Has Piketty cast a taxation shadow on India's Budget? Mint 31st July 2024

 

These Are The Budget's Two Key Messages For The Future: NDTV.com 24th July 2024

 There is always a lot of anticipation ahead of a Union Budget announcement in India. Experts and others had plenty to say about what the finance minister should prioritise: cutting taxes, boosting capital expenditure, or reducing spending on social welfare, often seen as freebies. This time, there was a surplus of advice on how the government should use funds that came by way of bumper dividends from the Reserve Bank of India.

However, when the actual document was revealed, it seemed many of these expectations were skipped as the government remained steadfast in its goal of fiscal consolidation. Alongside this, there are some clear messages that should be noted for the future.

Fiscal Prudence

The primary message is the government's commitment to adhering to the Fiscal Responsibility and Budget Management (FRBM) path, aiming to lower the fiscal deficit to 4.5% of GDP initially, with a further target of 3% in due course. This consistent stance should be considered when speculating on future actions by the Finance Minister, showcasing the government's resolute stance while addressing the global audience.

The Budget entailed a comprehensive speech outlining aspirations and ideologies, supported by detailed documents covering revenue and expenditure sides. Summarising the numbers, the total outlay has increased by approximately ₹ 55,000 crore compared to the Interim Budget. Tax revenue targets are set ₹ 18,000 crore lower, yet the fiscal deficit has reduced by about ₹ 73,000 crore. Notably, the higher non-tax revenue, largely from the RBI surplus, amounts to around ₹ 1.46 lakh crore, setting the framework for all subsequent announcements.

What Taxpayers Get

On the tax front, there are discernible signals. First, all individual taxpayers are encouraged to transition to the new tax system, with current incentives focused on standard deductions and revised tax rates. Expectations for concessions under Section 80C and interest on home loans remained largely unmet. That mostly aligned with the broader objective of simplifying the tax system with lower rates and fewer exemptions. It looks like even incentives for investment in the new pension scheme (NPS) could potentially phase out in the near future.

Second, regarding capital gains, the direction is pretty clear. The taxation of equity markets has gradually evolved, with debt mutual funds losing long-term capital gains tax status, and dividends on shares and mutual funds becoming taxable. The tax-free status of equity gains has been revised to 10%. These changes aim to establish a level playing field across financial instruments, suggesting clearly that equity gains could eventually be taxed similarly as gains from other asset classes.

Third, the removal of indexation for property is quite significant. This sounds unusual since most houses are typically purchased by individuals leveraging their finances. For instance, assuming that a house costs ₹ 1 crore and there's an 8-9% interest rate paid over 10-15 years, the effective cost can double the purchase value. Indexation logically mitigates this effect. However, its withdrawal implies that all received money will be treated as income and taxed according to regular tax slabs. There is a concern that this could encourage a flourishing black economy, mirroring the current prevalence of cash transactions in the real estate sector.

Simplifying Compliance

That aside, it is plausible that in the next five years, income from all sources will fall under a single tax regime with minimal concessions, simplifying tax compliance by eliminating discrepancies. That seems to be the broad direction we are headed in. It will result in ease of compliance as well.

On the expenditure front, the Budget continues the private sector norm of 'performance-linked allocation'. Thus, incentives for hiring new staff are tied to company registration with the Employee Provident Fund Organisation (EPFO). Moreover, to discourage free rides, first-time employees must pass specific tests to qualify for benefits.

For MSMEs, the credit guarantee for unit loans will be a contingent liability managed through the banking system, necessitating new rating models. Allocations have notably increased for rural and urban sectors, with funds tied to performance metrics such as home purchases.

As a result, despite the pre-budget hype and multitude of expectations, two principles stand out for the medium and long-term: steadfast adherence to fiscal prudence and a simplified, uniform tax structure devoid of concessions. That has been the overarching theme of the budget this time.

Budget Should Nudge Stock Market Up In The Coming Days: Free Press Journal 24th July 2024

 At times the stock market movements are taken to be a vindication of the budget. While this is an extreme view, it cannot be ignored as the entire media is glued to the indices all through the day. Even so, it can be said that the market was virtually agnostic to the announcements by the end of the day even though there were wide gyrations in the interim period.

The NIFTY was marginally down by 30 points while the Sensex was down by 73 points. But the difference between the day’s high and low was 1500 points. Why should this be so? The budget speech started with expenditure outlays and then moved over to the tax proposals. The first part of the budget was generally positive. The focus was on employment, MSMEs, skill creation, inclusive development and so on. In particular, there was an emphasis on the housing sector.

While the proposals were not really new as they have been there for some time, the emphasis and the financial numbers added to the build-up of enthusiasm. The government has not changed the capex target but the fact the focus is on employment and investment means that the backward linkages with sectors was strong. Hence there was positive news for steel, cement, machinery, chemicals etc. where there is a direct link with these outlays. Housing too will be up on the agenda with a focus on affordable housing under the Awas Yojana at both the rural and urban levels. As banks are to be part of all this activity mainly due to the financing that has to be provided, the budget augurs well for all these sectors which should get reflected in the share prices.

As the news gets absorbed, all these sectors should be looked at favorably on the bourses. The point of discontent came when the tax proposals were announced relating to the market. Here there was a mixed bag. The rationale has been to make the system simple and bring about a level playing field. So, the long-term capital gains tax has been increased to 12.5% but this did not go well with the market, to begin with. However, it has been clarified by the FM that this was a way of harmonizing rates as real estate sales/gains would now have lower rates. Besides, it was a small segment with incomes of around Rs 15 lakh per annum which would be affected by this higher rate while the others were affluent anyway. Similarly, the taxing of buyback in the hands of the recipients has been done to bring in equity across different taxes. The higher STT on F & O can be seen as one way of deterring retail participation in this complex segment of the market.

These clarifications had a soothing effect after the initial shock of the announcement effect. In fact one of the biggest pluses for the corporate sector was the reduction of customs duties on a wide set of commodities. These include textiles, minerals, marine products, precious metals, mobile phones, solar energy, medicines etc. Not only will this foster a relatively lower cost economy but reflect in higher efficiency in these industries which should get reflected in business performance.

While it would be business as usual for markets from tomorrow onwards, as players would be waiting for new news to be absorbed, the budget proposals definitely have a positive impact on several sectors which will see higher demand and performance in the coming months. The tax savings at the individual level should also help to increase consumption in the future. Therefore, this should be clubbed under the category of a very progressive budget.

A positive stimulus for growth, job creation: Business Line 24th July 2024

 

Budget 2024: On the whole, a step forward: Indian Express 23rd July 2024

 Economists had offered several suggestions on how best to use the surplus funds from the RBI in the budget. It has used the bulk of the surpluses to lower the fiscal deficit ratio which stands now at 4.9 per cent for FY25. It appears, therefore, that fiscal prudence was the starting point of the budget. It will become easier for the government now to target 4.5 per cent next year.

Allocations have been spread across all segments. The total outlay has not changed much from the one in the interim budget. The funds have been channelled to agriculture and rural development, housing, and MSMEs – they are at the centre of the job creation objective. It can be said that the expenditures have been made to work better in terms of generating employment. This includes the direct payments to be made by the government for first-time employees, based on provident fund data. Incentives have been given to employers too for increasing employment.

How can individuals view this budget? It has looked only at the new income tax regime and not spoken of the old one. It has stated that two-thirds of taxpayers have opted for this alternative. Benefits have been given in terms of an increase in standard deduction and tax slabs have been tweaked. In effect, the FM stated that there would be a gain of Rs 25,000 as standard deduction and Rs 17,500 per annum on tax saved. This is a big plus as it will increase income and hence give people the option to either consume or save the amount. In the extreme case of adjusting for inflation, this will protect real disposable income. Therefore, there are benefits for the common man. It also gives the message that the government would like everyone to migrate to the new scheme.

The market reaction has been ambivalent. The stock market fell towards the end of the speech when the tax proposals were announced, but recovered subsequently. The announcement on higher long-term capital gains tax did create some dissatisfaction. But the corporate sector seems to have been assuaged by the benefits in the budget – the angel tax being abolished, the tax rate being lowered for foreign companies and the several rationalisations in customs duty.

From the macro point of view, the government has not changed any assumptions and hence, is still conservative with the GDP growth rate of 10.5 per cent. This fits in with the Economic Survey’s projection of a 6.5-7 per cent growth in real GD, which leaves inflation in the region of 3.5-4 per cent. This could be a conservative estimate to begin with as it does appear that the economy will grow at a higher rate of 7.3-7.4 per cent, in which case, it will benefit the fiscal deficit ratio which can come down further with the increase in the denominator.

Will the budget lower inflation? The answer is mixed — there are no measures to directly lower prices and the reduction of customs duties on a series of items can help to lower prices provided producers pass on the benefits. Hence, the core inflation component can see relief, though not very significant. However, higher disposable income and marginally lower inflation can increase spending power, which will work well for the economy.

One area which will continue to receive a boost would be the housing sector. While the schemes are already there and running effectively in the last seven to eight years, the affordable segment in both rural and urban areas would benefit from the thrust given by the government. There could be some delay in this taking off as individuals may be waiting for interest rates to come down before going in for such investments. But the real estate sector and related industries like steel, cement, machines, glass and chemicals will likely see additional traction on this score. This is notwithstanding the fact the The commitment to persevere with existing social welfare policies continues. With employment generation at the forefront and the emphasis on education and skilling, there is a definite change in approach to improve the quality of growth. The fact that the economy is doing well is given. But there is scope to improve the quality of this growth which requires a more skilled labour force. The budget addresses this issue.

On the whole, the budget has been progressive. The Interim Budget provided the right set of incentives and the relief provided in the FM’s speech carries these measures forward.government has not increased the capex from what was announced in the Interim Budget.

Well-focused Budget 2024 with special development thrust: Business Standard 23rd July 2024

 

Union Budget 2024-25 news highlights: The Union Budget 2024 may be termed as one with a special development thrust that addresses two major pressing challenges in the economy – employment and MSMEs. There is a direct thrust on channeling funds to first-time employees with commensurate benefits to companies, too, which will ensure there is an incentive to hire more people. This is in line with the flag raised by the Economic Survey on the issue. The collateral effect will be in a limited way on consumption as more jobs creates consuming capacity.

The MSME interests have been addressed through the credit route with a guarantee scheme being launched, besides asking banks to have their own models for lending that is not linked with collateral. This would also feed into creating jobs, which is progressive. There will be backward linkages to job creation, too, as well as a positive impulse for exports given that these units contribute to around 40 per cent of outward trade.

The funding being provided for balanced development that covers assistance to states like Andhra Pradesh, Bihar, Odisha and Jharkhand would be an indirect push given to investment in the economy.

The push to housing in both urban and rural areas is another nudge being given to investment in the country. The interest subvention-cum-subsidy approach to encourage the lower income groups to buy their homes will keep the real estate sector ticking.

It is not surprising that the direct expenditure through capex has not been changed by the government with the amount being capped to the Interim Budget level. This sounds practical since with just 8 months left for the year, the capacity to implement higher levels of projects would always be a challenge.

These measures will provide a stimulus for the infra-related industries like cement, steel, machinery with the real estate sector witnessing a revival at the level of affordable housing. There are opportunities for lending for the banking sector, especially for MSMEs, besides housing. At the micro level, education loans would also see an uptick in demand.

Fiscal deficit

The overall fiscal deficit has been lowered to 4.9 per cent compared to 5.1 per cent targeted in the interim budget and 5.2 per cent, which was a result of lower denominator when the gross domestic product (GDP) numbers were announced in May. Hence, a large part of the surplus received from the Reserve Bank of India (RBI), has been used to buttress fiscal prudence.

The size of the budget has gone up only marginally by around Rs 60,000 crore. These numbers also mean that the overall borrowing programme of the government is almost unchanged – in fact it has come down marginally. This should placate the market as it is virtual status quo from the point of view of liquidity.

Income tax changes in Budget 2024

As was expected there has been some comfort provided to individuals who opt for the new tax scheme as there is some rationalisation across the slabs which gives a net benefit to every tax payer and can be combined with the standard deduction that has been raised.

This should increase spending power or preserve real purchasing power. There appears to be nothing for those who have opted for the old tax scheme, which can be taken to be an indication for migration to the ‘no frills’ option.

The stock market, however, has not been enthused with the Sensex falling below 80,000 as the speech ended. But then one can never tell about markets.

A curtain raiser for policies to come: Business Standard 23rd July 2024

 

Economic Survey is all about messaging: Financial Express 23rd July 2024

 

Revoke ban on agricultural futures trade: Financial Express 22nd July 2024

 

Stakeholders are anticipating key signals from coalition government's upcoming budget: Business Today 21st July 2024 Print edition

 he budget that comes after a new government is sworn in would normally not elicit much discussion as it would be dealing with just about eight months when much of the normal announcements made during the Interim Budget would have to be implemented. This time will be different as the Budget is critical from the point of view of all stakeholders for the ‘messaging that is done’. It is the concept of a coalition government which evokes conjecture.

Global credit rating agencies would be watching out for what the Budget holds for the economy and the future when it comes to taking a status check of credit. The industry is watching out for how government expenditure will work out for FY25, whereas individuals will be looking for some tax relief, given the relentlessly high inflation rates in the last 3-4 years. Hence, the Budget will be a landmark one in terms of providing direction on all counts. Higher capex would be positive for industries like steel and cement, while a focus on housing or PLI will impact the concerned sectors discernibly.

What then should one look out for in this Budget? From the perspective of an economist, the budgetary numbers are important as they encapsulate government’s priorities. The continuity in government gives assurance that the starting point will be fiscal prudence and the walk will be along the Fiscal Responsibility and Budget Management path. Hence, the fiscal deficit ratio targeted in the Interim Budget at 5.1% would hold, although with a downward bias. The fact that the transfer of RBI surplus is about Rs 1 lakh crore higher than what was budgeted from the banking sector provides a lot of room for flexibility in managing other aspects of the Budget.

The other area of interest would be the quality of expenditure, where the government has shown commitment to increasing capex. Consensus across stakeholders in the government is likely and no compromise is expected here even though there may not be any major increase in the number provided in the Interim Budget of Rs 11.11 lakh crore. It was noted even during the time of presentation of the Interim Budget that even as the base of capex increases it is not possible to keep growing the outlay by 20-30% every year.

Markets will also be keen to know about the disinvestment plans as it was expected that post-election the momentum will pick up both from disinvestment and asset sale. It is likely that plans are in place and the Budget would provide further direction.

On the revenue expenditure side, the outlays on subsidies and other social welfare schemes will merit attention. The Interim Budget had more or less capped the outlays at levels closer to either the budgeted or revised numbers for FY24. The Budget allocation would be significant as any increase would be indicative of further possible enhancements as part of adherence to the promises made in manifestoes. Global agencies have also flagged this and would be tracking it.

From the point of view of industry, there is no expectation of concessions in corporate taxation although any kind of ‘deductible’ investment allowance would be an incentive to revive private investment. This is one area that has been lagging due to low demand. Further, the MSME segment is expected to be incentivised with a PLI-like scheme, where the outlay would be much lower but can cover a wider range of industries. MSMEs have a vital role to play in both industrial growth with a share of about 36% as well as exports (about 40% share), and such an incentive will also fit well with the government’s aspirations of making India more vibrant in terms of being part of global value chains.

At the individual level, it is necessary to increase consumption and savings. Over the years, growth in real consumption has slowed down considerably, which has been due to lower pace of job creation and higher cumulative inflation of almost 30% in the last 5 years. There are two routes here. The first is to fix income-tax slabs with inflation in mind. This can be an annual affair just as is done for dearness allowance adjustments. The other is to take a closer look at the GST system and rationalise the rates for mass-consumption goods. Both of them will help to increase purchasing power.

The declining share of assets in household savings is a concern as funds are being diverted to either equity markets or gold due to higher potential returns. Any drop in savings will, ex post, widen the current account deficit as investment gets financed by foreign funds rather than domestic. A way out is to enhance the savings limit under Section 80C of the Income Tax Act. This would be within the realm of old tax scales. A combination of the new system with wider bands of lower taxes and the old system with more scope to save can improve both consumption and savings.

Hence, it can be said that there is going to be a plethora of expectations from all sections including global agencies and investors. The India growth story has caught up globally, which has been achieved under a strong government. With continuity in the government and a blend of coalition politics, the language of the Budget and the actions in terms of dealing with different stakeholders become even more important. This Budget will be a curtain-raiser for the full show of what is to come in the next five years. Investors would form opinions that can influence their medium-term decisions based on the message conveyed in the July Budget.

Getting A Grip On Inflation Dynamics: Free Press Journal: July 20th 2024

 

The silent inflation which keeps creeping upwards which often escapes notice is core inflation which is the non-food and non-fuel part of the basket

How is one to view inflation today? Inflation coming down does not mean that prices are falling. It is just that prices are increasing at a lower rate. This has to be made clear because often there is jubilation that inflation has come down when households are still paying higher prices for their groceries. Therefore, when the RBI says that it is targeting an inflation rate of 4% or the Fed 2%, the implication is that there is some element of price increase which will happen every year and this number is considered to be acceptable.

In the last credit policy, the RBI had provided forecasts of inflation getting to less than 4% in the second quarter which is July to September. But it is expected to increase to the region of 4.5% in the next two quarters. How is one to read these numbers?

All models used in forecasts are based on past relations as well as assumptions made on certain variables for the forecast period. This is where the commonly used phrase ‘base effect’ comes in. When inflation in July-September 2023 was high at 6.4%, it provided a cushion for the present number. The other factor which is taken into account is the present state of prices. The persistent problem today is rising food prices which has kept food inflation elevated. It has averaged 8% for food and beverages group. Here too the base effect is there as it was 4.1% last year.

But the four products which are creating havoc in absolute terms are tomatoes, potatoes, onions and toor. They have a weight of around 3% in the index; and intuitively it can be seen that if these prices have moved up by 20-30%, the inflationary impact is between 0.6-0.9%. That’s the statistics part of the issue.

The fundamental character of any crop is that it is seasonal in nature. Tur for example is normally harvested in October-November and the output has to be made available for the rest of the year. In case of any crop shortfall, there will be a supply shortage through the year which has to be made good by imports. Another facet is that while there are 7-8 states which produce the product, Maharashtra, Karnataka and Madhya Pradesh are the leading states. All of them are in the interiors of the country and heavily dependent on the monsoon. Last year, output was lower which triggered the price increase. Imports are reckoned from Africa, Canada, and Australia among others. Once the supply shortage was observed, the exporters raised their prices knowing that there was no choice for us.

For perishables like tomatoes, onions and potatoes there are typically 2-3 crops where the harvesting can last for 3-4 months. But this is spread across the country. Crop failure in any location due to low or excess rain or heatwave can have ripple effects on the rest of the crop that gets diverted from other regions. Therefore output as well as prices tend to be volatile here.

Along with these four food items, prices of spices, milk and meat products have also been witnessing increase in prices. For spices it is a case of lower production while for dairy products and animal-based commodities, prices are up mainly due to higher input costs. There have not been supply issues here but the higher cost of animal feed which includes maize, fodder, oil cakes among others has pushed up the cost of maintenance of the animals. Hence while there is always focus on supply side issues for crops and other products, the allied activities which includes animal husbandry and fodder, often miss attention.

The last factor on the food side which has pushed up prices is the policy of Minimum Support Prices. The government announced these prices for all kharif and rabi crops. The idea is twofold. The first is to encourage farmers to grow certain crops and the second is to ensure that procurement is reckoned at remunerative prices by the FCI (Food Corporation of India). But the unintended consequence is that benchmark prices of all products covered by the MSP tend to rise in the market once they are announced as they become the floor. This also has an inflation impact, which can be mild in normal year, but work to cascade the effect when the output falls short of target.

The silent inflation which keeps creeping upwards which often escapes notice is core inflation which is the non-food and non-fuel part of the basket. It has been at a comfortable level for long at around 3% though it tended to average closer to 4-5% in the past. This normally is a response to generalised inflation when input costs go up. Producers would tend to increase prices of readymade garments, cosmetics, automobiles etc. when the input costs go up. The significant development in the last couple of years is that manufacturers have tended to hold back on price increases as inflation was high. But this is changing and as we can experience when we go shopping, prices of toothpaste, soaps, utensils, clothes etc. have been rising.

A takeaway here is that the low core inflation of 3% cannot be sustained for long and will have to move towards the 4% mark soon this year. This is what will keep this part of inflation ticking for the rest of the months.

Therefore, while inflation is likely to average 4.5-5% this year even in case the monsoon remains good and well spread, it is the individual components that can hurt family budgets. The one part which has been administered for long is fuel prices where citizens neither got benefits from low global crude prices not paid higher prices when it rose considerably. This part, it may be assumed will remain sluggish in terms of movements while the other components will witness the volatility which goes with supply changes and adjustments made to rising input costs.

Disinvest, but with right interest : Economic Times: 18th July 2024

 

Employment rises, but productivity dips: Businessline 12th July 2024

 

Adam Smith's invisible hand is a star cricket player : Mint 12th July 2024

 

Time To Ease The Process Of Paying Taxes: Free Press Journal: July 6th 2024

 

There are some rationalisations that are called for to make the tax system more elegant as some of the levies need to be reassessed

The core content of the Union budget is not likely to be different from what was presented in the interim budget. There would be certain specific additions in budgetary outlays to align the same with what was promised at the time of elections. But this would not materially change the look of the final numbers. This has been the case in all past budgets presented by the new government.

One area which merits a closer look is on the administrative side which can make the process of making tax payments simpler for individuals. These reforms would be neutral in terms of impact on budgetary numbers but can improve the ease of paying taxes. Also there are some rationalisations that are called for to make the tax system more elegant as some of the levies need to be reassessed.

Let us look at the ways to make tax filing simpler considering that filing returns involves a plethora of pages. The first pertains to the reconciliation of the form 26AS and AIS. One of them captures all transactions on which tax is deducted while the other tries to cover all sources of income under the PAN. However, the two need to match and ideally there should be only one of them as the tax payer is often trying to match the entries on both the forms. Further, when it comes to the purchases and sale of securities, the present system tends to club both the buyer and the joint owner together which has to be contested by the tax payer. This has been on for over two years now and needs to be corrected.

Second, the concept of TDS does leave the doors open to inconvenience for the tax payer. For certain earnings, there are exemptions while for others there are limits beyond a certain amount that merits a deduction. There are distinctions made for interest earned on fixed deposits of banks and others. Further, if one does not have to pay taxes, there is a form that has to be submitted, which has to be done every year. Finally, once the TDS is done, the individual has to pay the balance on time depending on the income slab.

A way out is to take an instruction from the customer on the amount of tax that has to be deducted which can be zero, or the relevant tax slab of the old or new tax scheme. This way the full tax can be deducted at one stroke. It benefits the individual who does not have to keep a track of all such earnings as very often the amounts could be small and appear in the AIS statement and not 26AS. The government would be better off as the entire tax amount would be received at one point of time. The individual often cannot track these payments and ends up paying the same once the AIS is updated which often involves a penal interest charge once the financial year ends.

Third, the AIS and 26AS need to be the final one when the tax payer views the same. With May 31 normally being the date allowed for companies to pass on the tax collected to the government, there is less time available as these forms keep getting updated on a daily basis. As these forms keep getting updated periodically it gets hard for one to figure out which is the final version.

Fourth, once the AIS is taken to be the final income statement of an individual, insisting on Form 16 and other documents should be done away with so that an individual is dealing with only one official document.

Fifth, while the tax laws says that super senior citizens do not have to submit form 15H to avoid TDS, the instructions have not filtered down to the banks. This needs to be done to make life easier to this class of people.

An alternative model which is suggested here is the following. The income tax department already links all income associated with a PAN. An algorithm can work out the tax to be paid which can be conveyed to the assessee periodically. This would be the ultimate level of sophistication where the government tells the individual what has to be paid. This was not possible earlier, but with all transactions now being linked with the PAN card, it should be easily accomplished.

On the tax rationalisation front there are a couple of anomalies that need to be addressed. The first relates to the education cess. This is levied on all tax payers and is on the total tax that has to be paid. This cannot be a permanent levy and logically should be done away with. There is no separate statement in the budget which talks of how this money is spent.

On similar lines, the surcharge being paid by higher income individuals needs a review as the logic applied is incorrect. To begin with a surcharge cannot be a permanent one. If the idea is to tax the rich at higher rates, the income slabs for taxation can be altered upwards. The major anomaly here is that there are different grades for this surcharge. It begins once the taxable income crosses Rs 50 lakh and there are different rates for higher incomes. However, the surcharge is on the entire tax payable on total income and not for just the incremental income beyond the threshold. This can be corrected because if an individual earns Rs 49.99 lakh there is a certain level of tax paid. But once it is Rs 50.01 lakh, a levy of 10% is put on the entire tax paid and not just the incremental part. Today a person whose income crosses the threshold pays higher tax than one who is marginally below these thresholds.

As a lot of progress has been made on getting the PAN linked to all financial transactions, logically citizens should have access to ease of paying taxes. With widespread digitisation, all the suggestions made can be implemented and will save a lot of time and do away with ambiguity.

Why economists rely on GST data: Indian Express 4th July 2024

 

It is one of the more appropriate and timely indicators to gauge the state of the economy.

Post Covid, economic indicators have tended to be heavily influenced by the base-year effects. Often, one tends to get contrary signals. For example, the Indian economy has averaged a growth of over 8 per cent in the last three years. However, consider the absolute increase in real GDP – for the five-year period ending in 2023-24, GDP increased by around Rs 34 lakh crore compared to Rs 42 lakh crore in the preceding five-year period. In this scenario, how does one gauge the state of the economy?

One of the more appropriate indicators to gauge the state of the economy is data on GST collections. This data has so far been published on a monthly basis. This is based on actual collections and hence does not require making any assumptions or the use of algorithms, which is the case with most macroeconomic indicators where some imputation is required. This data is critical for several reasons.

First, GST collections tell us whether consumption is increasing because it is a consumption based tax. GST collections, as a proportion of private consumption expenditure, work out to 10.5 per cent in 2018-19, rising to 11.3 per cent in 2023-24. This was after a decline during the two Covid years when consumption growth slowed down. Currently, GST collections are clocking a steady growth rate, indicating that the economy is on the right path.

Second, as this data is available for states too, it also throws light on the consumption patterns across regions. This is critical especially for companies, which can make plans based on this information as they can tailor their strategies for different markets.

Third, as indirect taxes are a major source of revenue for the government, this data also gives an idea to what extent the budgetary targets are being met. This holds for both the Centre and the states. Thus, getting this information is a useful indicator not just for the government, but also the markets which use it to project government revenues, possible fiscal deficit deviations and market borrowings. The monthly flows also give important signals on the distance covered in relation to previous years.

Fourth, as a part of the increase in GST revenues has been due to the formalisation of the economy, it also serves as an indicator on how much progress is made on that front. If macro numbers pertaining to consumption as per GDP estimates are not increasing at a quick pace, but GST collections are, then it perhaps says something about the state of the formal and informal economy.

Last, as the data also includes information on the compensation cess, it gives an idea of how states are faring.

From an economist’s perspective, the GST data is probably one of the most credible high frequency indicators to gauge how the economy is performing. While the Purchasing Managers Index are also published on a monthly basis, they are based on sample surveys and often diverge from the direction seen in the actual industrial production data which comes with a lag. Bank credit, which is also based on actual borrowing and is indicative of economic activity, tends to be affected by seasonal factors. Thus, the practice of releasing the detailed, disaggregated GST data should be continued.

What's driving rural spending? Business Line 3rd July 2024

 

A new era for bond market: Financial Express 1st July 2024

 The Markets will be entering a new phase from July onwards with the inclusion of Indian bonds in the JP Morgan Index. In fact, after the announcement of inclusion of these bonds in September, there was a gradual build-up of holdings in government securities (G-Secs) by foreign portfolio investors (FPIs). The assets under custody of sovereign bonds held by FPIs climbed from around $19 billion in September-end to $28 billion in mid-June. Clearly some of the players wanted to build their positions in advance to take advantage of the indices, once included. This phase was also associated with considerable activity in the G-Sec and forex market though there were several other factors at play. What can be expected going forward?

The basics can be put together to begin with. The JP Morgan index of bonds involving government paper would assign a weight of 10% to India at the rate of 1% per month. Hence even passive investment in the index would mean some allocation for Indian bonds. Twenty-three securities would qualify for investment where there are norms on the residual maturity as well as amount outstanding. Both are necessary for rebalancing the index. Unlike equity which is perpetual, debt matures at some point of time and would require replacement of appropriate securities. The Reserve Bank of India (RBI) has also included several securities under the FAR banner which denotes fully accessible route, where no limits are placed on FPI holdings. If one were to 

 between the market and the index, there could be additional inflows as one could take a call on the index and also a position in the particular security. All put together, there are estimates which point to an inflow of $20-25 billion on this score. This comes to around `1.8-2 trillion of potential purchases.

Now, the total borrowings for the year for the government is around `14 trillion. While only some securities would qualify to meet the index criteria, intuitively it can be seen that there would also be secondary market purchases of existing securities and hence it would free funding space of existing holders who could easily subscribe to the new securities issued this year. Hence, there will be easing of liquidity to a large extent as there is a new player in the market. Banks, in particular, will be less pressured to subscribe to these securities and can use them for lending purposes. Therefore, the advantage of liquidity will accrue over time.

Second, as there is more demand for paper, prices would tend to increase given that the supply is limited to existing stock or the announced fresh set of securities. Higher prices in the market would mean lower yields and hence this is something that will happen in the natural course. For banks holding on to paper, there will be mark-to-market gains to be made in such a situation. Also, lower yields across the spectrum of G-Secs without any rate action from the RBI would be indicative enough for other commercial rates to move down gradually. Therefore, the corporate bond market will also witness a decline in interest rates. This is so because corporate bond yields get benchmarked at a premium to the government bond of equivalent tenure.

Third, the fact that around $20-25 billion comes into the market every year would be good news for the forex market where the supply of dollars would increase. Presently our fundamentals look strong enough in terms of current account deficit and other capital flows. These additional FPI flows into debt will further strengthen the situation and make the rupee appreciate. This can counter, to an extent, the external factor of the dollar being strong in the market as long as the Fed holds on to the rates in the US. But this comfort is significant for the market.

Last, there could be collateral impact on equity market too, where foreign investors follow India more closely by virtue of this inclusion although, understandably, the two classes of investors are different. This could, however, be a possibility.

Hence, the immediate effects of these flows appear to be positive all the way. In fact, Bloomberg would be including Indian bonds in their indices from January 2025, which will further improve the situation. But such inflows would also be of concern to the RBI. First, a sudden jump in dollar inflows would also mean that there would be appreciation of currency, which may be tolerable only within limits. Hence, to control this volatility, the central bank would have to buy forex to ensure stability in the currency or else there is the threat of loss of export-competitive advantage.

On the other side, an increased source of funds in the market can cause the same kind of volatility as in the forex and bond markets. While lower yields would be desirable there must be limits here too, as this can come in the way of monetary policy. In FY24, there have been situations where the yield curve behaved differently when the shorter tenures were driven by liquidity while the longer term were tracking Fed actions. Here the securities covered in the index could move more decisively due to the concentration effects. Further, as these inflows will be concentrated in specific securities there could be skewed demand not just in terms of holdings but also trading. This needs to be watched more closely in the coming months.

On the whole, the “bond inclusion” in global indices is a reality and is something the government and the RBI have been working hard for. This does provide the global gravitas that was missing in a market which was largely domestic in nature. Along with this advantage there would also be closer scrutiny by players especially on the fiscal side, as most deficits finally get converted to G-Secs and enter the market which is now global in spirit.