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

Will the FM deliver?

If you happen to watch the business channels these days, all of them want to sensationalise and make news of something there is no news about. these news channels survive on sensationalising the banal. That's exactly the thing they are doing with the upcoming budget. they have already labeled it as the "Big B" (The original Big B must be squirming at the thought of this unlikely and banal competition).

What can be reasonably expected by the budget?

1. Income tax slabs will be raised to make way for the 6th pay commission. may be the lowest slab will be up from Rs.150000 to 200000.

2. A broad and vague statement about GST to be introduced will be spoken of with a deadline of three to four years so that the listeners will feel good about some progress in the administration and the practitioners will also feel good that it is not coming soon yet.

3. A proposal for disinvestment to bridge the gap in the fiscal deficit will also be talked of and an arrangement of selling equity in PSUs to other PSUs will be taken up to satiate the views of people hankering for fiscal prudence. Whether it is fiscal prudence to disinvest by transferring the money from one pocket of the government to the other pocket is a debatable point.

4. The recent success of farm loan waiver in the electoral hustings is bound to cast its shadow (or should I call it lustre) on the budget and there will be a constituency which would hanker for more of the same. This constituency will surely be catered to, and an announcement in some form or the other can be expected out of this budget too.

5. NREGS will also become a mainstream project of the government, given the keen interest of the family in the project. An announcement of extension and raised "deficit funded" programme can be expected on this subject.

6. Securities Transaction Tax, the slow poison affecting the stock markets and the Commodities Transaction Tax the poor cousin of the STT will remain the same and no reprieve on these items can be expected.

7. Some superficial and cosmetic changes can be expected in the indirect taxes system to make it look market friendly. Here the phrase "look market friendly" is important.

8. Education seems to be the new frontier where the government will show its keen interest. especially Higher education, rightly so when we have a former UGC chairman as the Head of the cabinet. More central universities, IITs, NITs, can be expected to be announced in this budget. We can also expect at least 5 universities to get a substantial largess to augment their resources.

9. Defence expenditure would go up by 20%, this has become an annual feature now with the prevailing Geo-political situation.

10. Setting up of a new force of the type of NSG/RAF may be announced to combat internal insurgents.

11. Some politicians are vying for a special status for the Hyderabad-Karnataka region, Bihar, etc., these may see the light of the day and some package can be expected for Hyderabad-Karnataka region and Bihar in an attempt to woo non-congress voters there.

On the topic of special status, one thought crosses the mind, Article 370 gives a special status to J&K and politicians from congress have been talking about a similar status to Telangana, Goa north-east, etc. Does this mean that we are heading towards a decentralised system of governance? Are we heading towards a federal system with a weak centre and strong regional states? only time will tell.

So, if this is reasonably expected of the budget in general, one has to stop and think whether it is really the "BIG B " as our media wants us to believe. I remember economic times portraying a caricature of honourable Shri. P Chidambaram as the superman during the 1997 budget. Ten years ago it was for the print media to raise the hype, now its the turn of the electronic media to do the same. The reach and impact of electronic media is deeper and broader. If the media starts encouraging false hopes and sensationalising no news as BIG NEWS then the nation will be in for a big surprise. It seems that the present electronic media has taken upon itself the mantle of changing the opinions in the country. This type of sensationalism in the electronic media and instant justice meted out to people via the media will not get them anywhere. People are bound to realise sooner or later that the "BIG B" is also same as the case of "prince stuck in the bore well" or "A man who prophesied his death" or "leopard in somebody's house" or "injured tigress on the road". All these media stories took up nearly 48 hours of national TV space at one time or the other leaving aside grave issues like hoisting of the Pakistan flag at Srinagar.

Any way This budget as I see it is going to be a non-event and I pray that I will be proved wrong. Over to Honourable Shri Pranab Mukherjee to to the Honours.

TWO CIRCUITS AND A SCAM

The Indian stock markets hit two circuits and were closed for the day. It was an unprecedented thing that happened.

A decisive win for the UPA has brought back the bulls in the market with a long list of wishes.

1. Easing of FDI norms for Insurance sector.
2. Reform in the banking sector (especially on the labour laws side)
3. Disinvestment from public sector undertakings to make up for the deficit brought about from last year's doles.
4. Dismantling of the Administered Pricing mechanism for petroleum products.
5. Easing of interest rates and making credit available to the industry.
6. Boosting exports by implementing a new export promotion policy.
7. Spending more money on health, infrastructure and education.
8. FDI in the aviation sector.

I HAVE ONLY ONE COMMENT TO MAKE FOR ALL THIS WISH LIST. THIS LIST WILL REMAIN A LIST AND YOU WILL PROBABLY BE ABLE TO SEE ONLY 40% OF THIS LIST COMING TRUE IN THE NEXT FIVE YEARS.

AS FAR AS THE MARKETS ARE CONCERNED THE REGULATORS ARE NOT IN SYNCH WITH THE MARKETS AND THEY NEED TO REFORM THE MARKET FIRST. A TRADING OF 300 ODD CRORES CAN STOP THE MARKETS FROM TRADING AND CAUSE A UPPER CIRCUIT. THIS IS THE BIGGEST SCAM OF ALL TIMES AND NEEDS TO BE PROBED.

Additional reading http://www.moneycontrol.com/india/news/market-outlook/nothing-to-be-proud-of-vk-sharma/398047/1

If the market can be easily manipulated with 300 crores then it is a very shallow market. We first need stock market reforms and we need a regulator not an opinion maker in the regulators seat.

All the best.

Waiting to Exhale

The Great Indian Election Drama of opposing postures is coming to an end tomorrow. All those who thought that the third front and the UPA are different will be in for a rude shock when they will muster all their might to come to power and bury their so called differences under the carpet of secularism.

If you notice the election campaign this year, there were four formations.

1. The United Progressive Alliance: which was not united at all and a splinter went up to forming a fourth front. The alliance was characteristic of unabashed sycophancy and unbridled faith in the first family of India. This alliance also made last ditch efforts to salvage its well wishers by using the CBI to give clean chit to all the well wishing offenders. You must notice one fact that majority of parties forming a part of this front have a common last name i.e. Congress and they root for a common last name too. i.e. Gandhi.

2. The National Democratic Alliance: which was non democratic to say the least. This alliance brought up non-issues when the real issues were not received well by the public. They understood late in the campaign that short and direct television campaigns without the "creative" was the order of the day. They have still not understood that they have to become an inclusive party and not an exclusive party to come to power. Here inclusive means more members and keeping the doors open for new members. Now that the contentions of Article 370, Ram Mandir and Uniform civil code have been kept in the deep freezer there is actually no ideological difference between the two national parties.

3. The Third Front: Means a bunch of regional satraps broken away from the congress of yore. these parties are really drifters with the only aim to get into power. They prefer to call themselves more secular than the Congress or the UPA and they also profess to speak for regional aspirations. Their slogan is to oppose congress in the states and truck with the congress in the centre.

4. Fourth Front: This is a group of parties broken away from all the three fronts with the USP of being away from the congress, the NDA and the Third Front. they would like to jump to the highest bidder post results.

I had not blogged for a long time because of the "Aachar Sanhita" which i had imposed on myself, so that my clouded political views should not add to the political confusion in the minds of the readers.

Now that the elections are over and the ban on exit polls has been removed, Amateurs like me can hazard a guess as to what will happen to the results. I am Hazarding this guess just for the heck of it and my guess is going to influence my strategies in the market.

Now for predictions: I think the house will be evenly divided between three fronts. if you combine the third and the fourth fronts. Left parties will gain enough seats so that they cannot be ignored in the formation of a government. I think all "secular" parties will come together to form the new government and probably this formation will also be given a new name as UPA will not be acceptable to come constituents (probably because of the word PROGRESSIVE in it!). This formation will lobby hard for the leadership of the government and a new face will emerge as the contender for the PM's post. It will be either Pranab Mukherjee or P Chidambaram. Congress would not give away the PM's post at all. If congress is forced to give away the PM's post then they will not participate in the government and will lend support from the outside only to pull the rug in the next Eighteen months. So, it is certain that it will be a congress led government without Dr. Singh as the PM and Left parties participating in the government.

Now for the markets. As I had written in my previous post the Nifty lingered around the 3600 mark until the election results and now it will take a decisive turn. If the Left parties form a part of the government then brace yourself for Nifty touching 1760 and if they do not participate in the government then it would be 4250 and beyond.

So all eyes on KARAT / BARDHAN/ YECHURY.