There are two aspects to the news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Fifty Second Edition we are covering the following news:
- Why has OYO moved towards NCLAT challenging insolvency plea against a subsidiary
- Economic missteps during recovery from pandemic
- Indian crew to face legal charges for Suez blockade
- China’s parliament approves Hong Kong electoral system reform plan
- Biden’s corporate tax hike could shrink economy
- Steel prices are making India’s economic recovery harder
Hospitality chain OYO has approached the National Company Law Appellate Tribunal (NCLAT) against an order of the Ahmedabad bench of the National Company Law Tribunal (NCLT) admitting an insolvency petition against OYO Hotels and Homes Private Limited (OHHPL), a subsidiary of the parent group. The NCLT admitted the petition of a supplier who claimed to have not been paid Rs 16 lakh by OYO.
The Ahmedabad bench of NCLT had on April 1 admitted an insolvency plea against OHHPL after a creditor approached the tribunal claiming a default of Rs 16 lakh. The NCLT admitted the plea and appointed an interim resolution professional to manage the day-to-day proceedings of the company. It had then also asked all creditors to submit their claims with proof on or before April 15. The initiation of insolvency against the subsidiary led to incorrect reports claiming that the entire OYO group had filed for insolvency.
On Wednesday, Ritesh Agarwal, the group chief executive officer of the hospitality chain, denied the reports and said that a claimant had sought Rs 16 lakh from its subsidiary, which led to the case at NCLT. In a statement later, though the company said it was surprised that the NCLT had admitting a petition against OHHPL for a contractual dispute, it also said that it would “refrain from commenting further on the merits of the matter” since the matter was sub-judice.
Founded in 2013 as a way to reserve budget accommodations online with reliable quality, OYO soon became a benchmark in budget hotel room bookings across the country. Flush with funds from Japan-based Softbank Group Corp, the platform had been on an aggressive global expansion scheme, before being halted by the outbreak of the Covid-19 pandemic and the subsequent lockdowns.
The actions taken by countries during the coronavirus pandemic to prevent a deeper economic downturn may have unintended consequences. Valuations for risk assets have become stretched, financial vulnerabilities have intensified and continuing policy support remains necessary, but a range of policy measures are needed to address vulnerabilities and to protect economic recovery.
There are three priorities. First, addressing corporate sector vulnerabilities and repairing balance sheets. Second, tightening some macro-prudential tools in advanced economies is important to safeguard financial stability and to enhance supervision and regulation of nonbanking financial institutions. Third, rebuilding buffers in emerging markets.
In the year ahead, the creativity is likely to be severely tested again, as they confront the challenge of guiding their economies through recoveries, stretched market valuations and strained social divisions. Policymakers must continue to promote those easy conditions until the strength of the recovery is ensured. By contrast, in countries where the recovery is slower and vaccinations are lagging, policymakers may be forced to lean against unwarranted tightening. Given their large external financing needs and their slow progress on vaccinations, emerging markets are likely to face daunting challenges.
With their sizable financing needs this year, emerging markets are exposed to rollover risk which will be complicated further if domestic inflation rises or if global long term interest rates continue to rise and for many frontier market economies, market access remains impaired. In many countries, the corporate sector is emerging from the pandemic over indebted. Whether the economic recovery will be uneven and whether it would suffer from scarring effects will depend on the ability and willingness of banks to lend once support is unwound by the governments.
Concerns about the credit quality of hard hit borrowers and about the profitability outlook are likely to weigh on the risk appetite of banks. Even if most banks have ample capital buffers, only a few may be willing to use the buffers to lend and support the recovery.
The measures that were taken to contain the pandemic in China were very quick and very effective, and as a result, the Chinese economy recovered to pre-crisis levels already last year in 2020, so that places China in a very good situation; but there were measures that were deployed, that did lead to further increase in leverage and in certain vulnerabilities. In China, there have been pre-existing vulnerabilities already prior to the pandemic, such as certain weaknesses in small and provincial banks, as well as leverage in some segments of the corporate sector. So, having a policy approach that is addressing those vulnerabilities is very much first order.
With the container ship ‘Ever Given’ that had blocked the Suez Canal since March 23 wrenched free from the sandy bank by tug boats this week, the next big concern for its crew comprising 25 Indians is how the Suez Canal Authority will treat them. Both the Indian government and the seafarers’ organisations are concerned about the legal issues that the crew may face, including the possibility of criminal charges. One of the possibilities is that the captain and some of the crew may be restrained from travelling further. They could be placed under house arrest until investigation is completed into the cause of the accident. The ship management, however, has not explained anything about the legal procedures the crew will have to go through. While Berhard Schulte Ship Management (BSSM) did not reveal the names of the 25 Indian seafarers, All the 25 crew members are reported safe and accounted for and they remain in good health. They are working closely with all parties involved to refloat the vessel. The hard work and tireless professionalism of the master and crew is being greatly appreciated. Despite the appreciation that has come in the way of the Indian seafarers, a legal wrangle is what will inevitably follow.
Meanwhile, the National Union of Seafarers of India (NUSI) based in Mumbai has expressed solidarity with the Indian seafarers. ‘Ever Given’ got stuck in the crucial Suez Canal on March 23, leading to a massive traffic jam. This resulted in more than 350 vessels carrying everything from cattle, clothes to crude oil and furniture getting stranded on both sides.
The decision making body at the helm of China’s parliament unanimously approved a plan for reforms in Hong Kong’s electoral system. China’s National People’s Congress Standing Committee approved the plan with a vote of 167-0. Earlier on March 22, eight Hong Kong democracy activists detained in China last year for illegally crossing the border were due back in the city after completing jail terms, in a case that drew international attention and concern over their treatment. They were among 12 activists whose boat was intercepted at sea by mainland authorities in August 2020 allegedly en route to the democratic island of Taiwan. All had faced charges in Hong Kong over the pro-democracy protest movement. The activists were arrested under a sweeping national security law Beijing imposed on the Asian financial hub in June 2020 that critics say is aimed at crushing dissent. Pro-democracy activists began fleeing Hong Kong for democratic Taiwan from the early months of the protests in 2019, most of them legally by air, but some by boat. Hong Kong, a former British colony, returned to Chinese rule in 1997 with the guarantee of freedoms not seen on the mainland, including freedom of speech and assembly. Democracy activists complain that Communist Party rulers in Beijing are whittling away at those freedoms, a charge China rejects. Since Beijing imposed the national security law on Hong Kong, scores of democracy campaigners have been arrested, some elected legislators have been disqualified and others have fled overseas.
US President Biden recently unveiled details of a $2.25 trillion infrastructure that would be funded by dramatically raising the taxes paid by U.S. corporations. This increase could have a detrimental side effect on the U.S. economy. The eight-year initiative, dubbed the American Jobs Plan, comes after Biden’s $1.9 trillion American Rescue Plan. The White House said it will pay for the latest package by raising the corporate tax rate to 28% from 21% and increasing the global minimum tax on U.S. corporations to 21% from 13%.
Recent findings from the Tax Foundation show that Biden’s plan to raise corporate taxes would reduce GDP, the broadest measure of goods and services produced in the country, by 0.8%, eliminate 159,000 jobs and reduce workers’ wages by 0.7%.
According to an economic analysis the corporate income taxes are one of the most harmful tax types for economic growth, as capital investment is sensitive to corporate taxation and the corporate income tax raises the pretax return firms required to pursue investment opportunities, reducing the pool of investments that firms find worthwhile to pursue. This lowers long-run economic output, reducing wages and living standards.
By hiking the corporate tax rate to 28%, Biden would also bring the federal-state combined tax rate to roughly 32%, “harming U.S. economic competitiveness and increasing the cost of investment in America.” Biden is pitching the tax increases in order to offset the cost of the infrastructure bill over the next 15 years.
Republicans have slammed the infrastructure package. Several moderate Democrats in the House have also signalled that they will not support the bill — risking its passage. If the American Rescue Plan becomes law, top American banks will likely see their tax bill rise surge: The nation’s six biggest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — could owe as much as $11 billion more in taxes. The corporate tax increase would generate about $740 billion in new revenue over the next decade.
Indian businesses are worrying about the inflationary pressure of steel even as concerns over oil prices continue to increase. The price of steel has gone up by 33% since April 2020 due to a strong surge in demand from some emerging markets and Europe, China and the US. What is contributing to this price rise? The answer is simple – the huge stimulus packages by governments across the world and the unlocking of economic activity with the growing optimism around vaccination.
Mumbai based CARE Ratings stated in its report that while this upward cycle in steel prices is a relief to domestic steel companies, struggling with low demand and stagnant prices, it has intimidated end-user sectors who are worried about the sharp rise in their raw material cost. The construction and real estate sector contribute to 60% of India’s steel consumption. They would naturally be the worst hit because of this price rise. Ministry of road transport has warned that the soaring steel prices are making infrastructure projects unviable. Furthermore, the second biggest consumer of steel in India, the auto-sector, is also under pressure because of this and they are forced to take a price hike at a time when the demand for four and two wheelers is weak.
This can have an adverse impact on Indian economy as a whole. If inflation further spikes, it will hurt people’s spending power and thereby demand recovery. At the same time, it will hurt job creation as the worst affected sector such as infrastructure and auto are labour intensive.