Stay Neutral or Turn Hawkish?

The Reserve Bank’s Monetary Policy Committee (MPC) will be holding its policy review meeting on 4th & 5th April, 2018 and will be sharing the outcome of the review on 5th April 2018. The MPC will be focusing on assessment of the current global & economic conditions and consequently comment on the medium term outlook on the critical indicators. The indicators to be focused will be consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters.

The MPC would be considering the recent interest rates hike by the FEDs. The Federal Reserve decided to turn hawkish with a rate hike (sixth since the financial crisis) and changing the interest rates range to 1.5-1.75%. To top it up, Jerome Powell (the new chairman of the Fed) has indicated that the Fed will continue with the hawkish stance and might decide to hike rates twice in the remainder of the year 2018.

Currently, following are the key rates:

  • Repo Rate – 6%
  • MSF Rate – 6.25%
  • LAF Rate – 5.75%

Link to the previous monetary policy prediction: What we predicted last time!

Global & Domestic Conditions Assessment:

  • In the advanced economies, the gradually falling unemployment, low interest rates, significant consumption and investment thus leading to recovery in the overall growth
  • The emerging economies continue to show positive growth with vulnerabilities related to political uncertainty and lack of consumer confidence.
  • Global trade continued to expand, underpinned by strong investment and robust manufacturing activity
  • Crude oil prices have started to head northwards in the recent past and are expected to continue amidst weak supply
  • On the domestic front:
    • GVA first advance estimates has been revised negatively to 6.1% from 7.1% amidst slowdown in agriculture and manufacturing
    • Manufacturing PMI contracted whereas the services PMI has expanded sequentially over the past few months
    • Retail (CPI) inflation decreased from 5.07% to 4.44% in February. However, the average inflation continues to hover above the medium term comfortable levels of 4%
    • Core inflation (non food & fuel) has continued to increase due to increasing household inflation coupled with the HRA allowance of the 7th pay commission
    • Households’ inflation expectations, measured by the Reserve Bank’s survey of households, remained elevated for both three-month ahead and one-year ahead horizons

Assessment & Outlook


  • The GVA projection have stood at the lower side of 6.6%. Following key factors will impact the GVA:
    • Stabilizing of the GST regime
    • Increased investment activity
    • Increased capacity utilization (currently at 70%)
    • Resolution of the large credit defaults
    • Stable crude oil prices (the trend suggests that the crude oil prices are expected to increase further)
  • The average inflation continues to be above the 4% levels. The inflation is expected to increase further in the year and will be shaped by the following aspects:
    • Further firming up of the international crude oil prices
    • Further increase in the input costs
    • Normal monsoons (above 88%)
    • The new process to calculate the minimum support prices might have an effect on the overall inflation

I predict, that the RBI may decide to increase the repo rate by 25 bps to 6.25% in order to contain the increased expected inflation, significant increase in inputs costs and the Fed hawkish stance. The move is expected to help the banking sector to revive profit margins as the banks will get the opportunity to increase the lending rates accordingly.

The RBI might also change their neutral stance to being ‘HAWKISH’ for the year 2018-2019. CRR & SLR will be untouched due to the ample amount of liquidity.

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Thank you 🙂



The Great Indian Bank Robbery

From the good old days of elections of ‘NaMo’ being elected, we have transitioned to witness the ‘NiMo’ fiasco. Recently, Nirav Modi pulled off  ‘the great indian bank robbery’. The Punjab National Bank discovered a fraud worth Rs 11,400 crores triggered by a red flag raised by one of the employees of Gitanjali Gems Inc.

In this blog, I am going to touch upon on the following broad topics:

  • Terminologies (LoUs)
  • How the actual process should have been
  • What aspects of the process were missing
  • Security & audit compromises
  • My take on the liability pending

What’s a LoU (Letter of Undertaking) ?

Let’s say you are a customer of an Indian bank and you require a short-term credit in a foreign country to import something. You can approach the foreign exchange department of your bank and ask for a LoU. In return, the bank would ask you for a collateral or a guarantee, which could be in the form of fixed deposits or other assets. This could even be 100% or even more of the credit sought, depending on your relationship with the bank. If your bank is convinced, it will issue an LoU, which when given to an overseas branch of another Indian bank would result in release of the amount in foreign currency. This amount does not come in to your account directly; it goes to a specific bank account of your banker back home. It is called Nostro account. You can then decide in whose favour the payment needs to be done.

How does the actual process happen?

Here’s the flow diagram of how the customer & bank interact and make the transaction successfully. Steps 1 to 10 will explain how the customer approaches the overseas and seller and the banks come into picture.


What aspects of the process were missing?

  • Step 4 – PNB never asked for any collateral to be provided before initiating the LoUs. To further explain, to provide a 12000 crore of credit, PNB did not ask for any fixed deposits or land or any form of guarantee which provides a comfort to open up the line of credit
  • The immediate approving credit offer failed to check/report the breach of insufficient collateral in multiple ways

Security & audit compromises:

  • SWIFT (LoU issuing system) is not integrated with CBS (Core Banking system). Core banking system is basically an interface via which each and every transaction should be ideally passing. However, SWIFT was not integrated and such transactions were missed.
  • Each employee of the bank is required to be transferred after 3 years as per RBI norms, whereas the two junior officials were not transferred for 5 good years
  • Internal & external auditors failing to capture the non-compliance
  • Process to track if the payment was made to the intended sellers was not confirmed or checked
  • LoUs or bank guarantees are not supposed to extended for more than 90 days (for diamond industry) as per the RBI guidelines. In this case, the credit was provided for 1 years which was way higher than the guidelines

My take on the contingent liabilities:

Gitanjali Gems (Nirav Modi) was a registered customer primarily for PNB. However, in order to cater their customer, PNB sought LoUs from other banks. Nevertheless, since the it was PNB’s customer, it would be PNB’s liability to make good of the payable of the other associated banks. 

On a broader note, despite if the liability is shared or borne by PNB completely, the event has added significantly in the write-offs of the balance sheets of the banks and will in turn affect the bottom line (profit) adversely. The event has come in times when the banking sector is under immense profit margin stress.

Thank you 🙂

Diverse views are welcome!

Is it time to ‘step on it’ yet?

The Reserve Bank’s Monetary Policy Committee (MPC) will be holding its policy review meeting on 6th & 7th Feb, 2018 and will be sharing the outcome of the review on 7th Feb 2018. The MPC will be focusing on assessment of the current global & economic conditions and consequently comment on the medium term outlook on the critical indicators. The indicators to be focused will be consumer confidence, households’ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters.

Currently, following are the key rates:

  • Repo Rate – 6%
  • MSF Rate – 6.25%
  • LAF Rate – 5.75%

Link to the previous monetary policy prediction:

Previous Monetary Policy Predictions!

Global & Domestic Conditions Assessment:

  • Global financial markets have remained buoyant, reflecting the improving economic outlook and the gradual normalisation of monetary policy by the US Fed
  • While bond yields in most AEs have moved sideways in the absence of inflation pressures, they have risen across most EMEs on country-specific factors
  • Retail inflation measured by year-on-year change in the consumer price index (CPI) recorded a seven-month high in October, driven by a sharp uptick in momentum tempered partly by some favourable base effects
  • The Reserve Bank’s survey of households showed inflation expectations firming up in the latest round for both three months ahead and one year ahead horizons

Inflation Assessment & Outlook:


  • Food inflation has been inching up since Dec touching new highs – due mainly to vegetables and fruits. Milk and eggs inflation has shown an uptick, while pulses inflation remained negative
  • Fuel group inflation, which has been on an upward trajectory since July, accelerated further due to a sharp pick-up in inflation in liquefied petroleum gas (LPG), kerosene, coke and electricity
  • CPI inflation excluding food and fuel (CORE inflation), which increased from July onward, remained steady for the period. This reflected the softening of petroleum product prices on account of the reversal of taxes on petroleum products by the central and state governments
  • There has been an uptick in housing inflation following the implementation of higher house rent allowances for central government employees under the 7th central pay commission award
  • The Reserve Bank’s survey of households showed inflation expectations firming up in the latest round for both three months ahead and one year ahead horizons


  • The CPI headline inflation is heading northwards and is expected to rise in the near future horizon basis the following:
    • Moderation in core inflation observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term.
    • The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects
    • The recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year
CPI Inflation Uptrend

Net net, the CPI inflation is expected to rise further. There’s a significant risk of it breaching the flexible inflation target (FIT) of maintaining the inflation between 2%-4%. However, basis the CPI numbers and forecasts, it is unlikely that the MPC would vote for a rate cut.

Gross Value Added Outlook:-

The GVA has been subdued in the past quarters and will continue to remain steady at 7-7.5% for the FY 2018-2019. The GVA is unlikely to move upwards in the last quarter of the FY 2017-18 due to the following probable impacts:

  • The recent increase in oil prices may have a negative impact on margins of firms
  • Shortfalls in kharif production and rabi sowing pose downside risks to the outlook for agriculture
  • Increasing “output gap”. The output gap is defined as the difference between the expected economic output at current utilization and the expected economic output assuming 100% capacity utilization. The capacity utilization is currently at ~72% due to increasing input costs and near stagnant demand dynamics
GVA Growth Rate Downtrend

I predict, that the RBI will maintain the status quo in order to contain the increased expected inflation and significant increase in inputs costs. CRR & SLR will be untouched due to the ample amount of liquidity. The MPC is likely to maintain the status quo with a ‘NEUTRAL’ stance & would prefer waiting for more data and indicators to be further accommodative for the following reasons:

  • Risk of inflation breaching the RBI targets
  • Increasing bond yields
  • Fiscal slippage concerns lingering

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Thank you 🙂



What should be your investment mix for the upcoming year?

Happy New Year to all my readers!

Growth and inflation form a crucial part of our investment strategy. Higher growth with consistent lower inflation rates can appreciate your investments significantly every year. 2017 has been a fantastic year in terms of the growth rates from the various investment avenues and to top it up, the inflation rates have continued to be on the lower side. However, in 2018, CPI inflation rates have shown significant uptick and are expected to inch northwards amidst weak rabi & kharif output. In this blog, we are going to understand how one should churn their investment portfolios to ensure that their returns are significant and well above the inflation rates.

I would like to take my readers through the following sections:

  1. Current CPI & Expectations
  2. Effects on growth rates
  3. Investment Strategy
  4. Some common tips to note for an investment strategy

CPI Inflation & Expectations:

Increasing Inflation Trends Up To Sept 2018

As indicated by the RBI in their policy review, the CPI inflation has reached to a 17 month high and expected to increase further. The CPI inflation might break the comfortable levels of 6% soon. This kind of uptick in the inflation demands a need for converting your investment from defensive to a moderately aggressive.

Effects on Growth Rates:

Here’s a depiction of what would happen if you do NOT churn your portfolio with the increasing inflation trends:


If you observe, any investment in the defensive style would earn less than 1% real returns over a period of 1 year. Hypothetically, if the inflation rates increase beyond 7%, the investment would be making -ve returns (in common terms – value of money will decrease).

Investment Strategy:

Hence, one should shift to ‘Moderately Aggressive’ or ‘Aggressive’ investment type basis the risk appetite. Here’s my recommendation on how the portfolio should look for every Rs 1 lakh you invest:

Stay Away from FDs!

The above strategy would earn you significant returns (14% average). The strategy can be modified by making it aggressive and earning greater returns of about 18% p.a.

Some common tips to note for an investment strategy:

  1. Avoid SIPs. Invest in regular intervals with lump sum amounts. This is to ensure that the returns are tax-free in lump sum amounts instead of small SIP amounts
  2. Always invest in ‘Open-Ended’ funds
  3. Avoid debt funds as they attract taxes in all scenarios as compared to equity funds (equity fund returns are tax-free after 1 year of investment)
  4. Investments in stocks should be with a minimum horizon of 5-7 years of holding
  5. Hybrid investments are of two types (debt and equity). Prefer equity over debt funds
  6. Keep your investments concentrate to a maximum of 5 mutual funds as the mutual funds are already diversified internally

While all this sounds great, some of you might have questions on where to start? A helping hand is always good to have. So here are my top picks of mutual funds and stocks for the year to get you started!!!

Liquid Mutual Funds:

  1. Axis Liquid Fund
  2. L&T Liquid Fund
  3. Essel Liquid Fund

Hybrid Liquid Funds:

  1. HDFC Balanced Fund
  2. ICICI Prudential Balanced Fund
  3. SBI Magnum Balanced Fund

Equity Oriented Funds:

  1. Franklin Build India Fund
  2. L&T Value India Fund
  3. Franklin High Growth Companies Fund
  4. ICICI Pru Value Discovery Fund
  5. SBI Magnum Multicap Fund


  1. HDFC
  2. HDFC Bank
  3. Maruti Suzuki
  4. Au Finance
  5. Idea Cellular

Note:- Investment is subject to market risks. Please use your own investment analysis before investment. The above mentioned funds & stocks are recommendations only and may vary basis your risk appetite.

Thank you for reading!

Subscribe and recommend to your friends and colleagues. Questions/Comments are most welcome! 🙂



Closing Move For The Year – RBI’s Monetary Policy

On December 6, 2017, the Monetary Policy Committee of the Reserve Bank of India will be announcing the monetary policy stance with the actions being taken on the policy stance, governance and other statutory measures announcements to handle the various crucial indicators of the economy. In this blog, I shall focus on the mentioned parameters to access the “likely” policy action to be taken by the RBI in their monetary policy review scheduled next week.

The current scenario of the policy rates is as follows:

  1. Repo Rate – 6%
  2. Reverse Repo – 5.75%
  3. Marginal Standing Facility – 6.25 % (Being pegged at 25 bps to the repo rate)

We will take a look at the various factors that will be considered in the following broad areas:

  1. Macro economic outlook (Inflation Included)
  2. Price Vs Cost Analysis
  3. Demand & Output
  4. Financial Markets & Liquidity Conditions
  5. External Environment

Macro Economic Outlook:

From the review reports of the RBI, the inflation and growth in Gross Value Added (GVA) projections have been deviating from the baselines set in April 2017. However, the global macro-economic and financial conditions has been in-lines with the projections by the RBI at the beginning of the FY 2017-18.

The deviations in the inflation and GVA growth projections can be explained in the following aspects:

  • Uneven and deficient rainfall in some parts of the country has negatively impacted the kharif output.
  • Global Crude prices have moved in a relatively wide range of $44-$57 and are expected to average to $55/barrel in the second half of the FY 2017-18 which might push inflation northwards
  • Weak global trade and growth barring the emerging economies. Advanced Economies are expected to show further weakness with the US fiscal being significantly less expansionary

Price Vs Cost Analysis:

Consumer price inflation fell sharply in the first quarter of 2017-18, driven down by a collapse in food inflation and a marked moderation in inflation in other components. The trajectory reversed in July and August as vegetable prices spiked and prices of other goods and services firmed up. Input costs tracked movements in international
commodity prices, while wage growth in the organised and rural sectors firmed up modestly.

Inflation Outlook:

  • The declined food prices during the first half will start to reverse amidst typical seasonal price firming
  • Significant increase in the HRA allowance by the Central Government shall add to inflationary increase
  • Broad rebound in the underlying inflationary measures in the previous quarter
  • Inflation expectations will play a key role in shaping the actual outcome
  • PMI indicates that the manufacturing as well as the services sector are facing input & output price pressures thus leading to contracted growth trends
  • Professional forecasters surveyed by the Reserve Bank in September 2017 expected CPI infl ation to pick up to 4.5 per cent by Q4:2017-18, reflecting the combined effects of unfavourable base effects, the upturn in food prices
    and the impact of the increase in the HRA


Demand & Output:

  • Aggregate demand has been impacted by slowing consumption demand, still subdued investment and a slump in export performance in the early months of 2017-18.
  • Manufacturing activity, which was dragged down by one-off effects of the implementation of GST, weighed heavily on aggregate supply conditions.
  • Notwithstanding initial deceleration, agricultural prospects remain stable and acceleration in services sector activity could impart resilience to the overall supply situation in the rest of 2017-18.
  • While the Govt awaits for GVA demand and growth data for the 2017-18 Q2, following is the current status as per the data up to Jul 2017:


Financial Markets & Liquidity Conditions:

Financial market conditions in the first half of 2017-18 remained stable, with the weighted average call money rate (WACR) moving progressively closer to the policy repo rate, stock markets scaling new highs, bond yields oscillating with fluctuations in inflation readings and the foreign exchange market buoyed by large portfolio flows. Credit off-take from risk-averse banks remained low, though monetary policy transmission strengthened for new loans in conditions of sizable surplus liquidity.

Following are the key aspects that would be considered by the RBI:

  • Equity markets scaled new peaks relative to earnings, propelled by a renewed reach for returns
  • The US dollar depreciated against major currencies, partly correcting for the upside it had gained post-Presidential elections in the US
  • Corporate bond yields softened, tracking, G-sec yields and moderation in credit spreads
  • Deposit rates have declined as banks were flush with liquidity
  • Credit flows from banks improved modestly, though still hamstrung by stressed assets induced deleveraging and weak investment demand
  • A cumulative 200 basis points (bps) cut in the repo rate since January 2015
    has been, by and large, transmitted to lending rates on new loans; however, transmission to past loans remains incomplete


With the inflation inching upwards and expected to move northwards thus increasing the average inflation, significantly weak demand and lower manufacturing & services sector growth, the MPC would would closely watch the inflation numbers and the CSO growth forecast metrics to be released in the near future

I predict, that the RBI will maintain the status quo in order to contain the increased expected inflation, lower growth rates and credit demand. CRR will be untouched due to the ample amount of liquidity. It is likely that the MPC might decide to cut the SLR rates to 19% from the current levels of 19.5% in order to support the liquidity effectively.

However, the forward guidance of the policy will be focused on cleaning up of the balance sheets and insolvency. The Indian Economy will have to have to wait to for at least 2 more bi-monthly reviews to see any expansionary stance in their policies due to inflationary fears.

Thank you!

Sixth Monetary Policy Committee Meeting

The sixth meeting of the Monetary Policy Committee (MPC), will be held on August 2 and 3, 2017 at the Reserve Bank of India. The MPC shall review the surveys conducted by the Reserve Bank to gauge consumer confidence, households‟ inflation expectations, corporate sector performance, credit conditions, the outlook for the industrial, services and infrastructure sectors, and the projections of professional forecasters. The Committee shall also review in detail staff‟s macroeconomic projections, and alternative scenarios around various risks to the outlook. The decision of the MPC shall be in accordance with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. In this blog, I shall focus on the above mentioned parameters to access the likely policy action to be taken by the RBI in their monetary policy review scheduled next week.

The current scenario of the policy rates is as follows:

  1. Repo Rate – 6.25%
  2. Reverse Repo – 6%
  3. Marginal Standing Facility – 6.50 % (Being pegged at 25 bps to the repo rate from the last policy review since the volatility of the call rates has significantly reduced)


The global economic activity has been growing at a modest pace, catalyzed by the emerging economies and some of the advanced economies. US markets have benefited from the wage gain and the industrial production has been steadily improving. However, US continues to face ebbed sales figures at home. The Euro zone continues to struggle in their movement towards growth. The political risk continues. Japan seems to be struggling with the subdued domestic demand and the political instability concerning the removal of Abby. Among the emerging economies, China has shown significant signs of stability, Russia has been witnessing improved recovery in their macro fundamentals while South Africa continues to face the depressing economic conditions. This clearly indicates that the global economic activity has been fairly slowed down and is expected to stay so for the coming 2 quarters as most of the emerging and advanced economies struggle to provide growth impetus.

The air freight and the container throughput have shown increasing trends indicative of strengthening global demand. Crude prices fell to a five month low in early May on higher output from Canada and the US, and remain soft, undermining the OPEC‟s recent efforts to tighten the market by trimming supply. These developments suggest that the inflation outlook is still relatively benign for AEs and EMEs alike.


Since late June central banks of developed markets have suddenly started echoing calls for a sooner-than-anticipated normalization of policy on the back of solid growth despite sluggish inflation.

After Fed’s 25bps of rate hike in June, Bank of Canada has already followed by hiking the policy rate by 25bps, the first hike in 7 years. Meanwhile ECB and BoE, although for different reasons, have also been sounding hawkish. The coordinated policy statements led to a sharp reversal in sentiments, resulting in bear steepening of the yield curves across US and Europe. Japan remains the odd one out, given BoJ’s recent fixed rate bond intervention in order to reinforce its commitment towards massive monetary accommodation. However, lately we have witnessed some reversal in earlier tight rhetoric from Fed members, lack of hawkishness in Fed Chair Janet Yellen’s testimony and some ECB members playing down earlier hawkish comments by ECB’s Mario Draghi.


On the domestic front, the recent CPI inflation print of 1.54 per cent is significantly lower than RBI’s already downward revised range of 2-3.5 per cent for first half of FY2018. With another print expected to be a tad below 2 per cent (despite inclusion of 7CPC HRA component), and the sustenance of low food inflation in the pre-monsoon summer months is expected to provide comfort to RBI that at least part of the food disinflation is structural in nature.

The forecast of a favourable monsoon further bodes well for food inflation. Also, the refined core index – core excluding petrol, diesel, gold and silver – a metrics of real underlying price pressures, continues to inch lower, suggesting a slower narrowing of output gap than probably anticipated by RBI.  Overall, given the not-so-adverse global environment and benign inflation trajectory, it will be very difficult for RBI to provide a rationale for not easing in the upcoming policy. The headline inflation is likely to stay at sub-4 per cent till November 2017. Undoubtedly, the June inflation reading marks the trough and we thereafter expect a gradual uptrend through rest of the year. In 2HFY18, inflation may largely range between 3.3-4.5 percentage, mostly in line with MPC’s projections.


On the growth front, Index of Industrial Production has shown clear signs of stagnancy so far at 1.7% and the central bank has forecasted that the IIP index may further slow down in the next 2 quarters. Also, the Q1 earnings of most companies have not been satisfactory as compared to the inflated valuations of the markets lately. With IIP slowing down, it might act as a key parameter in deciding the policy actions this time.


The banking sector has been facing turmoil because of the rising NPA’s and reduction in the overall increase in the exposures. The public sector banks have seen a sluggish credit growth of 7.26% whereas the private sector banks are clocking a fairly good credit growth rate of 17%. This trend is not new for India although, the public sector lenders have been defensive lately due to increasing bad loans. However, RBI might take some new actions in terms of forcing the public sector lenders to create sophisticated systems in order to perform an efficient credit and risk management and simultaneously clean up the balance sheets. With the probability to reduce interest rates in August 2017, the lingering fear of banks shifting their focus to credit growth from balance sheet clean ups shall continue to persist.

With the average inflation almost close to the comfortable levels of 3%, sluggish demand and higher industrial growth, RBI and the MPC would would closely watch the inflation trends in the near future. However, certain additional structural reforms in order to help banks clean up their NPA loaded balance sheets can be expected.  

I predict, that the RBI will cut the repo rates by 25 bps to 6% from the current rate of 6.25% in order to foster growth, IIP and the sentiments. CRR and SLR will be untouched due to the ample amount of liquidity and money supply in the system. The RBI would also like to ensure that the economy’s ERI  of 1% at least which is currently higher at 1.75%.

However, the forward guidance of the policy will continue to be fairly dovish, reform-driven and a certain push towards a more efficient monetary policy transformation. Although, the MPC will have to ensure that the rate cut does not impact negatively on the ongoing balance sheet clean ups and insolvency declarations with an expansionary policy action this month.

Counters are welcome. Thank you 🙂

One Nation, One Tax- Yay or Nay?

The NDA Govt – as part of the most prominent reform since Independence – rolled out the much awaited Goods & Services Tax reforms on the 1st of July, 2017. In this blog, we will understand why GST could not be the uniform tax NDA Govt was aiming for, we will also access the impact of the GST, how will it affect your pocket, the likely challenges the assesses will face while filing the GST taxes which is termed as “The Tax Maze” and ultimately what stocks should you look out for to plan your personal investment decisions.

What was the current problem Indian economy was facing? For consumers, India’s GST is one tax in the most practical sense that currently a bar of soap costs, theoretically, 29 different prices across 29 different states due to 29 different state VATs. Under the GST regime, there’s just one GST rate for a bar of soap. Where India differs from other countries that have implemented GST is that there isn’t one single rate that applies to all goods or services. For example, in Singapore, the tax levied on a pair of shoes and the tax levied on a bar of soap is the same – 7%.

Here’s a quick comparison of rate structure in India as compared to a few selected countries who have successfully implemented GST earlier.

Country Tax Rate
India 5%, 12%, 18%, 28%
Singapore 7%
Malaysia 6%
New Zealand 15%
Aruba 1.5%
Brazil 7%, 12%
Germany 19%

However, the one nation one tax regime was not quiet achieved as the NDA Govt had to factor in the fact that the poor were to be protected from the high rates & a set of political considerations which includes vote bank. In India, the GST council has come out with a rather unwieldy four-rate structure: 5%, 12%, 18% and 28%. In addition to this, there is the exempt category (0%) and additional cesses that are charged on top of certain products, which makes our GST regime have seven effective tax rate slabs.

What will be the macroeconomic impact of the GST rate structure?


The impact of GST was anticipated to provide an increase in the GDP growth rate by close to 2-3% provided the GST tax structure was comprehensive. However, witnessing a significantly complicated structure as ours, I suspect that the the GDP growth would not be more than 0.5-1% as compared to the current growth rates. The reason being the complexity of multiple tax rates and continuation of the various exemptions.

A recent analysis by HSBC shows that the roll out of GST is likely to add only 0.4% to GDP, “lower than earlier estimates as multiple tax rates and exemptions announced… are far from an ideal structure and could blunt the growth impact of the reform process.”

Sectoral Impact?

The GST benefit to a certain sector depends on the following two factors:

  1. The actual rate of taxation
  2. The extent to which the operating costs of a particular sector are eligible for the input credit

If a particular sector has higher tax rates but has significant amount of the input credits, the sector shall actually reap the benefits of lower operating costs.

Following is quick synopsis of the critical sectors and the likely impacts:

Filings Maze!

Businesses will have to undertake 37 annual filings (three a month plus an annual return) for each state the firm operates in. The basic problems for most small and informal businesses are similar: operating costs are about to go up as business owners hire accountants and computerise their operations. Anecdotal reports show that small firms with revenues of below Rs 1 crore could have 20% to 40% of their existing profits go towards GST compliance costs and higher tax rates. Thus, the overall operational costs might push the overall profitability southwards in the medium term. However, once the processes are streamlined, the growth rates might increase but the improvement comes with a significant gestation period.


GST is deemed to be a bridge to convert the unorganized sector into an organized form. However, it’s largely unclear at this point what extent of small businesses will simply become unviable post-GST. A recent report is not optimistic on what the new GST regime will do for job creation. We note that unorganised sector employs a majority of the labour force. With the unorganised sector shifting to the organised sector, a significant labour absorption capacity that currently exists may get eroded. This can compound the already chronic problem of job creation in India.

Markets Trajectory?

The stock markets have advanced significantly and have taken a positive cue from the fairly smooth roll out of the GST reforms. There were 2 advancing stocks for each decline in the markets for the week so far. However, the markets are expected to be jittery in the medium term as the turmoil regarding the GST filings and the infrastructure glitches.

The markets are expected to drop to the 9400 levels due to corrections. However, the technical indicators of Fibonacci extensions suggest that if the Nifty crosses the 9706 mark, the markets will turn bullish in the medium term. The data currently suggests that the markets are overpriced. Here are my picks for a medium term investment goal to watch out for on corrections:


What does it mean for YOU as a consumer?

  • Day-to-day essentials are largely exempt from GST
  • Banking and telecom services will get more expensive
  • Eating out to be cheaper if you eat at a non-air conditioned restaurant
  • Luxury cars, which will get cheaper
  • Movie tickets, especially regional cinemas, will get more expensive
  • FMCG products will be cheaper


For instance, soaps and toothpaste are supposed to get cheaper after the rollout of GST. They currently have an effective tax rate of 24-25% and after GST, this will come down to 18%. However, if as a consumer, you have always been paying say Rs 75 for a tube of toothpaste, it’s highly unlikely that the company that sells you the toothpaste or bar of soap will make it cheaper once you’ve gotten used to paying Rs 75.

To solve this potential problem, the GST legal framework creates an “anti-profiteering authority” that will check whether businesses are passing on the benefits of the new tax regime to consumers. Legal experts and industry leaders have almost unanimously declared that this anti-profiteering body will spark a minefield of litigation and prove to be problematic.


GST roll out on time and with ‘just enough’ infrastructure is a bold move by the NDA Govt. I do agree with the fact that the awareness approach could have been better. On a consolidated basis, the end consumer may not be the most benefiting entity in the economy. The businesses will be definitely benefited from the GST structure. However, there are a few aspects where the NDA Govt must act in the coming years. Once stabilized, the NDA Govt must try and unify the existing 4 rates as the economy starts witnessing the long term benefits of the GST regime.

Thank you. 🙂

Opinions and counters are encouraged!