Bloomberg News - India’s Rates Seen Elevated as Price Surge Risks Growth: Economy

Photographer: Dibyangshu Sarkar/AFP/Getty Images

Raghuram Rajan, governor of Reserve Bank of India, right, gestures as K.C. Chakrabarty, deputy governor, looks on during the Central Board Meeting at the Reserve Bank of India in Kolkata on Dec. 12, 2013

Indian interest rates will remain elevated as long as surging inflation imperils economic growth, a deputy governor of the country’s central bank said.

“If you are having continuously high inflation, it will kill your growth,” theReserve Bank of India’s K.C. Chakrabarty told Bloomberg TV India yesterday. “If interest rates are high, that’s because inflation is high, and unless inflation is brought down, interest rates will not come down.”

Governor Raghuram Rajan is seeking to quell consumer inflation of more than 11 percent, the highest in the Group of 20 major economies, as bottlenecks in the supply of everything from food to energy stoke price increases. He surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the RBI in September.

“Inflation is likely to remain elevated this year as well and may average over 9 percent,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, who expects Rajan to raise the key rate by 25 basis points at the next policy meeting on Jan. 28. “Continuing price pressures will leave the RBI with no choice but to raise the repurchase rate.”

Ashima Goyal, a member of an RBI committee that makes recommendations to Rajan on monetary policy, said in an interview earlier this week that he will avoid further increases to the repo rate if inflation fell in December, and may even have room for a reduction. She didn’t specify how much prices need to drop in that scenario.

Costly Onions

Consumer prices climbed 11.24 percent in November.Wholesale inflation was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.

“We have to improve the productivity, efficiency, distribution system, and, at the same time, keep our monetary policy such that demand factors should not play a role,” Chakrabarty, 61, said in the interview in Mumbai.

A weaker rupee is among the causes of Indian inflation, with the currency down about 12.5 percent against the dollar in the past year. The yield on the 10-year government bond has climbed to 8.84 percent from about 8 percent in the same period.

“The depositor has to be given a higher return than inflation, otherwise he will not save money,” said Chakrabarty, who has been an RBI deputy governor since 2009.

Prime Minister Manmohan Singh’s government has struggled to stem a decline in India’s savings and investment ratios.

Savings as a proportion of gross domestic product fell to 30.6 percent in 2013 from 36.8 percent in 2007, according to International Monetary Fund estimates. Investment dipped to 35 percent from 38.1 percent.

Bad Loans

Chakrabarty said the RBI is concerned about non-performing assets in the banking industry. At the same time, he added that “if you say the system is going to collapse because of this NPA, the answer is no.”

The risk to India’s banking industry rose in the six months through September as bad loans surged and profitability slumped, the central bank said in a Dec. 30 report. The average gross bad-loan ratio may reach 4.6 percent of total lending by September 2014 from 4.2 percent as of Sept. 30, it said.

The $1.8 trillion economy will probably expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade, according to central bank estimates.     By Kartik Goyal 

BBC News - France's 75% tax rate gains approval by top court

France's highest court has approved a 75% tax on high earners that is one of President Francois Hollande's signature policies.

Zlatan Ibrahimovic is one of the top players bought in by wealthy owners at Paris Saint-Germain, who are currently top of Ligue 1

The initial proposal to tax individual incomes was ruled unconstitutional by the Constitutional Council almost exactly one year ago.

But the government modified it to make employers liable for the 75% tax on salaries exceeding 1m euros (£830,000).

The levy will last two years, affecting income earned this year and in 2014.

Football clubs in France threatened to go on strike earlier this year over the issue, saying many of France's clubs are financially fragile and say the plans could spark an exodus of top players who are paid huge salaries.

The Qatari-owned Paris Saint-Germain has more than 10 players whose pay exceeds 1m euros, including the Swedish striker Zlatan Ibrahimovic.

There has also been a chorus of protest from businesses and wealthy individuals who have condemned the tax - including film star Gerard Depardieu, who left the country in protest.

Polls suggest a large majority in France back the temporary tax.

Unlike many other countries in Europe, France aims to bring down its huge public deficit by raising taxes as well as some spending cuts.

The highest tax rate in the UK is 45% and is applied to individuals.

Bloomberg News - Indian Probes Risk Revival of $160 Billion Projects: Commodities

The decision by India’s top investigating agency to probe a third billionaire-led mining deal in six months puts at risk government efforts to revive $160 billion of stalled projects.

The Central Bureau of Investigation said on Dec. 23 it started probing Anil Agarwal, who runs the country’s biggest aluminum and copper producer. It alleged irregularities in his 2002 purchase of the state’s 26 percent stake in Hindustan Zinc Ltd., a producer of zinc used in making metals and chemicals.

The investigations will restrain new investment just as the government of Prime MinisterManmohan Singh seeks to build infrastructure and revive growth from a 10 year-low, according to Rakesh Arora, Macquarie Capital Securities (India) Pvt.’s head of research. Increased scrutiny of dealmaking in India’s mining industry may lead investors to fund projects in other nations where regulatory risk appears lower, he said.

“This will certainly stall or at least delay investments in such projects as corporates will be wary of possible overhang following an approval,” Arora said yesterday in a phone interview. “CBI has clearly overstepped with such probes and government should come out strongly to support its stimulus measures.”

The sentiment clashes with that of the Federation of Indian Chambers of Commerce and Industry. It said India has started the process of removing hurdles for 255 stalled projects worth 10 trillion rupees ($161 billion) by expediting approvals, according to a Dec. 20 statement by the group that cited Ajit Kumar Seth, the nation’s cabinet secretary.

Probe of Privatization

The CBI is inquiring how Hindustan Zinc (HZ), owned by Sesa Sterlite Ltd., was privatized without the approval of parliament, which created the company in 1966 through an act.

Hindustan Zinc didn’t comment on the probe in its response to questions from Bloomberg on Dec. 23, saying only that the company’s reserves and resources rose to 348 million metric tons from 143.7 million tons at the time of the government share sale. Pavan Kaushik, a spokesman at Agarwal-controlled Vedanta Resources Plc (VED), didn’t respond to two e-mails or a text message in the past day seeking comment.

In June, the CBI began investigating Naveen Jindal, who controls Jindal Steel & Power Ltd. and is India’s second-richest lawmaker, and in October it turned its sights on mining tycoon Kumar Mangalam Birla, in both instances for allegedly benefiting from unjustified allocations of coal-mining permits.

May Elections

“There’s a feeling that with repeated episodes of a trust deficit between industry and government, the business sentiment and the investment environment would be vitiated,” Naina Lal Kidwai, country head of HSBC Holdings Plc and president of the Federation of Indian Chambers of Commerce and Industry, said after the first two probes were announced. “India could slip further from the growth trajectory that is so necessary for us to maintain.”

Singh’s administration faces elections in May amid a slowing pace of approvals and a series of environment-related bans on mining that undercut India’s traditional advantages with investors of being a democracy with more than a billion consumers.

Agarwal has faced a series of setbacks in his bid to build a mining and energy empire in India. Last month he said he regretted investing $8 billion in an aluminum complex in the eastern state of Odisha that has languished because of a shortage of raw material.

“I could either invest in Vedanta Aluminium or I could have bought Asarco,” Agarwal said in a Bloomberg Television interview broadcast Nov. 29, referring to U.S. copper miner Asarco LLC. “If you ask me today, I regret it.”

Buyout Delay?

The CBI inquiry will mean a delay in Agarwal’s plans to buy the government’s remaining stake in Hindustan Zinc and unlisted aluminum producer Bharat Aluminium Co., said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. Full control of the zinc unit would mean access to $3.8 billion in cash and equivalents, crucial for managing Vedanta’s debt of $15.7 billion, according to data compiled by Bloomberg.

Hindustan Zinc, which fell 2.2 percent in Mumbai after the announcement, declined 1 percent to 133.25 rupees at the close today. Sesa Sterlite, Agarwal’s biggest India-listed company, lost 2.3 percent on Dec. 24 and rose 0.9 percent today, taking its year-to-date increase to 3.1 percent, still lagging behind the benchmark index’s 9.1 percent gain. Jindal Steel and Power lost 42 percent this year.

“The government share sale in Hindustan Zinc now looks unlikely this fiscal year, which is a setback for Vedanta and its Indian unit Sesa Sterlite,” said Daga at Nirmal Bang Equities. “They have a large debt repayment obligation in coming years.”

Hindalco Involvement

Birla, being probed for his role in the allocation of a coal mine to aluminum producer Hindalco Industries Ltd. in 2005, has said he would look overseas for investments. He said in March he would invest in Brazil and Indonesia as frequent policy changes discourage companies from spending in Asia’s third-biggest economy. The 46-year-old, worth $8.6 billion, also controls India’s biggest cement producer and the world’s biggest supplier of aluminum for beverage cans.

“The country risk for India just now is pretty elevated and chances are that for deployment of capital, you would look to see if there is an asset overseas,” Birla said in March. “We are in 36 countries. We haven’t seen such uncertainty and lack of transparency in policy anywhere.”

Birla Defense

On Oct. 16, the CBI recovered 250 million rupees in cash from Hindalco’s New Delhi office, saying the amount was unaccounted for, according to a Press Trust of India report. On Oct. 18, Birla met Finance Minister Palaniappan Chidambaram and revenue secretary Sumit Bose, chief of all taxation departments of the country.

“Nothing wrong has been done,” Birla said that day.

Hindalco had announced investments in three projects on vacant land in the country at cost of about $5.5 billion, with expectations of surpassing 1 million tons of smelting capacity by 2011. While a large part of the investments have been made, the projects have been delayed by at least two years and the company’s smelting capacity stands at less than half the target.

In the past two decades, the government assigned 289 blocks bearing an estimated 43.3 billion tons of coal without auction to companies including Jindal Steel, Hindalco and their rivals, according to the nation’s auditor. That may have cost the exchequer 1.86 trillion rupees, the Comptroller and Auditor General said on Aug. 17 last year.

Headquarters Searched

The CBI in June registered a case against Jindal and his company Jindal Steel, and searched the company’s New Delhi headquarters and Jindal’s residence. Jindal, a member of the ruling Congress party, is scouting for iron ore and coal mines in Africa and Australia.

The company plans to set up mid-sized power plants in Africa, while cutting back investment plans by 40 percent for the next two years in India because of delays in getting coal mines, Managing Director Ravi Uppal said in August.

“The problems relating to coal, iron ore and other commodities are all homegrown,” said Juergen Maier, a fund manager in Vienna at Raiffeisen Capital Management, which oversees about $1.1 billion in emerging-market assets. “The best hope for India lies in the end of the current government, which has brought everything to a standstill.”

BBC News - Eurozone ministers agree banking deal

Eurozone finance ministers have agreed on a long-awaited pact on how to deal with failing banks in the region.

Europe's finance ministers have expressed their optimism over the outcome of the talks

It aims to create a 55bn euro ($75bn; £46bn) fund - financed by the banking industry, over the next 10 years.

The fund would be backed by a new agency, which will decide on how to deal with failing banks.

European leaders - who meet at a summit on Thursday and Friday - want to sign off on a deal so that this banking union can start in 2015.

The deal is part of wider efforts by the region's economies towards building a banking union as they look to avoid taxpayer-funded bank bailouts.

However, there is still disagreement over how banks will be wound up or re-capitalised in the early years while the new arrangements for banking union are taking shape.

Bridge financing could come either from the member states or from the eurozone's own rescue fund, the European Stability Mechanism. However, Germany has been insistent that eurozone money should not be used to shore up failed banks.

Chris Morris, the BBC's Europe correspondent, said the agreement was "on paper, probably the biggest centralisation of power in the eurozone since the launch of the euro. But some people say they are creating banking union in name only.

"There are different countries coming at it with different points of view," he said.

Three pillars

The proposed banking union consists of three parts or the so-called three pillars.

These are a common banking supervisor - the European Central Bank (ECB), which will be given the power to monitor the health of, and the risks taken, by all the major banks within the eurozone.

According to an EU proposal, the ECB will "have direct oversight of eurozone banks, although in a differentiated way and in close co-operation with national supervisory authorities".

It will also intervene if any of the banks gets into trouble.

The second part is the Single Resolution Mechanism. This means that if a bank anywhere in the eurozone gets into trouble, the process of bailing it out - or even letting it go bust - would be managed by a common "resolution authority".

The final pillar of the proposed unions involves a common deposit guarantee, which means that anyone with an ordinary bank account anywhere in the eurozone would have their money - up to a limit of 100,000 euros (£84,000; $138,000) - guaranteed by a common eurozone fund.

However, BBC business editor Robert Peston said national governments have not completely handed over power to determine the fate of any future struggling bank.

He said: "It is striking that finance ministers have not wholly delegated the decision-making on whether to close or take over an ailing bank to a new resolution board they are creating.

"They have reserved powers to determine the fate of struggling banks for themselves - which does not augur well for the most speedy action in a crisis."

'Stable growth'

Once EU leaders agree a deal, the proposal will go to the European Parliament for what are also expected to be tough negotiations on the final form of banking union.

The 17-nation eurozone is moving to strengthen its banking sector by introducing common rules and protections.

The move has come after the recent crisis forced a number of European governments to spend large sums of money supporting banks whose lending had turned bad.

Over the main years of the crisis, European governments spent 1.5 trillion euros (£1.3tn; $2tn) propping up the banks.

The idea of a banking union is to make huge taxpayer-funded bank bailouts a thing of the past.

"If we continue... on the path toward banking union then we will be able to continue the stabilization of the European currency as the basis for a return to stable growth in Europe," said Wolfgang Schaeuble, Germany's finance minister.

BBC News - Portugal passes 'troika's' bailout review of its economy

Portugal has moved a step closer to exiting its bailout programe after the international lenders that saved the country from bankruptcy approved a review of the economy six months early.

Portugal's austerity cuts have sent protesters onto the streets of Lisbon

The European Union and International Monetary Fund have been monitoring the country's economic reforms, a condition of the 2011 78bn-euro (£66bn) bailout.

Portugal hopes to leave the bailout agreement in the middle of next year.

At the weekend Ireland became the first eurozone country to exit its bailout.

The troika - the EU, IMF and European Central Bank - have carried out ten reviews of the economy to ensure that budget cuts and economic restructuring are implemented.

"The lenders agreed that our targets were met and our objectives are within reach," said the country's finance minister Maria Luis Albuquerque. "It was a very smooth evaluation... that envisages the end of the bailout programme on the agreed date" in mid-2014, she said.

Growth expected

An exit from the bailout would give Portugal back its financial independence, allowing the country to borrow on the financial markets.

During Portugal's recession, borrowing on the capital markets was effectively closed as the interest rate being demanded was seen as unsustainable.

Portugal has so far received 71.4bn euros of the 78bn euros which the troika agreed to lend the country in May 2011.

The country's economy is forecast to return to growth of 0.8% next year after falling 1.8% this year.

The troika said in a statement: "Further signs of recovery have emerged since the last review. Growth is broadly in line with projections, while unemployment has fallen by more than expected."

Bloomberg News - China Manufacturing Index Unexpectedly Drops

A Chinese manufacturing index unexpectedly fell to a three-month low as output gains eased and employment weakened, suggesting the world’s second-largest economy is vulnerable to a slowdown.

The preliminary reading of 50.5 for aPurchasing Managers’ Index (EC11CHPM) released today by HSBC Holdings Plc and Markit Economics compares with a final figure of 50.8 in November and the 50.9 median estimate in a Bloomberg News survey of 11 analysts. A number above 50 indicates expansion.

Chinese stocks extended losses as the manufacturing report underscored the Communist Party’s warning last week that the economy faces “downward pressure.” Weaker manufacturing may test the President Xi Jinping’s resolve to push through policy changes such as reducing local-government debt and industrial overcapacity.

“The reading confirms our view that Chinese GDP growth is already decelerating,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. He forecasts 7.2 percent gross domestic product expansion in 2014, compared with 7.7 percent this year.

China’s benchmark Shanghai Composite Index (SHCOMP) was down 1.4 percent at the 11:30 a.m. local-time break.

Separately today, large Japanese businesses pared their projections for capital spending in the fiscal year ending March 2014, according to a quarterly Bank of Japan report. Markit will also release PMI gauges for the euro area, France, Germany and the U.S.

Flash PMI

Today’s China report, known as the Flash PMI, is based on 85 percent to 90 percent of responses to surveys sent to more than 420 manufacturers. The final reading will be released on Jan. 2.

The National Bureau of Statistics and China Federation of Logistics and Purchasing will release their own survey of purchasing managers on Jan. 1. The gauge’s November reading was 51.4, the same as October, which was an 18-month high.

Qu Hongbin, HSBC’s chief China economist in Hong Kong, said in a statement today that the December figure is still higher than the average reading in the third quarter, “implying that the recovering trend of the manufacturing sector starting from July still holds up.”

Measures of new orders and export orders strengthened, while input prices increased at a slower rate, according to today’s report. The data were collected from Dec. 5-12, compared with last month’s survey from Nov. 12-19.

Wang Tao, chief China economist at UBS AG in Hong Kong, said the figures shouldn’t be “over-interpreted,” in part because of the earlier dates, as she maintained her forecasts for 7.6 percent GDP growth this quarter and in 2014.

Export Skepticism

Weakness in today’s manufacturing data adds to concerns that November’s official export numbers may have been inflated, said Tim Condon, head of Asia research at ING Groep NV inSingapore, who previously worked for the World Bank. Outbound shipments rose 12.7 percent last month from a year earlier, according to customs data last week.

Top party and government officials held the annual Central Economic Work Conference last week to map out policies for next year. A report issued after the meeting said policy makers will try to stabilize expansion, restructure the economy and promote reforms.

Maintain Continuity

Leaders also pledged to maintain continuity and stability in macroeconomic policies in 2014 and stick to a prudent monetary policy and proactive fiscal policy. They also vowed to tackle local government debt.

Separately, the State Council said it will expand the over-the-counter stock market to ease financing difficulties for small and medium-sized enterprises and expand channels for private investment. Such businesses may find it difficult to get loans from banks who prefer to issue credit to state-owned companies.

Higher costs and wages in China are prompting some companies to set up manufacturing in neighboring Asian economies. Samsung Electronics Co., the world’s biggest smartphone maker, is building a $2 billion plant in Vietnam that may make 120 million handsets a year by 2015, according to two people familiar with the company’s plans who asked not to be identified because the matter is private.

BBC News - Mexico's Congress approves measure to open oil resources

Mexico's Congress has approved a measure to open the state-run oil fields to foreign investment for the first time in 75 years, following a vote by the Senate earlier this week.

Many supporters of the state-run oil firm Pemex have protested the measure

The programme would let private firms explore and extract oil and gas with state-run firm Pemex, and take a share of the profits.

The measure must now be approved by 17 of the country's 32 federal entities.

Mexico nationalised its energy industry in 1938.

Thursday's vote to approve the measure lasted hours and was reported to be heated.

Mexico's President President Enrique Pena Nieto has said the move is necessary to modernise Mexico's energy sector and increase oil production, which has dropped from 3.4 million barrels per day in 2004 to the current rate of 2.5 million barrels per day.

Most observers expected that the signature reform of Mr Pena Nieto's presidency would pass.

However, the left-wing Democratic Revolution Party said it was a submission to US oil companies, and protest camps were set up outside the Senate.

They said the move strikes at the heart of Mexico's identity.

In 1938, then-president Lazaro Cardenas nationalised the oil industry, which had been operated by foreigners up to that point, asserting that Mexico had a right to its mineral wealth.