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Foreign investors are heading into the Union Budget presentation on February 1 with considerable pessimism.

While the pessimism of foreign portfolio investors may not be entirely linked to the outcome of the Budget, it will have a considerable impact on how the market may behave on the day of the announcement and for the rest of February.

“There is extreme positioning in the market heading into the Budget. FII is aggressively shorting but retail and HNI have build-up large long positions on the index (Nifty 50),” said Bhavin Mehta, vice president at Dolat Capital Markets.

The long-short ratio, an indicator of sentiment among foreign investors in the equity derivatives segment, collapsed to 0.49 at the beginning of the February derivative series from nearly 2 at the beginning of the January series, data collated by Moneycontrol showed.

Foreign investors are starting the new derivative series with net shorts of 43,506 contracts on the Nifty 50 February futures reflecting their considerable pessimism for the Indian equity market in February. The driving force behind the negativity is the fear of considerable hikes in interest rates in the US and a possible contraction in the US Federal Reserve’s balance sheet later in the year.

On January 26, the US Fed Chairman Jerome Powell told the media that the US labor market was strong enough to withstand rate hikes while he also suggested that the tightening cycle this time around will be different from those seen in the past.

Brokerage firm Nomura now expects the US central bank to raise interest rates five times in the calendar year starting with a 50 basis points hike at the March monetary policy meeting. “Powell’s comments suggest the FOMC is beginning to coalesce around a more front-loaded policy rate response to elevated inflation, wages, and inflation expectations,” the brokerage firm said in a note on January 27.

The pessimism of FPIs is also visible in their position in the options contracts of the Nifty 50 index. FPIs increased their long positions in the put options of the Nifty 50 by 82,681 contracts while they enhanced their short positions in call options of the index by 72,219 contracts.

A put option gives the buyer an option, not an obligation, to sell a security at a pre-determined price and time. A call option gives the buyer an option, not an obligation, to buy a security at a pre-determined price and time.

Taking a contrarian stance to foreign investors, retail clients are heading into the Union Budget with net long positions on the Nifty 50’s February futures of 68,592 contracts, which is considerably higher than the net long bets of 5,336 contracts at the beginning of January futures and options series.

A post-Budget short squeeze in the offing?

Market participants are fairly confident that the Union Budget will not throw any curveballs towards investors and will stick with the expected narrative of growth push and fiscal prudence.

“We believe the government will focus on gradual fiscal consolidation while pushing public capex, creating a conducive environment for private capex, and raising resources via strategic divestments,” said brokerage firm Morgan Stanley.

The considerable quantum of short positions by foreign investors on the Nifty 50 futures contract for February makes them vulnerable to a brutal short squeeze if there are positive surprises in the Union Budget.

A short squeeze is a scenario wherein the price of a security moves sharply higher forcing participants who bet on its fall to hurriedly cover their losses, which in turn shoots the price even higher.

Derivative analysts are, however, skeptical of any short squeeze and do not expect the Budget to have much say in the direction of the market going ahead. “The way they are shorting the market, clearly FPIs are not at all looking at the Budget but beyond it. The extent of selling from them is making me cautious,” Mehta said.

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Chinese researchers, in a study that is yet to be peer-reviewed, have said that a NeoCov, a type of coronavirus detected in bats in South Africa, could pose a danger to humans if it mutates further.

The study, available on preprint repository BioRxiv, has found that NeoCov resembles the virus that caused the Middle East Respiratory Syndrome (MERS).

The World Health Organization (WHO) has said that further studies are need to ascertain whether the NeoCov will pose a risk to humans, Russia’s TASS news agency reported.

WHO added that it works closely with other agencies like the World Organization for Animal Health to respond to the dangers of “emerging zoonotic viruses”, according to TASS.

Meanwhile, in India, health experts say that there is no new risk of NeoCov jumping from animals to humans.

“The chances of it jumping I would say is 0.001, which statistically means unlikely,” Dr Jayprakash Muliyil, chairperson of the National Institute of Epidemiology’s Scientific Advisory Committee told The Indian Express. “We live with so many pathogens; there is no need to worry about it. It is good for those who want to scare people.”

Institute of Genomics and Integrative Biology Director Anurag Agrawal told the newspaper that it is important to continue monitoring pathogens.

“Good to be aware but nothing to worry about, contrary to floating headlines,” he added.

Dr Shashank Joshi, a member of Maharashtra’s COVID-19 task force, tweeted: “NeoCov is an old virus closely related to MERS Cov which enter cells via DPP4 receptors. What's new? NeoCov can use ace2 receptors of bats but they can't use human ace2 receptor unless a new mutation occurs. Everything else is hype.”

India’s gold consumption surged to 797.3 tonnes in 2021, on the back of recovery in consumer sentiments and pent-up demand post COVID-19-related disruptions and the bullish trend is set to continue this year as well, according to the World Gold Council (WGC).

WGC in its Gold Demand Trends 2021 Report said India’s total gold demand jumped to 797.3 tonnes in 2021, registering a massive 78.6 per cent jump from 446.4 tonnes during 2020.

"The year 2021 revalidated the strength of conventional wisdom about gold and holds several lessons in revival that will shape policy thinking for years to come," WGC Regional CEO, India, Somasundaram PR told PTI.

Somasundaram further said "India’s gold demand recovered by 79 per cent to 797.3 tonnes chiefly a result of an exceptional fourth quarter demand of 343 tonnes that surpassed even our most optimistic expectation articulated in the third quarter and turned out to be the best quarter in our recorded data series".

Going forward, he said, this year COVID-19 and its future variants will remain a factor to watch as will price movements in gold, given global concerns on inflation, interest rate and geo-political developments.

"The spurt in demand that is, in part, a result of pent-up demand in the fourth quarter is less likely to be repeated this year, though the revival will continue to set a new normal above pre-pandemic levels".

"The next few years starting with 2022 will be years to watch for the effect of policy reforms, technology and industry collaboration to let gold evolve into a more transparent mainstream asset class," he stated.

For the full year in 2022, Somasundaram said if the current scenario continues without any further major disruptions then the total gold demand is likely to be around 800-850 tonnes.

The report further noted that jewellery demand during 2021 was up by 93 per cent at 610.9 tonnes, compared to 315.9 tonnes in 2020. Gold jewellery demand doubled year-on-year in 2021, surging past pre-pandemic levels to reach a six year high following a record fourth quarter demand of 265 tonnes, fuelled by weddings and festival season, underpin the resilience of gold demand following its deep-rooted socio-economic footprint in household finance, Somasundaram said.

In value terms, jewellery demand skyrocketed by 96 per cent to Rs 261,140 crores, from Rs 133,260 crores in 2020. He said, with the easing of lockdown restrictions in the second half and a successful progress of the vaccination program, economic growth altered consumer sentiment significantly, triggering spending and investments across the board during festivals like Dussehra and Dhanteras.

"This marked a remarkable recovery with many retailers reporting record sales volumes above even those of pre-pandemic levels and imports and exports rising in tandem. With more weddings yet muted celebrations, higher savings and pent-up demand boosted the jewellery market," he noted.

Many manufacturers reported stretched capacities and unusual waiting times, pointing to the robustness of recovery, he added. Meanwhile, the total investment demand for 2021, was up by 43 per cent at 186.5 tonnes in comparison to 130.4 tonnes in 2020, while in value terms, demand was up by 45 per cent at Rs 79,720 crores against Rs 55,020 crores in 2020, the report said.

However, total gold recycled in India in 2021, declined by 21 per cent to 75.2 tonnes, as compared to 95.5 tonnes in 2020, as per the WGC data. Total gold imported in India increased by 165 per cent in 2021 to 924.6 tonnes, compared to 349.5 tonnes in 2020.

"This surge in imports can mainly be attributed to manufacturers and retailers stocking up after clearing up their existing stocks following the implementation of hallmarking norms," Soma sundaram said.

Gold investment demand in the fourth quarter also surged to an eight-year high of 79 tonnes, softer prices in November coupled with a positive outlook about future prices adding impetus to retail investments, he said. He said digital gold savings also rose impressively due to their ease and safety, a pointer to altering future buying behaviour in investment gold.

Dear Finance Minister,

One of the great injustices in the world is insufficient appreciation of the importance of the union budget. Hardly anyone listens to the budget speech and the only thing most people are bothered about is whether their taxes have gone up or down. Nobody, apart from economists and the media, gets worked up over the fiscal deficit. Most people have no clue about the difference between the primary and revenue deficits. Why, just the other day I came across a guy who said he was under the impression that GDP stood for Glorious Drinking Party, which is why he thought we were celebrating India’s having the world’s highest GDP growth rate.

It’s all very disheartening, especially because the task of a finance minister is by no means an easy one. You have to take into account the incessant demands of the middle classes for tax concessions, of the masses for more welfare, of businessmen for more incentives. You have to listen politely to the contradictory advice dished out with reckless abandon by economists, read the fulminations of pundits in the op-ed pages, all the while keeping a wary eye on the rating agencies. And of course, you have a duty to brighten the prospects of your party being re-elected in the imminent state elections.

Furthermore, you have to raise revenues to cater to all these demands while doing your best to avoid increasing taxes and keeping the fiscal deficit under control. You have, in short, the unenviable task of squaring a circle.

But perhaps I can be of assistance. No, no, there is no need to recoil with horror---I am not going to lecture you on asset monetisation and privatisation and listing bonds abroad and so on. But I do have a modest proposal which will serve the twin purposes of both popularising the budget and earning trillions in revenue in the process. The aim is to spread knowledge about the budget to the masses, kindle their interest in it, while at the same time raising funds to meet development and welfare needs. Why, you could even cut taxes.

Simply put, my plan envisages allowing people to bet on the budget. They could bet on what the fiscal deficit could be as a percentage of GDP, what the revenue deficit should be, on the growth in tax revenues envisaged, on budgeted growth in capital expenditure, on the level of internal and extra-budgetary resources, on whether the level of deductions under Section 80 C should be increased, on whether the standard deduction will go up and by how much. In short, they could bet on any number in the budget. Indeed, they could even bet on who you will quote in your speech—Thiruvalluvar or the Mahatma or Tagore. But we shouldn’t allow betting on unrelated things, such as how long your speech is.

The best way to collect these bets is through the post offices spread across the length and breadth of the country. Postmen can readily be turned into bet collectors---it’s an easy job and they are likely to be familiar with the process, since many of them must be queuing up to get lottery tickets every week to supplement their meagre income.

Thanks to the marvels of technology, the bets placed can instantly be collated at a central office. On Budget Day, a certain percentage, say 25 percent, will be deducted from the corpus and the balance distributed to the winning tickets. What’s more, the winners could also be taxed---just as gains from horse racing and other games of skill are taxed now. Keep the minimum betting amount low, so as to increase volumes, and you will be able to garner trillions in revenues.

Within weeks of implementing this grand scheme, people all over the country will be going around with the budget papers in their hands, trying to figure out what the heck it all means. Within months, they would know all about the types of deficits, about the amounts allocated to various departments, about the rates of growth of taxes, about the level of disinvestment receipts, even about section 80JJA.

And you can rest assured that on Budget Day the entire nation will listen with bated breath to every word you utter. In fact, they will study every word you say closely throughout the year, so that they can place the right bets when the budget comes around.

I think PMBJP (Prime Minister’s Betting Janata Programme) would be the right name for this wonderful scheme. And the system could easily be extended to the state budgets, after changing the name to CMBJP, of course.

As for those who may have objections to betting, think of the huge increase in financial literacy such a system would lead to. Think of it as an educational project on which the public would only be too willing to pay.

It will be wonderful if you introduce this scheme in your forthcoming budget. If you do, I am certain you will reserve your place in history as the most innovative finance minister, not just in India, but all over the world.

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The upcoming Budget should focus on creating jobs and bridging the widened inequality in the economy besides accelerating growth, former RBI Governor D Subbarao said on Thursday while observing that given the continuing need to raise spending on education, health and infrastructure, there is not much leeway for tax cuts.

Subbarao also opined that experience shows export promotion behind protectionist walls is seldom competitive, so there is a case for reducing the tariffs.

"Accelerating growth is the objective of every Budget as it should be of this one. But this Budget should pay special attention to bridging the widened inequality in the economy," he told PTI in an interview.

While noting that the COVID-19 pandemic has caused enormous distress to the low-income segments who operate in the informal economy, Subbarao said the upper income segments have not only been able to protect their incomes but have in fact been able to grow their savings and wealth.

Citing the latest World Inequality Report which had said that India is among the most unequal countries in the world, he said,” Such wide inequality is not only morally wrong and politically corrosive, but it will also dent our long-term growth prospects.”

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2022-23 in Parliament on February 1.

“We need job intensive growth. If there is a theme for this Budget, it should be jobs,” he said.

The former RBI Governor pointed out that jobs have been lost because of the growth slowdown and also because of the shift in activity from the labour-intensive informal sector to the capital-intensive formal sector.

“Growth is necessary to generate jobs, but not sufficient,” he said, adding that there is a need for stronger emphasis on improving the ease of doing business through governance reforms so that investment becomes a promising option for both domestic and foreign investors.

Subbarao pointed out that raising the level of exports is good not just for balance of payments reasons but also from a jobs perspective because export production is labour intensive.

“Experience shows that export production behind protectionist walls is seldom competitive. There is a case therefore for rolling down the tariffs,” he said.

Asked if there is any scope for reduction in taxes in the upcoming Budget as that will provide some relief to the poor, Subbarao said as per media reports, this year’s tax collections will be better than the budgeted target which, he said, will be largely offset by lower privatization proceeds and higher expenditure on food and fertilizer subsidies.

“So, the net positive impact on the fiscal deficit is likely to be marginal,” he said. Also, Subbarao noted that the tax buoyancy the country saw this year will dissipate next year as the informal sector revives.

“Besides, given the continuing need to raise spending on education, health and infrastructure, I don’t believe there is much leeway for tax cuts,” he argued.

Asked whether the government should continue with stimulus measures in order to stimulate growth, Subbarao said in the last Budget, the finance minister committed to a fiscal consolidation path of reducing the fiscal deficit to 4.5 per cent of GDP by 2025/26.

“I believe it’s important to operate within that space. Any deviation from the fiscal consolidation path will impair credibility, dent investor sentiment and hurt our growth prospects.” he said.

Asked how big a concern is inflation, Subbarao said inflation has remained in the upper reaches of the RBI’s target band for much of the last two years.

Going forward, he said there will be pressure on inflation because of an unfavourable base effect, rising commodity prices and output price hikes by firms.

“Controlling inflation can go a long way to redress the distress of the poor,” Subbarao observed.

On the risk of stagflation, he  said he thinks that’s being too alarmist.

“Yes, inflation has been persistent over the last two years but note that it is still within the RBI’s target band.  RBI should be able to bring it down to the mid-point of the target band by normalizing the policy,” Subbarao said.

Stagflation is defined as a situation with persistent high inflation combined with low growth.

Retail inflation in India rose to 5.59 per cent in December 2021, while the wholesale price-based inflation eased to 13.56 per cent last month.On economic growth, he said if Omicron remains mild, mobility restrictions are likely to be targeted and decentralized.

“In the base case scenario therefore, we should achieve 9.2 per cent growth for the full year. If in fact these assumptions about Omicron do not hold, there will be a downside risk to the 9.2 per cent growth estimate,” Subbarao said.

Some of these measures, which can be addressed in Budget 2022 are:

Rationalisation Of Duty Structure: The industry has faced duty structure anomalies arising from free trade agreements (FTAs) with several countries, leading to an inverted duty structure for several downstream and intermediate products. This had also resulted in insufficient capacity creation for these products which are used as feedstock for specialty/value-added products.

Further, high duties on key raw materials and building blocks, which are not available domestically, impacted the competitiveness of domestic manufacturers. While, in recent years some of the duty structure related issues have been addressed, such as reduction in basic customs duty on Naphtha from 4 percent to 2.5 percent in Budget 2021, and some of the anomalies under the FTAs have been rationalised.

However, further rationalisation in duty structure is needed, with reduction in duties for key raw materials and building blocks, and addressing the instances of an inverted duty structure by increasing duties on intermediates/downstream product to encourage domestic production of value-added products.

Incentives For Exports: Incentives for boosting exports in the chemical sector can be announced. Schemes such as Remission of Duties and Taxes on Exported Products (RODTEP) can be extended to the chemical sector as well.

Production Linked Incentives (PLI) Schemes: Extension of the PLI schemes for more chemical segments would support the domestic manufacturing sector, and encourage capacity additions. Currently the PLI scheme has been extended to the Active Pharmaceutical Ingredients (APIs) and key starting materials (KSMs).

Cluster-Based Development: Any fiscal incentives/budgetary allocation for cluster-based development under existing programmes such as PCPIR/plastic parks (Petroleum, Chemicals and Petrochemicals Investment Region) or other such programmes will also help in domestic capacity creation. Such cluster-based development will also be beneficial for environmental and social risk management, due to shared facilities enabling better compliance with tightening environmental norms.

Research and Development: In order to produce more value added products, it will be necessary for the domestic industry to increase its R&D spend. Any incentives/rebates for R&D-related capital expenditure by the industry will be favourable.

Schemes For MSME Sector: MSMEs account for significant share of domestic chemical manufacturing, and specific schemes targeting this segment to enable technology upgrade, and ESG compliance (domestic and exports) can help the MSME sector move up the chemical value chain, increase its product offerings, and improve competitiveness.

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Also, new-age firms that have listed in the last few months at high valuations have taken a beating, dampening investor sentiment. Rising COVID cases in India, which have remained above three lakh for some days now, are also causing concern.

Early trends this earnings season indicate that high input costs continue to be a bugbear, as also delayed kharif (monsoon) crop harvesting due to unseasonal rains, and the virus.

PTC India Financial Services (PFS) has been taking heat for lapses in corporate governance and compliance after three of its independent directors quit last week.

The Securities and Exchange Board of India (SEBI) has pulled up PFS, barring the non-banking financial company (NBFC) from holding a board meeting until it addresses the corporate governance issues and submits a report on action taken within four weeks.

Shares of PFS and parent PTC India have plummeted for three consecutive sessions. But what has caused all this?

The trigger

On January 19, Kamlesh Shivji Vikamsey, Thomas Mathew T and Santosh B Nayar resigned from the post of independent director of PFS on concerns over lapses in governance and compliance. They submitted similarly worded resignations and other supporting documents.

The three directors said that former bureaucrat Rakesh Kacker had also previously written to the management highlighting lapses in corporate governance before his tenure ended at PFS in end-December. Kacker was also on the board of the parent entity PTC; he resigned on January 21.

Why did the directors resign?

The independent directors have made six allegations--one pertains to the appointment of another director, while the other five pertain to operations and corporate governance issues.

1. • PFS’s managing director and chief executive officer Pawan Singh did not allow “Mr Ratnesh” to join and function as director finance and chief financial officer despite board approvals for the appointment. The independent directors said that the company was in violation of the Companies Act, 2013 as Singh took the decision “unilaterally” and did seek board approval, nor gave an explanation.
2. • The directors also alleged that the company did not disclose the forensic audit report (FAR) relating to a loan account of NSL Nagapatnam Power and Infratech for two years between November 2018 and December 2020. Due to ongoing stress in the project, insolvency proceedings were initiated in the project for which bridge loan was taken by NSL and the promoter company of NSL made a one-time settlement (OTS) offer to the company in March 2020. But when the FAR came to light, PFS’s audit committee recommended that the matter should be reported to Reserve Bank of India (RBI) as suspected fraud and the board wanted to defer the decision on OTS till RBI responded.
3. • The management took no action on corporate governance issues highlighted by former PTC head Deepak Amitabh in a board meeting held on August 5, 2021.
4. • The management made changes in conditions of loans, without prior approval of the board. The independent directors cited two examples—both pertaining to highway projects—and expressed concerns that there may be more such instances.
5. • The management blatantly ignored communications from the independent directors where they called for-- documentation pertaining to the appointment and joining of Ratnesh, request for professional help of legal counsel, meeting of nomination and remuneration committee to fill up the vacancy of a lady independent director, and action needed after the withdrawal of nomination of Renu Narang from the board of the company that rendered the nomination and remuneration committee dysfunctional.
6. • The management did not provide the independent directors with the information sought by them.

What has the management done in response?

The management has refuted the allegations, questioned the intent of the independent directors and formed an internal committee for investigation. They have sent a status report to the RBI, SEBI and the two stock exchanges.

The management has started the process of appointing new independent directors and has sought SEBI approval to hold a board meeting in their absence.

The management also said that while the former chairman Deepak Amitabh raised concerns over the corporate governance practices of the company in a board meeting on August 5, 2021, the board provided a clean corporate governance report on the same day for the financial year ending March 31, 2021. They also pointed out that on September 24, 2021 the ex-chairman addressed the shareholders of the company at the 15th Annual General Meeting, appreciating the firm and mentioning no concern related to corporate governance.

What regulatory action has been taken?

SEBI has barred PFS from holding a board meeting until the company submits an action report within four weeks. This effectively means that the company is unlikely to get an exemption for a board meeting for the next one month.

The RBI and even the ministry of corporate affairs are soon expected to ask the company for an explanation.

What next?

All eyes would be on the action report PFS has to submit to SEBI in the next four weeks.

As a listed NBFC, the company falls under the purview of both RBI and SEBI. Authorities could direct the company to conduct an independent audit of the corporate governance issues.

The management has been in talks with key investors to assuage their concerns. They may have to take some more action soon to allay their concerns as the selloff in the shares of PFS and parent PTC continues.

PTC, formerly known as Power Trading Corporation of India, holds a 65 percent stake in PFS. State run-power sector companies NTPC, Power Grid Corporation of India, Power Finance Corporation and NHPC together own a 16.2 percent stake in PTC.

Sequence of events

August 5, 2021: Former PTC Chairman Deepak Amitabh raises concerns over the corporate governance practices of PFS in a board meeting.

October 13, 2021: Amitabh resigns from the post of chairman and managing director with effect from November 5, citing personal reason. He joined the company in 2003 and held the top position since 2012.

November 6, 2021: Rajib Kumar Mishra, who was director of marketing at PTC, was given the additional charge of CMD’s position till a regular appointment was done.

January 14, 2022: PFS directors were sent a notice informing them of a board meeting to be held on January 22. The independent directors claimed that the board meeting was invalid as the notice was not served to all the directors of the board and the agenda did not include the corporate governance issues raised by them earlier.

January 19, 2022: Vikamsey, Mathew and Nayar resign from the board of PFS, citing lapses in corporate governance.

January 20, 2022: PTC and PFS refute allegations made by the independent directors who resigned.

January 21, 2022: PTC and PFS hold press meet to announce they have formed an internal committee for investigation. They question the intent of the independent directors.

January 22, 2022: PFS has to call off the board meeting after SEBI pulls them up, barring them from holding a press meet until they submit an action report in four weeks.

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