Union Budget - An Analysis of Pros and Cons

The highlight of the Budget 2015 is not the presentation itself by a Finance Minister who raised sky-high expectations. They may have been barely met as it always happens with most budgets - all stakeholders are seldom happy. The main thing that moved the needle in the budget has been that the NDA government tried to keep distractions to the minimum, kept the flames of hopes around big-bang reforms alive by building around the framework of fiscal policy while engaging on issues of unprecedented international interest - Agriculture, Subsidies and welfare for the poor, Income inequalities, Infrastructure development, and the Make-in-India theme. In that sense, the budget has certainly delivered - in setting the path of economic development in the direction of the right intent. But in dealing with the expectations from the market and the industry and the way it delivered in print, this year’s budget takes a leaf out of what the previous governments usually did over the last decade - keep it skinned to the bone, keep it light and keep minimum jazz in the budget - let the rest build outside the budget. That has been the credo of many Congress budgets and this year  is no exception. It is only the media, the journalists and the public at large who await the budget more than their own appraisal results and then, when the budget doesn’t deliver, raise holy hell on the outcome. 

The markets are the easiest ones to lick here. Thankfully, the bond markets and forex markets have taken their weekend break but the bazaar didn’t sleep and agonised over the outcome of the budget over the last few weeks - crept up within hours of the budget and then collapsed, then the shorts entered the market as the indices gyrated to the mezzanine interpretations of the semi-literate and the uneducated idiots on the Television who don’t understand the canons of taxation (which is why cigarettes, aereated drinks and drinking water got taxed more) from the canards of inflation and disinflation (Black money curbs are less inflationary than the creation of black money itself), or the contours of fiscal policy (did someone tell you that India has always been pro-cyclical in fiscal policy in the last ten yeas, so if you couldn’t raise excise duties last year it is because growth came to a grinding halt last year and if you had to raise excise duties this year, it is because indirect taxes have dwindled to single digits stupid, so if you don’t raise now, you will never be able to raise again from a lower base of Tax-to-GDP ratio and if you raised it now, you can bet on an economy to rebound which bolsters up taxes) or that fiscal responsibility can be a platitude  even if you adhere to fiscal deficit targets on paper so it is okay to have a lower target than a pious threshold of 3.6 per cent which is what the markets expected BJP government to accept but the MoF accepts 3.9 per cent of the GDP for the next year while keeping it at 4.1 per cent for the rest of this fiscal. In the end, however, Sensex finished higher and hopefully, more pundits will grasp the subtle nuances of the budget in the days to come and move on. Markets have seldom got it right on budget day - anyways, does it ever dawn to you that for the last several decades, ITC as a share is the best short on a budget day because tobacco bears the brunt of the indirect tax hikes and yet despite zombie adverts and gross warnings, smokers don’t give up. ITC after today’s carnage would have been the best buy of the season, but I am digressing here (and I don’t own ITC shares may I also disclaim but ITC after yesterday's fall would have been a perfect long to get back into).

The budget needs to be seen from the context of expectations and the efforts to move forward in many ways towards a better and resurgent India. Yes, it may have made TVs cheaper and non-economy fares costlier, it may have made cars and carbonated drinks costlier and the mobile phones and Yoga therapy sessions cheaper but understand the broad direction and the fact that fiscal policy framework is intact - the rest if it hasn’t come your way must be on its way.

1. Has it got any serious negatives? Not many, yes the taxes have to go up when India has a huge consumption base and Tax-to-GDP ratio is the best indicator of the same. Last year, they envisaged 10.8% Tax-To-GDP ratio which is hardly achieved because of tax buoyancy going down due to stalled growth and high inflation. So they raised indirect taxes, bulk of them on items which are bound to be price-inelastic (i.e., the buyer doesn’t stop buying at higher prices) like cinema, coke and cigarettes. Service tax has been raised from 12 per cent plus to 14 per cent but this subsumes the education cess earlier incurred with an irritation to use calculator. The logic is simple, India is 65 per cent Services economy in terms of contribution to GDP - so a higher service tax is a small price to get back tax buoyancy and in most cases, service tax is passed on to the consumer of service. If a service is competitive, the tax gets loaded to the consumer, if not, it gets bested - thats the difference between a service and a product. Similarly, increasing duties on cars etc. is good news because it will encourage foreign players to consider setting up ‘make in India’ plants to compete with domestic car players. Of course, the car prices have been depressed for a while and a surge in car sales will happen when the crude oil prices are plummeting. The good part of the budget, to summarise on this point, is that there are no serious negatives - General Tax Avoidance Rule  (GAAR) is deferred for another two years; exemptions on Long-Term Capital Gains in equity continue, disparity between tenure of bonds versus Debt Mutual Funds for the purpose of Long-Term Capital Gains remains giving incentives for investors to migrate to taxable and tax-free bonds in the secondary market and no further cesses except on diesel and petrol are considered. In many other areas, there is status quo - which is good news because it shows the commitment to business continuity and stability of policy framework.
2. Does it help the poor, promote growth, revive agriculture and infrastructure and help in generation of jobs? Yes, in many ways despite what the likes of Malayalam and Manish Tiwari talk about. The budget already made its intentions to build world-class low-cost homes in all slums in the urban regions which will involve corporates, now it plans to rationalise the benefits of contractual savings like pensions and insurance with linkages to more organised ways of defined contribution schemes with linkages to Health Insurance (Rs.12 premium per annum to get Rs.2 lacs Accidental Death Benefit Insurance) and National Pension Scheme. National Pension Scheme is counting upwards of Rs.73000 crores and getting low-income workers into the ambit of EPF and NPS is going to create efficiencies of scale and access to the best products in the long run. The tax offset upto Rs.4,44,520 of income is a booster to those who earn incomes of under Rs.40k per month. Yes, the middle-class hasn’t got a good deal in the incentives for savings but still access to higher medical insurance is a good initiative to fortify ourselves against unforeseen medical emergencies. Of course, we are disappointed that a fresh approach to looking at building nest eggs for the middle-classes could have been better. There are measures to ensure players to “make in India” with sops linked to investments and capex and there are measures that help set up start-ups, and encourage corporate investments etc. Of course, the corporate income tax reduction from the next financial year will also help in generating capex and employment opportunities for the poor. But there is a catch - the Bankruptcy laws are going to benefit entrepreneurs adopting an American model of capitalism - of hire and fire and re-surface after folding up. While we don’t know the progress of the various small corpus funds of Rs.50 crores set up in last year’s interim budget, this year the focus is better in infrastructure, disinvestment (which has never been part of the budget and anyways happening with a velocity of its own) and agriculture to foster growth and development. Subsidies are now going to be linked in the Aadhar, Jan Dhan and Mobile connection triangle created - which seeks to curb leakages. 17 crore number of such accounts gives a great base to start implementing cash-less direct transfers. The attempt to reinvigorate MNREGA, build a lakh of kilometres in roads etc. augur well for creation of jobs. Initiatives like Mudra Bank and the measures on Infra and agriculture might create positive impact. On the solar and renewables space, the government may do more outside the budget than just making a token mention - because there is focus on not only mega projects but also in encouraging foreign players like China and Japan and US. For example, when a leading company approached the Power Ministry to levy anti-dumping duty on the Chinese, it is reported that the concerned Minister remarked to the owner, “We want 100 times of your capacity, so we want the Chinese to dump their panels in Solar so that the prices will come down in the long run while building world-class capacities.” Thats the approach of BJP government in creating pro-business, pro-big-scale in projects. Hopefully, the budget will clear the decks for more installed power in all sources of energy. The recent tie-up between Dilip Shangvi and Suzlon Energy is another example how the BJP is collapsing friends to create giant scales to compete in the world and also to make India Infrastructure-heavy like China.
3. Does it curb inequality and Black Money? On intent, it does but a lot depends on how BJP will crater up the political establishment to move towards Black Money curbs. A new bill may buy more time before the obvious actions like incentivisation of cards for transactions. Both require political will which is not very evident of late in BJP. But on inequality, Chidambaram was wrong in his assessment of the budget. Jaitley fired a salvo which may be the first of sorts amongst G20 countries to impose surcharge for ultra-rich and the high-income earners. This is the Thomas Picketty style of copybook measure which won’t pinch the rich too much. One more complex Act  - Wealth Tax Act - goes, which reminds us of the fate of those in the past like the Estate Duty and so on. The fact that Wealth Tax Administration collected Rs.1080 crores last year vis-a-vis Rs.9000 crores expected to be netted from the surcharge shows why Wealth Tax failed.  Isn’t this a step in direction of removing inequalities? The BJP unlike the Congress never shies away from taking measures to simplify laws and junk vestiges of colonialism, inaction or canons of Adam Smith that the Western World is trying to shake off. Take the Fiscal Responsibility and Budget Memorandum Bill (FRBM). We heard the outcry for BJP’s minor slip in fiscal deficit to 3.9 per cent as against the 3.6 per cent of GDP.  How can you keep the fiscal deficit at constant levels when the business and economic cycles change and move away from growth to stagnation? One of the commonly pointed out lacunae in the FRBM, 2003,  amended in 2012 is that the deficit could not expand in bad times and the government did not have to generate a surplus in good times. If only the government can undertake fiscal expansion during bad times, NDA government will find it easier today to show higher growth measures and hence slip on the deficit higher, now the leeway as per the Act is just 0.3 per cent per year which is already frowned upon by the critics and the opposition. The government still has to borrow unto Rs.375000 crores in the market putting a slightly upward pressure on the interest rates. But the budget set the tone aggressively stating they will re-look at both the FRBM and the Monetary Policy framework of the RBI  - giving a tough message to  Raghuram Rajan to cut rates soon. 
4. Does it have big-bang reforms and attention to detail? To the cynic, they don’t seem evident. But look at examples in the budget which are hidden in clauses not so salient. Like the collapsing of the FDI and Foreign Portfolio Investments, creating an easy trajectory for capital flows to seek quality assets in India. Or, the Gold Monetisation Scheme with its four variants - it can be a game-changer in the long run with an estimated one trillion dollars of gold reserves unofficially held by Indians in their bank lockers and sofa foams. It is time to get the gold out of the closet and recycle it to generate employment and business opportunities. Last year, savings in physical assets like gold and silver were 11 per cent of GDP outweighed 7.3 per cent in financial assets by households. Gold and other valuables slipped from 17 per cent levels but the drift has always been to hoard gold. The scheme will “monetise” our gold for productive uses by giving an option to earn 2 per cent interest on gold deposited in a Metal Account. Suddenly, from TTD to Trivandrum, temples and hoarders of gold may put a beeline to deposit more gold lying under the custody of snakes and officers. Another measure, the move to merge FMC and SEBI as one regulator - giving a filip to the country’s fortunes in becoming a formidable player in capital markets and commodities markets since India produces and exports many of the leading commodities traded on exchanges from Chicago to London. It was on the cards but timing in the budget allows the regulator like SEBI to become stronger. Yet another measure is to deepen bond markets by amending the relevant sections of RBI Act, this year more money has been poured in by the FIIs into the Bond Markets than the stock markets -and the drift makes it clear for investors to move into Corporate Bond market. Another instance of attention to detail: arming the NBFCs (Non-banking finance companies) to seek the refuge of Sarfesi Act in recovering the loan defaulters. This will go a long way in strengthening the financial system because NBFCs comprise 9 per cent of bank deposits and have a sizeable loan book, this measure will bring further efficiency and accountability to the erring defaulters. Measures like these demonstrate the budget looked at issues of pending action. Another big-bang announcement is two-pronged: One, that the the much-awaited Goods Service Tax (GST) is going to be ushered in from 1st April, 2016. And two, as a precursor to that, the budget re-iteraed that the States will now get an unprecedented 42 per cent of the share of taxes - getting the states to the right side of the Central Government is a key to implementing GST. And the budget needs a high five on that.
5. Will FIIs like the Budget? Will they put more money in the market? Hard to say, but the FIIs want in summary, macroeconomic stability, fiscal discipline, growth in the economy (now projected at 8-8.5 per cent) and ease of doing business in India (things like relocation of fund management in India not inviting taxes will be liked by them). Both Debt and Equity and now, even Alternative Investments like private equity and real estate seem to be entering a zone of sweet spot in the months to come. Moody’s has already given us retained rating. If the oil prices firm up at these levels (the FM's calculations of the fiscal deficit peg the oil at $70 levels) and stay there for some time, the Budget and its initial fizz will soon be forgotten by the pundits and populace - and India will be back to business mode if BJP works at de-bottlenecking the rest. As long as the government works towards improving the life of the common man in providing better health care, education, and means of livelihood - it has many ways of doing this by enlisting the help of corporates, unleashing the supply-side economics that expands the size of the economy and in the process push the infrastructure in key focus, then growth will always happen. For that the Budget is but a small step - but not the only step. In that sense, this budget is one of the better budgets to come in recent years - it has a great alignment of intent, clarity and the blueprint to make India achieve its economic potential. There maybe misses here and there, but they are not rectifiable in the medium term. What I also appreciate is that for the first time, the FM has acted on many suggestions given in the Economic Survey a few days before the budget. This rarely happens and must be lauded thanks to Arvind Subramanian.

If all the stakeholders of the economy - households, industry and business, consumers, savers and investors understand the cross-implications of the actions proposed in a budget with a 360 degree view and an understanding of how economics work, the future will be better for all of us - and politicians won’t succeed in rabble-rousing us from seeing the reality and the work-at-hand.

Disclaimer: The views are personal and no way reflect the views of the organisation the author works for.

#UnionBudget #Budget2015 #FMJaitley #Budget #IndianBudget #ArvindSubramanian #Rajan #ArunJaitley 

What AAP Victory Means for BJP

My father had voted in every election since Nehru's last election circa 1960. He says,"Never be more patriotic than the king. Because if you are, what if the king is wrong, or bad, or corrupt, or arrogant, or dies? You will become a laughing stock." That shaped my political convictions. I have never believed in blind worship of political parties, only go with the flow or the momentum of how the performance and pros and cons stack up. 

Friends who side with BJP or Congress should realise that the pendulum of momentum keeps swinging from left to right all the time. You err once, it builds momentum the wrong way and before you realise, the ground beneath will appear shaky. I have always been predicting that because of the advent of social media and multiple ways in which opinions get built up and mobilise people's anger and frustration, successive governments after UPA won't get such luxury of ten years. BJP's own success in May elections last year was a result of a number of factors including the groundswell of middle-classes and unemployed youth against UPA government. 

In eight months, they have yet to deliver on most counts and instead of using the political capital in the honeymoon period, they went about concentrating more and more power. Instead of collaborating democratically with a non-existent opposition which has put up a weak consensus against Modinomics, they have taken the same steps they accused Cong-I of - taking the Ordinance Raj, etc. They have turned a nelson's eye to the prime accused in Sarada scam, Jagan's case, Vadhra's dealings, Sonia's corruption, swiss bank accounts, pending infra projects, reforms in corruption, etc. They promised so many sops in Andhra Pradesh where they now share power with TDP  - all of them forgotten. Which is why, the anger of the voters can be clearly seen. 62 seats out of 70 reflects the voter's mood and give whatever excuses you want - Delhi is urbana, Delhi is not Lok Sabha, Issues were different - it's a mighty slap on the face of BJP and Modi to start taking their Manifesto promises seriously. Look at the decimation of Cong-I. But BJP is not in the same league as Cong-I - they still have the mandate and the mass  momentum going for them at national level. They should take in humility lessons that the electorate has given in Delhi. Or else, the middle-class anger against corruption and crony capitalism as reflected in Delhi will grow to a national level as it showed up as a bud in Lok Sabha elections last time. Clearly, I am not writing off either Cong-I either (it will re-surface in new avatars) but AAP better dirty hands and work for their promises since now they can't complain after such massive mandate. 

BJP will face lot of headwinds and the Budget will be the single metric that will salvage some of their lost ground - as middle-classes and businesses looking at growth returning to Indian economy await hopefully. Modi will have to reboot itself better to gain acceptability as a man of actions not just as a man of eloquence. On the federal front and at the national level, AAP is the new Normal which can align lot of non--BJP forces together for some time before momentum and political capital gets dissipated. That also depends on how AAP conducts itself in the legislature. But I still can't forget what I wrote about them an year back - making token entry in the assembly like those three elected MLAs in the last scene of "Yuva". Will they grow nationwide? We have to wait and see. Congratulations and Celebrations for now! 

As far as the BJP is concerned, no big quake yet. Because Delhi Rajya Sabha elections are done with in 2012 (Delhi has 3 Rajya Sabha seats), the next election due in 2018. By virtue of their present tally, BJP is likely to gain control of Rajya Sabha only by end of 2016 with the allies and on its own by 2018. (2015 will see election for only 10 Rajya Sabha seats, 2016 - 75 seats which include 21 seats of the states where BJP+Allies are ruling the states. Add another 5 nominated seats, which normally go to the ruling party. 2017 - elections in 10 RS seats and 2018 - 68 RS seats will see elections. Hence, BJP+allies is likely to get majority in 2016 and on its own in 2018.  Based on the current tally of BJP in the state assemblies of these states, BJP can win about 38 seats.  Last year (2018-2019) of ruling by the BJP in the present regime would witness passage of all pending reform measures in the Parliament. They should just take some of the big-bang promises and deliver them religiously or else, AAP can hijack a lot of political capital in the coming years. BJP has still hope but only if it listens. Wake up and smell the coffee Modi Saab. Mann ki Baat chodo, Kaam ki Baat karo!

#BJP #LessonsforBJP #AAP #DelhiElections

Don't worry, Economics At Work here!

Would have liked to post a longer note - exciting these times, but time also getting more dearer than petrol. I will make it as short and clear as possible.


Lets talk about Petrol first- I had been saying that we will never stop importing crude and therefore must prioritise that over Gold imports. Petrol price rise has been increased for number of reasons - Rising deficits, escalated rise in crude over the last few months, Rupee depreciation, and need to cut subsidy bills to give some relief to the Oil-marketing companies and also the import bill. This will continue to see rise, if you believe that crude oil prices will continue to be elevated over the coming years. The sooner you understand the economics of oil - the better our reconciliation with the reality, instead of raising ruckus over everything. Our politicians and sometimes, public dont realise that everything is not in the hands of government - your land prices and corruption deals, crony capitalism and MGNREGA schemes and Aarogyasri policies - may all be but eventually market forces will catch up with everything in life thats priced including the five elements - (air)gas, water, fire (energy), earth (sand) and sky (2G/3G).

Lets talk about Gold next. At current prices of gold prices in Rupees, if you invest now, and expect to make a return, beware.If international gold prices shoot up beyond the $1600 t/oz range and go back to $1800 levels and if Rupee appreciates back to Rs.50 to a USDollar, you make "zero" return. Current higher prices of Gold in India are due to Rupee depreciation. In any case, I am not yet done with my diatribe against Gold Merchants - so we will take that up separately. The Budget Bill hasn't cut customs duty but yielded to some other concessions.

Lets now talk about Sensex. At current levels of sensex, and Rupee-Dollar exchange levels, effectively, Sensex is literally trading at 12000-13000 thereabouts because of a 20% fall in Sensex and a 26% fall in Rupee exchange. Thats a colossal opportunity still. The less said, the better here.

Lets talk about the Rupee. There are more factors at work including the relationship between Euro/Dollar and Dollar/Commodities leading to a market decline in Rupee. Last Financial Year, we attracted $64 of NRI Remiitances - the highest in the world. I am sure everybody is watching even now. Similarly, if 50% of Corporate India hasn't hedged their dollars/euros, those in the export zone will make a bumper profit in the coming quarter. That should be good news. Besides, the RBI still has huge reserves to intervene - I am sure they have the smartest forex team in the world.

Lets examine facts and see things as they really should be seen. And for God's sake, lets understand how Economics really works in our lives. "Satyameva Jayate".