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Policy&Politics

Riding high on strong defence flavour seen ahead

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One sector in recent times which is unlikely to be impacted by rising inflation and crude prices and will still continue to grow at a healthy growth in the next 2-3 years ahead is the domestic defence sector. This is largely due to the Government of India’s focus on Make-in-India program which has encouraged local production of defence products by Indian companies. Earlier in August 2020, the Defence Ministry had announced that India will stop the import of 101 weapons and military platforms like transport aircraft, light combat helicopters, conventional submarines, cruise missiles and sonar systems by 2024. Also in December 2021, the ministry released a list containing 2,500 items which have already been developed indigenously. It also released a list of 351 equipment that will be developed within the country by December 2024. In the last few years, the government has taken a series of measures to boost domestic defence manufacturing sector. In May last year, the government announced increasing the FDI limit from 49% to 74% under the automatic route in the defence sector. India is one of the largest importers of arms globally. According to estimates, the Indian armed forces are projected to spend around USD 130 billion in capital procurement in the next 5 years. But the government now wants to reduce dependence on imported military platforms and has decided to support domestic defence manufacturing. The Defence Ministry has set a goal of a turnover of USD 25 billion (Rs 1.75 lakh crore) in defence manufacturing in the next five years that included an export target of USD 5 billion (Rs 35,000 crore) worth of military hardware. T h u s , t h e I n d i a n d e f e n c e manufacturing industry has become a significant sector for the economy. The industry is likely to accelerate with rising concerns of national security. Demand for defence equipment in India has also been growing due to the ongoing territorial disputes, especially with Pakistan and China. Also, the recent outbreak of conflict between Russia and Ukraine early this year has forced all the countries in the world to give a fresh and closer look to their respective defence requirements, and India is no aberration. Over the last five years, India has been ranked among the top importers of defence equipment to gain technological advantages over its enemies. To modernise its armed forces and reduce dependency over external dependence for defence procurement, several initiatives have been taken by the government to encourage Make-in-India activities via policy support initiatives. In such a scenario, which are the companies that are likely to derive maximum benefit and grow exponentially in the days’ to come? One such company, which is a dominant leader in the entire defence value chain, is Bharat Dynamics Ltd. It is the sole manufacturer and supplier in India for surface-to-air missiles (SAMs), torpedoes, Anti-Tank Guided Missiles (ATGMs) to the Indian armed forces. The Indian missile market today is dominated by DPSU produced missiles and foreign solutions at present. However, there is a drive within the establishment to indigenise missile production as much as possible in order to extricate the armed forces from any external dependencies for missile systems in the future. At present, indigenous development and manufacturing is carried out by three DPSUs – DRDO, BDL, and BEL. Amongst the three, BDL is the main player in manufacturing and is the sole manufacturer in India for SAMs, torpedoes and ATGMs. Frost & Sullivan has estimated the total Indian guided missile and torpedo market to be worth $24.49 billion. 79% of the market valuation remains unaddressed and $19.41 billion worth of opportunities will emerge in the 2017-26 time-frame. Modernisation of the armed forces and new procurements in terms of fighters, IFVs, submarines, corvettes, frigates, etc will in turn drive procurement of guided missile and torpedo systems. BDL current order book stands at Rs 11,400 crore as on date, comprising the Akash Weapon System, LR SAM, MR SAM, INVAR (3 UBK 20) ATGM and the Konkurs-M ATGM. BDL expects exports to be a big focus area for its products going ahead. On a conservative basis, BDL is targeting Rs 25,000 crore order book in the next 3 years ahead, largely driven by both domestic and export markets. Recently, BDL and Indian Army have signed a contract worth Rs 3,131.82 crore for manufacture and supply of Konkurs-M ATGMs to the Indian Army. Konkurs-M is a second generation, mechanised infantry ATGM, to destroy armoured vehicle equipped with Explosive Reactive Armour. The missile can be launched either from BMP-II tank or from ground launcher. It has a range between 75 to 4,000 metres with a flight time of 19 seconds. All this has got reflected in FY22 numbers with revenue at Rs 2,817 crore (Rs 1,914 crore) and a profit after tax (PAT) of Rs 500 crore as compared to Rs 258 crore last year, with a net EPS of Rs 27 as compared to Rs 14 in FY21. We expect that going ahead overall bottomline growth in the next 3 years starting FY22 onwards should easily increase at a CAGR of 20-25% and with capex funded largely from internal cash flows. Also the company holds cash/ investments to the tune of Rs 1,900 crore as on March 22 making its net debt free as on date. From a valuation perspective, the BDL stock has corrected by 12% from its peak level earlier in April 2022 and currently trades at Rs 796 levels at a PE multiple of 20xFY23E. For BDL with a strong earnings growth engine of 20-25% annually expected over next 2-3 years ahead, makes the risk reward look attractive for retail investors wanting to buy quality defence businesses at reasonable valuations in such volatile markets. Hence, in conclusion, long-term investors looking at a 2 to 3 year timeframe should look at BDL now as a strong wealth-creating opportunity ahead as BDL is a small fish but in a big pond where the total addressable defence will provide ample growth opportunities ahead. (The author is the Head-Research at Profitmart Securities and a seasoned financial planner and equity researcher) BHARAT DYNAMICS LTD Riding high on strong defence flavour seen ahead I f you are a person who w a n t s t o b e happily retired in these extremely uncertain times a n d i n t h i s unpredictable world today, then read on: You have retired your debt… children have settled in their careers, if not their lives… You are unfazed by anything life throws at you and, even if yes, you have a support group to take care of stretch situations… The markets are uncertain by nature and they also test our temperament in investing. As they say, it never matches historically however it rhymes. As the structure of the world economy and the way things seem, nobody has an answer on what will happen next. However, if we try to put a structure to things, the work can keep moving in a measurable manner at least internally. What strategy will help in this situation? Most of the issues in investments are grounded in the reality of risk. This risk is to be mitigated by asset allocation and by information flows. Life happens while we are making plans. Let us assume you are in the camp who looks at the worst in all circumstances. You need to look at the following mix: (1) Ultra short-term funds – 3 to 6 months: 50% (2) Low duration ¬– up to 1 year of maturity: rest 50%. Why this? This helps to earn without the dip in capital which is seen in mediumterm bonds and long-term bonds. This allocation helps in the situation when interest rates are rising without undue risks in capital because of the impact in medium-term/long-term bond losses. Well, the worst does not happen and there is an increase in commodity prices we still need to beat inflation to ensure that things move uphill for our purchases. As it is 30-40 percent of raw material costs have been impacted across industries and prices are being passed on. Therefore, what we need is a sense of reality infused with a likelihood of possibility of returns: (1) Balanced funds – 70% (2) Debt – 20% (3) Large cap – 10%. Things keep moving and, therefore, a minimum time horizon of 5 years is essential for us to see growth in our investments. In reality, it takes 5 to 10 years of disciplined investing to change your life. In not-so-good times, preparation is essential to secure the future. May you make a wise choice! Starting your investing journey in this uncertain world? Be careful while seizing the opportunity. You are going through the initial phases of your career. Things seemed to have been good and are still ok however there is this perception of the world changing and the rug being pulled from under your feet. What is the world likely to be? The war may not be fought on Indian soil. Assuming it does, digital services are less likely to be impacted. If it happens, then it is likely to be an IndoChina affair. However, with a strong government at the Centre, we are likely to see an increase in defence spend, implying less spends on cement and infrastructure which is the trade-off during the war and the 5-trillion dollarmark may be pushed to 2030 instead of the IMF Projection of 2027-28. Consumption is likely to be stable. However, monsoons are a balancing act. Then things can be assumed to work with some sense of normalcy. If we are in the region of 90-95% of the long-term average, then things are likely to fall in place. However, the long-term production increases as the situation stabilises. The central banks are at the driving wheel and they are likely to print more money to improve the war situation as things stabilise. In the current situation, what do we do? 1. Have an emergency corpus for a year: It is critical to have a corpus for one year preferably basis interest. Assuming you spend Rs 50,000 a month, you need to have Rs 6 lakh in debt funds/fixed deposits. Why debt funds versus fixed deposits? Debt funds offer an indexation benefit. Let us say, interest rates are at 6 percent in an FD and tax rate is 30%, net return is 4.2%. In a debt fund, net return is likely to be in the region of 5.5-6 percent which is 1-1.8 percent more than the FD. 2. Keep the insurances handy: Mediclaim and insurance is important in a downturn as Covid issues till are existent till now. This would avoid a drain on precious savings. 3. Look at the future: It is important to look at the future while taking a step at a time. It is recommended to look at SIPs/STPs while considering investing in today’s world. It is imperative to look at Top Quartile, i.e. top 25 percent across 11,000 opportunities to ensure one beats index funds realistically. Carpe diem carefully. It is not an easy road. It is up to us to maintain our cool while judging what is right for us and our families. May you be a winner! (The author is the CEO and Principal Adviser at Ashiana Financial Services) IN UNCERTAIN TIMES Want to retire happily? Here is the investment plan

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Policy&Politics

Govt extends date for submission of R&D proposals

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The Government has extended the deadline for submission of proposals related to R&D scheme under the National Green Hydrogen Mission. The R&D scheme seeks to make the production, storage, transportation and utilisation of green hydrogen more affordable. It also aims to improve the efficiency, safety and reliability of the relevant processes and technologies involved in the green hydrogen value chain. Subsequent to the issue of the guidelines, the Ministry of New & Renewable Energy issued a call for proposals on 16 March, 2024.

While the Call for Proposals is receiving encouraging response, some stakeholders have requested more time for submission of R&D proposals. In view of such requests and to allow sufficient time to the institutions for submitting good-quality proposals, the Ministry has extended the deadline for submission of proposals to 27th April, 2024.

The scheme also aims to foster partnerships among industry, academia and government in order to establish an innovation ecosystem for green hydrogen technologies. The scheme will also help the scaling up and commercialisation of green hydrogen technologies by providing the necessary policy and regulatory support.

The R&D scheme will be implemented with a total budgetary outlay of Rs 400 crore till the financial year 2025-26. The support under the R&D programme includes all components of the green hydrogen value chain, namely, production, storage, compression, transportation, and utilisation.

The R&D projects supported under the mission will be goal-oriented, time bound, and suitable to be scaled up. In addition to industrial and institutional research, innovative MSMEs and start-ups working on indigenous technology development will also be encouraged under the Scheme.

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Policy&Politics

India, Brazil, South Africa to press for labour & social issues, sustainability

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The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment.

India, on Thursday, joined the G20’s two-day 2nd Employment Working Group (EWG) meeting under the Brazilian Presidency which is all set to address labour, employment and social issues for strong, sustainable, balanced and job-rich growth for all. India is co-chairing the 2nd EWG meeting, along with Brazil and South Africa, and is represented by Sumita Dawra, Secretary, Labour & Employment.

The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment. India has pointed out that the priority areas of the 2nd EWG at Brasilia align with the priority areas and outcomes of previous G20 presidencies including Indian presidency, and commended the continuity in the multi-year agenda to create lasting positive change in the world of work. This not only sustains but also elevates the work initiated by the EWG during the Indian Presidency.

The focus areas for the 2nd EWG meeting are — creating quality employment and promoting decent labour, addressing a just transition amidst digital and energy transformations, leveraging technologies to enhance the quality of life for al and the emphasis on gender equity and promoting diversity in the world of employment for inclusivity, driving innovation and growth. On the first day of the meeting, deliberations were held on the over-arching theme of promotion of gender equality and promoting diversity in the workplace.

The Indian delegation emphasized the need for creating inclusive environments by ensuring equal representation and empowerment for all, irrespective of race, gender, ethnicity, or socio-economic background. To increase female labour force participation, India has enacted occupational safety health and working conditions code, 2020 which entitles women to be employed in all establishments for all types of work with their consent at night time. This provision has already been implemented in underground mines.

In 2017, the Government amended the Maternity Benefit Act of 1961, which increased the ‘maternity leave with pay protection’ from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers. This is expected to reduce the motherhood pay gap among the working mothers. To aid migrant workers, India’s innovative policy ‘One Nation, One Ration Card’ allows migrants to access their entitled food grains from anywhere in the Public Distribution System network in the country.

A landmark step in fostering inclusion in the workforce is the e-Shram portal, launched to create a national database of unorganized workers, especially migrant and construction workers. This initiative, providing the e-Shram card, enables access to benefits under various social security schemes.

The portal allows an unorganized worker to register himself or herself on the portal on self-declaration basis, under 400 occupations in 30 broad occupation sectors. More than 290 million unorganized workers have been registered on this portal so far.

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Policy&Politics

India to spend USD 3.7 billion to fence Myanmar border

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India plans to spend nearly $3.7 billion to fence its 1,610-km (1,000-mile) porous border with Myanmar within about a decade, said a source with direct knowledge of the matter, to prevent smuggling and other illegal activities. New Delhi said earlier this year it would fence the border and end a decades-old visa-free movement policy with coup-hit Myanmar for border citizens for reasons of national security and to maintain the demographic structure of its northeastern region.

A government committee earlier this month approved the cost for the fencing, which needs to be approved by Prime Minister Narendra Modi’s cabinet, said the source who declined to be named as they were not authorised to talk to the media. The prime minister’s office and the ministries of home, finance, foreign affairs and information and broadcasting did not immediately respond to an email seeking comment.

Myanmar has so far not commented on India’s fencing plans. Since a military coup in Myanmar in 2021, thousands of civilians and hundreds of troops have fled from there to Indian states where people on both sides share ethnic and familial ties. This has worried New Delhi because of risk of communal tensions spreading to India. Some members of the Indian government have also blamed the porous border for abetting the tense situation in the restive north-eastern Indian state of Manipur, abutting Myanmar.

For nearly a year, Manipur has been engulfed by a civil war-like situation between two ethnic groups, one of which shares lineage with Myanmar’s Chin tribe. The committee of senior Indian officials also agreed to build parallel roads along the fence and 1,700 km (1,050 miles) of feeder roads connecting military bases to the border, the source said.

The fence and the adjoining road will cost nearly 125 million rupees per km, more than double that of the 55 million per km cost for the border fence with Bangladesh built in 2020, the source said, because of the difficult hilly terrain and the use of technology to prevent intrusion and corrosion.

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Policy&Politics

ONLY 2-3% RECOVERED FROM $2-3 TN ANNUAL ILLEGAL TRADE THROUGH BANKING: INTERPOL

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However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity.

In a press briefing held on Wednesday, Interpol Secretary General Jurgen Stock unveiled alarming statistics regarding the extent of undetected money laundering and illegal trade transactions plaguing the global banking network. Stock revealed that over 96% of the money transacted through this network remains undetected, with only 2-3% of the estimated USD 2-3 trillion from illegal trade being tracked and returned to victims.

Interpol, working in conjunction with law enforcement agencies and private financial sectors across its 196 member countries, is committed to combating the rising tide of fraud perpetrated by illicit traders. These criminal activities encompass a wide spectrum, including drug trafficking, human trafficking, arms dealing, and the illicit movement of financial assets.

Stock emphasized the urgent need to establish mechanisms for monitoring transactions within the global banking network. Currently, efforts are underway to engage banking associations worldwide in setting up such a framework. However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity. The lack of real-time information sharing poses a significant obstacle to law enforcement agencies in their efforts to combat money laundering and illegal trade.

Stock underscored the role of Artificial Intelligence (AI) in exacerbating this problem, citing its use in voice cloning and other fraudulent activities. Criminal organizations are leveraging AI technologies to expand their operations and evade detection on a global scale. Stock emphasized the importance of enhanced cooperation between law enforcement agencies and private sector banking groups. Realtime information sharing is crucial in the fight against illegal wealth accumulation.

Drawing inspiration from initiatives such as the “Singapore Anti-Scam Centre,” Stock called for the adoption of similar models in other countries to strengthen the collective response to financial crimes. In conclusion, Stock’s revelations underscore the pressing need for concerted action to combat global financial crimes. Enhanced cooperation between public and private sectors, coupled with innovative strategies for monitoring and combating illicit transactions, is essential to safeguarding the integrity of the global financial system.

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Policy&Politics

FM defends Atal Pension Scheme, highlights guaranteed returns

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Finance Minister Nirmala Sitharaman defended the Atal Pension Yojana (APY) against Congress criticism, asserting its design based on choice architecture and a guaranteed minimum 8% return. She emphasized the scheme’s opt-out feature, facilitating automatic premium continuation unless subscribers choose otherwise, promoting retirement savings. Sitharaman countered Congress allegations of coercion, stating the APY’s guaranteed returns irrespective of market conditions, supplemented by government subsidies.

Responding to Congress’s claim of scheme misuse, Sitharaman highlighted its intended beneficiaries – the lower-income groups. She criticized Congress for its alleged elitist mindset and emphasized the scheme’s success in targeting the needy. Sitharaman accused Congress of exploiting vote bank politics and coercive tactics, contrasting it with the APY’s transparent framework. The exchange underscores the political debate surrounding social welfare schemes, with the government defending its approach while opposition parties raise concerns about implementation and efficacy.

Finance Minister Nirmala Sitharaman’s robust defense of the Atal Pension Yojana (APY) against Congress criticism highlights the ongoing debate over social welfare schemes in India. Sitharaman’s assertion of the APY’s design principles, including its opt-out feature and guaranteed minimum return, underscores the government’s commitment to promoting retirement savings among lower-income groups. The Atal Pension Yojana, named after former Prime Minister Atal Bihari Vajpayee, was launched in 2015 to provide pension benefits to workers in the unorganized sector. It aims to address the significant gap in pension coverage among India’s workforce, particularly those employed in informal and low-income sectors. The scheme offers subscribers fixed pension amounts ranging from Rs. 1,000 to Rs. 5,000 per month, depending on their contribution and age at entry, after attaining the age of 60. Sitharaman’s response comes after Congress criticism alleging the APY’s inefficacy and coercive tactics in enrolment.

Congress General Secretary Jairam Ramesh described the scheme as poorly designed, citing instances of subscribers dropping out due to unauthorized account openings. However, Sitharaman refuted these claims, emphasizing the APY’s transparent and beneficiary-oriented approach. The finance minister’s defense focuses on three key aspects of the APY: Choice Architecture: Sitharaman highlights the opt-out feature of the APY, which automatically continues premium payments unless subscribers choose to discontinue.

This design element aims to encourage long-term participation and ensure consistent retirement savings among subscribers. By simplifying the decision-making process, the scheme seeks to overcome inertia and promote financial discipline among participants. Guaranteed Minimum Return: Sitharaman underscores the APY’s guarantee of a minimum 8% return, irrespective of prevailing interest rates. This assurance provides subscribers with confidence in the scheme’s financial viability and incentivizes long-term savings.

The government’s commitment to subsidizing any shortfall in actual returns further strengthens the attractiveness of the APY as a retirement planning tool. Targeting the Needy: Sitharaman defends the predominance of pension accounts in lower income slabs, arguing that it reflects the scheme’s successful targeting of its intended beneficiaries – the poor and lower-middle class. She criticizes Congress for its alleged elitist mindset and suggests that the party’s opposition to welfare schemes like the APY stems from a disconnect with the needs of marginalized communities. Sitharaman’s rebuttal also addresses broader political narratives surrounding social welfare policies in India.

She accuses Congress of exploiting vote bank politics and coercive tactics, contrasting it with the transparent and inclusive framework of the APY. The exchange underscores the ideological differences between the ruling Bharatiya Janata Party (BJP) and the opposition Congress, with each side advocating for their vision of social welfare and economic development. In addition to defending the APY, Sitharaman’s remarks shed light on the broader challenges and opportunities facing India’s pension sector.

Despite significant progress in expanding pension coverage through schemes like the APY, the country still grapples with issues such as financial literacy, informal employment, and pension portability. Addressing these challenges requires a multifaceted approach involving government intervention, private sector participation, and civil society engagement.

As India strives to achieve its vision of inclusive and sustainable development, initiatives like the APY play a crucial role in promoting economic security and social equity. Sitharaman’s defense of the scheme underscores the government’s commitment to addressing the needs of vulnerable populations and ensuring their financial well-being in the long run.

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Economic

Regulatory steps will make financial sector strong, but raise cost of capital

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India’s financial system regulator, the Reserve Bank of India (RBI), is demonstrating a serious commitment to improving governance and transparency at finance companies and banks, with the RBI’s recent measures aimed at curtailing lenders’ overexuberance, enhancing compliance culture and safeguarding customers.

While the global ratings firm has appreciated the RBI’s “diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues”, it has cautioned that increased regulatory risk could impede growth and raise the cost of capital for financial institutions. “Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” says S&P Global Credit Analyst, Geeta Chugh. “India’s regulator has underscored its commitment to strengthening the financial sector. The drawback will be higher capital costs for institutions,” Chugh cautions.

The RBI measures include restraining IIFL Finance and JM Financial Products from disbursing gold loan and loans against shares respectively and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages. These actions are a departure from the historically nominal financial penalties imposed for breaches, S&P Global notes.

Besides, as the global agency points out, the RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities and become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. “We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” adds Chugh. The global agency has also lauded the RBI’s recent actions demonstrating scant tolerance for any potential window-dressing of accounts.

These actions include the provisioning requirement on alternative investment funds that lend to the same borrower as the bank finance company. Amidst the possibility of some retail loans, such as personal loans, loans against property, and gold loans getting diverted to invest in stock markets and difficulty of ascertaining the end-use of money in these products, S&P Global underlines the faith of market participants that the RBI and market regulator, the Securities and Exchange Board of India, want to protect small investors by scrutinizing these activities more cautiously.

On the flip side, at a time of tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). “We expect loan growth to decline to 14 per cent in fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions,” says Chugh. The other side of the story is that stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities and the RBI’s decision to raise risk weights on unsecured personal loans and credit cards may constrain growth. Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans.

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