Major events of the week are release of GDP data for quarter ending Dec’18, change in GST tax rate for housing sector and government decision on Air India. On corporate and banking front, RBI comes out with a proposal to modify rules governing bank CEO’s salary and an important decision by NCLAT on IL&FS. 

Indian economy has recorded growth of 6.6% in Oct-Dec’18 quarter (Q3’FY19) as per the data released by MOSPI. Best performing sectors are ‘Construction’ with GVA growth rate of 9.6% and ‘Electricity & other utilities’ at 8.2%. ‘Mining’ & ‘Agriculture’ continue to face challenge with growth rate of 1.3% an 2.7% respectively. GDP growth has recorded decline for second successive quarter after hitting a high of 8% in Q1. The decline in growth rate is sharpest for manufacturing sector, down from 12.4% to 6.7% now. From expenditure side, Gross Fixed Capital Formation (GFCF) has recorded growth of 10.6%, up from 10% earlier which is a sign of increasing investment activity. Government Final Consumption Expenditure (GFCE) has recorded decline in growth from 7.6% to 6.6%, probably a result of government tightening its belt to keep deficit low. MOSPI also released projection for full year which has been revised down to 7% from earlier 7.2%.

In an important decision, government approved long deliberated plan to transfer part of Air India’s debt into a special purpose vehicle (SPV) along with its non-core assets and subsidiaries engaged in ground handling and similar services. The move is highly significant as it serves multiple purposes. First, the reduction in debt to less than half of current level of over Rs 50,000 crore would mean substantial reduction in its interest cost and provide an opportunity to make the operations sustainable. Secondly, during the last attempt to privatize AI, market players had expressed reluctance to take control of these subsidiaries as they do not add much to the business but act as drag. Hiving-off them into SPV would help government to make another attempt at privatization of the airline.

In a much awaited move, GST council reduced GST rate on under construction houses from current 12% to 5% (without any input tax credit). Under-construction projects were facing sharp decline in off-take due to tax disadvantage in comparison to resale housing market. The reduction in rate eliminated the disadvantage. While the builders were permitted to claim input tax credit earlier which should have reduced effective tax rate for buyers. However, ITC was not getting passed on leading to higher tax outgo for buyers. In another important move, the council also reduced the tax rate for ‘affordable housing’ sharply from current 8% to just 1%. However, the definition of ‘affordable housing’ has been made restrictive making flats with carpet area less than 960 sq ft in non metro and 650 sq ft in metro eligible for the concession with price cap of Rs 45 lakh. This is an important modification as even large flats in smaller cities could come with price tag of less than Rs 45 lakh, defeating the purpose of the concession.

RBI has brought out a proposal changing the salary structure of CEOs of private and foreign banks. While it increases the cap on variable pay from current 70% of fixed pay to 200%, it also includes ESOPs (employee stock options) within the definition of variable pay. ESOPs were not included in annual pay leading to scope for opacity. Further, cap on aggregate variable components, which are largely performance driven, would reduce the incentive from high risk strategy, one of the reasons for global financial crisis. The proposal assumes greater significance in light of recent developments in the banking sector such as those related to ICICI bank, Yes Bank and Axis Bank.

There were no too many developments of great significance in the corporate sector. Some of the developments worth mentioning is Adani ports winning bids to develop airports, its first foray in this segment, Jet Airways, its promoter and lenders continued efforts to bring it back to health. In a rather unusual ruling, National Company Law Appellate Tribunal (NCLAT) directed that loans of IL&FS and its almost 100 subsidiaries would not be classified as NPA without its approval. The ruling essentially saves the company from being dragged into NCLT which could sharply reduce its value.

(Image courtesy of ddpavumba at

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