"Silence is one of the
hardest arguments to refute."
—Josh Billings (American,
1818-1885)
Word for the day
Grok (v)
To understand thoroughly and
intuitively.
To communicate
sympathetically.
Malice towards none
Ravichandran Ashwin is
calling the bluff of Indian selectors, thrice a week!
First random thought this morning
As per the recent opinion polls in Karnataka, forthcoming assembly
elections may not result in a decisive verdict. Both BJP and Congress may end up
well short of the half way mark. Both would need the support of JDS leader
Kumaraswamy to form a stable government.
So, in effect, the fate of the state now hinges on the fact
whether Kumaraswamy and Siddaramaiah could forget the acrimonious history between
them and join hands; or like Goa and Manipur, BJP will manage the situation
better and align with JDS to form the government.
In the opinion of Psephologists at least, the mandate of the
people does not matters.
Fiscal concerns may be deepening and widening
Continuing from yesterday.
One of the arguments in Greed
& Fear that I strongly disagree with is the reasons to be sanguine about
the fiscal slippages.
The author admits to "not
being so concerned" about the fiscal slippages. He cites the following
reasons for his sanguineness about the fiscal balance of India.
(a) Corporate and income taxes, which in aggregate account for almost
half of the revenue base in India, are rising at a much faster rate than
nominal GDP growth. As per the report corporate and personal income taxes rose
by 18.8% YoY in the first 11 months of FY18 (April 2017 – February 2018),
compared with 10.4% YoY nominal GDP growth in the first three quarters of FY18.
The author sees it as a
"positive consequence of demonetization".
(b) GST revenue may rise, as most of the teething troubles may be
over.
(c) The consolidated fiscal deficit (ie including the states) is
improving because the states enjoy an oversized share of GST revenues relative
to the central government (71% to 29%).
(d) In the author's view, fiscal deficit of 3.3% (FY18BE) hardly
suggests extreme fiscal laxity.
(e) The author has strong confidence in the commitment of the prime
minister Narendra Modi in fiscal discipline overriding political expediency.
In my view, these are the very reasons,
investors should be cautious about Indian economy and hence Indian financial
markets.
1. The
rise in tax revenue, as pointed out in point (a) above needs to be analyzed in
a different context.
Firstly, material rise in tax revenue,
as compared to rise in nominal GDP, indicates rise in effective incidence of
taxation that should impact the private consumption, savings and investment
adversely.
Secondly, the argument is that
demonetization has brought in a large number of hitherto untaxed individuals
and small businesses into tax net. If this is true, a large part of the
incremental tax revenue shall come from the middle and lower middle households
and marginal, small and medium sized enterprises (MSME). This is the segment where
the propensity to consume is higher than the upper middle and rich class.
In my view, higher incidence of
tax should definitely impact the consumption adversely and result in widening
income and wealth inequalities. This could not be a supportive argument for the
financial markets, which have historically thrived on exploitation of household
savers.
2. The
evidence so far suggests that the benefits of GST may be highly skewed amongst
states. More populous states like Bihar, UP, WB, MP, JH etc. are benefitting
less (or even losing) on account of GST implementation, whereas few
industrialized states may be gaining at their expense. This could certainly
impact ability of these state governments to invest in growth.
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Moreover, the aggregate data for
state fiscal condition looks satisfactory, based on buoyant GST collection
estimates for FY19. In my view, even if the actual collections meet the
estimates, the debt level in underperforming states may continue to rise.
It is pertinent to note that gross
fiscal deficit in India is already one of the highest in emerging markets.
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...to continue tomorrow
