"I don't make jokes. I just watch the government and report the
facts."
— Will Rogers (American, 1879-1935)
Word for the day
Bathos (n)
insincere pathos; sentimentality; mawkishness
Malice towards none
Ain't "Rath Yatra"
a communal phrase?
Why a political campaign on
a motorized vehicle not be termed a "Bus Yatra" or simply a
"Motor Yatra"?
First random
thought this morning
Why Indian middle class and media is taking unprecedented interest
in US presidential elections?
(a) India's interests are
now aligned more than ever with the US interests.
(b) More Indians now live
an American dream than ever.
(c) We see reflection of
our politicians in the two principal candidates.
(d) The entertainment
quotient of present elections is highest ever.
(e) All of the above.
(f) None of the above.
GST: More losers than gainers in year one
There is naturally a good deal of
anticipation as to the impact on Indian economy and corporate bottom-line.
Many readers have asked for my
views on the impact of GST. In past six months, on many occasions I have
expressed my views on GST impact. I may reiterate the same for the benefit of
readers.
GST is not
make or break
In past one year various segments
of the government have tried hard to sell GST as the panacea for faster
economic growth. The sentiment has also been echoed in matching notes by the captains
of Indian industry and professional money managers.
There can be hardly any doubt
about the need for and importance of a unified market and simplified tax
structure. GST certainly promises to fulfill this need. To that extent, the
profoundness of its utility cannot be challenged.
The problem lies in the assumption
that GST will catapult Indian economy into top gear almost immediately, to
which I beg to differ. For a sustainable and consistent 10% growth we would
need much more than GST.
The high growth phases in India
have so far been mostly a function of sporadic rise in domestic demand
catalyzed by fiscal profligacy, unsustainable private debt and/or global
commodity cycles.
Consequently, growth has been
highly cyclical, volatile and fragile. Every decade we have struggled to remain
out of the spectrum of "Hindu rate of growth" due to some global
crisis, poor monsoon, or political stalemate, etc.
Sustainable productivity gains
have not played any major role in India's economic growth structure, except
perhaps for the green revolution that saw material gains in agro productivity
in 1960-1970s.
Unlike many Asian economies that
chose the path of industrialization on the road to economic development, we
have taken the route of services. This has resulted in poor infrastructure
development. Regional and socio-economic imbalances are two major outcome of
this, adding to the fragility of growth.
Using the words of Dani Rodrick,
there are plenty of world-class firms in India, and the expansion of the
middle-class is unmistakable. But only a tiny share of labor is employed in
productive enterprises, while informal, unproductive firms absorb the rest.
Sustainable growth may remain
elusive unless we can take out at least if 50% of people engage in farming and
employ them productively elsewhere.
More losers
than gainers in year one
From investors' perspective the
single point of interest is to find the potential gainers and losers from the
indirect tax regime transformation.
A number of brokerages have
published research reports listing the potential gainers and losers of GST.
Unfortunately, I do not find any of the reports currently available in the
public domain actionable.
On my part, I am in no position to
list the beneficiaries, or otherwise, of GST with any degree of certainty.
However, the five things I can say with fair degree of certainty at this point
in time are as follows:
(a) GST is a progressive reform and will benefit the economy as a
whole. It is possible that due to regional political interest groups, in the
initial years some restrictions are introduced in the legislation that prevent
creation of a truly national market.
Nonetheless,
it will happen as the benefits become quantifiable over next decade or so. We
have been living without GST for seven decades. One more with less than full
implementation is definitely not a matter of life and death.
(b) One of the primary objective of GST is to improve tax compliance.
This is hugely disruptive to the ways a large number of businessmen in the
country are used to function.
It
is common knowledge that in the country hundreds of thousands of MSME units are
viable just because of tax evasion opportunities under the current taxation
regime. Many of these opportunities may not be available under GST regime. Hence,
the sustainability of these units is under thick clouds.
Moreover,
there is a full army of professionals which helps these businesses evade tax.
These also risk losing their jobs. A large number of revenue department
personnel who thrive on bribes, and agents responsible for collecting &
managing octroi & entry tax will also suffer.
Unemployment,
losses and shut down of businesses due to financial unviability, unemployment
and relocation of jobs are inevitable consequences that will impact urban consumption
in the short term. The positive is that we may see many polluting factories
operating in neighborhood getting closed.
(c) Many businesses have made huge investment in tax havens (backward
areas) to benefit from tax arbitrage at the expense of business rationale. This
investment risks going under water as this arbitrage vanishes in due course.
Rebalancing of industrial growth will follow.
(d) Productivity gains shall be seen in most large businesses as
logistic costs improve, and compliance becomes easier. For smaller local
businesses though benefits are not so direct. These may mostly benefit from the
overall pick up in economic growth.
(e) Project costs of many under implementation projects may need to
be revised to factor in higher input costs as "tax efficient" vendors
become unviable....to continue tomorrow
