricity.

clip_image002[10]In the process of subsidizing the so-called ‘poor farmer’, state electricity boards have run into massive losses and have recently landed a Rs 2 lakh crore bailout.

Fertilizer subsidy as a ratio to the value of crop output, which hovered between 3 to 3.5 per cent during 2000–06, rose to 4.8 per cent in 2007–08, and to more than 10 per cent in 2008–09 due to a spike in the price of imported fertilizers.

Fertilizer subsidy should be on nutrient basis, and ideally given directly to farmers. The sector must be freed from price controls and fertilizer imports must be opened up for the private sector through low import duty. This will help in rationalizing and containing the subsidy bill.

The poor must be insulated from price hikes, which should be directly targeted, but energy prices cannot be delinked from global prices, especially at a time when dependence on imports is rising.

Direct subsidy to a target group of small and marginal farmers is ideal against the present system of uniform indirect subsidy, which tends to benefit the larger farmers more.

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Even as you and I continue to enjoy the current ad-hoc subsidy regime, the intended subsidies do not even reach the deserving segment. The subsidy dilemma has now started impacting the country’s growth in the form of persistent inflation, high fiscal deficit and high rural wages.

And since growth is a pre-requisite to eliminate poverty, as acknowledged by PM Manmohan Singh, the economy may dive into a downward spiral if the current regime of distorted subsidies is not uprooted.

Sunder’s List: Global Slowdown

PMI readings that came out yesterday don’t paint a pretty picture. Eurozone PMI June Manufacturing comes in at 45.1 (below 50 implies contraction.) Brazil’s June PMI falls to 48.5 from 49.3 previously, the lowest read since October. US June ISM Manufacturing Index: 49.7 vs. 52.0 consensus and 53.5 prior (a huge miss.)

Slowing world economies, particularly China, are reducing Q3 and later orders and drastically dropping some raw materials prices

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Europe closed higher: Stoxx 50 +1.2%, Germany +1.2%, France +1.3%, Italy +0.3%, Spain +0.4%, U.K. +1.3%. While Dow -0.14% to 12863. S&P +0.18%.

Now the hope is that the US Fed will engage in QE3 and the excess liquidity will buoy risk markets.

The market thinks that the growing number of weak economic reports for the US in combination with lower inflation numbers may trigger another round of asset-purchases by the Federal Reserve (QE3). – UniCredit’s chief U.S. economist, Harm Bandholz (WSJ)

But all the earlier money printing did was to give a sugar high that is now turning into a sugar crash. S&P 500 companies just posted their worst pre-announcement period since the third quarter of 2001 – right after the 9/11 terrorist attack. (SA)

I’ll end today’s list with an awesome quote from NYT’s Paul Krugman about Europe:

The prospect of disaster, no matter how obvious, is no guarantee that nations will do what it takes to avoid that disaster. And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious. – Krugman (NYT)