Achae Din, China devaluation and its effect on India

Achae Din are here

The Industrial Output data was released yesterday

Consumer Price Index slowed to 3.8%

Food inflation was lower at 2.15%

Index of Industrial production was up at 3.78%

Manufacturing also grew faster

What can we infer from these numbers. The efforts of Dr. Raghuram Rajan and that of Mr. Narendra Modi is paying off. The slowing down of the inflation is actually more important for the poor of the country. The indirect and direct taxes will go up as there are green shoots in our economy.

The opposition (read Congress) has ensured that the GST Bill doesn’t get through in this monsoon session of the Parliament. As we all know Congress does not have the interest of the nation ahead of the silly points it is willing to score in the Parliament. Net result is we may not have the GST bill in operation from 2016 April.

CHINA DEVALUES ITS CURRENCY

If you thought US Fed was going to increase interest rates. You were mistaken, China has come with a devaluation of the Yuan by about 2%, the largest in about 2 decades. There has been a fall in its value after that too.

WHAT IT MEANS TO OTHER ECONOMIES

The cost of Chinese products will become cheap and will result in competitive devaluation by other economies. We can see South Korean and Japanese economies devaluing their currencies. Maybe India might also follow suit. If this happens Fed (of US) might not raise rates just yet. So many of our expectations might be false regarding the World economy.

WHAT WILL HAPPEN TO INDIA

We are likely to impose an anti dumping duty against Chinese steel into India. I guess a 4% anti dumping duty might not be enough. We might have to have a steep anti dumping duty. This might lead to a sharp reaction on the Indian Exports to China, as exports will not only be costly but might attract anti dumping duty as well. The total trade deficit of India with China is $45 Billion in favour of China.

What we have just now described is not only with regard to the Indian economy but refers to all the economies of the world.

What we are going to witness is an action and counter action currency war due to this devaluation.

EPFO is going to invest in Equities

I read a news item in The Hindu that EPFO (Employee Provident Fund Organisation) is going to invest (Rs 5000 crores)  in Indian Equities through SBI Mutual Fund. This is a welcome move as even the foreign provident Funds invest in Indian equities. I am giving you the pros and cons of the proposed investment.

PROS AND CONS OF INVESTMENT INTO EQUITIES

Argument against investing in Equities

Firstly if you look at stock market all over the world (in the last 5 years) the returns have been poor is markets like US, European Union and Japan. The only saving grace had been China(even which has fell in recent months) and some emerging markets. Even these markets have not been giving pre 2008 returns. Most of the emerging markets are interlinked with US and European stock markets. Hence if you look at recent history it paints a dull picture.

Secondly as far as the pension fund is concerned most of the people involved are over 60 years in age. Their main source( for many the only source) of earning is pension. Hence they are not keen to take the risks of the stock market. If you look at the stock market of advanced countries in the last 5 to 7 years the returns are better in Gold when compared to Equities.

Thirdly when you invest in equities and that too through the government there will be pressure to invest in companies favoured by politicians. Hence there is greater risk of lower returns. What I am driving home is the point that the investment decision will not be taken by the Fund manager (who assesses the risk) but by politicians.

Finally the Lehman crisis has given a big blow to the capitalistic world which has wounded the faith public had on  stock market. There are highly specialized instruments(which are not understood by the public) which make investment in stocks a very risky proposition.

Arguments for investing in Equities

Firstly after opening of the Indian economy, foreign funds have invested in our stock market and have benefitted. This includes foreign pension funds too. If foreign pension funds have benefitted by investing in Indian equity why not Indian EPFO.

Secondly investing blindly in stock is dangerous but investing by a knowledgeable fund manager is not that risky. However we should make the fund manager(s) independent and  accountable for the investments so that he is not pulled up by the politicians to fund their cronies.

While it is accepted Gold has given good returns in the past 5 years. It should be taken into account that it (Gold) is not a sound investment as it goes up in value only during uncertain times. If you look at the world today things are stabilizing (US to a large extent and Eurozone is slowly limping back to normalcy). This means gold is unlikely to be a safe haven to park your investments in.

Finally only 5000 crores is being invested in Equities and hence exposure would not be great for the pension fund.

I would like to conclude by saying an Independent and accountable Fund manager(s) for investment into Stocks would be a welcome move as it would give greater returns to the Indian pension fund.

Goods and Services Tax in India

Goods and Services Tax

As you all know the Central government is likely to introduce the Goods and Services tax in the monsoon session of the parliament. What do you need to know about this tax and its effect on you?

The Goods and services tax ( Herein referred to as the GST)

The GST does not apply to Alcohol, Petroleum products and electricity (or that is what is said)

    

            Initially there was Central excise ( Cenvat), Sales tax – Later known as Sales Value added tax and service tax. Now it is proposed to replace all these taxes with a single uniform tax namely GST.

           All Indirect taxes both at the centre and the state level are going to be replaced by one tax - the GST.

What are the advantages of having the GST

a     There was widespread tax evasion when there were lots of taxes. This resulted in the government realizing less money than when there was simple tax regime.

b     

       Total cost will reduce in a single tax regime

)       

       Time taken when goods move between borders of states will be reduced drastically.

d

       The unnecessary loss of fuel while waiting at the border will be reduced

e

       Demand will increase when the Cost is reduced.

f

       The GDP will be benefited by about 0.9 to 1.5% if GST is introduced

HISTORY OF GST

Kelkar Task Force – A task force was set up in 2005 for Fiscal Responsibility Budget management. 

And it recommended a uniform tax known as GST.

Kelkar Committee recommended  that all indirect taxes be replaced by one tax known as GST

What will not be affected by GST?

Direct taxes - Income tax, Corporate Tax and Capital gains tax

GST will replace all indirect taxes if the Parliament approves both in Lok Sabha and the Rajya Sabha (two thirds majority) and must be ratified by 50% of the states.

There are 3 types of GST namely

State GST – Collected by the state governments (SGST)

Central GST – Collected by the Central government (CGST)

Integrated GST – Collected by the Central government (IGST) (the exact names may change in the law but this is for understanding)

Transaction	New System	Old system	Comments	Comments
Sale within the state	SGST and CGST	VAT and Excise/ ST	Under the new system transaction will have SGST – goes to the state and CGST – Goes to the centre	The levying of excise or sales tax was not dependent on the levy of VAT
Sale outside the state	IGST	CST and Excise/ST	Under the new system the transaction between states has one type of tax – Integrated GST to the centre	Levying of CST was not dependent on Excise or sales tax

The GST is implemented in countries like Australia and Malaysia. It has resulted in better tax collection and fewer Tax evasion. Hence it is in everybody’s interest that the GST is passed in the Parliament.

Greek Crisis and its Solution

Greek Crisis - My understanding

History behind Greek Crisis

2010 - May

Euro 110 Billion was injected by the Troika of European Commission, European Central Bank and IMF(Troika). An agreement of austerity was reached and for the Structural reforms and Privatisation of Goverment assets between Greece and the Troika.


2011
A year later the recession worsened.And the Greek government (with the EU) agreed to the extension of the Loan repayment period from 7 years to 15 years.
A new aid of 109 billion euros and a 50% write off of Greek debt was agreed with the Troika of Euro leaders and IMF

Austerity measures brought down the deficit from 7.5% to 2.4% in 2011. But unemployment grew from 7.5% to 19.9% in Nov 2011

In 2013 the Hellenic Financial stability fund (HFSF) injected 48.2 billion euros in Greek banks for recapitalization efforts.This efforts increased the Debt GDP ratio by 24.8 points.In return the Greek government got shares of these banks which is now trading much lesser than the original value in the Market and hence it is a failure.

May 2014

Another round of Bank recapitalization was done with 8.3 billion euros by private share holders. HFSF is going to receive Euro 27.3 billions for the 48.2 billion it invested in 2013.



Solutions for this problem as suggested by many economists



1) Return to Drachma and devalue it for the exports to climb.The current national debt for Greece is around 300 Billion dollars.


2) Circulate a digital currency card (as Bank deposits far exceeds paper Euros in Greece).

3) Negotiate another Bailout ( agree for sale of government assets)

4) Convene an european debt conference and negotiate the debt for all European nations ( not Just Greece)

Current Debt to GDP ratio of Greece is 180% and will rise to 200% as forecast by IMF.


What could be a possible solution to the above crisis. My proposed solution is as follows



As we know Greece is dominating the headlines in the International scene. Greece itself came out with a sensible suggestion - they proposed a GDP linked bonds.

On the look of it it was a sensible suggestion. And it would work thus -

When the economy grows debt would grow and Greece would pay it easily. When the Economy shrinks it would keep the debt GDP ratio to be the same.

Why was it not acceptable to the Politicians.

There is a lingering disbelief that Tsipras( or the Greek Govt) would not allow the Greek economy to grow as it would mean Greece would have to pay more than they are indebted. On the other hand it would mean there is an incentive for the Greek economy to be in permanent recession. Meaning you repay much less than what you owe to your debtors.

A via media would be to have a cap and a floor on the GDP bonds. The cap would be for the Greeks to grow without having to repay more than what they owe the European union. The floor is for the lenders to recover a minimum of what they lent.

The EU and Greece need to agree to this if there is a solution which is feasible else it is gloomy days for all involved.

Excellent article by S.Gurumurthy in Indian express

I found an excellent article by S.Gurumurthy link is below

http://www.newindianexpress.com/columns/s_gurumurthy/MUDRA-Bank-Theoretical-Depth-and-Practical-Wisdom/2015/03/10/article2706479.ece

I liked to comment on this article.

The article on Mudra bank is actually laudable.

But what you should not miss is that the Small and Micro businesses depend on large businesses for getting them orders. Many also depend on them for getting the knowhow as they(Micro Businesses) are headed by many ex-employees ( of large corporations). Secondly they some times even depend on them for manpower ( training and to recruit employees). I agree finance is one of the reasons they(Small and micro businesses)  might flounder. But technical know how and technology sharing are also reasons they might find a roadblock in their business. 

Most big companies would prefer to support micro businesses because of security of company information, non disclosure of technology transfered etc. Companies prefer to develop dedicated suppliers. But once technology is transfered it is just a matter of time before it becomes public knowledge (not to mention Corporate theft of Information). This is in spite of the rapport the micro businesses have with the Big corporates whom they supply.

Nonetheless this act of creating a Mudra Bank is very much welcome. If you look at why micro companies fail it is first Credit (non availability), Next is non belief of the big corporates to trust them (for technology transfer) and another is obsolescence of the technology they are using. These are just a few that came to my mind.

All three dimensions are important and it must be taken care of by Mudra bank. In which case it is an excellent initiative by the Modi Government

Vengat

Beware of Mid September blues

Rajan Effect : Sensex soars 400 Points on Thursday

Dr.Rajan welcome to the Governor’s post of the central bank(RBI). You have a challenging job ahead. The reasons are Federal reserve might be tightening its money supply. The details of it is discussed below.

 If you look at the quantitative easing(QE) the Federal Reserve has undertaken, it runs to trillions of dollars. This was undertaken to kickstart a dull economy(USA primarily) from 2008. Now that the economy is showing signs of reviving it is likely to cut the QE.

http://en.wikipedia.org/wiki/Quantitative_easing

The first recall of the easy money will spook the markets in a jiffy. I might seem very pessimistic but when the first tranche of QE is recalled every developing market will catch a cold, when the Fed sneezes. More importantly a first sign of Fed indicating reversing the money flow has had catastrophic effect on the emerging economies. Just imagine the effect when it will actually turns it off.

http://www.moneycontrol.com/news/rupee/dr-rajan-try-convincing-us-that-rupee-is-worth-holding_945311.html#toptag

Dr.Rajan,  RBI Governor feels rupee can be defended. Agreed but if you take into consideration the enormity of the Fed’s actions can have, RBI might be a David not a Goliath. In the market Goliaths usually win and not the Davids.

Regarding the action taken by the Indian government, it is on a overdrive to make up for the lack of action by it in the last 3-4 years. Although the realty developers are not getting sleep but atleast the government has made its stand clear. The government is going overboard to please the landowners. You cant expect anything better than it in the election year.

http://www.moneycontrol.com/news/real-estate/why-land-bill-is-giving-sleepless-nights-to-developers_944879.html#toptag

Regarding downgrade, about 11 Indian Banks were downgraded recently. The downgrade is not for the 11 banks but for South and South East Asian region.

http://www.moneycontrol.com/news/economy/bank-downgrade-for-apac-region-not-just-india_945503.html#toptag

As predicted the nation’s status will soon become junk if the rupee is devalued like it did this August.

There is more data coming from United States which has decreasing unemployment rates. This makes the inevitable to come a little sooner rather than later.

http://www.nytimes.com/2013/09/07/business/economy/us-economy-adds-169000-jobs-as-unemployment-rate-falls.html?ref=business

Come middle of September and we will know what is the storm in store for us. We can say the worst is yet to come. Federal reserve is likely to act in mid September.

Growth in GDP is 4.4% this quarter

This shows the sorry state of the economy India is in. While the economy was performing badly was anyone’s guess. But the growth of 4.4% was unexpected. Most analysts were betting on 4.7%. The lower growth rate means India might have the lowest growth rate in about 5 years. Whats more worrying is that planned expenditure might be cut to bring the fiscal deficit under control. As growth slows down the taxes will also come down which means the government will have less to spend.

Manufacturing slumps and so does Mining

The negative in manufacturing is mainly due to slump in demand from Europe, USA and Japan. But with USA showing signs of recovering and also Europe, India does see a growth in manufacturing soon. Mining and quarrying will grow when the iron ore and coal export resumes ( Currently there is a ban on export of both because of litigation).

Next quarter will show better growth if we are to believe the government. What is alarming is elections are due to take place in May 2014. No government is going to take tough decisions before that. Congress led UPA is unlikely to return to power. The opposition is demanding an early election scenting that it is in its (BJP’s) favour.

All said and done growth in India is going to be less than 5% this year. Share prices of all companies are coming down. The only exception is IT and Pharma companies which rely on export revenue. Once the nation’s rating comes down we will see more exodus of FII money. So we have a grim month ahead for investors now.