Some food for thought
"When you know a thing, to hold that you know it, and when
you do not know a thing, to allow that you do not know it - this is
knowledge."
—Confucius (Chinese Philosopher, 551BC-479BC)
Word for the day
Everywhen (adv)
All the time; always.
First thought this morning
Punjab National Bank has reportedly stumbled upon a
"new" fraud by already declared bankrupt Bhushan Power and Steel
Limited, involving Rs38bn. PNB said in a regulatory that Bhushan
misappropriated bank funds and manipulated account books to raise money from
consortium lender banks. A vast majority of the fraud took place at PNB’s
Chandigarh branch, and also involved offices in Hong Kong and Dubai.
This is surprising that after so much drama, forensic audits,
intensive searches, new systems and internal controls etc post discovery of
Nirav Modi fraud last year, there could still be such big frauds remaining
undiscovered. Especially when the alleged fraudster is already facing
bankruptcy proceedings for more than 3yrs, and all creditors must have their
claims long time ago.
May be I am missing few vital points or reacting to the
newspaper reports not knowing the exact details of the case. But somehow it
does not make sense to me. I feel, some heads at PNB, RBI, Auditing firms and
investigating agencies must be put on block for the sake of accountability and
probity.
Chart of the day
New episode of Tom & Jerry released
The Economic Survey (ES) for 2018-19, devoted one full chapter
on importance of "policy certainty" in improving investment climate
and boosting investors' confidence.
The Survey categorically states "Economic policy
uncertainty also(sic) correlates strongly with the macroeconomic environment,
business conditions and other economic variables that affect investment. Surges
in economic policy uncertainty increase the systematic risk, and thereby the
cost of capital in the economy. As a result, higher economic policy uncertainty
lowers investment, especially because of the irreversibility of
investment."
"...a poorly drafted law that is riddled with
ambiguities, amendments, clarifications and exemptions that inevitably lead to
conflicting interpretations and spawn endless litigation. Needless to say, such
uncertainty can spook investors and spoil the investment climate in the
economy. Such uncertainty in economic policy can be avoided. In contrast, a nation
state that ensures predictability of policy action, provides forward guidance
on policy action, maintains broad consistency in actual policy with the forward
guidance, reduces ambiguity and arbitrariness in policy implementation creates
economic policy certainty. Investors may enjoy the certainty provided by such
an environment and flock to invest in this environment."
ES recognized that "advances in data analytics, in
general, and text analytics, in particular, have made it possible to quantify
uncertainty, in general, and economic policy uncertainty, in particular."
ES relies on the Economic Policy Uncertainty (EPU) Index
developed by Baker et. al. (2016) to claims that economic policy uncertainty
has secularly declined from July 2012 onwards in India, though with
intermittent episodes of elevated uncertainty in between.
ES in fact further claims that since early 2015 EPU in India
started decoupling from the global EPU and has completely diverged since 2018.
Quoting a number of economic studies, ES tries to establish that
EPU during the days of "policy paralysis" hurt the economic activity,
especially investment, in India hard; and that lower EPU since 2015 is leading
to better investment climate and business confidence.
After reading this Chapter of 6 of Economic Survey Vol I, I feel
fortunate that I am not an economist or even a student of economic theory.
Because intuitively I know that in post 2015 period EPU has remained as high as
any other period in post independence economic history of India.
Dramatic overnight demonetization of all high value currency,
implementation of half baked GST and numerous amendments and rate changes
thereafter; clandestine change in mandate of MPC to growth promotion from
inflation targeting; taxation of LTCG; imposing a variety of surcharges every
year; frequent flip flops on GAAR and DTAA, etc are but few examples of EPU
enhancement.
ES released a day prior to the budget recommends "...top-level
policymakers must ensure that their policy actions are predictable, provide
forward guidance on the stance of policy, maintain broad consistency in actual
policy with the forward guidance, and reduce ambiguity/arbitrariness in policy
implementation. To ensure predictability, the horizon over which policies will
not be changed must be mandatorily specified so that investor can be provided
the assurance about future policy certainty."
After reading ES and listening to numerous media interaction of
CEA, what FM does is inexplicable. She creates multiple uncertainties. For
example,
1. Proposal to hike
minimum public shareholding for listed companies to 35% from 25%, without
assigning any valid explanation or rationale.
2. Raising effective
tax rates (ETR) for persons (including foreign investors registered as body of
individual or association of persons) reporting a taxable income of Rs20mn or
more, giving a lame explanation that this ETR is still lower than many
countries like US. This is in fact contrary to the promise made in February
2019 interim budget where the then acting FM had promised tax concessions to
tax payers in final budget.
Frequent changes in taxability of foreign investors have riled
markets many times in past five years.
3. Refusing to honor
the promise made by the then finance minister in 2016 budget speech that tax
rate for companies will be brought down to 25% by 2020.
4. No mention of DTC
in budget, despite promise of implementing it this year. DTC is in works since
2009 and poses material uncertainty to businesses in terms of exemptions and
deduction that may or may not be available post its implementation.
On the side lines, new episode of Tom and Jerry has been
released. This is the favorite game played between government and the businesses.
The government proposes some changes in tax law and the business immediately
find ways to avoid the incidence of higher taxation. The government again
proposes changes to nip the new methods of tax avoidance, and the game
continues.
(a) After imposition
of dividend distribution tax, many companies had started paying shareholders
through share buyback instead of dividend. To plug this route, government has
brought the buy back and dividend at par.
(b) A duty of 5%
imposed on parts of TV. To avoid that companies like Sony, Samsung started
importing complete assembled TV sets through FTA jurisdictions like Thailand,
Malaysia Vietnam etc.
(c) Hearing that
minimum public holding may be increased to 35%, advisors of many promoters of
smaller closely held companies have already pulled out their excel sheets to
work out how to circumvent this norm. It could be through delisting (instead of
dilution); or declassfying some family members from promoter group etc.
