The Decisive Session

The parliament winter session (the decisive one) commenced on the 26th Nov, 2015. Parliament will hold the meet till December 23rd, 2015.  The session agenda includes 19 Bills currently pending in Parliament for consideration and passage (including the GST Bill).  14 new Bills are proposed to be introduced. Out of these one will also be taken up for consideration and passing.  Two Bills will be withdrawn. With a fairly stable signals so far, the winter session productivity does seem to be significant with close to 73% productivity. In this blog, we will focus on the productivity of upper house and the lower house in terms of results as well as the time spent. We will also focus on GST and the progress so far including the Arvind Subramanian committee recommendations. Finally, I will also conclude with the likely outcomes of the session, its effects on the GDP growth and the direction of the markets in the medium term.

For the readers, here’s what I discussed about GST in detail in one of my previous blogs:

ALL YOU NEED TO KNOW ABOUT GST

Lets first understand the major bills that will be due for discussion in the session. Here’s is a brief note on the same.

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The productivity of the sessions has been a significant driver of the reforms and development in India. However, history suggests that no session of the rajya sabha apart from the budget session has been productive. In the NDA Govt tenor as well the history has repeated itself with low productivity in the monsoon session. GST has been facing strong opposition for the structure of the bill. To get a sense of the productivity and performance against the plan, here are a few images that might help to give a clearer picture. 

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Total Productivity of Rajya Sabha in the Budget Session
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Total Productivity of Rajya Sabha in the Monsoon Session
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Productivity of the winter session as on 30th November, 2015

 

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Budget Session – Plan Vs Performance
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Monsoon Session – Plan Vs Performance

While productivity has been one of the issues, the strong opposition to the GST passage is still a concern for the NDA Govt. GST has been facing an opposition in terms of the structure, exclusions and inter-state tax. With 3 committees already publishing their recommendations, opposition was persistent with their demands. NDA Govt thence decided to form a committee headed by the Arvind Subramanian(Chief Economic Advisor to the PM). The key recommendations of the CEA led committee were:

a) Recommends eliminating all taxes on inter-state trade.

b) GST panel has suggested standard rate of 17-18%

c) Panel not for specifying GST rate in Constitutional Amendment Bill

d) Panel recommends bringing alcohol, petroleum within GST

e) Committee suggests revenue neutral rate of 15-15.5% for GST

f) Allocation to states will depend on revenues raised by Centre and states

g) Two options for the states: Single rate of 15% or a range of 17-18%

h) GST rate on precious metals to be in the range of 2-6%

i) Panel recommended removal of 1% additional levy

j) Higher GST rates on tobacco, luxury cars, pan masala and aerated drinks

k) The panel kept alcohol, real estate out of GST to achieve 15% rate

The NDA Govt will now be again presenting the GST bill with the required changes if they accept the CEA recommendations. If the NDA Govt succeeds in putting up a viable solution for the oppositions demands, it would truly make GST, one of the biggest reforms since independence in India. Although, the hopes are slightly on the lower side, things might change from here on if a mutual motive is maintained. The silver lining of the winter session was the passage of the Real Estate Regulatory Bill (2015) today, which is intended towards consumer protection and might be a way to maintain the market dynamics in this era of sky high real estate prices. One of my blogs might give readers a fair idea about the Real Estate Regulatory Bill.

Real Estate Regulatory Bill

To conclude, the path towards the GST passage looks rough for the NDA Govt so far. It might be right to say that the winter session might not give be able to deliver the said reforms. The non passage of GST will definitely be a huge setback for the Govt and might affect the GDP in the coming future due to the leading weak investment sentiments. On the other hand, markets with significantly low hopes about the GST passage, might head south in the medium term (Uptil the first quarter of FY 2016. Markets look volatile in the short term and might continue to be the same at least, till the US Fed meet due on the 15th of this month. Markets will be looking forward to the Budget session for a push in the reforms from here on, if at all the winter session turns out to be an unproductive one. It would be the appropriate time to move things forward in terms of reforms and use the current conditions of low commodity prices to our benefit.I hope, the Center and the opposition will start putting up a few actionable steps in place for the betterment of the economy on a macro level, rather than hinting a political vendetta. 

Thank you. 🙂

 

 

Indian Markets – Back To Square One

The Indian stock markets witnessed a sharp correction in the recent period. There have been various reasons for the continuing sell off which is threatening the bullish stance. The reason of naming this blog as Back To Square One is, the Indian markets have corrected to the tune of almost 15% starting from Jan 2015 which has led to a complete washout of the one year nifty gains. The markets have corrected back to the Aug 2014 levels in the past 9 months. In this blog, we will discuss the reasons of correction, the sharp fall and a bit of prediction of the coming short-term, medium term and long-term expectations.

Markets reached their all time highs during the 2014 period after the NDA govt took over. It was expected to do so in 2015 as well. In Jan 2015, markets were at 9100 levels which was triggered by the first rate cut of the year. But we saw that the markets could not sustain those levels for even a day. The stocks were valued at 24x P/E by that time, which indicated overvalued position  and now they have come down to 16x levels. The correction was expected from that time itself. Apart from this, the corporate earnings growth of Q4 was disappointing for the markets. The parliament monsoon session faced a continuous logjam for the entire period thus making the parliament session unfruitful in terms of reforms. This led to further correction in the markets.

THE PARLIAMENT SESSION OUTCOME
                                             THE PARLIAMENT SESSION OUTCOME SO FAR

While the economy was trying to settle down in April, the Shanghai Index fiasco kicked in. This led to a weak sentiment among the global markets. The Shanghai index corrected sharply by around 30% compared to the past year levels. The Chinese stock market regulator tried everything to curb the outflow post the Grexit fears and hardening of dollar against various currencies, but ultimately failed to recover. China, being one of the fastest growing economy for the past 7 years, started to show signs of slowdown. The FIIs took this as a signal that emerging economies have starting becoming risky because of the high valuations and might correct. With that fear, the FIIs started pulling out hot money from the emerging economies including India. As we know, the Indian markets are driven by FIIs inflows, the outflows starting affecting our index as well. The mutual funds tried supporting the levels of the market by almost equivalent levels of buying, but could not sustain for a long-term period.

Shanghai Index Movement Past Quarter
                        Shanghai Index Movement Past Quarter

The above mentioned facts were for the period up to August 2015. Last two weeks, starting from 22nd August 2015, markets witness tremendous volatility. The volatility was driven by auto sector, IT and Banking. RBI, in the last week of August gave an in-principle nod to 11 payment banks and might declare small bank licenses in the month of September. The payment bank licenses led to the fear of decline in the deposit share of the existing banks. The bank nifty hence corrected heavily with the declaration by RBI. The nifty corrected as well, since banks hold 21% weightage in nifty. The core sector growth on the other hand, slowed down thus indicating that we might have weaker IIP numbers since core sector growth has a weightage of 38% in calculating IIP.

NEW PAYMENT BANKS
                  NEW PAYMENT BANKS

In August last week, Nifty declined by almost 500 points.Most people took this as a crisis situation. Actually the correction was because of the sell off by brokers. SEBI, in its move towards protecting the investors interest, banned 59 brokers from trading on stock exchanges. They further asked the brokers to square off all the positions in the pre-open session next day. Thus, the markets corrected sharply on a single day. It was not the global woes but also the domestic sell off that led to the correction.

The markets so far have indicated that they are now looking for reforms.  In the short-term, the markets will eye the China woes and domestic indicators and are expected to be volatile. In the medium term, the markets will hope for a rate cut looking at the current conditions and GST Bill passage and might be on a bullish stance in the medium term. In the long-term, the markets are going to be bullish in nature as India might surpass China and become the fastest growing economy. Markets are now looking for a trigger which will take it back on the bullish path. It is waiting for the RBI to cut rates as well as for some reforms in terms of GST Passage. Till then stay invested is the key here.  

Next blog will be an investor education centric article. The question is ” Can your stock picks act as a liquid FD? “. Think about it. Thank you. 🙂


GST – So near, yet so far…

Goods and services tax is finally running its last lap. But it has not reached this stage without hurdles. It has been facing various problems to get implemented right from the time it was mentioned in the 2006 budget for the first time.

In India, the powers to levy taxes is divided between the states and the centre. There are lists which define who is to levy taxes. In some cases the entity comes under a common list thus creating multiplicity of taxes and substantially adding to the compliance and administrative costs for businesses. All of this calls for the need of a comprehensive way of taxation which is being brought in the form of GST.

Goods and services tax is a single tax rate on any supply of goods or services or both. The GST will wipe the indirect tax slate clean, replacing around a dozen indirect taxes and excise levied by the state and the centre. It is a courageous step to reduce the current tax complexities, encourage tax compliance, and streamline the system of tax credits. Although courageous, we are pretty late in implementing this reform compared to the rest of the world. More than 100 countries have already implemented these.

GST, as far as the implementation is concerned, will be decided on the basis of a tax rate to be levied. This tax rate to be levied is termed as the Revenue Neutral Rate (RNR). RNR is the rate at which there will be no revenue loss to the states after GST implementation. RNR is decided, bill is passed, everyone is happy right?? That does not seem to be the case so far. Calculating the RNR and finalizing a value which is acceptable to all the stakeholders seems to be a challenge. The Ministry of Finance had given the task to a few committees to come up with a rate for the same, bifurcated as state rate and central rate. The picture looked something like the given below table.

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The suggestions of empowered committee were void since the RNR of 27% is too high, while the 13th finance commission rates were way too low. If the rates are too low or too high, they would have to face opposition from states as well as consumers and industries. Mr. Finance Minister has so far indicated, based on a consensus, that the GST rate will be somewhere in the range of 21-27% which will be subject to agreement by all the states. Many experts believe that RNR less than 25% might lead to revenue loss. Despite what the RNR is decided, GST will definitely reduce the cascading of taxes to a great extent and would help in increasing the GDP by 0.9-1.7% from the current growth rate.

Although GST, India’s most ambitious tax reform, is being implemented with slow pace and is likely to be rolled out next year, a lot of roadblocks still remain as a challenge. Following are a few :

  1. Passage of the bill in the Rajya Sabha (as it is already is cleared in the other house) and ratification by at least half of the states.
  2. Arriving at a RNR and a minimum threshold level
  3. Deciding on the goods and services and exclusions if any.
  4. Formulating “place of supply”, so as to determine the point at which tax is to be charged
  5. Most important and crucial, is the designing of an effective information technology infrastructure and enable the credit flows

India is a country that thinks too much and is hesitant to implement it. There are around 132 countries who have implemented the GST with different names and in different forms. But are all those GST reforms perfect?? As a matter of fact, they are not. They have implemented them with certain predefined form and are improving based on the experiences witnessed. Sometimes the best way to achieve something is to just implement it first, and then go on improving the same. Anyway, despite all the roadblocks, it’s always important to be optimistic enough to believe that the GST will be rolled out next year and India will become the fastest growing emerging economies, probably. Lets hope the bill is passed in the monsoon session of the rajya sabha where the NDA Govt will have to face some more opposition stunts.

Thank you. 🙂

NDA Govt..Has it Fared Well so far ??

NDA Govt will complete a year in power on May 26th. It came in power with promises to implement some reforms that will make India one of the fastest growing economies.. The productivity and number of hours spent in the sessions seem to be promising from its rosy figures. But how far have they been able to keep up with their promises is still not clear from its actions so far. Hope you will get a clear look on whats been done and whats not!!

Modi

Here is a list some of the key Bills that are under consideration:

  1. The Constitution (One Hundred and Twenty-Second Amendment) Bill, 2014 (Goods and Services Tax)
  2. The Insurance Laws (Amendment) Bill, 2015
  3. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill, 2015
  4. The Andhra Pradesh Reorganisation (Amendment) Bill, 2015
  5. The Motor Vehicles (Amendment) Bill, 2015
  6. The Coal Mines (Special Provisions) Bill, 2015
  7. The Mines and Minerals (Development and Regulation) Amendment Bill, 2015
  8. Citizenship (Amendment) Bill, 2015
  9. The Public Premises (Eviction of Unauthorised Occupants) Amendment Bill
  10. The Black Money Bill (Money Bill)

Each bill has to be passed in both the houses of the parliament, the Lok Sabha and Rajya Sabha. NDA with majority in Lok Sabha will have minimal troubles of getting them through. Although, in Rajya Sabha it looks a little difficult to get the bills through for approval ( having a strength of 47 out of the total 245 seats). It’s important to note that rajya sabha approval is required for bills which are not introduced as money bill(ex Black Money bill). Thats why NDA should be credited to roll out the black money bill. Black money bill although has been passed by Lok Sabha and is bound to be cleared by Rajya Sabha. Black money bill although has been passed by Lok Sabha and is bound to be cleared by Rajya Sabha. NDA has so far passed most of the bills. But GST might have to wait for a while more to be passed in the Rajya Sabha after recently being passed from the Lok Sabha. GST has recently been referred to a select committee for legislative scrutiny. The road ahead for GST and land reforms seems tough with a strength of 47 seats in the Rajya Sabha.

Overall speaking, the NDA Govt has fared well in the past year with some hurdles because of the strong opposition. But they seem to bring in the required reforms of GST which are proposed to be rolled out next year. NDA has sure shown signs of reforms from making GST a success story in Lok Sabha.The way forward is tough for the Govt but if they convert this hurdle into an opportunity, NDA will be credited for introducing the biggest reform(GST) after 1947 for the development of India as the fastest growing economy.

Next up is all you need to know about GST and the way forward for it to be rolled out next year. Do read. It will be very informative in nature.

***Heres something about what do you do when you have to vote the next time. Most of us are not aware of this *** 
Next time when you vote, visit this :http://www.prsindia.org/ …check out your constituency’s MP track record and how has he performed during the session, has he asked the right questions, has he put up some issues of his constituency..and more to read about them..Do visit.. It might make us more aware about how things are and whom should we vote the next time 🙂

Thank you.