The wholesale price index (WPI) inflation for the month of December eased to a 3-month low of 3.58% largely on the back of decline in food prices. WPI inflation is largely driven by supply side factors and the poor prices that farmers are getting are getting reflected in lower WPI inflation. It also underlines the poor management of the agricultural supply chain where wastage itself leads to losses to the tune of billions of dollars each year. It may be recollected that the CPI inflation had touched 5.21% in December on the back of higher food prices and higher fuel prices.
The trade deficit for the month of December 2017 came in at a sharply higher level of $14.9 billion. This is nearly $2 billion above the average trade deficit that we have been seeing in the past few months. Apart from higher prices of oil, gold imports were up by 72% at $3.39 billion as the year-end demand led to sharp rise in gold imports. This is raises a unique problem for the RBI. Exports have not been able to keep pace with imports due to a strong rupee. The full year imports could cross the $500 billion mark and leave the RBI with just about 9 months of forex reserves.
Ernst & Young expects that the forthcoming budget may do away with the Dividend Distribution Tax (DDT) but the 10% tax on dividends may remain as it is more progressive in nature. The imposition of 10% tax was an additional level of tax only for high net worth shareholders. However, the DDT impacts all shareholders uniformly. That is the reason the government may choose to do away with the DDT. However, EY also believes that reintroduction of tax on long term capital gains was unlikely as it would lead to a huge dent in the attractiveness of equities.
After South Korea, it is the turn of China to crack down on crypto currencies trades. It is hardly surprising that the price of Bitcoin, which had crossed $20,000 last month, had fallen closer to the $13,400 mark. This fall was largely driven by the negative view taken by South Korea. Now China has followed suit. The Chinese government now plans to ban home-grown and offshore platforms that enable centralized trading in Bitcoins. Chinese authorities will also target individual who are providing market making in these crypto currencies. China was the most active market for Bitcoin trading.
The Indian government plans to split Air India into four parts before selling it to prospective buyers. The government will offer 51% in each of these 4 parts. The core aviation business of Air India and Air India Express will be offered as one business. Then the assets and liabilities of the airline will be split into different companies with real estate into a separate entity. Air India will be the first strategic sale that the Modi government will attempt and it is important as it will become a template for future such sell offs. Similarly, its regional arm, the ground handling and engineering operations will be sold as another company. Air India sits on over Rs.50,000 crore of debt and the government is unwilling to pump more public money into the beleaguered airline.
The US dollar, which was the worst performing currency last year among developed economies, continues to weak versus the Euro. The irony is that EU is likely to grow faster than the US and that growth differential is representing itself in the form of dollar weakness. The Bloomberg dollar index is already at its lowest level in 3 years and reflects a sharp fall from the highs of the Trump trade. The recent news that China planned to sell US treasuries is also weighing on the dollar. Markets appear to be more excited about growth in Japan and EU rather about growth in the US.
