Markets Are Listless And Standing By
The stock markets started on a somewhat strong wicket for the week on Monday but then lost steam to end flat
On Episode 367 of The Core Report, financial journalist Govindraj Ethiraj talks to Mukesh Butani, well known tax lawyer and founder of BMR Legal.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take: How Safe is My Money?
(05:00) Markets are listless and standing by
(07:41) India’s usually strong rupee has weakened when most other currencies have risen
(08:49) How iron ore went from being the hottest commodity to almost nothing and the India angle
(11:05) Why a minimum tax rate for global digital multinationals like Netflix and Amazon might take a little longer
(19:43) India’s domestic aviation sector continues to grow
(20:36) Candy giant Mars is buying parent of chips brand Pringles in mega $36 billion deal
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's Tuesday, the 20th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take: How Safe is My Money?
India’s finance minister Nirmala Sitharaman on Monday met with public sector banks and urged them to improve their deposit growth.
Deposits have been growing 300-400 basis points lower than the credit growth in the last few months, creating what is known as an asset-liability mismatch for banks.
The minister asked the banks' chief to focus on core banking business and increase the pace of deposit growth by introducing innovative products, according to news reports which quoted the finance minister saying earlier this month as well that there is a mismatch between deposit and lending growth.
"Growth in lending is higher...I will be meeting banks (on August 19) for various reasons and in that process, I will be talking to them about the importance of deposit collection," the Finance Minister Nirmala Sitharaman had said.
She also said that the RBI has given banks the liberty in terms of interest rate, and that they should make deposits more attractive.
RBI Governor Shaktikanta Das under whose broad umbrella all this falls under also asked banks to mobilise deposits through innovative products and services by leveraging their vast branch network.
"Banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues," he had said.
We have of course been discussing this almost every other day on The Core Report but I would say that there are an increasing number of perspectives to this.
First, we said that people are not depositing money in banks because they are putting it in real estate and the stock markets, or worse, speculative trades like derivatives or for the even braver ones, cryptocurrency.
Of course, in many cases, the money barely touches the bank account, taking off the moment it lands via a monthly salary or some other income.
High aspirations and high inflation have pushed people to take money out of bank deposits.
So we are in a situation where the economy will need more bank credit but banks are finding it tough to lend and maintain a healthy gap or balance or ratio between deposits and lending.
It is not that they are not getting deposits, it is that they are not getting enough.
This brings me to a fundamental question that I can pose and leave here ?
How safe is your money ?
Safety is a relative virtue. Some people might feel that the safest place for money or their savings is under their mattress, others might prefer the bank deposit while the rest would want to make their savings work harder, and thus invest it in attractive financial instruments.
Generationally, I can see why fixed deposits at lets say 7% are unattractive. There is no way you can even beat inflation in the real sense with this. When I say inflation, I mean the rising cost of living that we experience everyday and not just the statistics which can be misleading somewhat, at least for the purpose of computing our own spending.
I can also see that it will only take a shock or two for people to start switching again.
But that is not a point one wants to wish on anyone.
Bank deposits are not attractive because people don’t give enough importance to safety right now, or believe sacrificing safety for the likelihood of a higher return despite the risk is totally worth it.
I am not sure whether increasing the interest rate to let's say 8 or 9% will dramatically change the game, even if banks can increase.
Banks have to convince us that some part of our savings must be also protected from extreme or higher risk.
And that when things go south as they tend to do, whether it is real estate or stock markets, then the only money that is sitting safely is your bank account or your fixed deposit.
It is not an easy sell for banks at a time like this.
But equally, it is not the bank’s problem alone that they are not raising sufficient deposits to meet their lending needs.
The problem is ours too, for believing that putting money into risky assets somehow equals savings and thus safety.
Top Themes For The Day
Markets are listless and standing by.
India’s usually strong rupee has weakened when most other currencies have risen.
How iron ore went from being the hottest commodity to almost nothing and the India angle.
Why A minimum tax rate for global digital multinationals like Netflix and Amazon might take a little longer.
India’s domestic aviation sector continues to grow.
Candy giant Mars is buying the parent of chips brand Pringles in a mega $36 billion deal.
Markets & Currency
The stock markets started on a somewhat strong wicket for the week on Monday but then lost steam to end flat as no clear cues were visible.
The BSE Sensex ended at 80,425, down 12 points while the NSE Nifty50 ended at 24,573, up 31.5 points.
Top gainers were Hindalco, BPCL, Shriram Finance, Tata Steel, LTIMIndtree, Coal India, ONGC, and Dr Reddy's Labs, all between 1.8 and 4%, said the Business Standard.
The BSE MidCap and Small Cap indices were all up, between half and 1% approximately.
Speaking of cues, world markets are focussed on Wall Street where there appears to be some confusion as well.
In an indication of how the big brokerages and banks can be as whimsical or unsure about their assessments, Goldman Sachs has now reduced its probability forecast for a U.S. recession to 20% shortly after raising it.
So why did Goldman do this ?
Because fresh labour market data sparked a reassessment of market views on the economy, CNBC reported.
Just earlier this month, Goldman economists had raised their 12-month U.S. recession probability from 15% to 25%.
And then came the July jobs report on August 2 which showed nonfarm payrolls grew by a less-than-expected 114,000.
That was down from the downwardly revised 179,000 of June and below the Dow Jones estimate of 185,000.
The other figure was retail sales for July — which rose by 1%, versus an estimate of 0.3% — and weekly unemployment benefit claims, which were lower than expected, CNBC reported.
So Goldman did an about turn.
This also means their estimates of all these figures, including jobs data, were most likely off the mark.
Nevertheless, Wall Street was holding positive overnight.
We touched upon safety and of course gold comes to mind, whose prices are of course lower in India thanks to a much delayed reduction in customs duties following an increase in customs duty which should not have happened.
Gold prices have been hitting new highs and analysts expect more records, with some forecasting it will hit $3,000 per ounce next year, as the U.S. Federal Reserve meeting draws closer, reports CNBC.
The Federal Reserve meeting which could see a cut in interest rates is slated for September.
Spot gold held steady at last session’s record high of $2,508.14 per ounce, according to data from FactSet, while U.S. gold futures jumped 0.16% to set a new record of $2,540.8 per ounce during Monday Asia hours, extending gains from Friday.
Analysts told CNBC 2024 was the year where gold was supposed to reach multiple highs, alluding to its appeal as a safe haven asset.
Rupee Against Other Currencies
Meanwhile, the rupee rose to its highest level in nearly two weeks on Monday as the dollar index declined to its lowest level in six months, sparking broad gains in Asian currencies, Reuters reported.
The rupee was at 83.90 as of 11:10 a.m. IST.
A research report from BOB Research says if we were to position rupee movements with those of other countries, the rupee depreciated while most of the other currencies appreciated.
The rupee has depreciated just 0.27% in recent weeks but 14 other currencies appreciated in relative terms.
The Australian dollar and British pound also declined by less than 1%. The rouble, Turkish lira and Mexican peso fell by more than 1%.
Trade data indicated a higher deficit as exports growth declined in July.
There is also no clear trend in foreign portfolio investment flows in India
As BOB Research points out, FPIs up to August withdrew $ 700 mn in the month which was mainly in equity. This was against + $ 2.19 bn in the preceding fortnight.
The Story of Iron Ore
We have been discussing here how steel prices are at 3-year lows in India and Indian companies have filed anti dumping petitions against steel coming from Vietnam with the Ministry of Commerce.
We also touched upon how massive oversupply in China is shaking up the steel sector after the real estate sector there started slowing down.
And how iron ore prices were hitting new lows.
An interesting article from Bloomberg points out that of all commodities, the humble lump of iron ore benefited the most from the Chinese economic boom of the last 25 years.
So much so that iron ore prices nearly went up 10 times in the last 30 years more than any other commodities, creating billionaires and Wall Street favourites.
And now, it’s over, says Bloomberg, pointing out that the cost of the reddish dirt, which turns into steel inside blast furnaces, has fallen already below $100 a metric ton, down 55% from it's all-time high of almost $220 a ton set in 2021.
But the outlook is the issue, not the current price.
Bloomberg says the outlook looks sombre as Chinese steel demand reaches a zenith.
It’s becoming clear that China hit peak steel demand somewhere between 2020 and earlier this year.
The reason? The shift in its economic model to services and away from heavy investment and housing construction and thus will not follow the path followed previously.
What does this mean for India?
Well, China makes more than half the world’s steel and India is the second biggest.
While India could see stronger steel demand for longer, India actually exports iron ore to China, almost 90% of it at peak and around 80% on an average.
So which means only 10 to 20% of the iron ore mined in India is used in India or even less because there are other countries who are importing as well.
Moreover, India’s iron ore exports have been rising sharply, by almost 118% in the last year.
Total exports were upto around 48 million tonnes in the last year.
So the slowdown in China’s steel industry will affect Indian ore producers too, in price and output because of the surplus which could continue for at least four to five years.
A Minimum Tax Rate for Global MNCs
One of the items expected to be proposed in the Union Budget 2024 which was presented last month was a draft legislation on the global minimum tax for multinational enterprises.
The legislation would pave the way for changes in India’s tax laws.
This did not happen and more on that shortly.
The global minimum tax, also known as the Pillar Two regime, aims to prevent MNEs from shifting their profits to low-tax nations.
The tax regime hopes to ensure they maintain an effective tax rate of 15 per cent across all jurisdictions where they operate.
However, at a ad hoc intergovernmental committee that approved the United Nations terms of reference with an overwhelming majority of 110 votes, 8 countries including the G7 and US, UK, Canada, Korea, Australia, Israel and Korea voted against it while 44 nations abstained.
What is the import of this move and where does this leave the larger effort to bring about a minimum tax rate, particularly for the large digital multinationals whose products and services most of us consume ?
I spoke with Mukesh Bhutani, well known tax lawyer and founder of BMR Legal based out of New Delhi.
I began by asking him if there was a delay in the process of bringing about a minimum rate globally and where things stood ?
INTERVIEW TRANSCRIPT
Mukesh Butani: Well, the recent development is certainly connected with the global minimum tax. But it's not something that has just happened. It is something that had been evolving for the past year, year and a half. What happened on 15th of August is that the ad hoc committee in the UN voted, you know, overwhelmingly, 110 positive votes to what they call it as come out with a new international standard for the UN. This is actually the first step, which is towards the new global order by the UN, to some extent it does cast doubt on the ongoing OECD process, which, of course, is at a very advanced level, how that process is going to work on a go forward basis, what kind of frictions it is going to cause. Only time will suggest so. But I can merely say that the August 15 development is now going to translate into this vote being taken to the UN General Assembly, being voted upon. After the UN General Assembly, there will be a three year time frame by which the UN will evolve new standards, which is in 2526 and 27 and this three year discussion would be undertaken by the intergovernmental companies, which will translate into what they call as a final text of new convention, which will then be voted upon, and the new UN Global tax treaty standard will evolve, which, of course, countries will have to sign and ratify separately. So that's really the big development that occurred on the 15th of August,
Govindraj Ethiraj: Right. So now all of this is making it sound like it's a little further out than what one believed, including the fact that India too was supposed to bring it on board in the last union budget last month.
Mukesh Butani: Yes. So what India was supposed to bring, and it is still on cards, is to implement the pillar two, which is the global minimum tabs, which was signed first supported by the g7 in july 2022 and thereafter it garnered support from rest of the countries, and 140 odd countries are signatories to that. That process has gone back and forth for a while. It hasn't been finalized, but the fundamental framework has been done. There are 40 countries that have already legislated. India is not one of those 40 countries, but for what we understand from colleagues in the north block is that the legislation is ready. It is yet to be rolled out, which the government can easily introduce by way of a separate bill, or it can introduce by way of a subordinate legislation, such that in 2025 that's made effective. However, the recent UN vote, or the Adopt committee vote has put many questions in the minds of people as to how these processes are going to work parallely. The global minimum tax does tend to address some of the challenges of digitized businesses, and that's also one of the challenges which is there in the UN process as well,
Govindraj Ethiraj: Right. So if I were to now ask you about companies operating in India, or, for that matter, even Indian companies who are operating elsewhere in the world. How could this apply conceptually? I mean, before getting into how it could work practically, but how would a minimum 15% rate work and who could be affected as things stand.
Mukesh Butani: First of all, it applies to companies that have a global turnover about seven 50 million euros. Whether they are Indian multinationals or they are foreign multinationals. They all are subject they all have assumed that they all have international operations, they all will be subjected to a global minimum tax of 15% of course, that's easy, said than done. In order to make the 15% global minimum tax applicable, there would be certain treaty related anti abuse provisions, and there would be certain domestic law anti abuse provisions. For example, there is a concept of top up taxes that needs to be paid by countries to ensure that a multinational pay tax at 15% there are subject to tax rules, which are treaty driven, rules by which you introduce anti abuse provisions in situations where countries, there are certain countries where they do not pay the 15% rate of tax. So combination of domestic law and treaty related provisions will ensure that this 15% tax is the minimum tax that multinationals pay in each jurisdictions who have global turnover above seven 50 million jobs. And in your understanding, there are companies in India or companies that we can see who are right now not paying that level of tax. And therefore that law would be. Bring them under that purview. Bowen, I won't like to generalize. You know whether there are companies in India that are facing that however, if you look at it from a global, multinational standpoint, many, many businesses which are operating in a digitized environment, they are the businesses who are able to take shelter of what is called the century old tax treaty standards which levy tax on economic Nexus. And economic Nexus means that you ought to have an operation in a country, and without an operation in a country, you cannot tax it. So these standards are meant to look at those forms of business models rather than the traditional forms of business models. Having said that, you can really put those class of taxpayers in two categories, one that are highly digitized, the Amazons, the apples, the Netflix's of the world. Second, traditional brick and mortar businesses, which do have an E commerce model as well, so both businesses would equally be covered.
Govindraj Ethiraj: So let's say a country like India, and this is more a lay person's question, has a minimum corporate tax that any company in India pays. Let's say 30% now if you're paying 15% and you come under this, why would you not be pulled into the 30% or the regular peak level that everyone else is paying?
Mukesh Butani: So domestic companies, for domestic businesses, will try to levy 30% tax. The 15% global minimum tax is to prevent a situation where any jurisdiction, and obviously India, is not covered in that duration, does not levy the minimum 15% tax, then India assumes a right. A classic example would be an Indian multinational operating in a jurisdiction, let's say, for instance, Middle East, which does not levy the 15% tax. India then assumes right through the treaty network to levy the tax, or that country assumes right levy a top of tax. That is how the whole system works,
Govindraj Ethiraj: Right. Mukesh, thank you so much for joining me.
Mukesh Butani: Thank you, Govind
Air Traffic Continues To Grow
India’s aviation industry is continuing to grow though maybe slowing seasonally somewhat.
Indian carriers flew close to 13 million passengers in July, an increase of more than 7.3 per cent compared to the year-ago period, official data released on Monday showed.
However, the air traffic in July was lower compared to 13.2 million people carried by the domestic airlines in June this year.
"Passengers carried by domestic airlines during January-July 2024 were 92 million as against 88 million in the same period of the previous year thereby registering an annual growth of 4.70 per cent and monthly growth of 7.33 per cent," figures released by the Directorate General of Civil Aviation said.
Mars Plus Kellanova
You would have heard of Mars, the chocolate company and Pringles, the chips.
Well, the family owned candy giant Mars is buying Kellanova, the company that owns Pringles in a nearly $36 billion deal, bringing together brands from M&M's and Snickers to Pringles and Pop-Tarts in the year's biggest deal to date, Reuters reported.
IMportantly, the deal is a bet on consumers continuing to indulge in branded snacks, and comes as packaged food companies face stalling growth after years of price hikes to cover sky-rocketing inflation.
The combined company aims to hold prices steady, said Mars CEO Poul Weihrauch in an interview with Reuters Wednesday, and not pass on costs from the deal to consumers.
The point to note is this.
Food prices in the United States increased roughly 25% from 2019 through 2023, far more than other categories such as housing and medical care, according to data from the U.S. Department of Agriculture.
Consumers in the United States and Europe - major markets for both companies - have been looking for cheaper alternatives or ditching brands for cheaper private label goods.
Interestingly, there is another angle to think about for such companies in the western markets and quite likely at some point in India as well.
Which is that a decline in sales from the greater adoption of drugs such as Ozempic and Wegovy for weight loss, which curb appetites and lead to feelings of fullness.
