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

Economy is fine says the Economic Advisor.. As usual I beg to disagree..

The Economic advisor to the prime minister says the economy is doing fine and we can expect a growth rate of 8.5% this year. Good News.

As always I am a naysayer and my only grouse is that we have inflation running at an average of 10% for the last four quarters and with nominal interest rates lower than the inflation rates we have already run into negative real interest rate territory for the last three quarters. This does not bode well for the foreign exchange rate front. As long as the real interest rate remains negative, Rupee will keep being under stress, new symbol not withstanding. May be, this is good for the software companies and other export led businesses, but since we are an oil importing economy with a trade deficit of close to a billion dollars and heavy reliance on "invisibles" to Balance our BOP, we need more to be done on the trade deficit side.

All through the blog you will find mention of this inflation in India being more due to non availability of supply than the over supply of money. Managing this inflation by using monetary policy is like managing hypertension by asking the heart to pump less blood rather than by exercising more. Ask any doctor for a remedy he will certainly say that your body needs exercise to counter high BP and not drugs to slow your heart down. But our regulators are not "doctors" they have their monetary policy blinkers on all the time.

what next? INR (sorry I still do not have the font to write the symbol of the Rupee) will weaken to offset for the negative real interest rate for another six months and then if we see some inflation management (monetary or otherwise) we may see a stop to the rupee losing value.

This, along with the money due to be pulled out from emerging markets, thanks to the new act signed by Obama will lead to depressed markets for the next six months. a recovery for the markets is seen only later.

A review of the economy is expected on the 26th evening. The shape of things to come will be decided later. But, since it is an RBI event and therefore a monetary event, it may not give any medicine for the disease of low investment and low supply kind of situation we are in.

Till then short a few August futures and make money.

India Budget 2009

If there can be a perfect example for a damp squib, this is it! my earlier post I had opened a discussion on the role of media in creating a hype about the union budget and had also mentioned what can be realistic expectation of the new regime.

I was spot-on, in saying that no fireworks could be expected.

Now let see some of the important budget provisions and find out what they mean for you, me and the financial markets.

1. India Infrastructure Finance Corporation Limited (IIFCL) has been granted flexibility in raising finances and lending to infrastructure projects, meaning that it has been left to fend for itself.

2. The allocation for NHAI has been increased by 23%. Good move this would help in the development of national highways.

3. Farmers, the darlings of the politicians (that's not because they are voters but because most of the parliamentarians and politicians are farmers themselves!) have been offered an interest subvention @ 7% and a 1% subsidy for prompt payment (this means the effective borrowing rate fr farmers is 6% and they are not required to pay income tax too). It pays to be a farmer in India.

4. The Market development assistance for exporters in the form of interest subvention on pre-shipment credit extended up to 31st March 2010. Our finance ministry expects the global crisis to blow over by then and then we will be charging the same interest rate for our exporters as other manufacturers.

5. SARAL-2 will be introduced this year. Have you ever heard of a simplified simple tax form. here it is!

6. NREGA the wonder child of Congress (How come the name does not start with Nehru-Gandhi name?) has been allocated Rs.39100 crores (Rs. 391,000,000,000) this year. Lets do a small analysis. NREGA guarantees 100 days of gainful employment for one individual in every household in rural areas and pays Rs. 100 per day per head. This amounts to wages of Rs. 10000 per household for a year. So if Rs.391 billion have to be spent then this money is expected to cater to 39.1 million households, out of approx 197 million households as per the official census of 2001. The corollary of this is that 20% of our population is in abject poverty and is not capable of raising Rs.10000 per household in rural areas. If this is true then Shame on us. If this is not true then, there seems to be a problem with the way our government works.

7. A national mission on women's literacy is being set up and it will help in reducing illiteracy amongst women in the next three years. WOW a commendable job.

8. Students who take loans for education will enjoy a moratorium on interest payments till they finish their course. That is a great thing and it will go a long way in helping poor students to educate themselves.

9. A public Private Partnership is being envisaged in managing the good old employment exchange. That is a great idea, all you private placement consultants and naukri.com better watch out big brother has just entered the fray and he will gobble you up.

10. The Unique Identity Number project has been allotted Rs. 1.2 billion to start its operations. That will kick start the operations but we need more money to count the number of people in this country and provide smart cards for each of them.

11. GROSS FISCAL DEFICIT is expected to be 6.8% of GDP and the Gross State Domestic Product limit has been raised to 4%. Mr. Finance Minister Sir, your targeted Fiscal deficit was 3% and you went on to stretch it to 6.8%. How can you expect your counterparts in the State Governments who take pride in profligacy to contain themselves to 4%?

12. Direct Taxes: Individual Income tax slab at the lowest level has been raised by Rs.10000 for male individuals and women. The lowest slab for senior citizens has been raised to Rs. 240,000, a raise of Rs. 15,000. For the HNIs the surcharge of 10% is abolished. Here the people in the middle tax bracket seem to have got the wrong end of the stick.

13. Fringe Benefit Tax has been abolished. Now your company will allow you to go on tour and spend money and not worry about paying FBT on part of the amount you spent on that junket.

14. Commodities Transaction Tax is abolished. I don't know what to say. the government keeps banning commodities trading whenever it sees a flare-up in commodities prices. So the right question would be which commodity is being allowed to trade right now to understand the impact of abolishing CTT. Any way removing CTT will help commodity exchanges and help stock brokers to start commodity terminals as a hedge against the failing fortunes in the stock broking industry.

15. Minimum Alternative Tax: the MAT under which corporate growth has been swept under by the previous finance minister has just got bigger. MAT has been increased to 15%. There is no incentive for tax management using the growth=depreciation route now. THE SINGLE LARGEST REASON FOR THE STOCK MARKETS TO REACT THE WAY THEY DID IN RESPONSE TO THE BUDGET.

16. Thankfully there have been no major changes in indirect taxes.

17. GST to be operational from 1st April 2010. Good move. GST to be bifurcated to central GST and State GST. BAD MOVE. This means we are going back to the good old days when we had central sales tax and state sales tax. so in Karnataka instead of CST and KST we will have CGST and KGST. (How to share the spoils of the tax revenue amongst the centre and the state could have been kept in wraps and a common GST would have been better)


That's about it. As far as disinvestment is concerned, no specific announcement was made.

Moral of the story: More the things change, more they remain the same. The 1991 wave of reforms was not of Congress manufacturing, but out of compulsion of the IMF. Now that the economy is strong enough to withstand the perils of global financial meltdown we can do it our way, the NEHRUVIAN WAY. In fact, at one time the Finance Minister was singing paeans to Mrs. Indira Gandhi, for having the grand vision of financial crisis 40 years back and resorting to nationalisation of banks.

WOW I am very happy that we had such visionary leaders who could predict turmoils four decades ahead. Our FM needs to read a little of modern economics and find out that this financial crisis happened to US because the Glass Steagall Act was repealed in 1999. There was no way how our Prime Minister could envision that this would happen in 1979.

Now for the markets, the immediate support for the markets is 3800 on the NIFTY. Nifty has to fill the gap it created on that euphoric morning after the budget first. Then lets see if a plunge protection team is formed and whether it works else we will see the October 2008 bottoms again.

Where is the Bottom for the markets?

I have been flooded with calls on "where is the bottom for the markets?" frankly I believe the bottom should be anywhere between 2600 to 2800 for the nifty. If that means another 10% fall, so be it. But can you really catch the proverbial knife? It is better to start picking and choosing your investments from now onwards. a cursory look at the indices and a comparison of the prices of the stocks with their 14th June 2006 levels reveals a very interesting story. Only the reliance family, Infrastructure stocks are higher than those levels rest all are beaten down to lower levels. If this is not the opportunity to buy then when is it time to buy?
On Indices I would like to remind about the famous Samuelson "Indices are prepared by a committee which looks for the popular stocks and unpopular ones are eased out of the calculations, making the indices go up when the constituents are going down." So, whats the moral of the story? Start buying ETFs on the nifty (NIFTYBEES) and accumulate slowly. That will mirror the growth in the indices in the next bull run. All of us have a chance to participate in the next bull run as this bearish phase will be painful and long drawn up to the end of June 2009 when the new government takes over in India. Regardless of the colour of the government, the freshness of the incumbent will lead to better and clearer thinking on the policy front and may be, we will find the same policies continued forward as new initiatives. Nevertheless they will be from a new face in the Government and therefore will have a good feel about them.
So, start accumulating stocks for the next nine months and be ready to participate in the next bull run.

The oracle speaks once in a while

The Oracle speaks once in a while he does not have the identity crisis that I have to blog often, nor does he have to call for attention like me. The Oracle from Omaha said yesterday that one should be fearful when others are greedy and greedy when others are fearful in the financial markets. he also said "BUY AMERICAN I AM". what does this show? Dr. Mark Mobius said in the middle of September when the fed started the bail out drive that this is the end of the bearish phase as people have realised that there is a problem and the "doctors" are working on it.
What happens when you go to the doctor when you are ill? he treats you to make you feel better first and then treats you to actually make you better. Our doctors have tried hard to make us feel better but we have not been feeling better at all . they have also started the dose of medicine and have started treating the symptoms. We only hope that they start some homeopathic treatment which will go to the root of the problem and remove the ailment.
Indian markets seem to have gone back three years and there is a consensus building up about further losses. FII's have been pulling out of the markets in a big way. Retail investors are coming in with hordes of cheques for buying, but selective buying has emerged outside the ambit of the Indices. A look at the PE ratios tells us that the prices are compelling and the most industry PEs are around 10. that's the time to buy. Of course you can expect volatility of 15% but can anybody really catch the bottom therefore...
BUY BUY for Now.

An Hi-FIVer tomorrow and an opportunity to exit stocks

If you were looking for an exit opportunity from the stocks that you bought last fortnight, tomorrow is the day. This euphoria will be short lived and the rally will end with a whimper. Remember Isac Newton? he said "October is the worst month for stocks. The other months are December, April, March, January, May, June, July, August, February, November and September." All bail out drama will last for a while and then once short selling is allowed we will be back to the old meandering ways of the market for a while, at least till the middle of the next calendar year. We can expect the performing markets/ companies to be separated from the "also ran with doles" my the middle of 2009. I foresee a long and treacherous bear phase for the markets.

AIG being taken over by the federal government means a lot to the industry. I have been getting calls about the future of AIG and my stock answer is that there is no bigger person on this planet than the President of US of A to own a business. In India we have a peculiar scene, TATA group the most trusted group has a joint venture with AIG (now the property of the federal government). IRDA in India has water tight investment rules and thus, there is no cause for concern for the insurance policy holders.

So, where do we invest in India now? of course the Infrastructure sector because that's where all the money is going. if you want to buy a stock and forget then buy reliance infrastructure limited keep it in your demat accounts and forget about it for a decade. It will finance all your dreams at the end of the decade.