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

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.

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.

"If it isn't broken dont fix it" says RBI

That seems to be the mantra from our venerable Governor of the RBI. this credit policy is just a tweak with respect to raising the SLR to 25%. All the other rates have been maintained at the same level. RBI's review has pared down the GDP growth outlook of 6%.
The stimulation of the economy on the back of the financial crisis in the form of eased liquidity remains nearly constant. The powers that be, have been crying hoarse that it is still not time to repeal the stimulus given during the crisis. One fails to understand, why should the government not stimulate the economy constructively on a continuous basis? Why should the government only think of monetary measures when fundamental shift in stimulating the economies are needed?
The best form of stimulus would be to encourage individual savings and collective investments.
Now, what does one make of this credit policy? The policy may have said many things in words but as far as deeds are concerned, it is very clear. The Governor does not think anything is wrong and he does not want to rock the boat when everything is to the Government's satisfaction.
What do we expect in the market? The markets are more concerned with the slow growth expectations. We have already witnessed sluggish growth in corporate sales, this may start affecting the margins and profits in the next quarter. That is the fear in the minds of the players in the market now. The markets have also gone up on one way street for most part of the last year and the time for profit booking is ripe now.
So BOOK PROFITS AND DON'T WAIT TILL THE MARKETS TOP OUT.

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.

New Government Old Politics

I am writing this after a long time. In the meanwhile as the powers that be changed and exchanged their jobs, me too changed the job (you can find out about it on my profile). The last month has proved it again that as more things change, they remain the same. The Loksabha saw the first skirmish of what was to come in the next five years. DMK and UPA do not seem to see eye to eye on the disinvestment issue. That caused the stock markets to lose 500 point on the sensex and gain 450 points in a matter of two days. Now, was this a predetermined trading strategy is any body's guess.

The Nifty has relentlessly gone up from 2550 pre-elections to 4500 post elections and has made a lot of investors richer. What should one make of this near doubling of the nifty? May I remind you of the October lows (i.e. 2008 October). In the last eight months majority of the front line stocks have posted phenomenal returns, Reliance, SBI, RCOM, Reliance Capital, Reliance Infra, Reliance Industrial Infra, Suzlon, the list goes on...

Has the economic outlook changed so drastically that the despair of the markets has gone and the economic boom is right round the corner? Has the global financial crisis blown over? Does a change in the leadership in Government (in this case no change) make such a difference that people will throng to the stock markets and buy whatever comes their way at whatever the price? We have heard that markets are irrational but are they so irrational that they DOUBLE IN EIGHT MONTHS?

Given these circumstances, we can reach to two conclusions.
1. The markets were artificially brought down and a panic situation was artificially created so that gullible people sold out at lower prices. The economic situation had not worsened at all and everybody was crying WOLF.
2. The economic situation has really worsened and there seems to be hope that things will turn around. This hope has made the markets rebound and get ready for scaling new heights. The worst is over and out and things will be great once again. Our PM also corroborates this statement that India has the capacity to grow at 9% p.a. despite the slowing growth world over.

I would like to leave these question open for discussion...

Please feel free to leave your comments at the end of the blog.

Have the Bulls come back to pasture?

There have been considerable amount of articles, views and opinions by the experts, economists and others about the onset of the bull market. Let us examine the economic variables and try to reach a conclusion. Mr. Obama and his team of firefighters are working 24/7 to douse the fire that caused the financial meltdown. Other economies of the world seem to have come to terms with the large scale damage and seem to have dusted themselves and got up to traverse their journey to prosperity. The worst seems to be OVER!

In financial market terms: Whenever there is a consensus about a particular trend then the trend reverses and proves them wrong.

Here we are not talking about a trend but about pessimism. Whenever there is pessimism there seems to be a concerted effort to tighten belts, cut costs and generally be frugal. This frugalty will in turn bring down costs but will also bring in a possibility of entering the downward spiral of the economy.

Here we have a different phenomenon happening. India is on a growth path and is on its own trip. This is a country of more than a billion people with high aspirations and a penchant for savings too. As written earlier we have just redefined the hindu rate of growth at a little over 6% from the 3% growth of the past. This growth and the large base created in the last decade will hold it in good stead and will be able to digest the impending political instability.

As far as India is concerned, the bull market will take some more time to really start, the Indian political climate has to stabilise after the formation of the new government. Untill then the market will be range bound between 3000 and 2500 on the NIFTY.

So the conclusion is that, the bull market is round the corner. Let the tide turn in favour of a stable and viable government to confirm the Bull run.

China Shows the way

Lord Maynard Keynes must be a very happy man today and must be celebrating in his grave. The Chinese Government has toed his line and announced a $586 billion revival package, most of it is the promise to build infrastructure. This was what was expected of Indian Government too. But our policy makers are busy playing in the money markets. They huddle together for days and come up with damp squibs of reduced interest rates, reduced CRR and SLR. The fiscal deficit be damned, this is the time to act and push for higher government spending in infrastructure, housing, irrigation, power, water and so on.
The government should take a cue from the Chinese government and start a resurgent India programme of stimulating investment. We cannot tamely sit back and murmur about slowing growth, we have to do something ourselves and cannot expect FDI to walk in into India. Unless government starts investing private investors will not bring money to the table. This is a blackjack game where the house has to deal first and put money on the table, unless the players are convinced about money available to be won they will not play. That sums up the need for creation of investment climate in the country.

Wrong Prescription Again

Injecting liquidity is a very short term measure for the markets and the economy. The patient wants vitamins, proteins and carbohydrates so that he can get up and start walking again. I am talking about the Indian Economy. But, our doctor has given him a pain killer and a bottle of glucose. I met a friend here, who said this liquidity injection is like a ritual we have in our homes during January (Sankranti) : we pour sweets, chocolates, puffed rice, sugar cane pieces and coins on the small kids in the house. We call the neighbouring kids who will sit around the kid and collect all the sweets, etc. and then go away. The same thing is going to happen here, injected liquidity will find its way to the stock markets and other markets to buy puffed up stocks which will be downloaded by the FII's.

Expect the markets to come down after the initial euphoria of the liquidity injection and the US Presidential Election. This bearish phase in the Indian stock markets will last till the middle of next year (of course, I am repeating this line again!). So, if you have bought when I wrote BUY you could offload the stocks now and make a neat 10% gain. the Regulators, Government, Politicians and FIIs will give enough opportunities to re-enter the markets at better prices.

INSURER of LAST RESORT

This week saw the first spate of nationalization of the century. Loss making investment banks were "bailed out" by congressional votes. Do we now assume that this paves way for calibrated risk taking or unbridled risk taking? A glance at the history of financial business in particular shows that the cycle of nationalization, liberalization, privatization and globalization continues unabated. As Institutions take high risks and fail! nationalization raises its head. low level of risk taking and ultra conservatism leads to lower profits (but PROFITS) and prepares for liberalization and as the risk taking propensity of Institutions increases, this liberalization leads to privatization and globalization until the institutions fail after taking unbridled risks which paves way for nationalization again!! That in short is the cycle of economics.
This also props up a pertinent question. Does the state need to bail out private business and absorb losses? Does the state need to disinvest while making profits? The answers are obvious: The state cannot take risks but can underwrite all risks and the STATE is the INSURER OF LAST RESORT.

European banks are falling like nine pins

Our passion to securitize every asset has brought this doomsday on us. This rush of securitization made speculators out of home owners and they thought that apart from staying in their houses they could also play the real estate game and speculate on their own homes, see what all this has gotten us into!
what next? the central banks will bank roll these banks in trouble and take the assets on its own books. So, now if you foreclose then you will turn over your house to the government. The govt of US is going to own a lot of homes in the next six months apart from owning the stocks of your homes. I read a few comments on this phenomenon and I think, the people who have been talking about very bad days or dooms day are simply frightening / scaring investors away. That's like telling your kid brother not to eat the chocolate saying that is tastes bad and slyly eating one yourself.
If you believe in your country's progress and the progress of your fellowmen. If you think that business can be conducted and profits can be made then go ahead and buy stocks. Buy stocks of companies that have been around for 25 years or more and don't worry about their immediate problems. This too shall pass!