Archive for February, 2010

UAE Economy: Impact of Dubai crisis

Introduction
In 2009, the U.A.E. witnessed a significant slowdown in growth and strains in the banking system as a result of the global financial crisis, the decline in oil prices, and the continuing fallout from the bursting of the Dubai property bubble. The ramifications of the DW debt event will depend on the scope and modalities of the debt restructuring, its impact on the financial sector, and the strategy being developed by the Government of Dubai (GD) to put Dubai World (DW) and possibly other corporate entities on a viable economic and financial footing.

Improved global conditions, especially out of Asia, will fuel Dubai’s logistics and service sector. However, the correction in the over-extended property and construction sector renders the overall outlook highly uncertain. With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabi’s policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E. economy and the banking system.

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Key issues

The contrast between growth based on hydrocarbon resources and that based on non hydrocarbon diversification funded by maturity-mismatched leverage
The spillover effects and financial support structures in the federation
The volatility of markets in response to a lack of information disclosure and transparency
In particular, the debt announcement undermined the widely held market perception of implicit government support, including from Abu Dhabi

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BUDGET FY 2010-11

Macro economic expectations
Budget 2010-11 will be presented against a backdrop of reviving economic conditions. The year 2009-10 saw all the economic indicators painting a healthy picture of the economy after a year of subdued growth. GDP has started to accelerate; IIP has gone into a double digit growth trajectory. Exports have entered into positive growth zone. All these indicate a robust economy but these are still incipient signs and the economy still faces a huge risk in the form of inflation which is expected to reach double digit by this fiscal end. Finance Minister Pranab Mukherjee faces dilemma in the form of managing inflation and at the same time pushing the economy firmly on the growth path. In order to maintain growth momentum, fiscal stimulus needs to be maintained but the cost of retaining fiscal stimulus is high fiscal deficit which the country cannot afford. What strategy he adopts to balance all these contrasting factors would be unveiled on Feb 26, but this is what we expect the budget 2010-11 to come up with.

Government Revenue
Corporate sector is lobbying to bring down the corporate tax rate but considering the deficit reduction target of Govt and implementation of Direct tax code and Goods and services tax, we do not expect any change in the corporate or individual tax rate. A hike in the tax revenues is projected, seeing the buoyancy in the corporate bottom lines. Tax revenues can be expected to grow at a healthy rate of 20% as against a decline witnessed in the current year. With a robust growth observed in the industrial production, the customs and excise collections too may be projected to rise after the decline observed in the current year. The current Budget that penciled in only Rs.1,120 Cr as disinvestment proceeds, marked a conservative approach in budgeting Non-Debt Capital Receipts. However the estimates for disinvestment proceeds for FY 2010-11 could be buoyant at Rs.30,000 – 35,000 Cr. Proceeds from 3G auction are also expected to be realized next year and thus we expect a non-tax revenue of Rs 1,40,000 cr in this budget year. Overall, revenue receipts are expected to grow by 15.4% over that of the budgeted figure for 2009-10. Total receipts are expected to grow about 20% to Rs 7,43, 061 cr in the year 2010-11.

Government Expenditure
Budget 2009-10 saw expenditure burgeoning 13.3% to Rs 10,20,838 cr. This year emphasis would remain on reining in expenditure. The Plan Expenditure would be in line with the Gross Budgetary Support approved by the Center. It is estimated at Rs.3,73,000 Cr for FY 2010-11 marking a YoY growth of 14.7%. This fiscal would not be burdened with extraordinary inclusions such as 6th Pay Commission Arrears or the farm loan waiver scheme. Marking a trend based growth in the expenditure for various other heads, the total non-plan expenditure is estimated around Rs.7,40,000 Cr. The total expenditure for the year to come is projected in the range of around Rs.11,12,200 Cr.

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Indian Economy – Review and Analysis, January 2010

Dear readers, apologies yet again for the delay in posting January’s economic review but due to certain unavoidable circumstances the review could not be posted on time. Hope this review is useful and informative.

Equity
The BSE stock index started the year on a positive note, rising for the first 2 days to reach 17686. The markets remained strong for all most the entire month touching a high of 17790 on Jan 6. During the later part of the month on account of selling pressure markets reached a low of 15790 at the end.