Vijay Kumar Gaba: Nirmala Sitharaman

Showing posts with label Nirmala Sitharaman. Show all posts

Friday, January 28, 2022

I expect the Moon

Expectation is a strange animal. More you beat it, the stronger it rises. Consistent underachievement is perhaps the only way to kill it.

This is that time of the year when everyone gets an opportunity to express their wishes to the finance minister. Even though there is no empirical evidence to suggest that the finance minister would oblige even a significant minority of aspirants – not because she does not want to; but simply because she cannot.

Contours of the annual union budget

It is important to note that the finance minister of India is like the CFO of a business corporation. Her job is to keep account of the receipts and expenditure of the government; manage resources necessary for executing the plans approved by the Cabinet; ensure optimum utilization of available resources; and keep adequate provision for meeting the contingencies.

She is accountable to all the stakeholders, insofar as the transparency of accounts is concerned. Her discretion is however limited to choosing the sources of revenue needed for executing the plans of the government. She needs to plan how much resources to raise from (a) taxation; (b) sale of public assets; and (c) borrowing.

Taxation

In taxation, a balance has to be maintained between direct and indirect taxes to keep the incidence of tax just and equitable. However, since a major part of indirect taxes are now either in the domain of GST Council (GST), state legislatures (Excise Duty and Cess), or international agreements (Custom Duties), the union finance minister has very limited role to play in this. This restricts her discretion largely to the direct taxes only. Moreover, since most of the direct taxes have already been rationalized, she would have very limited scope to reduce direct taxes. If anything, she can impose some new taxes or additional cess. The best outcome for taxpayers therefore would be that the finance minister maintains the status quo on taxes.

Sale of public assets

In view of various Supreme Court decisions, legislations, rules and regulations implemented in past couple of decades, the Sale of public assets (mines, airwaves, PSE shares, land etc.) has to meet the criteria of sustainability, development, transparency, viability, socio-political expediency; etc. and depends heavily on the current market conditions.

In the past there has been absolutely no correlation between the asset sale targets announced in the budget and actual realization. Last year the finance minister budgeted aggressive Rs17.75trn from sale of assets. As of today, we have not achieved even half of it.

Borrowing

Borrowing depends on consideration of fiscal discipline, servicing capacity, and market conditions. Historically, we have borrowed from domestic lenders only. However, in recent years the role of foreign lenders has been rising; the exchange rate volatility has therefore become a consideration. The FRBM Act also guides the extent of borrowing.

Budget presentation – mostly a marketing event

The importance, or otherwise, of the annual budget presentation must be seen within this framework. Although the attention that is paid to the annual budget speech has diminished in past decade or so, it still evokes intense interest from the financial market participants. I feel it has more to do with the marketing success of business news channels rather than anything else.

…that raises anticipation and hope

In the run up to the budget presentation, a number of TV shows are hosted to propagate an environment of expectation, hope and fear amongst market participants. The anticipation, that is sometimes far beyond the realm of reality, guides the market volatility.

The representatives of various interest groups and lobbyists for pressure groups expect demand from FM, which she may have no jurisdiction to give. For example, someone asks FM to allocate more money for infrastructure spending. Whereas, this request should logically be made to the concerned ministry and departments, which in turn shall make a plan, and get approved by the cabinet. FM will be obliged to provide resources for a plan approved by the cabinet.

No one wants to yield

Everyone expects a moon from the finance minister, but no one wants to yield anything.

Like every year, the stakeholders are seeking massive investment in infrastructure; fiscal support for MSME; boost to private consumption by leaving more cash in people’s hand (lower taxes); higher spending on healthcare, agriculture, and education; aggressive disinvestment; lower fiscal deficit; stimulus of housing sector; etc. No one is proposing new or higher taxes.

…FM will continue with her trapeze act

The finance ministers have always struggled to maintain a balance between higher social sector spending and fiscal consolidation. That struggle will continue this year also. Regardless of what the finance minister reads in her speech, the allocations to various social sector schemes will see moderate changes only with many schemes getting lower allocations.

The emphasis could be on motivating private sector investment with little fiscal support.

I believe conditions are too fragile to introduce any new taxes like Estate Duty or any material hike in existing tax rates.

Tuesday, February 2, 2021

FM played brave like Pujara; a Pant like execution needed

“Progress lies not in enhancing what is, but in advancing toward what will be.”

—Khalil Gibran (Lebanese Thinker Poet, 1883-1931)

Allaying all fears, the finance minister presented a brave budget. She took all Covid-19 blows on (fiscal) body and refused to yield to fiscal pressures. She prudently refused to indulge in allurements of raising resources through additional taxation. The Budget for FY22 is continuation of various measures announced during 2020 to support the economy. The recognition of the need of new economy (ecommerce workers, startups, e-learning, new education techniques etc.) and willingness to let go the control over even strategic CPSEs are signs of pragmatism. This is perhaps the only budget in independent India that does not propose to make any change in income tax rate structure.

It is now upon the administrative ministries, departments and state governments responsible for executing the proposals. Like Rishabh Pant, who went to Australia with a poor record of recent execution, the performance of these executing organs of the government in recent past has not been encouraging. It is to be hoped that the execution will improve materially in next 15 months and Indian economy shall emerge winner.

The stock market celebrated the budget ebulliently. This is despite the warnings by RBI Governor and CEA (Economic Survey) that stock market appear disconnected from the real economy.

Six core ideas of the budget

1. Health and Wellbeing of citizens - Preventive healthcare, better sanitization and clean water

2. Physical & Financial Capital, and Infrastructure – investment in building physical and financial infrastructure.

3. Inclusive Development for Aspirational India – Recognition of the needs of new economy

4. Reinvigorating Human Capital – Modern education policy

5. Innovation and R&D – National Research Foundation to research ecosystem in country

6. Minimum Government and Maximum Governance – Aggressive disinvestment; administrative reforms; easier and transparent tax administration

Key development proposals

· Rs 64180cr to develop capacities of primary, secondary, and tertiary care Health Systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases.

· Universal water supply in all Urban Local Bodies; and liquid waste management in 500 AMRUT cities. (Rs. 2,87,000cr in 5yrs)

· The Urban Swachh Bharat Mission 2.0 (Rs. 1,41,678cr over 5years).

· Voluntary vehicle scrapping policy Commercial vehicles 15yrs age and personal vehicles 20yrs age would need a fitness test.

· Rs. 35000 allocated for Covid-19 vaccination. More to be allocated if needed.

· Mega Investment Textiles Parks (MITRA) Scheme to be announced in addition to PLI.

· A Development Financial Institution (DFI) with Rs20000cr initial capital to be set up. The institution to have Rs5trn loan book in 3yrs.

· Proposal to set up National Monetization Pipeline. DFC to be monetized after commissioning in June 2022.

· Award of 8500kms of road under Bharatmala project in FY22.

· Private sector may be allowed to own and operate 20000 city busses under PPP mode.

· Portability to be allowed between power distribution companies. Rs3.05trn for upgrade of power distribution infrastructure.

· Proposal to launch a Hydrogen Energy Mission in 2021-22 for generating hydrogen from green power sources.

· Private players to be allowed to manage and operate major Ports.

· Proposal to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code.

· Proposal to introduce an investor charter as a right of all financial investors across all financial products.

· FDI limit in insurance sector increased to 74% from present 49%.

· Asset Reconstruction Company and Asset Management Company to be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.

· Rs. 20000 cr allocated for recapitalization of public sector banks.

· The limit of Rs50lac outstanding for action under SARFASI Act reduced to Rs20lac for large NBFCs.

· Proposal to launch data analytics, artificial intelligence, machine learning driven MCA21 Version 3.0 with modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.

· Clear roadmap for privatization of CPSE. Proposal to take up the privatization of two Public Sector Banks and one General Insurance company and IPO of LIC in FY22. Rs1.75trn to be raised from disinvestment in FY22.

· Social security benefits will extend to gig and platform workers. Minimum wages will apply to all categories of workers, and they will all be covered by the ESIC.

· 15,000 schools to be qualitatively strengthened to include all components of the National Education Policy.

· Higher Education Commission to be set up for standard-setting, accreditation, regulation, and funding of higher education institution.

· National Research Foundation to be set up to develop research ecosystem in the country. (Rs50000 over 5years)

Direct proposals

Personal taxation

· No change in tax rates and slabs.

· Assesses above 75yr of age having only pension and interest income need not file return, if TDS covers their full tax liability.

· Dividend income to be considered for advance tax only when announced. For FPI, TDS on dividend to be at lower treaty rate.

· ULIPs Premium over Rs2.5lac in a year to be treated at par with Mutual Fund Investment.

· Interest on contribution to Provident Funds on contribution exceeding Rs2.5/year to be taxable. (Wef 1-04-2021)

· The additional deduction of `1.5 lakh shall therefore be available for loans taken up till 31st March 2022, for the purchase of an affordable house.

· IT Returns to come pre filled with salary, interest, dividend and capital gain of listed securities.

· Person in whose case TDS/TCS of Rs50,000 or more has been made for the past two years and who has not filed return of income, the rate of TDS/TCS shall be at the double of the specified rate or 5%, whichever is higher.

· Proposal to increase safe harbor limit from 10% to 20% for the specified primary sale of residential units.

Business taxation

· Further affordable housing projects can avail a tax holiday for one more year – till 31st March, 2022. Tax exemption to be notified for Affordable Rental Housing Projects.

· For assesses carrying 95% or more transactions digitally, Tax Audit would be needed only if turnover exceeds, Rs10cr.

· Eligibility for claiming tax holiday for start-ups extended by one more year - till 31st March, 2022.

· TDS of 0.1% required on purchase transaction exceeding ` 50 lakh in a year, provided the supplier’s turnover exceeds rs10cr.

· TDS requirement on dividend paid to Trusts (REITs/InVits) in whose hand dividend is not taxable.

· Provisions for Equalization Levy on ecommerce players rationalized.

Assessment Procedures

· Time limit for reopening of assessment reduced to 3yrs from present 6yrs. Re-opening for serious tax evasion to be made more objective and system driven.

· Dispute Resolution Committee to be set up for small assesses and Settlement Commission to be wound up. ITAT to also go faceless.

· Time limit for completing assessment reduced to 9months from the end of relevant assessment year.

Budget at a glance

Fiscal Trends

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Tuesday, May 19, 2020

New 3Ds - disappointment, dismay and disillusion

Post budget presentation of Union Budget for FY21 on 01 February 2020, I had cautioned the investors to avoid becoming victim of their own expectations (Mr. Market victim of his own expectations). From the reactions over the mega Rs20.97trn stimulus package, coming from the various market participants, it appears that perhaps no one has heeded to my suggestions. The market participants in particular, and the public in general, appear disappointed, dismayed and disillusioned by the policy measures announced by the finance minister in five tranches last week.

The set of policy measures has been analyzed threadbare by numerous experts, commentators, and various stakeholders, using zillions of gigabytes of data. Had the newspaper being published regularly, millions of reams of paper would have also been used by now in analysis and criticism of the set of policy measures announced. I shall therefore refrain from further analyzing the series of announcements made by the finance minister.

(The readers may have noticed that I am deliberately avoiding the term of "stimulus" to describe the set of policy measures announced. In my view, "stimulus" would be a misnomer to describe these measures. In fact, it would not be totally wrong to say that the term "stimulus" must be used only in medical context. Using it in economic, financial, social and personal contexts may be subject to frequent misinterpretations. It is an established principle of human psychology that different people may not respond similarly to the same stimulant. For example, in the principles of management it is recognized that some employees respond to monetary stimulus while the others get stimulated by the challenging tasks.)

However, since many readers have asked for my views, I must state as follows:

(a) The policy measures announced by the finance minister are all good and well intended. There are some serious administrative improvements like allowing private participation in mining sector; rationalization of interstate trade of farm produce, marginalization of the role of APMCs, hike in FDI limit in defense production, consolidation of PSUs, etc. There are some significant liquidity support measures for the beleaguered NBFCs and MSMEs. Some compliance deadlines have been pushed back.

Admittedly, none of the measure announced represents any out of box thinking. Most of these were either in the pipeline (APMC marginalization, defense production, PSU consolidation, accelerated payment of dues to MSME, settlement of Discom dues, interest subvention, MNREGA, Fisheries, Bee Keeping and Social Forestry missions, Contract farming); had already been announced by the RBI is past three months; or are merely extension of the steps already by the government or RBI.

I am sure, only a few could find fault with the policy measures announced per se. These measures are growth supportive and desired.

(b) Packaging the growth supportive measures that were going to be announced anyways over next few months, as emergency stimulus package to counter the socio-economic impact of COVID-19 induced lockdown is a avoidable mistake. This unnecessarily inflated the expectations of people and led to serious disappointment, dismay and disillusionment. With this, the process of diminishing confidence in government's policy making machinery and abilities that started with demonetization shall accelerate further.

(c) The timing of announcing this set of policy measure is questionable. You imagine a young man who has met with a serious accident and is struggling for his life in ICU of a hospital lying on life support system, and his father shows him picture of a suitable girl that he has found for him. The girl shall marry the boy, if (i) he survives; (ii) is fit enough to marry; and (iii) gets his job back. The boy obviously is not interested in the proposal. He is definitely more interested in standing at his own feet first.

Similar is the situation with the entrepreneurs & farmers staring at huge losses and uncertainties, laborers, daily wage workers, middle class workers facing the prospects of job losses and salary cuts, students and professionals entering the job markets this year, etc.

I however do not concur with the popular rhetoric of cash distribution to stimulate demand; removal of tax on Long Term Capital Gains (LTCG) and Securities Transaction Tax (STT) on equities, and reduction in rates of GST, etc. I am not sure if these measures would help significantly enough to lead the economic revival.

The things like LTCG, STT etc are relevant for a tiny proportion of the economically relevant population. Moreover the amounts involved are insignificant in the broader economic context.

In my view, the government should the following five things simultaneously too help the economy revive and get back on the sustainable growth path:

1. Prepare the ground for accelerated growth in future. This will involve laying the foundation stone for top class infrastructure and supportive policy framework for development of industrial base to widen and deepen the participation of India in global supply chain.

2. Make India self reliant in technology, food and energy.

3. Anticipate the new post COVID-19 world and identify the businesses and methods that shall survive and grow in that world. Support those businesses in their transition. Identify the businesses that might be redundant in the new world order. Arrange for peaceful and orderly demise of such businesses and rehabilitation of the businessmen and workers in the new order.

4. Help the citizens to (a) survive this period of crisis by ensuring adequate supply of all essentials (food, shelter, healthcare, education, clothes etc.) at affordable prices; (ii) retain their dignity in life and death; (iii) acquire new skills that may be needed in the new world order; and (iv) maintain peace and harmony.

5. Ensure the stability, liquidity and vibrancy of the financial system to support the growth and sustenance efforts of the people and businesses.

In my view the lower incomes, job uncertainty, and higher effective taxation shall mean that discretionary demand may not normalize for next three years at least. There is no point in wasting scarce resources in stimulating such demand.

The demand for insurance, healthcare, and skill development needs may become non-discretionary. The government must support people in meeting these demands by enhancing the initiatives like Ayushman Bharat, Skill India etc.

Our team visited Agra and Aligarh divisions of UP over past 5 days. I shall share some key observations made during this visit tomorrow.

Friday, January 31, 2020

Dilemma of the CFO of a stressed company

This morning I see the finance minister as CFO of a financially stressed company. She faces all the problems a highly stressed business could in bad times. For example—

The business of the company has witnessed considerable slow down in past few years. The revenue has shrinked and losses have increased.
The ability to modernize and expand has been constricted as stressed balance sheet and poor cash flows are hindering capital expenditure.
The investors are reluctant to commit more capital as the return on past tranches of investments has been poor.
The company is not able to sell non-core businesses and assets to mobilize the resources needed to sustain the ongoing capex as well as the current repayment obligations.
The competitors have snatched market share with competitive pricing and better delivery.
The ability to retain talent has been hampered due to a variety of constraints.
The rating agencies have put the company on watch list for a possible down grade.
The top management of the company is struggling with allegations of misgovernance and failing to deliver on promises.
To make the matter worst, the new accounting system put in place a couple of years ago has still not stabilized. Many claims have been overpaid and many have been rejected erroneously.

Given these circumstances, you imagine the plight to the CFO (here minister), if -

Most debtors are unable to discharge their obligations and are seeking debt waiver or substantial concessions.
Employees are threatening strike if salaries are not hiked and non-core assets are sold.
Raising prices of goods and services is mostly out of question due to already precarious competitive positioning.
Shareholders are seeking higher dividend.
Creditors want equity to be diluted materially and debts be discharged to deleverage the balance sheet. Any increase in leverage ratios is strictly no-go zone.
The media has already declared that the CFO is going to lose her job in a month. They have also declared a retired banker as her successor. The management has neither confirmed nor denied these viral media posts.

I would never wish anyone to be in her shoes. Nonetheless, I would not refrain myself from offering my five cents to the finance ministers:

(1) Avoid jingoism.

(2) Don't try to please all, because you cannot.

(3) Incremetalism will not help anyone at this stage. Do some zero based thinking.

(4) We need ship loads of foreign capital and technology to survive and grow. Respect them for what they have.

(5) Focus on your strengths not weaknesses. Give euthanasia to the people who have been already declared brain dead.