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'Cutting customs duty right step'

It is ridiculous the amount of duty that we have to pay on imports, writes Dr Bhaskar Dasgupta.

india Updated: Jan 09, 2008 13:29 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

Babble in the Indian Markets

A happy prosperous New Year to all the readers. The Sensex passed 6000 over the holidays and on Monday, it kept on going up to 6069, a gain of 12 points over Friday's close. There was plenty of interest, but later in the day local institutions did indulge in a bout of profit taking.

This profit taking based selling intensified at the last session of Tuesday with a drop of 95 points over the open, closing the market at 5944.

Mobile companies perked up a bit following news that the number of subscribers doubled this year compared to 2002 and are at about 28 million. I am reserving judgement on the utter mess the government has made out of the cellular licensing regime. A report by the Planning Commission that the second half of this fiscal year growth for India could top nine per cent moved the share prices up by 13 points at the close. Stocks moved up 2.54 per cent on Thursday following the government's announcement that there will be a range of duty cuts and taxpayer incentives on products such as phones, computers, chemicals etc. Friday saw a slight upturn at the end, but there was a sharp intra day peak at 6249 while falling down to end up 11 points at 6119. The sharp movement up was driven by the government's sops to remove duties on a whole range of consumer items relating to mobile phones, DVD's, computers, refrigerators, airline travel and the like.

A report that the government is thinking about reducing the peak customs duty from 25 per cent down to 20 per cent made me quietly cheer this on. It is ridiculous, the amount of duty that we have to pay on imports. India has the third highest customs tariff in the world and as usual, we have it all backwards. The objective of customs tariff should be primarily as an instrument of industrial policy, but we have got it inside out by thinking about customs tariff as a means of state funding. I mean, how silly can you get? But that is by the by, hopefully the rate of reduction will continue till we have a reasonable (read low) amount of customs duties. The fact that the government can gain more from increased trade activity in the form of sales tax and corporation tax has been missed. I wrote the previous sentences on Monday, but reading about the duty cuts on Thursday, I have to take back my words to some extent, good step this.

A clarification by the Supreme Court gave rise to hope that the strategic disinvestment programme will get back on track. Readers would recall that the court stopped the privatisation of HPCL and BPCL because they were created by an Act of Parliament and can only be privatised after another Act of Parliament and this caused the entire program to come to a grinding halt. The recent clarification states that public sector companies formed under the Companies Act can be privatised normally. So firms such as Hindustan Organic Chemicals, State Trading Corporation, Madras Fertilisers etc. will be up for sale now. Good that this got cleared up.

Ok, here's a big rant and right after praising the government's customs duty even. Indian mining companies are exporting high grade iron ore to China and other countries. This was because of low freight costs and improved infrastructure for exports plus the mining companies going out and aggressively marketing Indian iron ore. We get foreign exchange, diversify our economy, get better exposure to the international market, build up our infrastructure, develop markets and a whole host of other benefits. Guess who is squealing? The domestic iron ore consumers, because they are moaning that the prices set by the government owned National Mineral Development Corporation are being put up. By the way, NMDC is also exporting iron ore. So what does the government do? It puts controls on the export of iron ore. The answer is not to put controls, but to deregulate the market, let the consumers purchase iron ore, hedge their purchases and manage their inputs and outputs properly. It will take the mining export sector years to recover from this silly regulation now. How short sighted can you be, eh?

Babble in the World Markets
The DOW closed sharply higher on Monday following deep interest in semi-conductor stocks and software sectors, which obviated some concern about the falling US Dollar. Seibel Systems gave good fourth quarter numbers and promised higher licensing revenue. The DOW closed 134 points up, while the NASDAQ closed almost at a two year high at 2047. The Euro perked up again on Monday, hitting highs of $1.2695, the Pound Sterling hit an 11 year high of $1.80 while the Yen was up at 106.97. Gold is also up, with gold futures at $424 an ounce.

The British FT 100 moved up marginally to 4513, while European Stocks were a bit higher as well. Tokyo was up as well after optimism that 2004 would be a good year, with the Nikkei up 148 points to 10825. Tuesday saw the US stocks close on a mixed note, with the DOW dipping shortly but then rising again to close just five points down at 10538, while the NASDAQ was up 10 points at 2057. The earlier sell-off was more because of profit taking than anything of major concern to the economy. The London market was again down this session, with a drop of 0/2 per cent to 4505, following fears of the pound strengthening (at $1.8228) but had good numbers from the retail sector's Christmas buying binge. Similarly, both the German and French markets were down marginally at 4032 and 3595 respectively, after fears that the rising Euro (at $1.2756) would hurt automakers badly. The Nikkei was also down by 11 points due to worries over the strengthening Yen (at $106.06).

Wednesday saw a mixed performance in the USA, with the NASDAQ hitting a 29 month high after an Intel upgrade, while the DOW closed 10 points down at 10529. The UK was down as well after an oil stock downgrade to 4473, just like the European markets, which suffered from oil stock downgrades and the weakness in the US market. Japan was still suffering because of currency fears, and the Nikkei fell 56 points to 10757. Thursday witnessed a rise in the US markets following the telecom sector surge after Nokia raised its fourht quarter earnings outlook, but the market was waiting for Friday's employment report. The DOW closed 63 points up, while the NASDAQ moved up to 2100. Both the UK and European Central Banks kept the interest rates on hold and Nokia's good forecast helped the European markets to move up by 1 per cent on the German side and 0.8 per cent on the French side, while London moved up by 0.5 per cent.

The jobs report on Friday was disappointing. The US Labour Department said that the non-farm payrolls increased by 1,000 in December, far below the 136,000 expected by the analysts, but the US unemployment rate fell to a 14-month low of 5.7 per cent. A bit confusing, but the markets were down. The DOW closed the day by 134 points down at 10458, while the NASDAQ also closed down 13 points at 2087. The dollar suffered as well, with the Euro surging to a new record high against the greenback to $1.2868. Europe suffered because of the bad US jobs report as well as a report from Royal Dutch/Shell that 20 per cent of its reserves were of a lower quality than previously thought. The DAX dropped 0.7 per cent to 4016, the CAC 40 was down 0.5 per cent at 3574 and the Footsie 100 down by 0.6 per cent at 4469.

The Institute for Supply Management in the USA provides a manufacturing index and it reported that the index had jumped form 62.8 to 66.2 in December compared to November. A reading above 50 means an increase in manufacturing activity and analysts say that this is proof that the recovery has taken root and the falling dollar is helping push exports up. Now the open question which was hovering around for a long time is whether capital investment will start rising is being answered in the positive, which is great news!

Oil prices are up at $30.27 (Brent Crude) following on from reports that there will be cold weather in the USA and the OPEC has no plans at all to increase production. In addition, the rumours that one of the planes which was not allowed to take off from Mexico City was headed towards the Alaska Pipeline (which provides 17 per cent of USA's oil) also gave rise to serious amount of nervousness in the markets. By the way, OPEC has categorically denied that they would change the pricing bands after the fall in the dollar. I am actually not surprised! USA must be bringing severe pressure on the OPEC to stop thinking along the lines to revalue and even more, to stop thinking about pricing in Euros! Now, that would really set the cat amongst the pigeons and the deficit financing will be really tough!

China decided to recapitalise two of its big state owned banks, China Construction Bank and Bank of China, to the tune of $45 billion. Now this was a brilliant move, I have to admit. First of all, the level of non-performing loans in China is absolutely gruesome and consequently, the large state owned banks are technically bankrupt. So what does the Banking Regulator do? It takes a chunk of its huge foreign exchange reserves and gives it to these two banks for new lending as well as shoring up their balance sheets. The reserves will stay in dollars and, therefore, remove some pressure from the upward straining Yuan. I am not sure whether this capital injection will help. If the objective is to remove the non-performing loans, then past history is not very good. Removing non-performing loans means a good bankruptcy law, ability to take redundancies and a good social welfare net. None of these are currently in China so I am frankly rather doubtful whether this will work out. Still, let's see.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Feb 03, 2004 22:43 IST