All posts in the GST category

Indian Economy – Problems as on Sept 2017, and Way Forward

Published September 4, 2017 by vishalvkale

The enclosed article {Biblio. 1} by Mihir S Sharma, one of the few straight talking Economists on Indian Media, does raise some excellent questions. It is a superb analysis of the shoddy economic management – and also raises the fact that something is indeed broken. The economy requires deep seated reforms at core levels-  not vacant sloganeering grandiose plans. Quite correctly, the need of the hour is attending to the real issues that confront on the Business, Trade and Economic Front; as well as a straightforward analysis of what is wrong, devoid of Jumlaas and vacuous statements.

All Macro-Economic Parameters are in the doldrums, as should be evident to all but the most devoted Bhakt; the time is now ripe for us to rise above narrow parochial statements, and try and get to the root of what ails our nation on an economic front. High NPAs, Low Credit Offtake, Slowing growth for 6 straight quarters, slow export growth and an economy on Government steroids… and many other parameters that we can assess – all point to the facts that this are not right, and there is something wrong somewhere that need correction. What is more, we are already at 93% of the fiscal deficit target for the financial year, and this is just the first week of September.
A glance at the Economy does not inspire much confidence; and this isn’t cyclical in nature. Sure it will turn around on its own – some parameter/s in the external environment are certain to get positive over time – allowing another burst of high growth, which will push the required structural changes into the background. It is just a question of time. Question is -we now have the opportunity, and a clear political mandate, to get some real reform going; can we take advantage of this? This does seem unlikely, as Media and public is once again focusing on the small good news of GST July Returns, which is like celebrating a 4 in an ODI when you require 22 runs an over to win!
The Big Boys of the Indian Economy have no appetite for investment; neither do they have the required resources in their Balance Sheets to take further risk. The small boys, always under-represented in voice in Media, with little or no public imagination behind them, go unnoticed. Their performance, with both Profit and Revenue slippage in 16-17, is also rather worrisome; all in all, a bleak picture. Add to this  the rather unfortunate fact that access to Institutional Credit for these small players is still far from as good as it should be, a fact that goes woefully under-reported. Thus, we arrive at a situation where it is Government spending which is driving growth; rather a sorry state.
Another article, again by Mihir Sharma – kudos to him for a series of stunning analyses – points out : “A recent analysis of listed companies by the Reserve Bank of India showed that companies with paid-up capital of under ~50 lakh saw net profits fall by 23 per cent in 2016-17. Companies with sales of less than ~25 crore saw revenue fall by 44 per cent. This doesn’t look like a sector capable of reviving the supply of jobs. Nor is investment here going to be easy; commercial bank credit has slowed so much, and the government has been so slow to resolve the banking crisis that alternative forms of financing investment will be needed: Corporate bonds, for example. But, naturally, that helps only larger companies. If there’s a revival, it will come at the top end of the scale.” {Refer Bibliography}
Sure – the GST will deliver its benefits over a period of time, be it tax base, regulated transactions, cost savings for businesses et al – but that does nothing the change the fundamental problem – low credit offtake, high NPA, declining sales and investments and so on. The problems of the SMEs will remain as they are – access to credit, low technology adoption, distributed ownership and operations, managerial skill issues and so on. That leaves us two choices – treat this as cyclical, and applaud GST… or push our sleeves and get to task of attending to what is wrong, avoiding grandiose statements and plans.
To make matters more interesting, 233 of 633 districts are monsoon deficient as on date, and adding to this is other detailed analyses of precipitation distribution, making things uncertain, though not a cause for Alarm yet. One can only hope for a decent precipitation September month. Agriculture is just coming out of a long rut, and has seen a spate of loan waivers; further, it is a contributor to only 19% of GDP. Its issues are a debate unto themselves, and are far longer terms horizon solutions, which we do need to take – but that is another story, to be taken up later. The question in this overall backdrop – what can be done, firstly for immediate respite and secondly for longer term improvement?
 At this point, the Bhakts get personal and state – why don’t you suggest a solution? That is a fallacious approach to take, as it  diverts attention from the issues, and shrugs off responsibility from the leaders we have in Parliament, in various think tanks, institutions, and other similar places. It isn’t my place, a part of the public voice, to suggest solutions which require data, and access, and power – neither of which I possess. We have these institutions for a reason – and I can only point out basis hardcore facts and data that things aren’t going smoothly, that a course correction is long overdue. I and people like me can only serve to try and direct public and Media attention towards the right path.
On the longer term, one thing is clear – the SME sector needs to both upskill, upscale as well as get far better institutional support; some changes are being made in that direction, but far more is needed in various support terms from institutions. This is clearly a longer-term solution, and has further deep institutional process and structural reform that will be needed; not an easy thing to attempt, strong politician or not.  And thus, expecting an immediate revival in GDP, Jobs etc from this sector in the short term is expecting a bit too much.

That only leaves us with, as Mihir Sharma correctly points out, the larger boys – the ones who have scale, and established operations. In order that the NPA scenario gets clarified, credit offtake improves, and so on – it is essential we focus on these – or in other words, the domestic environment; rather than chase foreign money and investments, the need is to ensure local money gets mobilized for local investments, demand improvement steps be taken, private investment uptick starts post-haste; for, with the Government already at 93% of its fiscal deficit this year, it has little scope left in its balance sheets for any further activities – and last year, it was government investment that was a key factor in growth!


GST & Subsidies – The Pluses, and how to mitigate the Minuses

Published August 6, 2017 by vishalvkale

In the midst of these seemingly hopeless times with nearly every economic parameter going down, it is heartening to see a small, tiny uptick in credit offtake from banks {Business Standard ,”All Eyes On RBI Today”,  2nd August Credit Chart – See Chart below}. I haven’t seen many people note this : but the chart is clear. There is a small uptick – this may of course be irrelevant, and unsustainable; but it is present. It is now for the Government to ensure this uptick is sustained; increasing Credit Offtake is a prerequisite for a sustained Economic Recovery. 

However, it is with regret that I admit my article isn’t about recovery prospects; as most of my readers will no doubt be aware – I don’t indulge in speculation; that requires detailed data trends which are not available to me, as well as tools. This present writeup is more about the risks that are facing us in the current situation, which taken individually or together can derail this small beacon of hope. The beacon of hope isn’t just the Credit Growth, but rather the GST as well as the increasing Tax Base; and of course, not to forget the welcome initiative of this Government to take some hard decisions. As to whether these hard decisions are enough or not, is another story, for another article. As I said, speculation isn’t my style, neither is it my current forte.
Lets us tackle this most prickly of issues straightaway. Article after article is claiming-  in the Pink Media {I freely admit I have stopped reading White Media, as I find them not upto the Mark. I count Livemint in Pink Media, as in Economic Media} – that the current dispensation is not taking hard decisions, or real reform moves. I respectfully submit that the reality is the exact reverse – they are not only taking Hard Decisions, they are doing so with a single minded determination. Let us give credit where credit is due.
The GST is itself a hard decision; fine – it is, well, let us say not upto the mark – but it is a start. {Libs, hold on please – will attend to GST in a separate section here}; yet, the Government went ahead, warts and all. This will unlock future potential, as I analyse in a strategic analysis of GST impact subsequently in another article. Next, the rather unfortunate tendency of this Government to target subsidies with a single minded determination and focus brings a new atmosphere in the country and among the people.
Bhakts are over the moon over this reform; Libs are cautiously optimistic, while being wary of the downsides of this move – which are, quite frankly, way too many and way too technical to be stated in a short summary. Both sides are right. The news on the ground isn’t great; the move has choked the economy, as we can see in the trickle of information that is now coming out. While there is logic in the claim that these are temporary, this needs a careful look at.
Trucks – one article said 20-30% – are not getting loads; Chemists are not ordering some key drugs in sufficient quantity as they fear input credit will not be passed on; SME order books are empty, and they are paying a temporary price; Hotels business is down 20; Manufacturing sector took a big hit in July – which is the sharpest decline or hit in nine years; Housing and Real Estate is showing signs of stress due to RERA and GST; Textile Segment – esp the small units – is also showing stress due to GST. You can of course claim that these are short-term changes, but there is more to it, as we shall see.
The Government, at long, long, last – has shown some signs of attacking our crippling subsidy problem. We are a developing country, and the more we spend on Subsidies, the lesser we have for Development and Capital Expenses. In that light, it is beyond argument that this is one area that required attending to. At last, we are doing it – but is our approach right? There are some indications that the Government is thinking of tinkering with the kerosene subsidy, and the fertilizer & Gas subsidy.
On the face of it – this looks a great move. But go deeper, and problems emerge. The government has announced that the price of subsidised kerosene will be raised by 25 paise per fortnight until the subsidy goes. But look elsewhere – 40% of Kerosene is diverted, true. What of the balance 60%? That is used by those whom it was meant for. Second, cooking gas subsidy is being phased out. Third, railways – where catering and Blankets etc might be phased out.
First of all, as all indicators point out – as I look at in this article of mine on my blog – The Indian Economy has not been faring too well. On top of that, demonetization created massive disruption particularly on the SME and Unorganised & farming sectors of the economy. Adding to this potpourri was a potent cocktail called The GST, which created further disruption. Point to be noted here – this was bound to be felt highest in the SME and Unorganised sectors, as the Larger players had the time, knowledge and the money to implement change processes as well as whither the short term storm. Also remember that the contribution of the Small and Unorganised sectors to the Indian Economy is to the extent of 40-50% of GDP as well as being the major contributor to Savings as well as employment
While the overall direction’s utility and benefits are actually beyond argument – the bhakts have it right there; the downside risks outlined above need to be taken into consideration. The Smaller players in various sectors, who together make a large segment – how long will it take for them to feel the benefits of the new regimen of the Economy? Do they have to ability to whether this storm? If not – what will be the impact? Joblessness – how many people will lose their jobs? {There is evidence of this, look in links enclosed} Or how many companies and operations will have to shut shop? And quite apart from the economic impact, what about the human side of the story? The two taken together, make a strong case for a more Human approach, for reasons of pure economics, as I look at in the next part..
The human side is what worries me the most, followed by the ability of the small sectors to engage with and emerge victorious over the challenges thrown at them. That they will win eventually is beyond argument – history is mute proof of that. But the process of change can be painful. It will require deep strategies, executed to perfection, to mitigate the impact, involving re-skilling, re-training, and a very soft handling. As on date, there seems to be no evidence of this happening. What will happen to the people who will get hurt in the interim is open to question; they will just have to cope on their own.
The other critical factor is the ability of the smaller players to weather the change. Take subsidies; sure – some of it is a waste. But large portions do reach the intended beneficiaries {read Kerosene article below}; to this category of people, people like you and me perhaps, the small amount of help through subsidies is actually quite large from their point of view. Instead of devising mechanisms to reduce misuse, the Government is doing away with them altogether. Similar is the case of the facilities example – instead of finding ways to improve, the Government might just do away with them.

Sure, these are hard decisions – some of them are bound to be beneficial, given they are based on solid logic. But does the on-ground reality in industry amenable to such gut-wrenching changes? If it isn’t, it doesn’t mean we don’t do the changes – all I am saying is that there is way to take hard decisions – and this isn’t it. Once again, it boils down to the most tricky of all things in life : implementation. Further, there is also a distinct feasibility of markedly improved strategisation as well as tacticalisation. I refer to strategic ways of mitigating the downside, and the precise tactical roll-out plan of such far-reaching changes; many, many methods are feasible, which given the audacity and correctness of the overall objectives and the strategy, will certainly lead to benefits for all… but is anyone listening? I fear not…


And several others over the course of my regular readings… 


Published August 4, 2016 by vishalvkale

The GST bill – the single biggest economic, and, dare I say – the single biggest reform across the spectrum – enacted since 1991 at least, and perhaps since Independence, is now a reality. But wait – is it really a reality? What has happened to justify the euphoria that I can see in tweets and media? Is there any reason for celebration, or is there just more reason to introspect, contemplate and look forward with increased hope towards the future?
First, nothing has changed as on 4thAugust 08:52AM; absolutely nothing; not for us, not for business, not for trade, and not for daily life. Forget the big debate of last evening and night – and move on; get to your office / classroom and try and perform exactly as you have been doing for the past umpty-ump years. There is a lot more than meets the eye, and a lot more that needs to be done; a lot that needs to be understood. Let us forget the promises and the game-changers stuff. There is a long process to go; let it come to fruition!
Yes – there is reason to celebrate; and for more reasons than one. For the first time in my experience at least, I was treated to a calm, balanced and fair & frank debate in Parliament; used as I am to ugly scenes, such a calm and reasoned debate – with both sides trading not punches & barbs, but rather point and counterpoint, giving an inch or more where due, and moving the process forward  – was a pleasure and a genuine treat to watch. This entire episode, quite apart from the benefits in economic terms , represents a true victory for our democracy, in the way the many hues and sides of the argument debated and made it possible; full marks today to all who made this possible!
In economic terms – the GST, when implemented, will, depending upon the final structure that sees roll-out, be a massive booster whose impact just cannot be stated in simple and straightforward terms. It will impact, in my assessment, almost every aspect of business, as anyone who has handled inter-state business can readily testify to. Reams have been written on the precise economic impact, let me not waste space on that aspect; please google for details.
The point I would like to make here in bold italics is that everything, literally everything, depends on the final draft that sees the light of day; what are precise rules, the exact  rates, the exemptions, what is in and what isn’t; impact on competitiveness and the rest of it will only be clear once the final version is in and all is known. Till then – we can remain hopeful for a great positive impetus on business, and little else in specific terms. Only one thing is certain – ease of doing business across state boundaries will have a sea-change, alongwith all its attendant benefits in terms of cost, market access, logistical and supply chain management impact etc
For the rest – we have to wait for the full details to come in, then and only then can a firm picture emerge. To quote an example, the handset trade is worried about the incentives offered to local manufacturers on making phones locally; as we saw in my budget analysis of last year, an attempt to address the inverted duty structure in prevalence was started by the Hon. Finance Minister; such changes were a sea-change, making local manufacturing cheaper to importing. What happens to such benefits, spread across states, SEZs etc is a matter of conjecture for us laymen; only time will tell.
Let us be crystal clear – even without the benefits that might accrue as alluded to above – this is a game-changer; just the operational efficiencies and cost benefits that arise from doing business in the changed reality of one unhindered market are simply too massive, too important and too large to be dismissed or ignored. Logistics and Supply chain benefits alone will justify it, almost; the ease of managing inventory and shipping to various locations, and not having to bother about state boundaries is bound to lead to massive cost savings over the long term. Add to that the lower administrative tasks – lesser and less cumbersome reports to file, less approvals, time saving etc : it all adds up to massive benefits.
Curiously, just the benefits listed above – which few Media articles have dwelled on, strangely – list the challenges as well. Who to file the reports to? In what format? Who to take approvals from? Who is the nodal authority for implementation, redressal and complaints? What is the rate – and how will the new rate impact the business competitiveness and pricing, given that it involves a financial implication in a world where margins are wafer-thin? If we add the other benefits, a whole list of to-do articles emerges, and clarification points become evident.
A common market will also require a strong and well-connected nation in terms of Information Network, common forms, formats and protocols across states, departments essentially speaking the same economic and tax language; it will also require a completely re-trained taxation staff across the nation –   with new procedures to be learnt and the old to be unlearnt. We are talking about an entirely new way of taxation; while it is welcome – let us not be euphoric. Euphoria has a tendency to lower our guards and allows mistakes to creep in; while hope ensures we are focused. At this juncture, India does not need Euphoria – it needs hope and hard, back-breaking hard work.

A lot has been said about how GST will  do away with Tax evasion – I can’t quite see how. Sure, to some extent it will increase the taxation base, make evasion difficult given the advent of technology as well as the streamlined and bottom-to-top connectivity in the taxation regime, but I somehow don’t see it having a stunning and large impact on corruption. Maybe, over time, it will slowly weed out the corrupt practices – but that remains to be seen. I am not fully convinced on the corruption aspect; you can put that down to my ignorance if you disagree with me. And if you have firm ideas on how it will lessen corruption, do drop a comment…