Budget 2012-13

This year's budget has four points which have caused anxiety.

1. Raising Service tax to 12% and creating a negative list of services. This act of the finance minister has put a plethora of services in the ambit of service tax. Indirect taxation in itself is a very demotivating tax for entrepreneurs. "Value Added Tax" or excise duty are taxes for adding value to the raw material so that the ultimate user of the goods pays for the labour spent on these raw materials. Service tax is also in the same legion, the ultimate consumer of service has to pay tax on the services consumed. The logic being, our government is not able to tax individuals and firms directly, effectively and therefore they would like to recover taxes from them through this roundabout means. The logic may be correct but it is flawed when you calculate the yield.

Imagine a large industrialist who has more than 50% stake in his public limited company, he obviously falls in the 30% + Surcharge category tax slab. If his company has lets assume a payout of Rs. 1 billion as dividend then more than 50% of that money would come straight to the promoter's pocket and that too tax free!

So our friend promoter now file income tax returns claiming tax free income of more than Rs. 500 million and may be a salary of around 20 million rupees. if he pays 33% tax on the 20 million rupees his tax outgo would be 6.66 million rupees and that would be an effective tax rate of 1.2%. what is the amount of money he would be spending on services to pay a service tax is another question. if he spends around 5% of his residual income on services he would be paying a service tax of approximately Rs. 2.5 million. Compare this with the tax he would be paying if dividends were taxed. If dividends were taxed then the tax that this person would be paying would be 30% of Rs. 520 million amounting to Rs. 156 million.

The excuse put forth for not taxing dividend at the hands of the tax payer is that it is very difficult to implement. All we need is to implement it with the big fish and let the small fry go away. A cursory look at the share holding pattern of large companies in India shows that the most of the companies have promoters stakes above 30%. retail investors account for around 5% of the investors in these companies. therefore it is easier to locate the shareholders and demand dividend tax from them in fact with compulsory demat accounts it is still easier for tax collection. Dividend can also be taxed at source like any other TDS and the companies can be asked to deposit the TDS on dividends. That way it would be the most easiest tax to collect. In times of inclusive growth it is blasphemy to let go large industrialists with small effective tax rates.

So instead of taxing people on the services they avail, it would have made great sense to tax dividends and the government could have mopped up more tax from this exercise.

2. Amending tax laws to levy capital gains tax on transactions outside India, when the assets are in India with retrospective effect from 1962 is a RETROGRADE STEP. Any amendment in tax laws should be for the forthcoming year so that the businesses and the people at large take this as a cue and engage in activities knowing fully well about what part of their earnings need to be share with the government. If the government is going to pull out historical deals and ask for a share in the profits earned in earlier periods, this means that the government is going to wait until you make profits and then lay its claim on its share after the game is over. That's not GAME Mr. Finance Minister! Any tax law which proposes to tax income in future is welcome but not past income. Past is Past Pranabda, please make the rules of the game before the game starts, Indian government is known for changing rules of the game midway, but changing the rules after the game is over is obnoxious and not palatable.

3. Fiscal deficit seen at 5.1%. Should we say this is realistic or should we assume that our FM will be off target by 2% like all other FMs in the past. If he is off target by 2% then it would mean a Fiscal deficit of 7% and that would be catastrophic. If he is realistic,  then what happened to the target of 3% fiscal deficit announced in the previous years? Why can't the government cut costs? stop spending on freebies and concentrate on good governance and prudent financial administration? Are coalition pressures stopping the finance minister from taking bold measures like restructuring the tax rates to increase effective taxation rates of wealthy people and reduce the taxation rates of the the lower and middle income groups? World over there is a growing consensus amongst the rich that they are ready to share their wealth but that is not to be seen in India, why? This approach of floundering on the policy front and squandering the fruits of growth in the last decade will slowly and surely take the country to a 1991 like crisis.



Car Sales for the year 2011-12. Source http://www.team-bhp.com/



4. Increase in excise duty on large cars. Whom are you kidding Mr. FM? Even if you consider all cars of C1, C2, D1, D2 and Premium Category as large cars, the number would be @ 720,000 cars per year, an increase of Rs. 50,000 per car amounts to Rs. 36,000,000,000 that is Rs. 3600 cr. I think that's too much ado about nothing. One more tokenism.

Let's talk about the Rajiv Gandhi Equity Savings Scheme. As a stock market practitioner I still have no clue as to how am I going to tell aam aadmi that he should open a demat account and invest Rs. 50,000 in equities locked in for three years and then he would get an income tax benefit. Seems a far fetched idea! Anyway thats our FM for you. 

As far as the markets are concerned, FII liquidity is still chasing Indian equities, since they do not have any other assets elsewhere worth investing. Around 10 bn dollars have already reached the shores of India in this calendar year and these dollars are giving me the jitters that they may fly back the way they came in, SWIFTLY...

Hoping that the FIIs do not find a better place for investment, our markets will surely go up slowly. technically speaking, the 50DMA has crossed over the 200DMA after nearly a year and a half and has given a good bullish signal. I only pray God that these things will keep the market moving northwards despite the wrong economics.

Have a nice Day

Is FDI in Retail the "fix-all" for the Indain economy

The cabinet approved 51% FDI in multi-brand retail in the last week. The rumour mongers and spin doctors of the government have started talking as if they have taken a giant step in the direction of development of Indian Economy.

Lets take a look at what are the fall outs of 51% FDI in multi brand retail. If the larger retailers really warm up to this idea and invest in or country, who will bring in the remaining 49% is the moot question? will it be through equity dilution to the Indian Public? or will the corporate chieftains, known for their hoarding propensity grab up the remaining 49% stake? if the public is allowed/invited to participate through the equity route, it will be a welcome step in making public participation more inclusive, else it will be another of those schemes meant for the rich to be richer and poor to be poorer (this is assuming that the larger retailers will adhere to good corporate responsibility and keep their shareholders interests in mind whence they manage their businesses).

Another major lobby which will benefit from this immensely will be the real estate lobby. People holding (hoarding) large patches of prime real estate will be able to strike highly profitable deals at unrealistic prices and will be able to make more money. The high rents paid for these commercial properties will end up burning a hole in the pockets of the final consumer. No only this, but another interesting thing is panning out in the Indian markets due to these unrealistic property prices and rental rates. Visit any city, you will find hordes of empty commercial spaces in the upper floors of posh building without any tenants. The owners think that they will be able to attract the same rent as building space with frontage and have kept them empty. The rentals of commercial spaces work out to a little over 4% per annum on the investments made. investors in real estate/ commercial properties are still doing it because they think that the loss in rentals will be made up by the capital appreciation. (doesn't this smack of the stock market mentality? unattractive dividends being made up for by the capital appreciation of stocks!)

The question is, is this approach to real estate pricing  correct in the first place? Is real estate the same as stocks? stocks are liquid: real estate takes a long time to liquidate, stocks can be easily transferred: real estate takes an eternity, litigation in stocks is very minuscule: real estate is highly litigative in nature. So many differences can be drawn to elucidate that real estate and stocks are different classes of assets and they have to be valued and treated differently.

The trading community, which relies on the difference between the farmers/producers price and the retail price will be the worst hit in this milieu. The commission agent will lose his relevance once large retails come over. Remember Reliance had started a vendor portal to procure all their SKU's directly from the producers. Disintermediation is a good thing for markets. But, intermediation employs a majority of people in India (with a long history of trading, and a country of traders) the question arises that whether it is prudent to kill the business that Indians are so good at?

I have posed these questions to elicit comments and make this a lively discussion/debate. Please feel free to vent your views on the subject.

Now, for the outlook on the markets: The cheer in the stock market will be short lived as with other bailout measures. the NIFTY is in a secular bearish trend and it will take a big effort to turn the tide.

ANNA forces a compromise

The entire episode of Anna and his struggle to bring about the issue of corruption center stage has brought about some key take-aways.

1. The youth and the middle class population of India have become politically aware and they should shed their cynicism and VOTE in the next election.

2. We should not be carried away by tokenism of the politicians: like spending a night at a villager's house (after installing generator, western toilet and filling his house with mineral water)

3. We should stop electing people who are known land grabbers and are in cahoots with builders, contractors and other people who deal with businessmen who sell their wares mostly without receipts and thus steal on sales tax, income tax and other taxes.

most black money results from evasion of taxes. if taxes are paid truthfully and correctly then the question of generating black money does not arise at all.

4. We should stop talking about CASTE in this country.

WE ARE ALL INDIANS FIRST AND INDIANS LAST. ELECT A GENUINE REPRESENTATIVE NOT FROM YOUR CASTE AND THEN SEE THE DIFFERENCE.

ELECT A REPRESENTATIVE WHO SPEND LEAST MONEY ON CAMPAIGNING.

STOP ELECTING PEOPLE BECAUSE THEY BELONG TO A FAMILY

ELECT PEOPLE FOR THEIR WORTH NOT BECAUSE THEY BELONG TO A FAMILY

That's all for today

I know this post is going to elicit a lot of comments. all comments are welcome.

How to support the fight against Corruption

Let us all pledge to do our bit to free India from the clutches of Corruption and Black Money by taking these simple but very DIFFICULT STEPS

1. Ask for a bill on every purchase and pay the Sales Tax.
2. Give Receipts on every sale and pay the VAT/Sales Tax
3. Declare the correct amount on every sale or purchase of Land and Flat and Pay the registration tax that is applicable.
4. Never demand or pay a cash amount while buying or selling property.
5. Stop bribing the traffic police for traffic violations and pay up the legitimate fines.
6. Register for only one ration card, gas connection and electrical connection.
7. Pay electrical bills on time even for connections of farms.
8. Declare genuine farm income only and not club other incomes as Agricultural income to avoid taxation.
9. Do not pay or receive donations without receipts.
10. Stop acting as though the law is meant for the minions and not for us.
11. Stop running households on expense accounts of businesses. Declare real income from businesses.
12. Stop Bribing people asking for enhanced credit limits/ Loans etc in Banks and financial Institutions
13. Stop asking for kickbacks on commissions on LIC policies, General Insurance Policies, etc.
14. Stop buying Degrees and Diplomas online and apply for jobs with them.
15. Stop asking teachers to give more marks by bribing and coercing them.
16. Start giving receipts for services (especially Doctors): Consultation, Operations, procedures, etc. Other Consultants like Accountants, Tax Consultants, etc.

All these and much more....

Only if we start cleaning up our house and souls then we will be able to clean up the country. Our country is seeped in corruption not because of the politicians and bureaucrats but because, we tolerate corruption, we always believe the laws are for others and not for us. we always want to wipe out corruption but want to get farther by bribing somebody on the way.

THINK ABOUT IT!! IS IT POSSIBLE TO SACRIFICE ALL THIS!!

Hoping for a corruption free India!

wither markets

Let's look at what's the problem with the markets. Nifty went to about 5650 and bounced back today. I think this is just a small bounce. Nifty is headed towards 5500 before it decides which way to go.

In fact, I heard a nice joke the other day. Somebody said that Nifty has made a Ghazini pattern. It forgets where it is going after every fifteen minutes.

There is a lot of bad news for the Nifty to do anything good. Inflation is still very high and we have negative real interest rates in Indian markets. Most of our friends (and experts) expected the dollar to be at Rs.42 by the year 2010 and they even went on TV to boast about it (in fact one very learned "Professor" grilled me hard about this issue when i said that the dollar would reach Rs.48 and of course made fun of me) I only pray to the good lord and ask HIM to forgive the Professor for he knows not what he did:)

With negative interest rates, the FIIs will slowly start realizing that they are not making money anymore and losing due to the depreciating Rupee. I am categorically saying it again that the Rupee is expected to depreciate up to Rs.50 per dollar and you can expect FIIs to take a walk from the Indian markets for a short time.

The reasons for the fall in the markets will be the usual suspects (from the media viewpoint) lukewarm budget, inflation, scams and any other new "NEWS" they can find. but the writing on the wall is very clear. NIFTY at 4900.

NEWARKED

Obama visit has triggered off the fall in the markets as expected. If India is to create jobs for Americans we can now coin a word called "newarked".

Newarked: means you just lost your job to a Newyorker/ American. you can also say that your job was newarked, meaning it was given off to an American.

Antonym of Newarked: Bangalored.

Anyway, now that Obama has come and gone, let's get back to business and see where we are headed. The market tried to touch the all time high during diwali and then has been flaundering post diwali. i think the market will correct by another 20% before it begins its northward journey.

Some of the stocks that can be bought now are RCOM, Bhartiairtel and IDEA. Stocks to exit are all Banks and auto stocks. This is exactly opposite of what experts are talking about on TV.

Stray Thoughts on Financial Ratios

Whenever we talk of financial ratios, some students of finance who read only text books come up with weird rules and standards. On Monday I was conducting a viva-voce exam for some students. Most of the summer projects were ratio analysis of the company that they had worked in as interns. First of all ratio analysis is not a two month activity, at best it can be a three hour activity or an overnight assignment on finance, nevertheless these students spent an entire 60 days in companies and then came out with a report on financial ratios. That was the first thing that pout me off. the other thing that put me off was that one of the students confidently came up and said that the current ratio of the company he had worked in was at 1.8 and that it was not ideal. when asked about the ideal ratio he said it should have been 2. I asked him where he has read this, he mentioned the book of one of the finest gurus of finance in India (Dr. I M Pandey). I asked him to bring the book and read the paragraph where Dr. Pandey has categorically written that one should not follow this convention blindly. in fact he has not used the words "rule" or "standard" that goes to show how the students reads and understands according to his convenience.

I asked all these students about their perception of a great blue chip company. They cried ITC and Hindustan Unilever in unison. then i asked them to find out the current ratios of these two companies. being FMCG companies they invariably work on negative net current assets and therefore a negative working capital. That in fact is the reason for their high efficiency. the students went about finding out the current ratios of these companies and came out with the obvious: less than 1. Then the students were convinced that there is no hard and fast rule about the current ratio.

Current ratio (Current assets / Current Liabilities) is calculated to find out the liquidity position of a company or firm when the company or firm is an unknown one. If one is analysing a known brand and a company which is in business for a long time then this becomes redundant. If the company is able to dictate terms to its suppliers and its customers then it will always be in a position to use all the suppliers monies for financing its current assets making use of its own funds redundant. That shows why big companies with bigger brand names are in a position to sell for cash and buy at long credits, skewing their current ratios below unity and therefore operating with negative working capital.

A petty businessman with a lot of commonsense would find this article talking about the obvious. he always know that running a business with others money the right way of running a business.

Now for the opinion on the markets: I reiterate that the markets are poised for a fall. they may pick up some steam and even reach the earlier high of Jan 2008. The distance between today's indices and January 2008 highs is only 10-12%. This distance will be traversed in no time at all and all those investors who realise that the markets have gone up will be the ones who will buy between 5800 and 6250 of the nifty. I pray that more people read this part of the piece and refrain from any buying at these levels. and please do not feel left behind if the nifty actually goes above the 5800, because even if the nifty really touches the previous high it will fall to minimum of 3500 in the coming year 2011. So please reign in your horses. If you still plan to be in the markets then just trade, be nimble, get out at the faintest profit margin. The markets can start falling anytime from now to December and the fall will be substantial.