Modi government’s priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle, says StanChart in a report
India needs swift policy action to remove bottlenecks like increase the investment rate and reduce the incremental capital output ratio (ICOR) – a measure of productivity – to move towards the growth rate of 6.0%-6.5% in the near term. Though the immediate focus would likely be on improving productivity to the pre-global financial crisis levels, the stronger-than-expected electoral mandate has improved the chances of a quicker-than-expected recovery in the investment cycle as well, says Standard Chartered Securities (India) Ltd in a research report.
"The new government’s priorities and concomitant lift in the decision making environment have improved the chances of the removal of bottlenecks and a revival of the investment cycle. It will take time, but a sharper-than-expected recovery in GDP growth, to say 8% by FY17, is not inconceivable. We note that equity market upside can be significant over the next 18-24 months, which in turn should continue to fuel investor appetite for domestic cyclicals, reversing the four-year sell down trend," the report says.
The return on assets (ROA – net profit divided by total assets) for the Sensex and asset turnover ratio (revenues divided by assets) further vindicate the macro deterioration in productivity, especially in the past two years FY13-14. The decline in ROA is particularly steep among domestic cyclicals (viz. capital goods) and policy-dependent sectors (viz. utilities). StanChart feels, this could turn swiftly if there is a broad-based recovery led by the government’s priorities to accelerate decision making and breaking the resultant policy logjam. That can lead to a virtuous cycle which can improve consumer demand and sentiment besides reducing stress in the banking system.
According to the report, to support the recovery, external funding support is more forthcoming now. "We estimate that $80 billion per year of external funding support is required to achieve 8% GDP growth – the government’s original growth forecast under the 12th Five Year Plan (FYP) for FY13-FY17. This is based on external debt/equity requirements for infrastructure and other sectors. Reducing political risks and a stable currency can make the requisite external funding support easier to attain, thus aiding the process of economic recovery," it added.
In an optimistic scenario, StanChart says moderation in inflation and rate cuts can add further fuel, making the recovery broad-based and it that happens, domestic cyclicals will have much more legs. It says, "We forecast March 2016 valuation targets under these optimistic assumptions for the economy-centric sectors like banks, cap goods, cement, real estate, oil & gas, consumer discretionary, on a sample of key index and large cap stocks”. (see Figure below)
StanChart says under the bull case, there could be significant upside in banks, cement and capital goods. While material upside exists for reform driven sectors as well (viz. oil & gas), it is contingent on the government’s stance on pricing and subsidy phase-out, and hence largely delinked from the economic recovery theme.
"Upside would come not only from valuation re-rating (headroom to +1SD PER), but also from the potential for EPS growth uplift from both volume growth recovery, return of pricing power (viz. cement, consumer discretionary, capital goods) and lower credit costs (banks)," the report added.
After the special investigation team (SIT) was set up following Supreme Court orders, there are hopes of a decisive action to unearth black money stashed abroad
One of the first actions of the Narendra Modi government was to set up a special investigation team (SIT) to track black money. The decision is not merely about a poll promise. No amount of hard work will bring the economy on track, unless the government finds a way to raise revenue innovatively. With a fiscal deficit of 4.47% of GDP (gross domestic product) and a lot of ‘unpaid bills’ (the unpaid subsidy bill alone is expected to aggregate around Rs1 trillion, says an article in The Mint), the government has the tough task of meeting sky-high public expectations with very little manoeuvrability.
Forcing rich Indians to bring back the wealth stashed overseas is certainly a better option than the Congress formula of draconian taxes, complex compliance processes and harassment, followed by amnesty schemes every few years to let tax-evaders off the hook. In any case, the Supreme Court (SC) had closed this option and also set a deadline for the black money issue.
The Congress-led regime has been dragging its feet on this issue for over five years, despite specific information available from France and Germany. That Indians have money stashed abroad is not a myth. Various global organisations have attempted to quantify the amounts from time to time. One such is Global Financial Integrity (GFI) which estimated black money outflow from India at a whopping $344 billion in the decade of 2002-11, of which $85 billion was in 2011 alone; India is ranked fifth in the world in terms of illicit outflows.
Why do we expect the Narendra Modi government to be different? First, an extremely credible person like Justice MB Shah has been asked to head the SIT. He has already held its first meeting. Secondly, it will report directly to the SC and this empowers it enormously. Thirdly, we have a strong leader at the Centre who is not burdened by coalition compromises. Finally, this is an issue that the Bharatiya Janata Party (BJP) leadership has agitated before the apex court and in the court of public opinion. Failing to act decisively will irreparably damage its own credibility.
Corporates and taxpayers alike have been harassed by the 'tax terror'. It is time to put an end to the income tax department's misadventures
Prime minister Narendra Modi’s second major initiative within days of forming the government is initiating the much-needed tax and law reforms. The government has indicated that it plans to amend the controversial retrospective amendments to the Income Tax Act that were introduced to overturn the Supreme Court verdict on Vodafone. The amendment has been used by tax and enforcement agencies to harass several leading multinationals and had spawned hundreds of litigations in forums across India. While business houses and chambers of commerce were publicly silent, it was common knowledge that several multinationals, including some automobile giants were contemplating pulling out of India as a reaction to the UPA’s repressive tax regime and arbitrary interpretation of regulations. Many held back only on the hope of political change after the elections.
Interestingly, Mr Modi is also set to deliver on his election promise of good administration and rule of law. The PM has asked Union secretaries to give him a list of laws that can be scrapped fast. A detailed list of such laws, based on the findings of Dr Bibek Debroy, is already available in his book In the Dock. Interestingly, Dr Debroy says that the last time that a set of redundant laws was scrapped was in 2001, when Arun Jaitley was the law minister, again under a BJP-led government. Nothing moved after that, despite the huge public clamour for judicial reform to end the harassment of people through ridiculously outdated laws.
Moneylife readers are waiting, with eager anticipation, for action on another promise—income-tax reforms. We have already published two Cover Stories that have detailed how draconian TDS (tax deduction at source) provisions have not only forced people to act as unpaid tax collectors for the government, but also imposed harsh penalties for every lapse. One continues to come across newer details about the unfairness of the system.
On 3rd June, Punit Ved wrote in The Economic Times about how refund laws were stacked against income-tax payers. In a nutshell, he says, if the taxpayer fails to pay tax, or to pay on time, she is subject to severe punishment—12% interest and a 12% penalty. However, if the tax department is late to refund, it pays a mere 6%. What makes it draconian, says Mr Ved, is that the interest paid by the taxpayer is not allowable as expenditure while computing taxable income whereas the interest received by the taxpayer is taxable and gets further reduced post-tax. This unfair system, he says, is an important cause for corruption.
In the past few years, several taxpayers, including retired senior citizens living on their savings, have complained that the government is unilaterally adjusting their legitimate refund to fictitious demands going back to 2001-02. The amounts, often, run into a few thousand rupees but there is no easy redress. They are forced to run from pillar to post. Nagesh Kini, retired auditor and chartered accountant, says that these mindless orders covering 10-12 year-old ‘income’ have emanated from the Central Processing Centre at Bengaluru. Aggrieved by such orders, he suggests a class-action approach to the income-tax ombudsman. Unfortunately, victims of the tax department’s expropriation are usually lacking in leadership to make their case as a group. People who have been waiting for achche din (better days) to begin are hoping to see some far-reaching changes on this front too.