GST article in Business Today

GST impact: Business class can't avoid paying taxes; prices of most consumer items to come down

R.Kannan   New Delhi     Last Updated: July 7, 2017  | 08:24 IST

The Goods and Services Tax (GST) is a path-breaking change in the world's tax system. This type of large change was not effected in any part of the world earlier. The system will take two-three years to stabilise. In the beginning, there will be a lot of issues and several stakeholders, including state governments and industry associations, are not certain about the effects of GST on their finances and business models. Once it is introduced, there will be several changes in rates and classifications of commodities and services. The government has already set up an organisation to address the teething problems regarding GST.

Impact on the economy

GST is likely to bring many of the entrepreneurs, who are not paying taxes today, under the tax net and increase the government's revenue. Further, the transactions happening in the parallel economy will be captured in official statistics, resulting in higher GDP. It will increase tax collections and reduce the budget deficit, and the government will be able to spend more on economic development.

In the financial year 2016/17, services constituted 53.8 per cent of the Gross Value Added (GVA). Now, an increase in service taxes by 3 per cent will see an increase by Rs 40,000 crore. With an expected 10 per cent growth in services within the economy, service tax collections alone can go up to Rs 75,000-1,00,000 crore, a very large increase over the previous year. The cost of services provided by banks and non-banking financial companies (NBFCs), telecom companies and housing societies will also go up. There will be an increase in cost to the customers.

Impact on the consumers

In more than 50 per cent consumer goods, the cost is likely to come down. In case of services availed by the consumers like telecom, banking, financial Services, online shopping, insurance, eating out, airline travel and housing society, charges will go up. Consumers will have to brace themselves to pay higher bills for services availed. Since there is no pass through for fuel, they are likely to remain the same. Television, movie tickets, processed food and cement are likely to become cheaper. Car buyers can rejoice as the mid-segment cars will be neutral under GST. Small cars are likely to become cheaper. However, luxury or SUV cars are set to become expensive. Wherever the manufacturers see reduction in costs, they have to pass on to the consumer under the anti profiteering rule. Overall, the customer should see a net gain.

What it means for large corporate houses

As an anti-profiteering provision has been made, large companies have to pass on the saving in any of the costs due to the introduction of GST. In case the costs go up due to supply chains not being ready with GST registrations and filings, the costs will either have to be absorbed or have to be passed on to customers. However, no corporate can increase profits on account of GST. In the next three to six months, due to the uncertainty in demand and change in distribution models, inventory is likely to go up, and the working capital requirement is set to rise, which is expected to increase the cost of funds.

Several companies have availed investment benefits, which were for a 10-20 year period, and it is not clear how the transfer of benefits under the new system will pan out.

Will SMEs suffer?

Small and medium businesses have also been brought under GST. Here, the tax will be uniform for all and it will increase cost at the point of supply. As all transactions will be captured in the GST regime, it will have an effect on additional tax collections under the income tax. According to a provision, if the turnover is less than Rs 20 lakh per annum, there is no need for registration and payment of GST. However, many small companies are suppliers to large companies, and they have to register under GST if they want to continue with it.

Today, the distribution of goods is organised in sync with the rates asked by the states and the warehouses. As the rates will be synchronised now, there will be no need to keep so many clearing and forwarding (C&F) agents across the states, and warehousing and distribution could be optimised. This move will lead to consolidation of fragmented industries, and many small and medium industries will have to be consolidated.

In the short run, there will be a lot of issues and the small and medium enterprises will require guidance from the government and large buyers. In the long run, GST would be beneficial for all stakeholders, and it will be good for India's economic growth.

R. Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group

Hidden Strengths of Public Sector Units ( PSUs) in India

PSUs in India have played a major role in building the Indian Economy and the Industrial Development in India. After the Industrial Policy of 1956, many new PSUs were created in India serving the strategic needs and forming the base for Industrial Development. In each of the PSU in the sector , the PSUs emerged as  leaders in the  sector.

After opening of the Economy in 1991 and emergence of competition, many of the leading PSU’s lost their charm and started making losses. They had lost their leadership position and became marginal in the sectors they were the leaders.

Even today, some of the units are able to maintain the market leadership and operate very successfully keeping their competitiveness alive. PSUs including the loss making ones have lot of hidden advantages and their intrinsic value is much higher than the accumulated losses and there is a good scope for turning around them.

1. Land Bank. Most of the PSUs have land banks in leading cities in India and their value far exceeds their book value. Some times, the value could be even more than 10 to 20 times of their book value. Capitalising the land bank by sale, lease and joint development will provide the required competitiveness going forward. The concepts of REIT’s and Invit’s could be explored. In case of sick units, the land bank could be capitalised, the loans repaid and there will be scope for payment of dividend and meeting employee liabilities. Some of the PSUs sitting on huge land include Railways, BSNL,MTNL and the leading Public Sector banks.
2. Assets at low historical costs. In many cases, the equipments are in operations ,even after the economic life is over. The assets are reported at historical costs. Their replacement value and market value are much higher than the value in the books. Even after incurring high maintenance expenses, still they are able to produce products which are much cheaper than others.
3. Social Infrastructure / Town Development / Social Development. The PSUs in many cases are mega enterprises. While they were being formed about one third of their investments were towards , development of town around factories, schools, colleges , hospitals. Apart from serving the commercial objectives , they also served the social and economic development objectives. They have good experience in managing townships , social infrastructure and played a key role in development of towns and communities.
4. High quality Talent. PSUs pay one of the highest salaries, in the sectors they operate today. The selection process in PSUs is very good and through competitive examination, they were able to attract very good talent. Once, they are in the system, the continuing education is given lot of importance and the personnel are deputed to attend the world renowned courses in the sector.  Whenever Private sector have requirements for high quality personnel, PSUs become the hunting ground.
5. Wide distribution network. The consumer facing PSUs have the largest distribution network in the sectors they operate. Competitiveness of an enterprise is determined by the reach a corporate has. The network can be effectively utilised for cross sale of products of other PSUs and the complementary products from other corporates. This can help to earn fee based income using the distribution network.
6. Transparent accounts. PSU accounts are subjected to audit at various levels and various stake holders are involved in close scrutiny of the operations. The accounts reflect the real financial status of companies. There is no incentive , even to hide losses.
7. Technology. PSUs are the first movers in technology adoption and in India, most of the spending on Hardware, Software and R&D happens in PSUs. As a result , they have some of the good technologies. Companies like HAL, NTPC, BHEL ,etc are known for good technologies.
8. Systems and Procedures . They have very good well defined systems and procedures. Starting from preparing a Perspective Plan, they prepare Corporate Plans and Annual Plans and budgets for many years now.
9. Engagement of leading Management Consultants. PSUs have taken the help of leading management consultants in the World, to prepare their growth strategies and they get the best inputs for preparing robust growth plans.
10. Capital expenditure. Even during the Crisis, the Capital expenditure was happening only in PSUs. Most of the mega  projects valued at thousands of crores are executed by PSUs. This also helped in maintaining the GDP growth rate.
11. Large dividends. Government being the largest shareholder or sole shareholder of PSUs, the dividend declared by PSUs has emerged as one of the major sources of revenue for the Government. The oil PSUs also pay huge taxes and help generate income for the government.
12. Government backing. They have a strong share holder, the Government, which can continue to support the new initiatives towards higher business growth.

In the light of the above, the PSUs which still have competitiveness , should draw up aggressive growth plans to preserve their competitiveness going forward in future. In others, scope for capitalising the above strengths to be explored. The PSUs having large land banks have to draw up a strategy based on capitalising the land bank without losing much time.

Considering the increased uncertainties in the Economic Environment, PSUs have a  role to play in stimulating the investments in the Economy and need to increase their competitiveness to become agile. This will happen through culture change and improving the decision making process. The response to the fast changes in the environment is the need of the hour. The best practices in Private sector in bringing good decision making process across PSUs and sharing best practices from best PSUs will go a long way in making the PSUs relevant in future.

India Union Budget F 18

India - Union Budget F18

The economic survey and Union budget proposals have brought a feel good factor to the economy after the deep impact of the demoentisation on the Economic performance of India.  There was an effort to address most affected segments of the society including Farmers, SME’s and various measures were announced to ensure the development of various sectors of the society.

The budget proposal has 10 distinct themes: Farmers; rural population; energizing youth; poor and underprivileged; infrastructure; financial sector; digital economy; public service; prudent fiscal management; and tax administration. Under each of this, detailed action plans have to be drawn up and implemented faster with close monitoring of implementation of these schemes.

A Consolidated outcome budget for all ministries has been created. Fiscal deficit for F18 is projected to be at 3.2% of GDP and Revenue deficit for F18 is projected at 1.9%. The targets set are indicating the tight fiscal management.

There is a need to get back to 8% GDP growth and regain the growth momentum. Despite, the projection for GDP in the budget is lower, there is always a scope to look at measures which can take our economic growth back to higher levels.

One of the strategies stated in the budget is to use the data collected from Demonetisation process to bring more assesses into tax net and increase the tax collected from the existing assesses.  Apart from using measures like VDS  other schemes and penalties, even by brining to the notice of assesses that from the data government has the knowledge of the income, communicating the same to assesses that they have to pay higher, the compliance of tax payment could be increased by several notches.

The demonetization itself has brought the effects, which would have been realized if the GST was implemented. Again, introducing GST in the proposed form, is likely to create uncertainty in the environment and making the formulation of plans by Corporates.

The time frame for implementation of GST is very short and there is a need to build capacity not only with corporates and even with suppliers to the large corporates. This is a mammoth task and the government has to increase its reliance on professional agencies for capacity building.

There is a Surplus liquidity in banking system now after demonetization and the Public sector banks require further huge capital. The allocation of Rs.10,000 for recapitalization is very less and the government has to consider allocation of at least Rs.25,000 cr, which would help to raise additional Rs.2,25,000 cr through other sources of funding.

There is a proposal in the budget to spend more in rural areas, especially for improving the productivity of the farms and creating employment opportunities in other areas. This is the need of the hour and under every crop, we should set an objective to reach the best productivity of the crop in the world. This would help to increase the growth in agriculture to at least 6% p.a.  Farmer credit fixed at record level of Rs10 trillion, will ensure adequate credit flow to underserved areas in India.

The Mission Antyodaya to bring 1 crore households of poverty is a good move and it will increase the consumption levels in the Rural economy.

It is heartening to note that , the allocation to the MGNREGA is at the record level of  Rs48,000 crore and the participation of women now at 55% compared to less than 50% in the previous year. This will also keep many families out of poverty line.

In India, education is one of the sectors which had contributed to the development of IT and high tech sectors in India. There is an emphasis on Education and plan to introduce  System of measuring annual learning outcomes, emphasis on science augurs well for skill development. Innovation fund for secondary education is again a good concept.

Realty. The decision to  give infrastructure status for Affordable housing and redefining the scope  to take carpet area of 30 Sq.m in four metros and 60 sq.m in other towns is a good proposal , which will give a fillip to housing development.

Infrastructure. Now the government has decided to look at Transport sector in an integrated manner and brought a concept of Railway tying up all other modes of transport would bring down the logistics costs. Total allocation to transport sector at Rs2 trillion.

Total capex and development expenditure of railways is planned at Rs1.31 trillion and lot of emphasis on  Passenger safety. The government will set up a Safety fund corpus . Railway lines of 3,500km will be commissioned compared to just 800 Km in the previous year. There is also a plan to list the Railway related PSU’s , which will provide additional funds from issue of shares to the public.

Roads . There is an  Allocation for national highways of Rs64,000 crore and the road development will increase the connectivity . There is also a plan to improve the rural connectivity in a big way.

Civil Aviation. Airports Authority of India Act to be amended to enable monetization of land resources. 

Foreign Investment Promotion Board (FIPB) to be abolished. This is a good move and it confirms the government’s intent to open more sectors for FDI. This will attract more investors from abroad.

PSU’s. There is a plan to  List PSUs which are not listed today and   to create integrated public sector oil major. PSUs have lot of assets and market value will be running into many trillion of Rupees. Capitalisation of land available with PSUs have to be taken up on priority basis.

SME’s. Under Pradhan Mantri Mudra Yojana: Lending target at Rs2.44 trillion. Already , lot of funds were disbursed under this scheme. Increasing the target, would help to support the growth of SMEs.

Digital Economy. The intent of the government is very good. But trends across the world indicate that even developed economies have high reliance on cash transactions to support the economic growth. In India , the major entrepreneurial class is from the Trading sector and their dependence of cash as a working capital is very high. Restricting the cash payment to Rs.3 lakhs will constrain the trading activities in Tier II, III, IV cities and rural areas. Further , we are still not fully ready with Cyber security infrastructure to execute transactions on a country wide basis. In the light of the above, in addition to promoting digital , even the cash economy requires support to keep our economic growth at high levels.

Political funding. Maximum amount of cash donation that can be received is Rs2,000, political parties can receive donations by cheques or digitally; amendment proposed to RBI Act to issue electoral bonds, every party has to file returns within specified time. This is a radical reform as far as electoral reforms and political reforms are concerned.

Personal income tax: Rate reduced to 5% for income bracket of Rs2.5-5 lakh, All other categories to get uniform benefit of Rs12,500 per person and there is a proposal to  levy surcharge on income bracket Rs50 lakh-Rs1 crore.

FPI category 1 and 2 investors exempted from indirect transfer provisions is a good proposal to keep the interest of foreign investors intact. As expected , the capital gain treatment changes which would have affected the confidence of foreign investors was avoided.

Concessional withholding rate will be extended to 30 June 2020 for ECB’s and  rupee-denominated Masala bonds. This will facilitate issue of ECB’s and Masala Bonds.

·         The Revised Estimate (RE) for Total receipts is Rs.19.33 trn, which was 0.92% lower than the Budgeted Estimate(BE) and it was higher than the previous year by 8.96%. The projection for F 18 is Rs.21.21 trn, a rise of 9.72% over the RE for F 17. The growth in revenues were lower than the Nominal growth in GDP. The projection for Receipts is also lower than the projected growth in Nominal GDP.

·         The RE for Gross tax revenue for F 17 was at Rs.17.03trn, higher than the budget estimate by 4.41% and 17.04% higher than the previous year. This was mainly on account of the VDS scheme and the additional receipts arising out of Demonetisation impact. The projection for F 18 is Rs.19.11 trn, a growth rate of 12.21% over RE of F17.

·         After the share with the states, the revised net tax revenues in F 17 was at Rs.10.88 trn ,  3.22% higher than the budget. It was higher than the previous year by 15.3%. The projection for F 18 is 12.27 trn, 12.27% higher .

·          Due to poor performance of corporates, the corporate taxes were same as the budgeted level at Rs.4.94trn. The assumption is that , it will rise by 8.83% YoY in F 17. Budget for F18 is at Rs.5.38 trn, a rise of about 9%. Partly, the lower growth projected is due to reducing the tax rate for SME’s from 30% to 25%.

·         Taxes on income was at Rs.3.53trn, same as the budgeted levels in F17. They had assumed an increase over the previous year by 23% in F 17. This has assumed a sharp rise of 25% in F18 at Rs.4.41 trn. They have factored in the addition of new assesses in the light of demonetisation impact. Through data mining and better administration, they are planning to increase the revenue from this source by 25%.

·         There was a talk about brining back the wealth tax. Since this will not be a large sum and collection cost of the taxes would be higher than receipts, wealth tax was not brought back .

·         In Customs, the revenue was lower than the budget by 5.65% at Rs.2.17trn and higher than the previous year 3.33%.  This was mainly on account of  lower trade growth in the world and the softening of import prices and export prices. The growth projected for F 18 is 12.9%, at Rs.2.45 trn. Since trend witnessed today is one of protectionism by many countries, there is a risk that , the growth projected of 12.9% may not come true. The rise in oil prices, will contribute to higher customs duties.

·         On Excise, they were planning to collect Rs.3.87 trn. against the BE of Rs.3.18 trn and  34.3% higher than the previous year. The high rise in excise duty was mainly on account of increased excise rates on petroleum products. When we had witnessed low prices in imported Petroleum products, all the savings was not passed on to the customers. The government retained part of the savings in the form of additional excise duty. In F 18, they expect Rs.4.07 trn, a rise of 5.16% over RE of F 17. Since , the oil prices started rising and likely to be firm in the coming year, the scope for mobilising additional excise duty from Oil is limited. There is no proposal to effect many changes to excise duties since GST will be implemented soon.

·         Service tax collection was higher than the budget by 6.9% at Rs.2.47trn. It was higher than the previous year by 17%. The projection for F 18 is Rs.2.75 trn, 11% higher than the previous year.

·         Revised Interest receipts by the government was lower than the previous year at Rs.28.5% at Rs.18149.03 cr in F 17 and it was  39% lower compared to the budget estimate of F17.Projection for F18 is at Rs.19020.73 cr. The growth expected on this count is only 4.7% over the previous year.

·         In F 17 , they had assumed receipt of dividend of Rs. 1.53trn and it was higher by 23.4% over BE.  This was higher than the F 16 by 36.6%. Dividends have contributed a significant share to the overall kitty.  If the amount of old currencies received by RBI were lower by Rs.2 trn as was expected, through special dividend, this could have been much higher in F 17. In F 18 the assumption is that Rs.1.42 trn, a fall of 7.19% over RE of F 17.

·         Other non tax revenues. This includes Sale of air waves and disinvestments. The revised plan for F 17 was Rs.1.61trn, 3.5% lower than the budget and 43.3% higher than the previous year. The budget for F 18 is Rs.1.25trn, 22% lower than the previous year.

·         They had assumed revised ,miscellaneous capital receipts of Rs.45500 cr, a shortfall of 19.4% over the F 17 budget and 8% higher than the previous year. Estimate for F18 is at Rs.72500 cr.59% rise over the last year. This is a significant increase.

·         Resources from   Market loans In F 17, it was lower than  BE by 18.3% and 14.1% lower than the previous year at Rs. 3.47 trn. In F 18, it is assumed to be same at Rs.3.48 trn.level. Revised Short term borrowings in F 17 was lower than F 16 by 63.2 % at Rs.18629 cr. It was higher than the budget by 11.89 %. The plan for F 18 is a reduction of 89.2% and the plan is to mobilise Rs.2002cr.

·         The government internal debt at the end of F 17 is likely to be Rs.57.31 trn and it is expected to rise to Rs.61.80 trn. External debt will rise from Rs.2.25 trn to Rs.2.40 trn.

·         Total liabilities of the government is expected to be Rs.74.40 trn at the end of F 17 and likely to rise to Rs.79.63 trn.

·         The revised amount raised through securities against  small savings in F 17 was higher than F 16  by 72.2% and budget by 309% at Rs.90376 cr. There is a plan to increase this to Rs.100157 cr , 10.8% higher than F 17. They have kept the borrowing to the lowest possible level and emphasis on loans as a major source of funding is less.

·         Other Capital receipts in F 17 was revised at Rs.9948cr . In F 18 , it is likely to be higher by 438% at Rs.53513 cr.

·         In the expense category, Central expenses were likely to rise to Rs.16.16trn.from BE of Rs.16.01 trn., 11.5% rise over the last year. Budget for F18 is at Rs.17.23 trn, a rise of 6.62%. The increase projected for expenses is very low indicating that, the government will rely on working closely with State Governments and private sector.

·         Expenses through transfer of funds in F 17 was revised to Rs.3.97 trn, 5% higher than the budget. It was higher than the last year by 16.4%.  There is an assumption of increase and this is expected to be at Rs.4.23trn in F  18. They do not expect a big benefit from DBT and direct transfer scheme as the reduction is not substantial.

·         Total Expenditure for F17 is revised at Rs.24.21 trn, 1.89% higher than the BE. It was higher than the previous year by 15.17%.  Estimate for F18 is kept at Rs. 25.32 trn, 4.58% higher than RE. This indicates, there has to be an austerity drive as far as expenses are concerned.

·         In terms of assets at the end of F 17, the value is likely to be Rs.21.38 trn and it is likely to rise to Rs.23.39 trn. From the details given for various categories, it appears that the value of assets of the government of very much undervalued and they are at historical costs. If the strategy of capitalising the assets and increasing the credit rating of the country, there is a need to revalue the assets closer to the market rates.

India Government Finances - October 2016

Central Govt. Finances: Apr.-Oct 2016 ( FY 17)

Highlights:

• Total receipts during April- October 2016-17 were at Rs. 1150843 cr, 12.6% rise over the same period last year. It was 50.7% of BE 2016-17. Out of which revenue receipts were at Rs.697988 cr, 18.2% rise YoY and Capital receipts were at Rs.452855 cr, 5.1% higher than the last year.
• Gross tax receipt was at Rs.818884 cr, 18.0% growth YoY. Net tax revenue retained by the Central Government was at Rs. 530015 cr, 23.6% higher than the last year and it was 50.3% of the budget estimate for whole year.
• Recovery of loans were at Rs.7938 cr, 16.2% higher than the last year.
• Total Government expenditure from Consolidated Fund of India was at Rs.1150843 cr, out of which, revenue expenditure was at Rs.1025884 crore (59.2% of BE) and capital expenditure was at Rs. 124959 cr (50.6% of BE). The share of Plan expenditure and Non-Plan expenditure in total expenditure was 29.6% (341219 crore), and 70.3 % (809624 crore) respectively.
• Revenue Expenditure increased from the previous financial year by 16.8% and Capital Expenditure decreased by 12.8%.
• Revenue deficit was at Rs.327896, 14% higher than the last year and it was 92.6% of total budget estimate.
• Fiscal deficit was at Rs.423507 cr, 3% higher than the same period last year and it was at 79.3% of BE.
• Primary deficit was at Rs.196700 cr, 0.4% rise YoY.It was 477% of BE.

·         Eight core infrastructure industries grew by 6.6 per cent in October 2016, as compared to 3.8 per cent in October 2015. The growth of these industries during April-October 2016-17 was 4.9 per cent, as compared to 2.8 per cent during the corresponding period of previous year

·         Foreign exchange reserves stood at US$ 361.1 billion as at end-November 2016 as compared to US$ 360.2 billion at end March 2016.

·         The growth rate of IIP in Oct. 2016 was at (-) 1.9 per cent is due to negative growth in mining and capital goods sector. Also lower growth in manufacturing sector affected overall IIP growth. During Apr- Oct.16 the overall IIP contracted by 0.3 per cent s compared to growth of 4.8 per cent during same period last year.

·         Foreign trade: Merchandise exports and imports increased by 2.3 per cent and 10.4 per cent respectively in US$ terms in Nov. 2016 over Nov. 2015. During Nov. 2016, oil imports increased by 5.9 per cent and non-oil imports increased by 11.7 per cent respectively over Nov. 2015. During April-Nov. 2016, merchandise exports increased by 0.1 per cent and and imports declined by 8.4 per cent respectively.

·         Balance of Payments: The current account deficit (CAD) narrowed to US$ 3.7 billion (0.3 per cent of GDP) in H1 of 2016-17, significantly lower than US$ 14.7 billion (1.5 per cent of GDP) in H1 of 2015-16. Net invisibles’ earning was US$ 45.7 billion in H1 of 2016-17 as against US$ 56.7 billion H1 of the previous year.

·         External Debt: India’s external debt remains within manageable limits as indicated by the external debt-GDP ratio of 23.4 per cent at end-June 2016. India’s external debt stood at US$ 479.7 billion at end-June 2016, recording a decline of 1.1 per cent over the level at end-March 2016. Long-term debt was 397.6 billion at end-June 2016, as compared to US$ 401.7 billion at end-March 2016. Short-term external debt was US$ 82.1 billion at end-June 2016, as compared to US$ 83.4 billion at end-March 2016.

·         As per the estimates of Gross Domestic Product (GDP) for the second quarter (July-September) 2016-17, released by the Central Statistics Office (CSO) on November 30, 2016, the growth rate of GDP in Q2 of 2016-17 was 7.3 per cent as compared to the growth of 7.6 per cent in Q2 of 2015-16 and 7.1 per cent in Q1 of 2016-17. The growth rate for the first half (H1) of the current year works out to 7.2 per cent as against a growth of 7.5 per cent in H1 of 2015-16.

                                                            

India Union Budget

India Union Budget  F17 – 29^th Feb 2016

·         The budget has been made with an objective to give a boost to the Rural Economy, impetus to infrastructure investments , creation of more employment opportunities and giving a boost to the new ventures.

·         Close to Rs.1 trillion has been allocated for Rural development and Rs.2.2 trillion to give a push to infrastructure. A clear road map for number of KM’s of roads has been specified.

·         There is a stimulus for Real Estate and Infrastructure through making the tax aspects relating to REIT’s and INVIT’s more investor friendly. There is also an incentive for those who are buying houses valued at less than Rs.50 L and avail a loan of less than Rs.35 L. The income earned from Affordable housing projects has been made 100% exempt from tax.

·         The above measures are likely to increase the private consumption levels, create demand for infrastructure driven industries.

·         There is an attempt to reduce the incentives given for various investment schemes by individuals less attractive. Especially, the schemes relating to superannuation , Provident fund and investment in equity. Considering that out of total savings in India, less than 10% is invested in financial instruments, this move could reduce the share of financial instruments further in the investments made from savings.

·         There is a VDS scheme announced and schemes for settlement of Income tax dispute cases and they had factored in more than Rs.25,000 cr of additional tax from these schemes.

·         Considering the above measures and the implementation of 7^th Pay commission will keep the inflation above 5 – 6% levels going forward.

·         The Revised Estimate (RE) for Total receipts is Rs.17.85 trn, which was 0.45% higher than the Budgeted Estiamtes(BE) and it was higher than the previous year by 7.32%. The projection for F 17 is Rs.19.78 trn, a rise of 10.8% over the RE for F 16.

·         The RE for Gross tax revenue for F 16 was at Rs.14.59 trn, higher than the budget by 0.7% and 17.25% higher than the previous year. Considering that Banks and Corporates did not show such an high growth rate, the contribution to growth in tax has come from taxes on petroleum products and increase in Service tax. The projection for F 17 is Rs.16.30 trn, a growth rate of 11.7%. This will result in higher inflation.

·         After the share with the states, the net tax revenues in F 16 was at Rs.9.47 cr , only 3% higher than the budget. It was higher than the previous year by 4.86%. The projection for F 17 is 11.25% . In F 16, the tax shared with the States rose by 49.9% and it is likely to rise by 12.67% at Rs.5.57 trn.

·          Due to poor performance of corporates, the corporate taxes were lower than the budgeted level by 3.75% at Rs.4.53 trn. The assumption is that , it will rise by 9% to Rs.4.93 trn in F 17. Considering the very poor performance of corporates in F 16, if many corporates would be able to turn around the performance, the growth could be even higher at 12 – 15% over the previous year’s level.

·         Taxes on income was at Rs.2.99 trn, 8.7% lower than the budgeted levels in F16. They had assumed an increase of Rs.53,000 cr over the previous year, a growth of 18.1% in F 17. This has assumed a sharp rise , after factoring in the expected inflow on account of VDS and settlement of pending cases.

·         In F 15 , there was a collection of Rs.1086 cr of wealth tax. In F 16 there was no number shown and in F 17 it has been assumed to be nil. Considering the poor compliance on this count, they could consider scrapping the concept of Wealth tax. The administration cost of this tax would be higher than the expected collections under this account.

·         In Customs, the revenue was higher than the budget by 0.56% at Rs.2.10 trn and higher than the previous year 11.4%. Considering that the value of imports were lower than last year, despite the imported value of petroleum products dropped, the customs duties were maintained at the previous years’ levels, which was a positive in revenue generation. The growth projected for F 17 is only 9.8%, lower than the growth witnessed in F 16.

·         On Excise, they were planning to collect only Rs.2.29 trn. But they had collected Rs.2.84 trn, 23.6% higher than the budgeted level and 49.6% higher than the previous year. Whatever savings on import of petroleum products was protected through higher Excise duties on the petroleum products. In F 17, they expect Rs.3.18 trn, a rise of 12.2% increase over F 16.

·         Service tax collection was higher than the budget by 0.11% at Rs.2.1 trn. It was higher than the previous year by 25%. The projection for F 17 is Rs.2.31 trn, 10% higher than the previous year.

·         Interest receipts by the government was lower than the previous year at Rs.2.78% at Rs.23,804 in F 16 and it is likely to rise to Rs.29,620 cr , a rise of 28% over the previous year. Here the Government must have assumed issue of Bonus Debentures by PSU’s to share holders and receipt of Interest on such debentures.

·         In F 16 , they had assumed receipt of dividend of Rs. 1 trn and it was higher at Rs.1.18 trn. This was higher than the budget by 17.51% and higher than the F 15 by 31.7%. In F 17 the assumption is that Rs.1.24 trn, a rise of 4.66% over F 16.

·         Other non tax revenues. This includes Sale of air waves and disinvestments. The plan for F 16 was Rs.0.94 trn and the actual was Rs.1.12 trn, 19.6% higher than the budget and 38.99% higher than the previous year. The budget for F 17 is Rs.1.65 trn, Rs.53,000 cr higher than the previous year, 46.4% higher than the previous year.

·         They had assumed Miscellaneous capital receipts of Rs.56,500 cr, a rise of 123% over the F 16 level.

·         The strategy for  Market loans is to keep this at previous year’s levels. In F 16, it was lower than  F 15 by 2.75%. In F 17, it is assumed to be even lower by 3.5% at Rs.4.25 trn.

·         Short term borrowings in F 16 was higher than F 15 by 648 % at Rs.68,665 cr. It was higher than the budget also by 128.40%. The plan for F 17 is a reduction of 75% and the plan is to mobilise Rs.16,649 cr . Hence, the Government will not compete in short term funds market and the liquidity for others in the short term market should improve.

·         The amount raised through small savings in F 16 was higher than F 15 by 65.6% and budget by 138.39% at Rs.53,418 cr. There is a plan to reduce this to Rs.22108 cr , 58.6% lower than F 16.

·         Other Capital receipts in F 16 was negative at Rs.28,000 cr . In F 17 , it is likely to be higher by Rs.53,000 cr at Rs.25,677 cr.

·         In the expense category, Interest payments are likely to rise by 11.3% to Rs.4.92 trn.

·         Defence services will rise by 13.63% to Rs.1.43 trn.

·         Subsidies in F 16 was marginally than the previous year at Rs.2.58 trn. There is an assumption of a marginal reduction and this is expected at Rs.2.50 trn in F  17. They do not expect a big benefit from DBT and direct transfer scheme as the reduction is not substantial.

·         Pension payments rose by 2.26% in F 16 and it is expected to increase by 28.87% in F 17 and it is expected to be Rs. 1.23 trn, Rs.27,000 cr higher than the previous year.

Despite , the Economic growth coming below 8% , the collection by the government was very robust in F 16 and the projections for F 17 also assumes, significant improvement in revenue from many of the revenue sources.

In a crisis situation like this, the role of government in kick starting the higher economic growth is very critical. Some of the issues which are attracting the attention of investors are the Non Performing Assets in the Banking System and the poor performance of many PSU’s.

The PSU’s and PSB’s have hidden assets in terms of real estate assets and Capitalising them would help to bolster the balance sheets of the PSU’s and PSB’s.

Globally, the banking system is in bad shape and if they have to declare their real NPA’s, then the banking system will collapse. In a growing Economy like ours, there is a good scope for our banking system to recover. If they have to aggressively provide for NPA’s within a short period, then the health of banking system will deteriorate within a short period and the rating of the entities will go down thereby making the capital raising a difficult exercise. Hence we can look at experience of China, which at one time had NPA’s of more than 45% and the experience of other countries where NPA’s were very high. A window of 5 years could be given to provide for NPA’s.

Considering the various initiatives by the Government , it should be possible to achieve the desired growth levels and if there is any slippage in collection on account of any extra ordinary sources of income as assumed , it could put strain on the Fiscal deficit. Hence it is essential to prepare special action plans to generate revenue at regular intervals under the Other income categories.  Under the present assumptions, the deficit will be down to 3.5% , which would help to achieve a good country rating and enable the mobilisation of funds from foreign sources.

Like in F 16, For the next one year, the commodity prices are likely to be soft and this should facilitate the achievement of various objectives of the Budget for F17.

Hidden Strengths of India

Hidden Strengths of  India – 7^th Feb 2016

R.Kannan

India continues to do well in the Global Economy despite there is a big scope for reforms in the various sectors of the Economy. The proposed reforms are work in progress  Once they are implemented India will continue to grow at higher than the present levels.

India has many hidden strengths which are not reflected in the reports , statistics and surveys carried out by experts. By capitalising the strengths, India would be able to realise its full potential of Economic growth.

1. Largest number of entrepreneurs in the world. India has the largest number of entrepreneurs in the world. Most of these entrepreneurs are in the services sectors , especially , trading. Tier 2, 3, 4 cities and villages have entrepreneurs in the areas of trade and related activities. There are more than 20 million entrepreneurs in India and assuming an average house hold size of 5, 100 million people depend on these activities in India.
2. Largest number of small start ups in the world. Traditionally, in India, lot of new start ups, especially in Trading are being created by small entrepreneurs. This is mainly in the areas of retailing and trade. The phenomenon is witnessed not only in Urban areas but also in rural areas.
3. It is very easy to start a business in India, where only the local licenses are required. The businesses which require license from  local body is easy to start. It does not require licenses from District , State and Central government levels.
4. Profitable businesses at high interest rates.  In India, interest rates vary from 0% to 4000% p.a . The small vendors borrow funds at 10% day and they generate 30% returns per day. Despite the rates of interest are very high, the loans are still affordable. Many of the small businesses generate very high margins and they have the best asset and working capital turnover.
5. Availability of funding from various sources. Since the savings rate is very high, there are many sources from which funding for business could be raised. Starting from friends to small money lenders , funding is available from Micro Finance Institutions,  State funding agencies, central government agencies, banks, financial institutions, corporates, Primary market, secondary market , Private equity, FDI, FII’, foreign Hedge Funds and provident funds are available. 
6. High generation of employment in small scale sector. Most of the employees in India are in the unorganised sectors and especially in small scale. Lot of new jobs are being created in the small scale. After the advent of mobile phones and their penetration in the rural areas , lot of employment is generated in the related fields even in rural areas.
7. Very high savings rate. India has a very high savings rate of 30%. This is equivalent to $ 600 bn a year. In a five years, the savings generated will be equivalent to $ 3 trillion. This is three times the requirement of investments required for investment in Infrastructure. If attractive financial instruments are created , it would be possible to meet funding for the infrastructure investment within India.
8. High money multiplier. Since most of the transactions in India are carried out by Cash, the money multiplier is much higher than the statistics on the Indian economy. Since the multiplier is higher, this helps to generate value addition at different levels in the Economy.
9. Very high assets holdings by Government, Government agencies, PSU’s,Banks , Corporates, Religious bodies, NGO’s and Individuals. There are big land holdings, gold holdings in the economy and if the market value of these assets are valued , the debt equity ratio for the above would be much lower than the Economic Statistics. There is a need to capitalise hidden assets by various entities in the economy.

Overnight, the PSU’s can be turned around. Since they hold land in Prime areas. Public Sector Banks hold lots of real estate assets and the market value of investments by LIC is much higher than the cost of investments. Gold is held by many religious institutions and Individuals. Most of the assets are in illiquid form and strategies have to be developed for making them liquid and performing.

10. Self supporting local communities.  Since India is very large and dominance of rural areas, many rural communities are still immune to what is happening globally and they can sustain their performance irrespective of the global economic developments . The small economies can be protected from high volatility.
11. Higher competition between states. Now each state government behaves like an entrepreneur and there are initiatives in each state to attract more investments and each state has set up a target to grow the economy at a faster rate than the Indian economic growth. The initiatives in three to four states alone can lead to higher economic growth levels in India , when the programmes are implemented .
12. The real GDP. Since there is a big parallel economy  in India, the real GDP is much higher than the GDP reported . Most of the risk funding, where returns are not certain, comes from funding sources from Parallel Economy. Parallel economy is also helping to sustain the higher level of economic activities in India.
13. Indian Diaspora. Their asset holdings in other parts of the world are very high. Now, many of the economies in the Globe are becoming unattractive, many of them are looking at the investment in opportunities in India. As and when , the conditions become favourable for their investment, more funds would come to India from Diaspora.
14. India’s consumers. In India, as per the Income classification, we have the maximum number of customer segments in India. There is a constant movement of consumers moving from lower category to next higher category. This creates demand for all types of goods. For e.g., there is a demand for the cheapest car to the costliest car in the world. 
15. Attractiveness of Investment. The reports released by various agencies in the world does not reflect the reality. The ranking is given on small data of variables and it does not represent the reality. The situation is not as bad as reported. As per the survey done by World Economic Forum this year, India ranks top amongst all the countries in the world for the attractiveness of investments.

India has all the strengths, as outlined above and we have to develop strategies and action plans to capitalise the hidden potential. The action plans developed should not disturb the existing eco system which is favouring creation of entrepreneurs. The action plans should add to the present strengths. In 1700’s and before, India was one of the leading economies in the world contribution to a significant portion of Global GDP. This will add 2% to our GDP ,India can regain its status of the leading country in the world.      

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