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BIG NEWS – Sep 29th 2017

Posted on 29-Sep-2017 Comments  0

Oil heads higher

But will it sustain beyond the Saudi Aramco IPO?

One commodity that has been quietly heading upwards is crude oil. Brent crude is already above $57/bbl and is looking all set to touch the $60/bbl mark. How much higher than $60 it goes is uncertain at the current point of time. US shale is not flooding the market any longer and that is helping prices move higher. There are 3 key factors to watch out here…

The Harvey and IRMA effect…

The impact of Hurricane IRMA was the first major reason. Actually, the IRMA and Harvey hurricanes were expected to temper oil prices as most refineries off the coast had to shut down. However, the refining re-commenced much faster than anticipated. This ensured that despite fall in refinery demand, the crude demand did not get sharply impacted. Secondly, the crude shale output in the US has also fallen sharply to around 8.7 million barrels per day (bpd), which has helped to maintain the balance between supply and demand thus, keep prices buoyant. Obviously, when prices went below the $50/bbl mark many shale rigs were forced to shut down due to non-remunerative prices.The US has realized that fighting down prices too low is not helping its own cause too. The idea is to keep its oil output buoyant without destroying oil prices too much by flooding the oil markets. That appears to be the broad terms that the OPEC, Russia and the US appeared to have agreed to.

How much higher will oil go?

It may be a hard call but much higher levels than $60 look quite difficult for now. It is estimated that above the $60 mark the demand/supply equation once again may start favoring excess supply leading to lower prices. The OPEC also has an interest in not letting prices go too high as it could again rekindle demand for alternative energy sources. The price of $60/bbl is the ideal equilibrium price for OPEC and the US wherein oil economics can be sustained without encouraging too much of alternate energy demand.

It is all about Saudi Aramco IPO…

At the end of the day, the story behind the strong oil prices may boil down to the forthcoming Saudi Aramco IPO. At nearly $2 trillion valuation, the IPO will be the biggest ever. For Saudi Aramco to get attractive valuations and for investment bankers to sell the issue,buoyant oil prices are a must. Saudi Aramco’s profitability is directly linked to high oil prices and the OPEC will have to present a strong story of higher oil prices if the Aramco IPO has to sail through. It is very likely that we may see oil prices sustaining around the $60 mark for quite some time to come. That would be good news for the oil markets as a whole as it will approximately match out demand and supply. Thanks to the Aramco IPO, the oil price disruptions will be mitigated for now! ©

GST Blues

What can the government do to stem the issue…?

The government did make a great start by sticking to its deadline of July 01st for GST launch. While the launch and its implementation have been fairly smooth, the real problems have arisen after that. To be fair,some teething problems were expected in the process but what has transpired in the last few weeks is a sense of chaotic frustration among businesses. Here are 4 things the government can do to mitigate the situation on a priority basis…

Put the tech devils to rest…

There is too much time and energy spent on handling small IT issues. The government needs to immediately take a ground-zero look at its IT backbone as well as the delivery by its tech vendors and look to diversify its risk if the need arises. In the larger interest of control, the government should look at in-housing its entire IT activity to the extent possible.

What about my credit?

That is the big practical problem that people are facing. The much talked about seamless input tax credit is not exactly working putting people through a lot of pain. The pain becomes more acute for exporters as they need to claim their tax paid on imported inputs as credit against exports. Currently, they are finding it hard to do the same and that is leading to a serious liquidity crunch for these exporters.

How about online plus offline?

This is perhaps the biggest challenge faced by the GST implementation.When the online Income Tax filing system was introduced, it was launched with 2 major differences. Firstly, the online filing was launched in a phased manner with all categories of filers being gradually brought into the online filing fold. Secondly, for quite a few years, the IT department offered the dual facility of filing your returns online or through the off-line route. This kind of a dual approach would have worked fine as most traders are not exactly familiar with too much of IT usage and this will give them time to fully shift towards online filing. It will also give the GST Council enough time to tweak its hardware and software accordingly.

How about auto-registrations?

The big reason GST adoption is lagging is that people are still finding it hard to register for GST. There are system-related and technical issues. To begin with, the government can automatically port all businesses with a valid PAN number to automatically port into GST since the GST number is based on the business PAN anyway. The service tax registration process was a lot simpler and the GSTN need not have duplicated the process all over again. That is the starting point and if that is simplified, a lot of comfort and simplicity will follow down the GST value chain! ©

GE versus Railways

Why Indian Railways must walk away from the $1.6 billion deal…

There has been a major furor around the Railway Ministry decision to renegotiate the diesel engine purchase from GE. Piyush Goyal has rightly questioned the logic of spending on diesel engines at a time when electric engines make a lot more economic sense. GE, on the other hand, has subtly threatened that such an action could lead to FDI downgrades for India. The truth obviously lies somewhere in between. But first, the case!

The Railways / GE deal…

During the tenure of Suresh Prabhu, the Indian Railways had entered into a deal with GE for the supply of 1000 diesel engines. While 100 engines were to be imported into India from the US, the balance 900 engines were to be manufactured by GE at a plant that is being set up in Bihar. The entire fracas arose when Piyush Goyal refused to accept the economic rationale of the deal and instead preferred to opt for the more efficient and economical electric engines. That has raised the hackles at GE as it will be a major business loss for them. GE has obviously warned India that such a move may not be in the larger interest of India as India has emerged as the largest recipient of FDI in the last 3 years. Such a move may be seen as unfriendly to business and may therefore deter foreign investors. For now Piyush Goyal is only insisting on re-negotiating the terms of the deal and not about cancelling the deal.

The monetary implications…

The overall deal is likely to be to the tune of $2 billion or nearly $13,500 crore. The deal has the potential to generate jobs in India due to the plant that GE will set up here. However, if one does basic mathematical calculations then the shift to electric engines will any ways save the Indian Railways Rs.9000 crore per year. Therefore,in less than two years the entire investment in these diesel engines will be more than compensated. Anyways, the total penalty that India will have to pay for reneging from the contract will be just Rs.1300 crore. That will be made up 7 times over in 1 year itself.

Why India must walk away…

Will this impact India’s global standing in the market? Not exactly! We are talking about major technology shifts which can have a drastic impact on the performance of the Indian Railways. Since there is an exit clause and the contract is not exactly adding value to India, it is only logical that India walks out of the contract. Going ahead,India must factor technological obsolescence into its long-term contracts. Indian Railways cannot afford to be stuck in outdated technology. The exit route does make a lot of sense. Irrespective of the intimidation tactics that GE may use, India must walk out. That is in the larger interest of the Indian Railways and that is what matters! ©

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