India’s Losing Battle With Food Prices
Retail inflation for the month of June rose to a four-month high of 5.08% in June after food inflation jumped to over 9%, the highest level in six months
On Episode 339 of The Core Report, financial journalist Govindraj Ethiraj talks to D K Joshi, chief economist at Crisil Ratings as well as Dwarak Narasimhan, Partner at Price Waterhouse & Co LLP.
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SHOW NOTES
(00:00) The Take
(03:55) Stories Of The Day
(04:41) Markets on holding pattern, earnings in spotlight.
(06:56) India’s losing battle with food prices
(18:55) New taxes to discourage companies from moving headquarters are coming
(28:58) Lufthansa says high prices are causing business travel to shrink, American carriers too report tougher times despite strong traffic
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning it's Monday, the 15th of July and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai.
The Take
For several years, the biggest symptom of the Government’s failure to get out of the business of doing business was Air India.
And the Government realised that the losses had piled up so high that it was not worth it. Of course, that decision could have been taken anytime in the last 20 years but better late than never.
One fine day in January 2022 or two and a half years ago, the Government successfully sold Air India to the Tatas who knew then and now that we're buying a giant migraine which will stay with them for the foreseeable future, as migraines are wont to.
The expectation from the current dispensation was, in the early days perhaps, that they will move away from the traditional socialistic pattern of controlling or running businesses and hand over increasingly to the private sector.
That has not and, as The Core Report has been consistently pointing out, will not happen in our near future.
The fact that stocks of state owned companies like PSUs are doing extremely well, though in many cases for reasons some of the best market analysts cannot quite fathom, is obviously emboldening the Government to stay the path of being a business manager in addition to everything else.
Reuters is now reporting that the Government now plans to overhaul more than 200 state-run firms to make them more profitable.
This adds Reuters, not surprisingly, is a departure from Prime Minister Narendra Modi's aggressive programme that has struggled to take off, government sources said.
The programme to privatise a major portion of India's $600 billion state sector announced in 2021, had slowed ahead of the general election in April-May and could face more resistance, as in that is the feeling though I feel it is not so likely.
The new plans include selling large parcels of underutilised land owned by these companies and monetisation of other assets, said two officials who are aware of the policy. Some aspects are yet to be fine-tuned, they added.
The aim is to raise $24 billion in the current April-March fiscal year and re-invest the funds in the companies, while setting five-year performance and production targets for each company, instead of short-term targets.
"The government is shifting focus from indiscriminate asset sales to enhancing the intrinsic value of state-owned companies," said one of the officials.
Translated, the Government is digging its heels in and staying put. Put it differently, it will manage the economy and businesses in it.
Reuters also quoted Hardeep Puri, India's oil minister, said last week a plan to sell state-owned Bharat Petroleum Corp was no longer on the table as the company was making almost as much profit in a year as the price it was to be sold for.
Governments in India don’t like to let go of the public sector or state owned corporations. For one they make lots of money, particularly if they are in monopoly or close to monopoly areas like energy and defence.
The money itself is something to lean back on for a rainy day, or every other day in the form of dividends that enrich the exchequer.
It can of course be argued that divesting at such high prices is a good idea but then that would mean giving up control.
Owning assets also imparts a sense of power and access which the Government in general has lost over the decades with the increasing role of the private sector.
We are now seeing an effective rebalancing of an old equation. And also could provide an outlet for job creation for example. Like state owned oil corporations have done in the past by lets say awarding petrol pump licences or other licences for gas distribution.
That of course has limitations but then you can’t argue when share prices are high. Maybe the Government is doing something right.
Maybe.
It does go against the grain of effective allocation of resources though.
And where the Government of the day should be focussing its energies on for the betterment of its citizens aspirations and lives if not livelihoods.
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Stock Markets Ahead
The markets had a good week last week but the coming week is a holiday shortened week with a holiday on Wednesday for Muharram.
Much as I love doing this show, the occasional midweek holiday is a welcome gift, I must confess.
So last week, the broader indices continued to run strong but ended on flat and underperformed the main indices in the week ended July 12.
The BSE Sensex was up 523 points to finish at 80,519.34, while Nifty50 index rose 178.35 points or 0.73 percent to end at 24,502.20.
On Friday, Jul 12, 2024 The BSE Sensex and Nifty50 touched record highs of 80,893.51and 24,592.20, respectively.
The top performing sectors last week were IT, where we seem to be seeing in recent months a general return or resurgence of interest and institutional capital flows, even as the results are somewhat predictable.
Oil and gas also did last week though bank, realty and auto fell somewhat.
This week will be an interesting one because the first quarter, which is April 1 to June 30 results will start coming out.
Analysts we spoke to last week are expecting consistent growth and have not seen any major causes of worry in the first quarter which could have affected corporate results badly, except some bumps maybe in consumer facing companies linked to turn weather patterns and uneven consumption.
Reliance Industries, Bajaj Auto, BPCL, Asian Paints and Infosys are among the companies who will announce their results.
On Friday, HCL Tech on Friday posted a 20.4 per cent rise in consolidated net profit to Rs 4,257 crore for the June-ended quarter and gave a revenue growth guidance of 3-5 per cent for FY25 on GenAI diversification and strong operational execution, LiveMint reported.
Inflation Rises, Food Inflation’s Vice Like Grip
Retail inflation for the month of June rose to a four-month high of 5.08 per cent in June after food inflation jumped to over 9 per cent, the highest level in six months, data released by National Statistical Office (NSO) on Friday showed.
The big problem is food prices which represent almost 40% of the consumer basket.
So inflation rose after falling for the last five months.
The reason for food price rise is of course extended heatwave episodes across major parts of the country.
Vegetables inflation rate was at 29.32 per cent in June and has remained in double-digits for eight months. And we will address this in a moment.
Food inflation based on the consumer food price index (CFPI) rose 9.36% year-on-year in June, compared to a 8.69% rise in May and 8.70% in April.
The higher food inflation in June was because of the rise in prices of items such as cereals, vegetables, milk, and milk products.
So the big questions are, will food inflation cool down, now that the monsoons are gathering steam and more importantly, what are the short and longer term issues at play when it comes to food prices.
Because, as I ask, food prices are not just a mild statistic to ponder over but something that affects our daily lives.
I reached out to Crisil Ratings chief economist D K Joshi and began by asking him how he was seeing the inflation numbers also in the context of stubborn inflation in food, a theme that his team has been focussing and spotlighting for some time now.
Direct Taxes Up
Direct tax collections surged nearly 20% from a year earlier to ₹5.74 lakh crore in FY25 so far, riding a jump in personal income tax flows.
Personal income tax collection is seen rising further, with some individuals expected to pay taxes with the returns for FY24, the Economic Times said.
The last date for filing income tax returns is July 31 for the assessment year 2024-25.
The reason for rising tax collections is corporate profits which are rising, reports the ET.
Strong profits of course augur well for Q1 results and thus the markets in the near to medium term before other factors take over.
Net corporate tax collection for the fiscal as of July 11 was ₹2.10 lakh crore, an increase of 12.5%, while net personal income tax collection was up 21.4% to ₹3.46 lakh crore, according to data released on Saturday, the ET reported.
What Are the Big Corporate Tax Issues?
One big expectation from the Union Budget on July 23 is that India could announce its adoption of the “Pillar-2” tax regime anchored by the Organisation for Economic Cooperation and Development (OECD).
This is part of a larger global effort to fight tax avoidance.
The basic idea is that multinational enterprises also called MNEs should pay a global minimum tax which will then or should discourage profit shifting.
For instance, several US MNCs have domiclines in the Netherlands or Ireland.
The minimum Effective Tax Rate (ETR) of 15% is what is being targeted across all jurisdictions in which they operate. MNEs, as per the rules, are defined as those entities with a global turnover exceeding 750 million euros.
To understand this a little better and also get some sense on some of the key corporate tax issues Indian companies are focussed on, I reached out to Dwaraknath EN
, Partner at Price Waterhouse & Co LLP in Bangalore and began by asking him how he was looking at the Budget.
Lufthansa Cuts Back
It's not clear whether other airlines in Asia and middle east are facing similar pressures, at least yet, but German airline has said it slash costs and cut back on future projects as a “new reality” of lower corporate travel and increased competition drives down fares from post-pandemic highs, according to a letter to staff, reported by Bloomberg.
The lead carrier said while its costs have risen sharply, unit revenue has been lower than expected as customers aren’t prepared to pay higher fares, according to the letter from unit Chief Executive Officer Jens Ritter seen by Bloomberg News.
With corporate travellers in short supply, the airline isn’t able to compensate for seasonal demand fluctuations, Ritter wrote.
“We are experiencing a ‘new reality’: not a crisis, but a structural change,” Ritter wrote in the letter. After two years of soaring demand, “we are seeing a normalisation in the market. This is accompanied by high competitive pressure,” he said.
Across Europe and the US, airlines are struggling to fill planes in the all-important summer vacation season, which has dragged down ticket prices.
On Thursday, Delta Air Lines Inc. warned of worse-than-expected financial results and a weak outlook for the third quarter.
The airline expects business travel to remain at its current low level, and to see more leisure travellers visiting friends and relatives, or going on vacation. As a result, travel is skewed toward the summer instead of the winter, according to the letter.
The question of course is now how Asian and middle eastern airlines are seeing traffic patterns. We will update you on this in the coming days.
