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LATEST NEWS UPDATES | Food Security Bill to partly hurt ongoing recovery; 1QFY14 earnings in focus

Food Security Bill to partly hurt ongoing recovery; 1QFY14 earnings in focus

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published Published on Jul 6, 2013   modified Modified on Jul 6, 2013
-The Economic Times


MUMBAI: The Union Cabinet this week passed an ordinance to implement the National Food Security Bill (NFSB). The bill guarantees legal entitlement of food grains at a subsidised price to ~67 per cent of India's population. The ordinance will come into effect immediately once it is signed by the President.

But it also needs to be approved by both the houses of Parliament in the monsoon session within six weeks of first sitting. The implementation of NFSB will be done in phases and thus its impact on the FY14 fiscal deficit is likely to be limited.

The Centre has budgeted food subsidy for FY14 at ~Rs 900 billion, or 0.80 per cent of GDP. Extra burden on the government's finances in FY14 could be ~Rs 100 billion (~0.10 per cent of GDP) depending on the pace of implementation. Post NFSB's complete rollout, the bill's burden could be ~Rs 300-350 billion per year (~0.30-0.40 per cent of GDP).

In the medium term, while its social impact will be positive, the economic impact could be slightly negative. Besides increasing the burden on the government finances and fueling inflation, the NFSB could face implementation issues leading to resource wastage.

Moreover, passage of the NFSB ordinance at current challenging times for the Indian economy could partly hurt the ongoing recovery. Besides NFSB, the Indian markets will in the near term examine upcoming corporate earnings for the quarter gone by (1QFY14).

We do not see any meaningful signs of recovery in 1QFY14, as domestic demand conditions remain slack amid sticky inflation, high real interest rates, sluggish consumer sentiment, subdued business confidence and uncertain global backdrop.

Although demand is weak in overall terms, it is more pronounced in sectors such as metals, cement, infrastructure and auto.

At the same time, a drop of ~9.0 per cent in rupee during the April-June quarter will adversely impact the finances of Indian companies.

There could be some pressure on EBITDA margins owing to MTM losses on forex liabilities, although it is likely to be limited to accounting changes. Accordingly, PAT of India Inc will get impacted to some extent.

In terms of sectors, earnings from companies in metals, construction and cement sectors are likely to be the worst hit in the just-concluded quarter. Owing to muted vehicle sales, profits of most auto companies are expected to be subdued. On the positive side, companies in sectors such as pharma, telecom and private banks are expected to register commendable growth in profits.

(The analyst is Head of Research (Individual Clients), Edelweiss Financial Services)


The Economic Times, 6 July, 2013, http://economictimes.indiatimes.com/news/economy/indicators/food-security-bill-to-partly-hurt-ongoing-recovery-1qfy14-earnings-in-focus/articleshow/20942223.cms


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