Getting instant reactions and opinions from the popular media is fine, but when you need the cold truth about the Budget where do you turn? Ameet Patel and Debashis Basu explained the fine prints of Budget to savers at an event organised by Moneylife Foundation
India's new Finance Minister Arun Jaitley delivered his maiden budget on the 10th July. Budget 2014 had huge expectations tethered to it and the stock markets too reflected these expectations. To take stock of what the budget did well and where it failed, Moneylife Foundation organised a seminar with Ameet Patel and Debashis Basu in Mumbai.
Ameet Patel, a Chartered Accountant and partner at Sudit K Parekh & Co, spoke about changes in taxation and innovations (or the lack of it) in the budget. Debashis Basu, Moneylife Foundation's Founder Trustee, took on how the budget would affect investments and the investment climate. Their talks were followed by a lively interaction between both the experts and with the audience.
Historically, budgets have become more and more muted in their effect on the economic and investment climate. Mr Patel began therefore, by listing out some expectations that India had from this budget, especially on the tax front. Mr Patel gave a thumbs down to the fact that contrary to expectations, there was no change in the tax rates, there was a change in the DDT calculation(which may result in lesser dividend payouts) and that the Surcharge and Education Cess had not been removed.
Among the good moves by the FM, the increase in the tax slabs for senior citizens was a good change, he said. He added, "the rise in the income threshold for non senior citizens who pay no tax, would put more money in the pockets of taxpayers." People who earn upto Rs.2,50,000 a year, would owe no tax to the government, changed from the previous limit of Rs.2,00,000.
He said, "'Achhe Din' are indeed here for foreign investors," and rued that similar benefits had not been made available to domestic investors. On the changes in taxation for debt funds, he said, “They might as well shut down the debt funds.”
Mr Patel said one of the biggest plus points in the budget was a statement of intent on rolling out the Goods and Services Tax (GST). Even though there was no firm commitment on a proposed date for introduction of GST, the Finance Minister assured states that their concerns would be taken care of and a consensus would be built with the states for a smooth roll-out of the GST. Another good sign, according to Mr. Patel, was the clear message from the government, that they do not believe in using retrospective taxation, and would not use legislation with retrospective effect except in the rarest of rare cases.
In sum, the biggest positives for taxpayers, according to Mr. Patel, were the following:
Mr Basu took the stage to speak on how the Budget affects future investments for investors and savers. He began with the macro view of the economy and pointing out that the budget did not deliver smaller government. The borrowing needs of the government, the interest outgo and have the needed spending cuts, or improved climate for doing business and so the fiscal deficit remained a serious impediment to bringing down inflation and interest rates. The bugdet has changed the tax treatment of non-equity funds, but this would not affected Moneylife readers because Moneylife has never advocated non-equity funds like Monthly Income Plan, Capital Protection Funds and hybrid multi-assets funds.
For investors, Br. Basu re-iterated the Moneylife philosophy, "less is more and simpler is better when it comes to investments." He listed out the types of investments to stay away from for all investors, which are, Capital Protection Funds, Monthly Income Plans and Gold ETFs.
For those who were investing themselves, even investments in Debt Funds and FMPs was not the best idea. He said, "with the change in tax treatment for FMPs, you will need to hold them for atleast 3 years to get the tax benefit. This would mean that you were taking a long term interest rate call when investing in these products," Moneylife has written before, about how difficult it is to predict interest rate movements for even experts.
Mr Basu said the given the budget, the economy was likely to take longer to recover. Over this period, the rupee was unlikely to strengthen soon and inflation would continue to be at current levels for a while. In such a scenario trust ONLY high quality stocks, he said. “I would tend to favour only large cap funds and select midcap funds, and stocks in the IT, pharma and consumer goods” he said. He ended his talk by saying that you could still “keep the faith but keep a watch out” regarding the new administration and Finance Minster.
As per WPI inflation, during June, prices of vegetables as a category declined by 5.89% while that of potato and onion soared by 42.51% and 10.70%, respectively, in the wholesale market
After rising to a five-month high last month, inflation in June dipped to 5.43% mainly due to decline in the prices of food items and vegetables with the exception of potato and onion. The Wholesale Price Index (WPI) inflation was at 5.16% in June 2013.
As per WPI inflation, prices of vegetables as a category declined by 5.89% during the month, while that of potato and onion soared by 42.51% and 10.70%, respectively in the wholesale market.
Inflation had soared to a five-month high of 6.01% in May 2014.
Among other important items, the prices of sugar and edible oils fell by 2.09% and 0.75%, respectively during June.
The food items that became expensive during the month include fruits (up 21.40%), followed by milk (10.82%), egg, meat and fish (10.27%) and rice (10.24%).
The inflation of food items as a category, however, continued to remain high at 8.14% during the month and will continue to be a cause for concern for the Government which is gearing up to meet the impact of poor monsoon on the price situation.
From Greece, to Portugal to India and even the US — it is easy to see what holds back growth. Its hard to implement it
Indian Prime Minister Narendra Modi has just issued his first budget. Despite the exuberant expectations of the market, the reviews have been underwhelming. He did pledge to control state spending, create 100 mid-tier “smart cities, and a toilet for every home. But according to Standard & Poor’s (S&P), it wasn’t enough.
S&P was hard to please. Although it was “a step in the right direction”, it was “short on detail”. “The budget is less ambitious in reducing the subsidy burden. It promises better targeting of food and petroleum subsidies. However, it is not yet clear how that will be achieved, or how much saving it would bring.” It maintained India’s BBB- rating (the lowest investment grade possible) and its negative outlook.
What's there for a government leader to do? How can he boost India’s stagnant growth rate above 5% again? Admittedly, it is hard to live up to election hype. No doubt investors will pay for a bit of over enthusiasm, but then again they always do. There is a solution though. A rather simple one really. It doesn’t require cutting subsidies or raising taxes. It is guaranteed to create growth, but it may be difficult to carry out.
Compared to Greece, India has been rather fortunate. Greece’s GDP has contracted every year for the past six years. It may finally turn positive this year and hopefully accelerate. Saved from total collapse by a bailout from the “troika” of International Monetary Fund, European Central Bank (ECB) and European Union (EU), it has been helped especially by a boom in tourism. It returned to international capital markets in April. It appears that the reforms imposed in return for €172 billion have paid off. But sadly the very regulatory reforms that made this success possible are thought to be no longer necessary.
For example, the tax system has under gone a major reform. A profusion of remote tax offices filled with local officials prone to bribes has been centralized. Technology upgraded to provide more monitoring. Still a small group of politically connected Greeks can still avoid most of the taxes. Entrenched bureaucrats and trade unions, whose core competency is blocking change, easily stymie other reforms. Greece probably needs another dollop of bailout money. It is resisting because there is still a long list of reforms that come attached.
Other European peripherals have problems that are similar to Greece. Portugal made news last week for its banking issues, but these are minor compared to its labour regulation. It is almost impossible to dismiss a worker. Italy is the same. Barring serious financial problems or misconduct, laying off a worker faces insurmountable difficulties. It is not just the inflexibility that discourages hiring and growth. It is the complexity. Employers and employees cannot strike their own bargains. They have to fit within one of the 15 different types of contracts.
One would assume that in the US, the heart of unfettered capitalism, that entrepreneurs wouldn’t have these problems. For example, in both India and China severance pay is mandatory for certain workers. Not in the US. But the worship of free markets has not stopped legislators from trying to regulate and tax everything.
The US license raj is alive and growing. In the 1950s, less than 5% of workers were required to be licensed by the state to do their jobs. Now 35% do. These licenses are not just for well-educated professionals like doctors, lawyers, accountants and dentists. They include various low wage jobs like barbers, bartenders, and cosmetologists.
It is not just the licenses. There are of course taxes. Taxes are a part of living in any country or city. The interesting thing is that businesses don’t mind paying taxes provided they are easy to comply with. This is the main point. Regulations, licenses, taxes, and labour contracts are all part of a system created by government to protect citizens. But more often than not, they don’t.
Why? Simple, we have to remember the great economist Mancur Olson and his free rider concept from The Logic of Collective Action. In short getting rid of rules is very hard. The reason is that their benefits are usually concentrated among a few individuals and the costs are spread among the general public. It is in a bartender’s or a taxi driver’s interest to prevent others from entering the business to compete. To protect themselves the incumbents get government to pass rules limiting access.
Mr Modi like every other leader wants his country, in his case India, to grow rapidly. Mr Modi has a goal of 7%. Cutting subsidies and developing “smart cities” may be good publicity, but they will not do the job alone. Globally, according to World Bank surveys, countries that rank higher on the ease of doing business grow faster. So cutting red tape is the best way to get the job done although building a new transportation infrastructure might be easier.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and speaks four languages.)