MUMBAI: Shares of SBI fell 7.8% on Tuesday, the highest drop in a day in two years, after the country's largest lender shocked investors with an unexpected plunge in fourth quarter profits.
Analysts forecast a further 8% decline in the stock in the next couple of weeks, but expect investors to resume purchases at lower levels as valuations turn attractive once worries about the bank's prospects recede.
SBI shares dropped to 2,413.60 on Tuesday, the lowest since July 26, 2010, as the bank stunned investors with a sharp jump in provisions for bad loans and lower-than-expected interest income.
"In addition to the higher-than-expected provisions, the steep decline in the net interest margins has come as a major negative in the results. The uptick in gross NPAs also added to the asset quality concerns," Gaurav Dua, head-research, Sharekhan . "This could result in the stock underperforming in the near term," he said SBI's net profit fell to 20.88 crore in the quarter ended March 31, 2011 compared with 1,866.60 crore in the same quarter last year.
Investors and analysts were caught unawares as the management gave no indication of such provisioning prior to the results.
"The new management appears to have endeavoured to increase the provision coverage quite sharply, which is a bit of a change in policy from the old management. Perhaps, this change in stance was not communicated too well to the market," said Brian Hunsaker, head-Asia Research of Keefe, Bruyette & Woods, Asia.
Worries about higher-than-expected provisioning for bad loans could drive away investors from shares of banks with weaker asset quality in the short-term.
Tuesday, May 17, 2011
Coal India 2nd most valued co after RIL
MUMBAI: As the stocks of ONGC and Coal India went in opposite directions-ONGC's southward and Coal India's northward-in Tuesday's weak market, it brought about a significant change in India Inc's market capitalization table.
In less than a year since making a blockbuster debut on the bourses on November 5 last year, Coal India, the PSU major which is the world's largest coal miner, surpassed explorations major another PSU giant ONGC to become the most valuable state-run company. The Kolkata-headquartered Coal India also became the second most-valuable company in India, after the petrochem-to-explorations major Reliance Industries (RIL). Currently, the top three valued companies are RIL with a market cap of Rs 3 lakh crore, Coal India with Rs 2.5 lakh crore and ONGC with Rs 2.37 lakh crore.
Since debuting on the bourses on the eve of Diwali Day at the fifth spot in the market cap league table, the stock of the coal mining giant has gained 62% from its IPO price of Rs 245 to its current close at Rs 396 on the BSE. The outperformance of this newcomer on the Dalal Street becomes even more spectacular when compared with RIL and ONGC, and also with other benchmark indices. Since October 21, the day Coal India IPO closed, the ONGC stock has lost 18% and RIL 15%. Similarly, sensex is down 10% and nifty on the NSE is down 11% during the period.
The rise of Coal India on the bourses has also raised expectations among Dalal Street traders that it would soon be included in the elite sensex scrips on the BSE, although analysts pointed out even if it does enter the 30-share index, the stock will have a very low weight given the high government holding.
In terms of free float market cap-the method that BSE's index committee follows to determine the weight of a stock in most of its indices-Coal India stands at 21st position when compared with the current constituents of sensex. While calculating the weight of a stock in an index, the free float methodology considers the non-promoter holding in a company and assigns a weight to its market cap based on the same.
At Tuesday's close, Coal India had a free float market cap of Rs 25,400 crore, compared to Rs 47,500 crore of ONGC. This is because the government holding in ONGC is 74.1% while the corresponding number in Coal India is 90%.
"It is important to include Coal India in the sensex," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities, a New Delhi-based broking house. "It's become a critically important company. So if it remains out of the index, it would miss the whole purpose of an index being a representative benchmark," he added.
As per BSE's rules for inclusion in the sensex, a stock should have a three-month listing history on the bourse and should have been traded on each session during this period.
The company should also have reported revenue in the latest four quarters from its core activity, the BSE website said. Once a company qualifies within these rules, the bourse's index committee has put in several other filters, like free float market cap, sector representation to finally arrive at the final list of 30 stocks, it noted.
In less than a year since making a blockbuster debut on the bourses on November 5 last year, Coal India, the PSU major which is the world's largest coal miner, surpassed explorations major another PSU giant ONGC to become the most valuable state-run company. The Kolkata-headquartered Coal India also became the second most-valuable company in India, after the petrochem-to-explorations major Reliance Industries (RIL). Currently, the top three valued companies are RIL with a market cap of Rs 3 lakh crore, Coal India with Rs 2.5 lakh crore and ONGC with Rs 2.37 lakh crore.
Since debuting on the bourses on the eve of Diwali Day at the fifth spot in the market cap league table, the stock of the coal mining giant has gained 62% from its IPO price of Rs 245 to its current close at Rs 396 on the BSE. The outperformance of this newcomer on the Dalal Street becomes even more spectacular when compared with RIL and ONGC, and also with other benchmark indices. Since October 21, the day Coal India IPO closed, the ONGC stock has lost 18% and RIL 15%. Similarly, sensex is down 10% and nifty on the NSE is down 11% during the period.
The rise of Coal India on the bourses has also raised expectations among Dalal Street traders that it would soon be included in the elite sensex scrips on the BSE, although analysts pointed out even if it does enter the 30-share index, the stock will have a very low weight given the high government holding.
In terms of free float market cap-the method that BSE's index committee follows to determine the weight of a stock in most of its indices-Coal India stands at 21st position when compared with the current constituents of sensex. While calculating the weight of a stock in an index, the free float methodology considers the non-promoter holding in a company and assigns a weight to its market cap based on the same.
At Tuesday's close, Coal India had a free float market cap of Rs 25,400 crore, compared to Rs 47,500 crore of ONGC. This is because the government holding in ONGC is 74.1% while the corresponding number in Coal India is 90%.
"It is important to include Coal India in the sensex," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities, a New Delhi-based broking house. "It's become a critically important company. So if it remains out of the index, it would miss the whole purpose of an index being a representative benchmark," he added.
As per BSE's rules for inclusion in the sensex, a stock should have a three-month listing history on the bourse and should have been traded on each session during this period.
The company should also have reported revenue in the latest four quarters from its core activity, the BSE website said. Once a company qualifies within these rules, the bourse's index committee has put in several other filters, like free float market cap, sector representation to finally arrive at the final list of 30 stocks, it noted.
Monday, May 16, 2011
'Low inflation essential for steady, high growth'
The Reserve Bank of India (RBI) on Monday said growth in the short term may have to be sacrificed to tame rising prices. According to the central bank, steady growth requires lower inflation.
D Subbarao“You cannot get high growth by tolerating high inflation in the long run,” RBI Governor D Subbarao said, while speaking at an event held at the Indira Gandhi Institute for Development Research. He said RBI had to manage demand and inflation expectations, which may lead to sacrificing some growth in the short term.
Inflation, which remained above the central bank’s projections during 2010-11, stood at 8.66 per cent in April. The steep increase in fuel prices over the weekend is expected to add to inflationary pressures, according to economists.
Subbarao said April inflation of 8.66 per cent was high and RBI needed to manage the trade-off between growth and inflation to hasten growth. “The objective of the 12th Plan is faster, more inclusive and sustainable growth. From RBI’s perspective, the primary challenge is to manage faster growth with low inflation. We need low inflation for steady and high growth,” Subbarao said. RBI has pegged gross domestic product growth at 8 per cent for the current financial year — lower than the government’s projection of nine per cent. “Perhaps the threshold for inflation is five per cent,” Subbarao said.
Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, while speaking at the same event, said any reduction in inflation would happen gradually. “I think inflation remains an area of concern. Inflation results which we are seeing now, are probably the outcome of measures we had taken three-four months back. I think the effect of what has been recently done would be felt two-three months down the road. Overall, I expect inflation to soften in the next few months. It will, however, remain above 6 per cent for some more time,” Ahluwalia said. He added the Planning Commission’s comfort zone on inflation was somewhere between five-six per cent. “It is agreed inflation would remain above 6 per cent for some more time. However, there is no dispute in anybody’s mind that inflation above six per cent is in the danger zone,” Ahluwalia said.
Apart from demand-side pressures, RBI saw rising oil and food prices as key drivers of inflation.
D Subbarao“You cannot get high growth by tolerating high inflation in the long run,” RBI Governor D Subbarao said, while speaking at an event held at the Indira Gandhi Institute for Development Research. He said RBI had to manage demand and inflation expectations, which may lead to sacrificing some growth in the short term.
Inflation, which remained above the central bank’s projections during 2010-11, stood at 8.66 per cent in April. The steep increase in fuel prices over the weekend is expected to add to inflationary pressures, according to economists.
Subbarao said April inflation of 8.66 per cent was high and RBI needed to manage the trade-off between growth and inflation to hasten growth. “The objective of the 12th Plan is faster, more inclusive and sustainable growth. From RBI’s perspective, the primary challenge is to manage faster growth with low inflation. We need low inflation for steady and high growth,” Subbarao said. RBI has pegged gross domestic product growth at 8 per cent for the current financial year — lower than the government’s projection of nine per cent. “Perhaps the threshold for inflation is five per cent,” Subbarao said.
Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, while speaking at the same event, said any reduction in inflation would happen gradually. “I think inflation remains an area of concern. Inflation results which we are seeing now, are probably the outcome of measures we had taken three-four months back. I think the effect of what has been recently done would be felt two-three months down the road. Overall, I expect inflation to soften in the next few months. It will, however, remain above 6 per cent for some more time,” Ahluwalia said. He added the Planning Commission’s comfort zone on inflation was somewhere between five-six per cent. “It is agreed inflation would remain above 6 per cent for some more time. However, there is no dispute in anybody’s mind that inflation above six per cent is in the danger zone,” Ahluwalia said.
Apart from demand-side pressures, RBI saw rising oil and food prices as key drivers of inflation.
Markets open flat, ONGC slips over 2%
Markets opened on a subdued note due to lack of any strong trigger and weak global cues. The S&P CNX Nifty was up 2 points, at 5,501 and the Sensex was up 23 points, at 18,365.
Foreign Institutional Investors have turned Jittery as they have been net sellers of $1.6 billion (Rs 7220 crore) since March 25 according to the Bombay Stock Exchnage due to high inflation and hawkish stance of the central Bank. Technical analysts expect further downside for the markets as the Nifty has formed a bear flag pattern on technical charts resembling an inverted flag on a pole, the decline has strong volume and consistent downward price movement.
Edelweiss in the morning note said, “The bear flag continuation pattern is still in play as we look for an eventual break down of last week’s range trade. The momentum oscillators have again rolled bearish.” Edelweiss expects markets to take support at 5370-5350 levels.
Across Asia, markets were trading mostly lower amid signs of a slowdown in the United States which dragged the global stocks and oil prices lower.
Japan's benchmark Nikkei average was down 0.4% over concerns of compensation pay out at the nuclear power plant and losses in auto shares. Hong Kong's Hang Seng fell 0.4% led by losses in resource shares. China's Shanghai Composite index slipped 0.2%.
Among individual stocks ONGC fell 4% on concerns that upstream oil companies may have to bear the subsidy burden of Rs 30,000 crore according to television reports as government increased upstream subsidy sharing to to 38.5% of total burden for FY11 which may affect the profitability and plans of Follow on public offer. Also State Bank of India was on investors’ radar ahead of quarterly results, according to Reuters poll profit is expected to rise 63% y-o-y.
Foreign Institutional Investors have turned Jittery as they have been net sellers of $1.6 billion (Rs 7220 crore) since March 25 according to the Bombay Stock Exchnage due to high inflation and hawkish stance of the central Bank. Technical analysts expect further downside for the markets as the Nifty has formed a bear flag pattern on technical charts resembling an inverted flag on a pole, the decline has strong volume and consistent downward price movement.
Edelweiss in the morning note said, “The bear flag continuation pattern is still in play as we look for an eventual break down of last week’s range trade. The momentum oscillators have again rolled bearish.” Edelweiss expects markets to take support at 5370-5350 levels.
Across Asia, markets were trading mostly lower amid signs of a slowdown in the United States which dragged the global stocks and oil prices lower.
Japan's benchmark Nikkei average was down 0.4% over concerns of compensation pay out at the nuclear power plant and losses in auto shares. Hong Kong's Hang Seng fell 0.4% led by losses in resource shares. China's Shanghai Composite index slipped 0.2%.
Among individual stocks ONGC fell 4% on concerns that upstream oil companies may have to bear the subsidy burden of Rs 30,000 crore according to television reports as government increased upstream subsidy sharing to to 38.5% of total burden for FY11 which may affect the profitability and plans of Follow on public offer. Also State Bank of India was on investors’ radar ahead of quarterly results, according to Reuters poll profit is expected to rise 63% y-o-y.
Foreign investment in MFs likely to face cap
MUMBAI: India's policy-makers are considering putting a cap or ceiling of between $5 and $10 billion on investment by foreign investors in Indian mutual funds to possibly limit the impact of any surge in inflows once this route is opened up soon.
The government had announced in this year's budget that it would allow overseas individuals to invest in equity schemes of Indian mutual funds as part of a move to diversify the class of foreign investors in the local equities market. Securities market regulator, Sebi, the Reserve Bank of India and the finance ministry have been in talks to operationalise a scheme for this and the central bank has suggested that as a prudential measure, a ceiling on investment by these foreign investors should be fixed to start with, two senior officials ent said.
The way the scheme will operate is that a foreign investor will have to open a dematerialisation or paperless trading account and a bank account here for which the Know Your Customer norms will be done by a local bank or intermediary registered with regulators here. Once this is done, foreign investors can buy into over 400 equity schemes.
Foreign funds and non-resident Indians who are registered with Sebi are allowed to invest in equity mutual funds but there has hardly been any investment except in select exchange traded funds.
In the Indian equities market, there are no fetters on foreign funds in terms of investment except a limit of 10% on a single foreign investor buying into a company's capital. For investments in Indian corporate and government debt too, there are restrictions. "We need a framework for both capital inflows and outflows and we thought that it would not only be prudent but also provide clarity upfront if we say that there would be a ceiling on investment," a senior official said. This official declined to be identified.
What could be of concern to the central bank is a possible surge in volatile capital inflows later which could put pressure on currency and inflation management. When foreign capital flows are robust, the Reserve Bank will have to mop up these flows which in turn results in boosting liquidity in the local markets. To check this excess liquidity, the RBI sells securities or bonds to banks and institutions to drain it out - a process known as sterilisation. This however comes at a cost to the government - which has to service the interest cost on these bonds.
Right now, such worries are overblown because excess inflows if any are being used to finance India's current account deficit - the excess of goods and services imports over exports. In FY11, foreign portfolio investors bought stocks and bonds of over $31 billion. In the year to date, foreign funds have been net sellers at $490 million. Sebi has worked out a scheme for foreign investors to buy into local mutual funds which is being vetted by the government and the Reserve Bank of India. One of the challenges in getting the scheme going is in ensuring KYC or due diligence of the foreign investor. Only some of the depository participants such as banks which have a wide global network may be in a position to carry this out. Indian institutions may either to forge tie-ups with foreign partners or open offices abroad if they want to woo greater foreign portfolio investment. If the scheme takes off as policy makers are hoping it would - it will boost India's mutual fund industry which manages assets of over Rs 7,00,000 crore and is now weighed down by the problem of lack of interest on the part of distributors to sell mutual funds. They have been loath to push mutual fund products after the regulator banned fund houses from charging investors an entry fees or load.
The government had announced in this year's budget that it would allow overseas individuals to invest in equity schemes of Indian mutual funds as part of a move to diversify the class of foreign investors in the local equities market. Securities market regulator, Sebi, the Reserve Bank of India and the finance ministry have been in talks to operationalise a scheme for this and the central bank has suggested that as a prudential measure, a ceiling on investment by these foreign investors should be fixed to start with, two senior officials ent said.
The way the scheme will operate is that a foreign investor will have to open a dematerialisation or paperless trading account and a bank account here for which the Know Your Customer norms will be done by a local bank or intermediary registered with regulators here. Once this is done, foreign investors can buy into over 400 equity schemes.
Foreign funds and non-resident Indians who are registered with Sebi are allowed to invest in equity mutual funds but there has hardly been any investment except in select exchange traded funds.
In the Indian equities market, there are no fetters on foreign funds in terms of investment except a limit of 10% on a single foreign investor buying into a company's capital. For investments in Indian corporate and government debt too, there are restrictions. "We need a framework for both capital inflows and outflows and we thought that it would not only be prudent but also provide clarity upfront if we say that there would be a ceiling on investment," a senior official said. This official declined to be identified.
What could be of concern to the central bank is a possible surge in volatile capital inflows later which could put pressure on currency and inflation management. When foreign capital flows are robust, the Reserve Bank will have to mop up these flows which in turn results in boosting liquidity in the local markets. To check this excess liquidity, the RBI sells securities or bonds to banks and institutions to drain it out - a process known as sterilisation. This however comes at a cost to the government - which has to service the interest cost on these bonds.
Right now, such worries are overblown because excess inflows if any are being used to finance India's current account deficit - the excess of goods and services imports over exports. In FY11, foreign portfolio investors bought stocks and bonds of over $31 billion. In the year to date, foreign funds have been net sellers at $490 million. Sebi has worked out a scheme for foreign investors to buy into local mutual funds which is being vetted by the government and the Reserve Bank of India. One of the challenges in getting the scheme going is in ensuring KYC or due diligence of the foreign investor. Only some of the depository participants such as banks which have a wide global network may be in a position to carry this out. Indian institutions may either to forge tie-ups with foreign partners or open offices abroad if they want to woo greater foreign portfolio investment. If the scheme takes off as policy makers are hoping it would - it will boost India's mutual fund industry which manages assets of over Rs 7,00,000 crore and is now weighed down by the problem of lack of interest on the part of distributors to sell mutual funds. They have been loath to push mutual fund products after the regulator banned fund houses from charging investors an entry fees or load.
IBM, HP opt out of 2,000-crore UIDAI bid
NEW DELHI: Two of the world's largest technology companies - IBM and HP - on Monday opted out from bidding for the 2,000-crore outsourcing contract to manage the world's biggest citizen identity database, people familiar with the development said.
The Unique Identity Development Authority of India, or UIDAI, headed by Infosys founder Nandan Nilekani , had asked vendors to submit their proposals for the contract by Monday evening. After IBM and HP dropped out from the race, the remaining five - Accenture , Wipro, TCS , HCL Infosystems and Mahindra Satyam - will go to the next stage and begin their negotiations with the UID officials.
"They (IBM and HP) are not interested," confirmed an official familiar with the bidding.
In one of the biggest outsourcing contracts to be awarded this year by any Indian government department, the selected vendor will manage all IT and the national repository which will contain data of all Indian citizens.
Executives at vendors who decided not to bid said it was a decision by Global HQs not to participate in bidding.
"As far as I know, we have not submitted any bids, the conditions did not match our processes," said another person who requested anonymity because he is not authorised to speak with media.
The tech majors had earlier complained to Unique ID Authority of being biased towards products of certain vendors (EMC Corp and Cisco). The authority postponed the bidding last month and made changes to the tender specifications after ET reported about a fiery meeting in the capital with the bidders.
The final five vendors submitted bids on Monday at UIDAI headquarters at Jeevan Bharti Building at Connaught Place in huge cartons. The timely selection of the IT vendor is critical to the success and implementation of the UIDAI project, which aims at giving 600 million Unique ID numbers by 2014.
"We decided to quit the bidding process on the request of our global headquarters. Things had become pretty hostile between us and the authority over the weeks," said an official at one the US-based tech majors which opted out. "Things had become pretty bad for us after we complained," said another top level official declining further comment.
Spokespersons of both IBM and HP declined to offer reasons why the companies opted out from participating in one of the most prestigious and large projects in India, even after submitting expressions of interest. Both companies got selected and participated in all pre-bids as well.
Another executive said his company decided to opt out because the chances to win the project were not as bright.
"It costs us over a million dollars to put in such a large bid as teams fly down from across the globe over many months. It's best we concentrate on projects where chances of winning are higher," he added.
UIDAI officials say it's up to the companies to bid. "Some who opted out have earlier participated as equipment vendors. We will take about three months to decide on the winner from the bidders," said a UIDAI spokesperson. The selected vendor will manage all IT infrastructure for the project. Only large firms with at least 4,000 people and sales of 6,000 crore in the last three years were allowed to bid.
The Unique Identity Development Authority of India, or UIDAI, headed by Infosys founder Nandan Nilekani , had asked vendors to submit their proposals for the contract by Monday evening. After IBM and HP dropped out from the race, the remaining five - Accenture , Wipro, TCS , HCL Infosystems and Mahindra Satyam - will go to the next stage and begin their negotiations with the UID officials.
"They (IBM and HP) are not interested," confirmed an official familiar with the bidding.
In one of the biggest outsourcing contracts to be awarded this year by any Indian government department, the selected vendor will manage all IT and the national repository which will contain data of all Indian citizens.
Executives at vendors who decided not to bid said it was a decision by Global HQs not to participate in bidding.
"As far as I know, we have not submitted any bids, the conditions did not match our processes," said another person who requested anonymity because he is not authorised to speak with media.
The tech majors had earlier complained to Unique ID Authority of being biased towards products of certain vendors (EMC Corp and Cisco). The authority postponed the bidding last month and made changes to the tender specifications after ET reported about a fiery meeting in the capital with the bidders.
The final five vendors submitted bids on Monday at UIDAI headquarters at Jeevan Bharti Building at Connaught Place in huge cartons. The timely selection of the IT vendor is critical to the success and implementation of the UIDAI project, which aims at giving 600 million Unique ID numbers by 2014.
"We decided to quit the bidding process on the request of our global headquarters. Things had become pretty hostile between us and the authority over the weeks," said an official at one the US-based tech majors which opted out. "Things had become pretty bad for us after we complained," said another top level official declining further comment.
Spokespersons of both IBM and HP declined to offer reasons why the companies opted out from participating in one of the most prestigious and large projects in India, even after submitting expressions of interest. Both companies got selected and participated in all pre-bids as well.
Another executive said his company decided to opt out because the chances to win the project were not as bright.
"It costs us over a million dollars to put in such a large bid as teams fly down from across the globe over many months. It's best we concentrate on projects where chances of winning are higher," he added.
UIDAI officials say it's up to the companies to bid. "Some who opted out have earlier participated as equipment vendors. We will take about three months to decide on the winner from the bidders," said a UIDAI spokesperson. The selected vendor will manage all IT infrastructure for the project. Only large firms with at least 4,000 people and sales of 6,000 crore in the last three years were allowed to bid.
Free trade pact with EU likely to include auto
CHENNAI: India's proposed free trade agreement (FTA) with the European Union could include tariff reduction on import of vehicles as well as automotive components. If it does, it will be a first since India's FTAs with other auto hubs like Japan, Korea and Thailand have so far left out completely-built vehicles from the areas covered by the FTA. The possibility of fully-built vehicles being included in the FTA with the EU – home to auto majors like Volkswagen, BMW, Mercedes Benz, Fiat and Renault – is causing considerable heartburn in the auto industry.
The industry apex body SIAM (Society of Indian Automobile Manufacturers) had protested against the inclusion of fully-built vehicles under the EU FTA earlier this year. The commerce ministry had, back then, asked for their recommendation on the subject. SIAM had said it's against any exception to the rule that has so far applied to other FTAs including the Asean, Korea and Japan. All of them lead to some tariff reduction on components but did not touch fullybuilt up vehicles. SIAM wanted status quo to be maintained in the case of the EU FTA as well.
Since then, though, the industry has not been kept in the loop about the details of the negotiations or the areas that are likely to be covered. The ministry and SIAM had a public face-off before that – the government felt the auto industry enjoyed undue tariff protection unlike other sectors while SIAM felt the EU FTA would seriously impact both employment and investment in the sector.
The EU FTA has now entered the final phase of negotiations and the draft will likely be announced shortly. Once both the Indian commerce minister and EU trade commissioner announce their intent to sign, the FTA will be formally implemented next year.
"Apart from offering the EU undue tariff advantage in automobiles over Japan, Asean and Korea, it will also mean cheap import of big cars which will run on subsidised diesel at a time when big cars in India are being taxed higher and there is also talk of a diesel tax on big SUVs and luxury vehicles," said a Delhi-based auto CEO.
Currently import of fully-built up cars attracts 110% duty though the actual import duty is 60%. The rest of the taxes are also applicable on locally assembled vehicles. European car majors such as Volkswagen, Mercedes Benz, BMW, Renault and Fiat have made substantial investments in India. VW, for instance, has pumped in Rs 3,800 crore in its new plant in Chakan, Maharashtra; Mercedes Benz and Daimler India are together pumping in around Rs 5,000 crore into the Indian market in creating a car assembly line and a truck manufacturing plant.
The industry apex body SIAM (Society of Indian Automobile Manufacturers) had protested against the inclusion of fully-built vehicles under the EU FTA earlier this year. The commerce ministry had, back then, asked for their recommendation on the subject. SIAM had said it's against any exception to the rule that has so far applied to other FTAs including the Asean, Korea and Japan. All of them lead to some tariff reduction on components but did not touch fullybuilt up vehicles. SIAM wanted status quo to be maintained in the case of the EU FTA as well.
Since then, though, the industry has not been kept in the loop about the details of the negotiations or the areas that are likely to be covered. The ministry and SIAM had a public face-off before that – the government felt the auto industry enjoyed undue tariff protection unlike other sectors while SIAM felt the EU FTA would seriously impact both employment and investment in the sector.
The EU FTA has now entered the final phase of negotiations and the draft will likely be announced shortly. Once both the Indian commerce minister and EU trade commissioner announce their intent to sign, the FTA will be formally implemented next year.
"Apart from offering the EU undue tariff advantage in automobiles over Japan, Asean and Korea, it will also mean cheap import of big cars which will run on subsidised diesel at a time when big cars in India are being taxed higher and there is also talk of a diesel tax on big SUVs and luxury vehicles," said a Delhi-based auto CEO.
Currently import of fully-built up cars attracts 110% duty though the actual import duty is 60%. The rest of the taxes are also applicable on locally assembled vehicles. European car majors such as Volkswagen, Mercedes Benz, BMW, Renault and Fiat have made substantial investments in India. VW, for instance, has pumped in Rs 3,800 crore in its new plant in Chakan, Maharashtra; Mercedes Benz and Daimler India are together pumping in around Rs 5,000 crore into the Indian market in creating a car assembly line and a truck manufacturing plant.
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