The year of change

Recovery of global economy, transparency in tax regime, return of equities and the bottoming out of interest rates

By Mohan Sule

Investors looking for stability in 2017 after a year of turbulence arising from second-guessing the US Federal Reserve’s moves, Brexit, negative interest rates in the EU and Japan, slowing of China’s overworked manufacturing engine, the stubborn refusal of Raghuram Rajan-led Reserve Bank of India to speed up cutting the cost of money to boost growth, the recurrence reports of mounting bad loans of PSU banks, slump in domestic exports including of tech services, the unexpected triumph of Donald Trump in US president polls and currency swap in India are likely to be disappointed. Many more disruptive forces are hovering on the sidelines. Not all of them will have an adverse effect. Some might even inject transparency, ease doing business and fuel private sector capital expenditure, notable for its absence in the year gone by. Advancing of the budget by a month is not the only change that will be seen in the New Year. The coming financial year might be curtailed to nine months so as to synchronize it with the calendar year. The budget for 2018 might be presented late this year, making the year unique. Anyway with the imminent implementation of GST, budget-making going ahead will be an academic exercise of presenting the balance sheet as the only area for tinkering will be direct taxes and import duty. Due to the tussle between states and the Centre over control of revenues, GST might become effective mid calendar year instead from 1 April. Prime Minister Narendra Modi’s 31 December 2016 announcement of sops for the rural and semi-urban areas is an excellent example of how the government need not wait for budget day to announce policy measures.

So the effects of two big-bang reforms, GST and shift to less-cash, will be the dominant themes this year. The widespread embracing of banking and digital channels will widen the tax base. A uniform and low indirect levy will protect the organized players from the unfair price advantage accrued to units without book-keeping and might prompt the small units to opt for the benefits of being in the formal sector. The third change will be the comeback of inflation. The RBI sounded a warning about food items looking up at its December policy meet and kept the base rate unchanged despite ample liquidity in the banking system from the inflow of cash following withdrawal of the high denomination notes on 8 November. The warming up of agri commodities is despite good southwest monsoon and higher sowing of rabi crop. Higher minimum support prices might be the contributor. On top of it is the threat of bounce-back in prices across the board on heating up of crude oil ever since the cartel of oil producers decided late last year to curtail production. With its usage to make inputs for industries across the board, the spurt in cost is sure to be passed on to consumers. Fall in unemployment and a robust job market in the US contributed to the Fed finally making up its mind on continuing ramp-up interest rates. A mighty dollar, however, has the power to keep the bubbling metals, riding on global recovery, capped.

Rejuvenation of exports will be the fourth transformation. With the US and Gulf economies staging a comeback, China will be the biggest beneficiary, as its comatose factories revive and its appetite for raw materials and intermediates surges. The flux in the banking sector will mark the fifth difference. The proliferation of choice, with payment banks and banks on tap vying for attention, might result in consolidation if the government decides to dilute control. Keeping off from interfering in appointments and operations is perhaps a step in this direction. As such banks will be at an inflection point of using the low-cost deposits collected since the last two months of last year to clean up their balance sheets and make themselves attractive to investors, depositors and borrowers. The sixth fallout will be the back-tracking to the Big-Is-Beautiful theme as companies with expanded capacities will be at the forefront of reaping the benefits of the spurt in consumption. A flurry of IPOs from small and mid caps eager to enter the big league might keep the secondary market under control. While the focus of action will be equities, bonds will bolt as interest rates bottom out. Volatility of traditional safe-haven investment instruments on fears of government crackdown on accumulation will be the seventh modification. Gold will be subjected to pulls from inflation and pressure of a resurgent rupee. Real estate will be the joker in the pack. Mid-segment and low-cost housing in tier 2 and 3 cities will be the growth drivers for listed developers as better road, air and digital connectivity will decelerate migration to big cities. 

New beginnings

Slowly, but surely, Narendra Modi is dismantling the system that perpetuated corruption and crony capitalism

By Mohan Sule

History is rife will tales of retreating armies wasting the land so that the occupiers end with a pyrrhic victory. In recent times, the Gulf War is an appropriate example. Iraqi troops set Kuwaiti oil wells on fire as they began withdrawing from their invasion early 1990s. Now something similar is happening in India. The difference is this time the victor is making sure that the vanquished never ever again are able to go back to their days of benign feudalism. Slowly but surely the edifice that sustained and spread politics of patronage to every institution in the country for more than 60 years is being dismantled. The rotting monument to deification of political families, built by those campaigning on the platform of wealth distribution and equality but making a comfortable political career out of poverty perpetuation on one hand and crony capitalism on the other, is being brought to ground, brick by brick. Siphoning off tax payers’ money as public sector bank loans, to industrialists practising hedonism and farmers deprived of basic infrastructure, and then waiving them off had become the norm and so also subsidized services. The Robin- Hood-like actions were masked as magnanimous gestures underscoring the compassion of the ruling clique. Since May 2014, such brazen acts of financial impropriety are becoming rare. Top appointments in banks, now considered the fountainhead of corruption, are now the responsibility of the Bank Board Bureau. Loans are being sanctioned without phone calls from the High Command.  Political opportunists are now calling for farm loan waiver, comparing it with the recent action of some large public sector banks categorizing certain big-ticket loans as duds.

Fortunately, the clamor has not gain traction. On the contrary questions are being raised as to who had green-lighted the largesse without adequate collateral and how the central bank remained mute even as more credit was extended to the defaulters. Brakes were applied only post May 2014 and the move to provide for the non-performing assets should be seen as cutting losses. Also, many borrowers were hamstrung due to two years of drought and slowdown in the US and EU and Japan markets. The Jam trinity of Jan Dhan, Aadhar and Mobile is the centerpiece of efforts to cut out middlemen from any transaction. The zero-balance account’s core theme is to bring the informal and marginalized sections into the banking system and to get the attendant benefits of cheaper loans, freeing many from the tyranny of the neighborhood loan shark. It will also create a credit history of the borrowers. The unique identity number will boost mobility and provide an easy path to claim subsidies and insurance payouts. The cell phone is poised to take over as a power platform to merge as well as access facilities. In addition, GST will prevent tinkering with indirect taxes by the profligate Central and state governments to finance their populist schemes. This was the easy way out for lazy as well as venal policy makers to punish or reward competitors of friendly donors. Of course, items within the four slabs can be shuffled as per the evolving environment in the new regime, but not the tax rate.

The debate over demonetization’s objective is fruitless. The fact is it can achieve multiple tasks. Apart from making counterfeiting difficult and sucking out unaccounted cash, the amnesty scheme has given an idea about the identity and earning capacity of the depositors. The cribbing about inadequate liquidity is a covert form of pressure on the government to go back to the old ways when cash transactions dominated the GDP. Inconvenience in obtaining bank notes is pushing users to opt for various digital modes of payment. The unexpected calmness with which Indians have gone about exchanging their old currency has belied the expectation of opposition parties of a tumultuous reaction that would have forced the government to roll back fully or partially the move. Perhaps the adversaries of Narendra Modi underestimated his resolve in facing any backlash from those singed from the stern measure. It must be said he has more credibility than the critics in convincing the population that the discomfort is worth the effort for lower inflation and taxes and towards transparency going ahead and that there are various platforms that are quick and efficient to conduct daily business. More needs to be done to ensure that the efforts are not undone due to minor glitches. The first is availability. The second is affordability of the alternatives. The third is widespread dissemination of information. Sometimes surreptitiously, sometimes in full glare, Modi has succeeded in loosening the nuts and bolts of the gigantic machine that thrived on funds without accountability.