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Monday, November 26, 2012

Detection of suspicious trading activity fails again in India as FDI crusade continues in the Parliament while money laundering inflicts the economy again!Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.

Detection of suspicious trading activity fails again in India as FDI crusade continues in the Parliament while money laundering inflicts the economy again!Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.

Troubled Galaxy Destroyed Dreams, Chapter:821
Palash Biswas

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FDI crusade continues in the Parliament while money laundering inflicts the economy again. Detection of suspicious trading activity fails again in India but a series of revenue-raising setbacks since October 29 now means it will be almost impossible for the government to meet that target, economists say, and some finance ministry officials privately agree. That increases the risk that credit rating agencies could downgrade India to junk in the coming months.Chidambaram's deficit reduction plan banks heavily on raising billions of dollars by auctioning off cellphone airwaves and selling shares in state companies.The finance minister has banned government officials from holding conferences at five-star hotels, restricted travel and ordered a freeze on hiring to fill vacant posts.A single-minded political veteran who commands both fear and respect in officialdom, P Chidambaram is squeezing government ministries hard to cut spending wherever they can, and quickly, to help rein in a widening fiscal deficit.He is a man under pressure and with an eye on the clock.Four weeks ago to the day, he set himself an ambitious target: to hold the government's fiscal deficit for 2012/2013 to 5.3% of gross domestic product, even as sceptical private economists forecast a deficit closer to 6%.The deficit reduction plan unveiled by Chidambaram last month was panned by economists for being short on specifics and putting a firewall around fuel subsidies and expensive social welfare programmes for the country's millions of poor.A month earlier a deficit reduction panel appointed by Chidambaram had urged the government to cut such spending. Their language was dramatic: India was on the edge of a "fiscal precipice" and the economy was "flashing red lights", they said.

Keeping in mind, the character of the black money economy based on foreign capital inflow and servic instead of production and manufacturing, it is ironical that  Anti-corruption crusader-turned-politician Arvind Kejriwal formally launched his Aam Aadmi Party (AAP) on Monday with a rally at Jantar Mantar, reiterating an anti-dynasty, anti-corruption mantra.While Key controls for "detection of suspicious trading activity" failed at an India outsourcing unit, contributing to USD 2.3-billion loss caused by a rogue trader of global banking giant UBS, a joint probe by British and Swiss regulators has found.

Consensus eluded an all-party meeting called on FDI issue today even as Samajwadi Party and BSP provided comfort to the government by not insisting on voting and Trinamool Congress sprang a surprise by speaking in a similar tone.Chidambaram's battle to tame the deficit takes place against the backdrop of a continued economic slowdown, and a fractious parliament where the government has lost its majority after its biggest coalition ally withdrew support to oppose its reforms.

Favouring to Foreign Direct Investment (FDI) in the country, Finance Minister P Chidambaram Sunday said that FDI is essential for the country to counter India's current account deficit.On the other hand,Obama, Congress will blow new taxes, not cut deficit!

Finance Minister said it in Pune while addressing a seminar. ?There is an opportunity for reforms in various sectors that must be seized,? he said.

"We need an additional 70 billion dollars, and we need to tap into the savings of another country. Look at the huge opportunity it creates for reforming several sectors of the economy. Firstly, you open up new sectors for foreign investment, because that is an imperative. Secondly, you must have a stable polity in this country, otherwise nobody will invest. You must have stable policies, especially tax policies," Chidambaram said.

India needs to increase its capital flows to plug a current account deficit that widened to a record high of USD 21.76 billion in the January-March quarter, and was cited as key reason behind the rupee currency's fall to a record low in mid-June.

Although the gap narrowed to USD 16.55 billion in the June quarter, allowing the country to run a small balance of payments surplus, it still remains above analysts' comfort levels.

Chidambaram said that there was a need to build consensus for reforms, calling for support from various ministries.

"I think the mere fact that today a ballooning current account deficit is a huge challenge, but I think it throws up opportunities. If sectoral ministers and sectoral departments look at the compulsions on us because of the current account deficit, I think huge reforms can be done in many sectors of the economy," he said.

India has thrown open its doors to foreign retailers this year, liberalising investment rules to allow in global supermarket chains and as well as lifting an investment cap on single-brand retailers.

But the rule changes have provoked a furious backlash from some political parties and domestic retailers, a reaction which threatens to derail a package of pro-market reforms aimed at reviving growth.

Top Indian officials said they will cut the widest budget deficit among the world's largest emerging markets and curb public debt, as India seeks to avert a credit-rating downgrade.ndia's fiscal deficit could miss the revised official target and swell to as much as 5.6 percent of GDP, a top government official told Reuters on Thursday, making it tougher for the government to avoid a credit rating downgrade.The comments were the gloomiest scenario for public finances yet given by the government and follow a failed auction of mobile phone spectrum last week that dashed its income forecasts. Global rating agencies have threatened to downgrade India's sovereign credit rating to junk if it fails to rein in its deficit, which is ballooning because of higher spending on food, fuel and fertiliser subsidies and poor tax receipts.Just last month, Finance Minister P Chidambaram raised the fiscal deficit target to 5.3 percent of GDP for the current financial year to end-March 2013 from a previous target of 5.1 percent.

The Empowered Group of Ministers (EGoM) on telecom, headed by Finance Minister, P Chidambaram, will meet on November 29 in the backdrop of lukewarm response to the recently concluded 2G spectrum auction. Meanwhile,the RBI today relaxed norms allowing telecom companies to raise long term funds from overseas to refinance domestic loans taken by them to pay for 2G spectrum, a move that will help the stressed sector.

"The successful bidders making the upfront payment for the award of 2G spectrum initially out of Rupee loans availed of from the domestic lenders would be eligible to refinance such Rupee loans with a long-term ECB, under the automatic route," the RBI said in a notification.

The relaxation in external commercial borrowing (ECB) norms, the RBI said, has been made keeping in view the "large outlay of funds required to be paid directly" to the government within a limited period of time.

The central bankBSE -0.27 % further said that the successful bidders in the 2G auction will be allowed to avail of ECB under the automatic route from their ultimate parent company without any maximum ECB liability-equity ratio.

However, the ECB can be availed of from the parent company if the lender holds minimum paid-up equity of 25 per cent in the borrower company, either directly or indirectly.

Further, the successful bidders can avail of short term foreign currency loan in the nature of bridge finance under the automatic route for the purpose of making upfront payment towards 2G spectrum allocation and replace the same with a long term ECB under the automatic route, RBI added.

"The relaxations in respect of the ECB liability-equity ratio, percentage of shareholding by the ultimate parent, refinancing of Rupee loans and bridge finance are part of a special dispensation applicable only to the successful bidders in the upcoming 2G spectrum auction," the RBI added.

The recent auction for 1800 MHz band got total bids worth Rs 9,407.64 crore, just one-third of the minimum Rs 28,000 crore that the government had expected.

The Reserve Bank today allowed Indusind Bank BSE 2.92 % to increase its FII investment limit to 49 per cent but asked it to ensure that the aggregate foreign investment in the bank does not exceed 74 per cent.

"The Reserve Bank...advise that its approval to the Induslnd Bank for raising FII investment limit to 49 per cent is subject to the condition that aggregate foreign investment in the bank should also not exceed the composite sectoral cap of 74 per cent," the apexBSE 0.00 % bank said in a statement.

As on September-end, Foreign Institutional Investors' (FIIs) had 34.26 per cent stake in the bank.

In its Annual General Meeting, IndusindBSE 2.92 % Bank's promoters had passed resolutions to allow FIIs to buy up to 49 per cent of its paid-up equity capital through primary/secondary markets in India.

"As Induslnd Bank has now passed necessary resolutions in this regard, equity shares of Induslnd Bank can now be purchased through primary market and stock exchanges...," RBI said.

However, the purchase of equity shares by a single FII/ SEBI approved sub-account of a registered FII in the Induslnd Bank should not exceed 10 per cent.

The Reserve Bank said it would henceforth be monitoring the FII investment under Portfolio Investment Scheme (PIS) at sectoral cap/statutory ceiling as applicable and not the intermediate ceiling fixed by the bank.

"It will be the bank's responsibility to ensure that the applicable cap is not breached. The permission is being issued from FEMA angle only," it added.

As per the current norms, RBI needs to be intimated in case of transfer of five per cent or more shares of a private sector bank by FIIs.

India's government is "optimistic" it will rein in the shortfall for the year through March 31 to 5.3 per cent of gross domestic product from the previous year's 5.8 per cent. The government has no plan "at the moment" to increase its record borrowing programme, Finance Minister Palaniappan Chidambaram said on Saturday.

The deficit will be cut 0.6 per cent annually for the next five years, Mr Chakravarthy Rangarajan, Chief Economic Adviser to Prime Minister Manmohan Singh, said on Saturday in Kolkata.

"I would like to, with all the conviction and command, reiterate that the government is fully committed to contain the fiscal deficit within 5.3 per cent," Economic Affairs Secretary Arvind Mayaram said on Saturday at a conference in Mumbai. "We have a programme of disinvestment and we are confident of meeting our targets."

Credit Agricole CIB said last week that financial markets are pricing in an increasing likelihood of a credit rating downgrade to junk status.

The threat of losing India's investment-grade sovereign ranking prompted Mr Singh to reduce fuel subsidies in mid-September to tackle the fiscal gap and boost investment by allowing foreign investment in retailing and aviation. The government is also looking to curtail expenditure, Mr Mayaram said. The US$1.8 trillion (S$2.2 trillion) economy is likely to expand 5.5 per cent in the three months ended September, Mr Chidambaram said, matching the preceding quarter's expansion.

The government raised less than a quarter of its Rs 400 billion target in a 2G spectrum auction in mid-November. A second auction is planned before March, but a senior government official told Reuters there would likely be at least a Rs 200 billion shortfall.

The government succeeded in raising Rs 8.1 billion by selling shares of state-run Hindustan Copper Ltd on Friday, although the deal was supported by buying from state institutions.

To put the deal in context: New Delhi aims to raise Rs 300 billion by selling shares in state companies this fiscal year, which ends in March. Excluding the latest sale, it has managed just Rs 1.25 billion so far.

The government is staring at an overall shortfall of nearly 500 billion rupees in revenues this year, the government official said, speaking on condition of anonymity because of the sensitivity of the subject. This may require additional borrowing from the market.

Chidambaram's battle to tame the deficit takes place against the backdrop of a continued economic slowdown, and a fractious parliament where the government has lost its majority after its biggest coalition ally withdrew support to oppose its reforms.

Manufacturing is contracting and exports are falling. India's October trade deficit of nearly $21 billion was its worst on record.

And a second round of reforms aimed at liberalising the pension and insurance sectors has fallen victim to gridlock in parliament. It is not clear if the measures, long sought by investors, will be passed in the current winter session.

But Chidambaram, who began his second stint as finance minister in August, gives no appearance of being disheartened and as recently as Saturday was confidently predicting he would be able to contain the deficit to 5.3% of GDP.

Inside his ministry, officials said the target looks daunting but they have had no word of a revision from the minister. Instead, he has intensified pressure on them to find ways of meeting the target, they said.

Chidambaram's credibility is not yet on the line, said analysts. In fact, perhaps the opposite. His credentials as an economic reformer during two previous stints as finance minister are buying him time to pull India back from the fiscal precipice.

This is the third instance when outsourcing of key oversight jobs by global banks (British giants HSBC and Standard Chartered being the other two) to India has come under the regulatory scanner abroad for ineffective controls against suspicious financial transactions.

UK's Financial Services Authority (FSA) fined UBS 29.7 million British pounds (about Rs 265 crore) for failing to prevent large-scale unauthorised trading in this case, while Swiss regulator FINMA (Financial Market Supervisory Authority) also said it has found serious risk management deficiencies and major control failures at the bank.

In its probe report, FINMA said that UBS' back office operations team was responsible for ensuring timely confirmation of deferred-settlement trades, identified through "a specific report maintained by an outsourcing provider based in India (the 'T+14 report')".

The probe found that the bank's online trade supervision system SCP (Supervisory Control Portal) and the 'T+14' report "were key controls for the detection of suspicious trading activity, but both proved to be ineffective.

"The failures of these controls serve to illustrate poor organisation and risk management within UBS," FINMA said.

FSA and FINMA jointly initiated a probe in September 2011 after it came to the light that a London-based trader of Swiss banking major had caused substantial losses totalling USD 2.3 billion (about Rs 13,000 crore) due to unauthorised trading on the bank's Exchange Traded Fund (ETF) desk.

Obama, Congress will blow new taxes, not cut deficit

Americans have a pretty good idea of what President Obama and Congress will do if they raise taxes as expected: It will be blown on expanding the government, not cutting the deficit as Washington is promising.

A new Rasmussen Reports poll finds that 48 percent of likely voters believe that new taxes are likely to be used for new government programs. Some 38 have faith that the president and Congress will keep their word and cut spending and deficits and 14 percent are not sure.

The fight over preventing the so-called "fiscal cliff" are hung up on taxes, with most Republicans urging leaders to block them or at least win Democratic concessions on reforming Social Security and Medicare in return.

According to the pollster, "Democrats, who typically display more faith than others in politics and government, are the most optimistic. Fifty-four percent of the voters in President Obama's party believe new tax monies will go to deficit reduction. Sixty-nine percent of Republicans think the money will be used for new programs instead."

Voters' feeling that the president and Congress are hiding their real plans is borne out in other questions in Rasmussen's poll, which is also a stark reminder of how divided the nation is.

For example, just 34 percent of likely voters have a favorable opinion of the federal government, while 63 percent view it unfavorably.

And when party affiliation is included, Rasmussen found that only Democrats favor big government. Some 59 percent of Democrats have a favorable view of the federal government while a whopping 86 percent of Republicans and 73 percent of unaffiliated voters share an unfavorable opinion of the national government.

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