Protectionist Policies Looming Over Indian IT Sector

India's US$115 billion software services sector has come under tremendous pressure since Donald Trump took over the US presidency, thanks to the protectionist policies and immigration restrictions from the international markets, which make up a bulk of the Indian IT companies' revenues.

The US, under a new executive order signed by US President Donald Trump, proposes to replace the current lottery system for issuing H1B work visas with a merit-based approach. The country is reviewing its visa program for foreign workers to curb purported abuse and frauds related to visas.

This system is designed to help US companies hire highly skilled foreign workers only when there is a shortage of skilled employees in the country.

Employers applied for about 16% fewer H1B visas than in 2016 (199,000 applications this year, compared with 236,000 last year.

Meanwhile, Finance Minister Arun Jaitley has raised the issue of changes in the H1B visa regime, stating that the recent executive orders of US President Donald Trump indicate a possible tightening of the visa regime.

In his bilateral meeting with the US Commerce Secretary, in the US, Jaitley outlined the significant contributions skilled Indian professionals have made to the US economy. He expressed hope that the US administration will take this into consideration while taking any decision regarding curbing visas to Indian companies.

It is not just the US slowly closing its doors to relatively cheap immigrant workers; there is already an air of protectionism in the global markets. Singapore and the UK are both cutting down on visas to Indians in the IT sector, while also increasingly protecting high-paying computer engineering jobs for locals.

Similarly, Australia has abolished a work visa program -- 457 visa -- used by over 95,000 temporary foreign workers, a majority of them Indians, to tackle the growing unemployment in the country.

The Indian government is raising its voice against protectionist policies by countries like the US and Australia to tighten their visa regime and pressed for a World Trade Organisation (WTO)-backed global framework to facilitate services trade.

The proposal is aimed at liberalising rules for movement of professionals.

An overall protectionist trend is expected to hit the Indian IT firms' bottom line. Especially in the US, which accounts for more than 50% of revenues of India's IT majors. Indian IT companies such as Infosys, Wipro, and TCS could take a hit on their revenues in the short term.

However, we believe that it is unlikely that the companies will substantially reduce their focus on the US. Instead, companies may look for other means to reduce costs or protect margins.

Moving on to news from China...

China's first quarter GDP growth hit 6.9%, better than expectations and the fastest in six quarters. A recovery in China's industrial sector drove the growth. Manufacturing grew 7% compared to first quarter last year.

China's factory output rose 7.6% in March YoY, the fastest since December 2014. Fixed asset investment grew 9.2% in the first quarter. Retail sales rose 10.9% in March from a year earlier. Private investment rose 7.7% in first quarter. China's steel output rose 1.8% in March to a monthly record of 72 million tonnes.

However, growth in the construction industry slowed to 5.3% from 5.9% at the end of last year. The property sector grew 7.8% from 7.7% in the first quarter. The finance industry rose to 4.4% from 3.8%.

The data comes as a cheer to the Chinese economy. In our view, the dragon economy has plenty of legs left to stand on. A detailed report in Vivek Kaul's Inner Circle (requires subscription) points out some positive signs emerging in the Chinese economy, without undermining the longer-term risks and challenges.

In news from UK, British Prime Minister Theresa May called for a snap election on 8 June. The move is viewed as positive as it will create a more stable political outlook for Brexit to happen. The election will help strengthen her party's majority in government ahead of Brexit negotiation.

After the news, the pound sterling rose to its highest level against the dollar since early October.

Indian Stock Markets Steady Despite Geopolitical Tensions

Back home, the Indian indices ended their weekly session on a positive note. The BSE Sensex was down 0.33% for the week, while the NSE Nifty was down 0.35%.

Realty (11.45% up) and utilities (3% up) were the biggest gainers for the week. Metal (2.74% down), Healthcare (2.21% down), and FMCG (0.91% down) were the biggest losers for the week.

According to data released by the Central Statistics Office (CSO), wholesale price inflation (WPI) eased to 5.7% in March as compared to 6.6% in February this year.

However, WPI was in the negative zone, at -0.5% in March last year.

The fall in inflation can be attributed mostly to falling oil prices, with the inflation for fuel and power segment coming in at 18.2% in March compared to 21% for the previous month.

The build up inflation rate so far this financial year is 5.7% compared to a build up rate of -0.45% in the corresponding period of the previous year.

Since the start of financial year 2016-17, WPI has been rising consistently, so much so that in February it reached to a four-year high due to a rise in fuel inflation (21%) and a lower base in the previous year's index.

Interestingly, core WPI, which has been increasing since July 2016, declined marginally to 2.4% in February 2017 - it was at 28-month high of 2.7% the previous month.

The decline was led by a marked fall in fuel and manufacturing products inflation. While this came as a welcome breather, the same is expected to rise as the notebandi cash crunch normalises. So when consumer spending returns to normal, we should all be on guard for rising inflation.

However, the sharp correction in crude oil prices over the last week should help douse minerals inflation in March 2017. Moreover, the continued appreciation of the rupee relative to the US dollar would dampen the landed cost of imports. In addition to this, the RBI has slowed the pace of remonetisation in March, which will reduce spending over time.

Such trends are likely to keep the WPI below the 6% mark for this month.

In other news, the World Bank yesterday said that the Indian economy will claw back to 7.2% growth this financial year and 7.5% in 2018-19.

However, the World Bank noted that significant risks to economic growth could emanate from fallout of notebandi on the small and informal economy, stress in the financial sector, and global uncertainty.

Meanwhile, as per an article in the Economic Times, about 10% of the 60,000-plus people employed in telecom tower companies could lose their jobs over the next year.

This is the result of rapid consolidation among telecom service providers which hurts tenancies and revenue at the infrastructure firms. The consolidation has forced recruiters to sharply reduce their hiring in the above segment by up to 50%.

This development will contribute to India's big unemployment crisis. It will also threaten India's demographic dividend.

Note that we have a big unemployment crisis that can derail the growth of the Indian economy.

However, the irony is India also faces a severe staff shortage. The shortage ranges between 20% to 50% in all the crucial services - i.e. defence, HRD, health, home, finance, and law.

As per Vivek Kaul's analysis, a little over twelve million individuals will join the workforce every year in the years to come. This works out to around one million a month. And at this rate, the Indian workforce is expected to be larger than China's by 2030.

The demographic dividend benefits a country if the government of the day is able to create the right environment in which jobs are created. And from what we see, we are failing miserably on this front.

But this is not the only crisis hitting India's economy now. To know more, refer to Vivek's special report.

In the news on the goods and services tax (GST), the government is now looking to bring variations in GST rates on the same types of products to a minimum.

This is to ensure that the GST structure does not get any more complicated.

Presently, India has adopted a four-tier tax structure of 5%, 12%, 18%, and 28% under the GST regime for various products and services.

The rate applicable on most products is 18%. The highest rate allowed by GST law is 40%. Since there is a huge gap between these two rates, many believe the GST structure will undermine the basic tenet of simplicity. That's what the initiative aims to resolve.

We believe the implementation of the GST promises to transform India into a single common market and many sectors stand to gain immensely from this transition.

Further, the goods and services tax (GST) is likely to bring about a structural change in the Indian economy. It's bound to bring more companies under the new tax regime, thus providing a level playing field to organised players.

This could be a positive for stock market participants, as the transition will lead to a value migration from unorganised players to organised players. And companies with solid fundamentals and a competitive moat will capture most of this value.

Nifty 50 Index Ends in the Red

The Nifty 50 Index traded on a volatile note during the week. On Monday, it opened lower but traded in a narrow range. The index opened gap up the next day and rallied 80 points in the first half of the session. As geopolitical tensions loomed, the index slipped more than 100 points in the second half of the session. The selling pressure continued until Wednesday close but did not last long as the index recovered 33 points in the next session. Finally, On Friday, the index opened 43 points gap up but gave up the gains towards the end of the session. The Nifty ended its weekly session 0.35% down. The 8,950-9,000 level remains a strong support zone for the index.


Gold Trades on a Volatile Note

Gold traded on a volatile note during the week. On Monday, it opened higher and continued to trade upwards till next day closing. Gold held steady supported by geopolitical tensions over North Korea. But the buying interest did not continue for long and gold witnessed some selling pressure midweek and drifted lower on profit booking. Finally, on Friday, gold resumed its up move and ended the weekly session flat.

Gold Ends Flat

Silver Witnesses Selling Pressure

Silver traded in a downtrend during the week. It opened the weekly session higher but slipped immediately to end the session negative. The white metal continued to trade down throughout the week. The selling was seen on back of weak trend overseas. On Friday, silver witnessed some more selling and ended the week with 3.01% loss.

Crude Oil Plunges 7% for the Week

Crude oil traded on a negative note during the week. It opened its session down on Monday and continued to trade south throughout the week. The commodity fell as US government report indicated rising production. The selling continued on Friday as well and the commodity ended its weekly session with 7.20% loss.

Crude Oil Witnesses Selling Pressure

Natural Gas Witnesses Volatility

Natural gas traded on a volatile note during the week. On Monday, it opened the session gap down and traded down until next day close. On Wednesday, the commodity opened gap up and traded positively till the close of the session. The buying seen due to favorable weather forecast. But the buying interest did not last for long and commodity slipped sharply the next day. It fell after the weekly storage data turned unfavorable. Finally, on Friday, natural gas witnessed some more selling pressure and ended the week with down by 2.85%.


Dollar Trades on a Positive Note

The dollar traded on a positive note during the week. It opened its session higher on Monday and continued to trade positively until Tuesday close. It rose on dollar demand from importers amid growing geopolitical unrest. Midweek, the currency witnessed some profit booking. Finally, on Friday, the currency continued its uptrend and ended the weekly session with 0.22% up.

Marginal Gains for Dollar

Euro Hits Three-Week High

The euro traded in an uptrend during the week. It opened the weekly session lower but ended the session positive. The currency continued its uptrend throughout the week to hit a three-week high. The buying was seen as new opinion poll indicated the centrist candidate will win the French election. The currency witnessed some profit booking on Friday and ended its weekly session 0.67% up against the Rupee.

Pound Witnesses Buying Interest

The pound too traded in an uptrend during the week. It opened the weekly session higher and continued to trade up until midweek. The currency rose as UK PM called for early general election. The currency witnesses slight profit booking towards end of the week. On Friday, traded down against the rupee but ended the weekly with 2.10% gains.

Yen Trades Down After Initial Spurt

The yen traded on a mixed note during the week. On Monday, it opened the session gap up. But the buying did not last for long and the currency kept drifting lower throughout the week. The weakness was seen after trade data and comments from the finance ministry on central bank independence. Finally, on Friday, the yen continued to trade lower but ended the weekly session with marginal gains of 0.08%.

Commodities 13th Apr 21th Apr % Change
Gold/10 gms 29,409 29,418 0.03%
Silver/kg 42,571 41,289 -3.01%
Crude Oil/barrel 3,457 3,208 -7.20%
Natural Gas/mmBtu 207.10 201.20 -2.85%
Currencies 13th Apr 21th Apr % Change
USD / INR 64.50 64.64 0.22%
EUR / INR 68.70 69.16 0.67%
GBP / INR 80.95 82.65 2.10%
JPY / INR 59.20 59.25 0.08%

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