Union Budget 2016-2017

An investor's prelude
Friday, 26 February 2016

Opinion
Vijay Kumar Gaba

Budget - A marketing event, no less, no more

Team InvesTrekk

Although, the attention that is paid to the annual budget speech has
diminished in past decade or so, it still evokes intense interest from the
financial market participants. I feel it has more to do with the marketing
success of business news channels rather than anything else. A number of TV
shows are hosted to propagate an environment of expectation, hope and
fear amongst market participants.

investrekk@gmail.com

Somebody gotta give

Last evening I heard some bankers and economists at a seminar. The
common running idea in all formal presentations was how to revive
investments without compromising fiscal discipline. But none, yes none,
suggested higher taxation on businesses or the rich.

(For private circulation only)

No Research. No Advice.
We simply state what we
see while exploring the
vast treasure, you know
as India.

Market low on hope this time

This year heading into the budget presentations, the markets are badly
beaten, extremely jittery and expecting little from FM. Save some minor tax
concessions here and there, the market is mostly praying for a status quo.
Reforms go much beyond New ITR forms
I have been insisting that "reform" must be distinguished from mere
administrative correction. A policy measure in order to qualify as "Reform"
must change the status quo materially.
Reform do not mean higher profit or higher Sensex
The businesses, investors and consumers need to assimilate that economic
reforms do not necessarily result in more profit in the immediate term. To the
contrary, economic reforms are more likely to cause pain and inconvenience
in the immediate term as these involve fundamental changes in the
processes and practices of doing business and consuming goods & services.
NITI Ayog needs to tell the government that in past one decade it is not the
farming, textile, railways, or SME but it is the telecom sector which has
provided maximum incremental employment opportunities.
And it all has happened in spite of the government.

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26 February 2016

Union Budget - A marketing event, no less, no more

The finance minister is like CFO of a business corporation. His job is to keep
account of the receipts and expenditure of the government; manage
resources necessary for executing the plans approved by the Cabinet;
ensure optimum utilization of available resources; and keep adequate
provision for meeting contingencies.
He is accountable to all the stakeholders, insofar as the transparency of
accounts is concerned. His discretions are however limited to choosing the
sources of revenue needed for executing the plans of the government.
In specific Indian context, FM has to decide how much resources to raise
from (a) taxation; (b) sale of national assets; and (c) borrowing.
In taxation, a balance has to be maintained between direct and indirect
taxes to keep the incidence of tax just and equitable.
Sale of national assets (mines, airwaves, PSE shares, land etc.) has to meet
the criteria of sustainability, development, transparency, viability, sociopolitical expediency; etc. and depends heavily on the current market
conditions.
Borrowing depends on consideration of fiscal discipline, servicing capacity,
and market conditions. Historically, we have borrowed from domestic lenders
only. However, in recent years the role of foreign lenders has been rising; the
exchange rate volatility has therefore become a consideration. The FRBM
Act also guides the extend of borrowing.
The importance, or otherwise, of the annual budget presentation must be
seen within this framework. Although, the attention that is paid to the annual
budget speech has diminished in past decade or so, it still evokes intense
interest from the financial market participants. I feel it has more to do with the
marketing success of business news channels rather than anything else. A
number of TV shows are hosted to propagate an environment of
expectation, hope and fear amongst market participants.
The anticipation, that is sometimes far beyond the realm of reality, guides the
market volatility. The representatives of various interest groups and lobbyists
for pressure groups demand from FM, what he has no jurisdiction to give. For
example, someone asks FM to allocate more money for infrastructure
spending. Whereas, this request should logically be made to the concerned
ministry and departments, which shall make a plan, and get approved by
the cabinet. FM will be obliged to provide resources for a plan approved by
the cabinet. A defiance could see him losing his job.
I believe that it is high time that the development agenda of the government
be completely separated from the budget presentation. Let budget be an
accounting exercise with a reasonable degree of predictability and
transparency.
Let public appraisal of the development agenda be a continuous process
through regular reporting by the concerned departments and ministries.

26 February 2016

Somebody gotta give

Once there was this person who lived his life in complete dissoluteness. He
loved to eat out, smoke, drink, often enjoyed late night parties and spent
profusely. All was going on well, till the day his heart gave him first shock. The
life suddenly changed. The sight of death triggered the transformation.
Morning walk, yoga, healthy meals, early to bed and timely medicine were
his life now.
Somewhat similar is the situation of many Indian corporates and banks today.
The profligate capex funded by indulgent borrowing by the businesses in past
15years has severely damaged their balance sheets. Unable to bear it, most
have conveniently passed the pain over to lenders.
The promoters are naturally worried that a close scrutiny by Supreme Court
and RBI may set the course right by holding them accountable for their
accesses.
The markets which have cherished every bit of their profligacy in the past are
also naturally worried.
The government is seeking to structurally reverse the persistently negative
interest rate on financial savings which in past decade have discouraged
household savings, the very backbone of our economic growth. The tax
incentive on savings has also become a totally ineffective tool in the current
inflationary scenario. A reform here to fix the savings rate at CPI plus one
percent would make many businesses unviable.
The family businesses which have long thrived on subsidized capital from
banks and financial institutions shall have to dilute their equity, should they be
forced to borrow at competitive terms. Do they really want it? Similar is the
case with labor reforms, tax reforms, etc.
Not many businesses seem to be welcoming lower tax rate with rationalized
exemption regime.
Zero tax on long term capital gains on listed equities is another bone of
contention. The mere hint of withdrawal of this exemption has made markets
jittery. But to develop a vibrant debt market an encouraging start ups, brining
parity in taxation of debt instruments, unlisted equity and listed equity might
become necessary.
...but not me
Last evening I heard some bankers and economists at a seminar. The
common running idea in all formal presentations was how to revive
investments without compromising fiscal discipline. But none, yes none,
suggested higher taxation on businesses or the rich.
Many wanted tax sops to encourage private sector investment and higher
protection to the globally uncompetitive industries facing challenges from
cheaper imports. But no one explained that how businesses will be motivated
to invest in new projects when the economy wide capacity utilization is at
cycle lows and export demand is clouded!

26 February 2016

Market low on hope this time

On February 28, 2015 Shri Arun Jaitely presented his first full budget amidst
great expectations. The market which was already on roll for past many
months, scaled new high within three trading sessions after presentation of
the budget. However, since then it has been a rather disappointing journey
downhill.
...bruised and jittery
This year heading into the budget presentations, the markets are badly
beaten, extremely jittery and expecting little from FM. Save some minor tax
concessions here and there, the market is mostly praying for a status quo.
...praying for status quo
Given the constraints like:
(a) the substantial pay commission and OROP payments already overdue;
(b) disinvestment targets already scaled down due to poor market
conditions;
(c) commitment to implement food security law in FY17;
(d) RBI Governor's and global rating agencies' strong urge to not
compromise on fiscal discipline;
(e) lower nominal economic growth leading to muted tax revenue growth;
(f)

political urgency to provide for social spending in view of the key state
elections due in FY17 (TN, Kerala, WB, UP and Punjab) - expecting any
radical proposals from FM in the budget seems unrealistic to me.

I believe, the market fully understand the dilemma of the finance minister
and hence does not expect him to dole out any goodies from his hat. Save
for the customary pre-budget memorandums by the trade and industry
representatives, I do not see any pressure on FM from the market side.
...conjuring up fears which FM can easily allay by inaction
To the contrary, to keep the spirit of its participants alive, the market has itself
conjured up some events - not happening of which will make people
relieved; return of long term capital gain tax on listed equities being the most
prominent one.
Having observed the working of the finance ministry closely in past 21months,
I am reasonably assured that both the finance minister are exceedingly
sensitive to the financial markets. At this juncture, I do not expect them to do
anything that will trigger a sell-off in the market.

26 February 2016

LTCG an anomaly, may need to be corrected, sooner than later

Having said that, I think that exemption to the listed equities from LTCG
(provided STT has been paid on the sell trade) is an anomaly that would
need to be corrected at some point in time, sooner than later.
Tax break on LTCG defy logic
Evaluating holistically, the activity of buying and selling equity shares in
secondary market per se does not provide any risk capital to the underlying
businesses.
It in effect just changes the beneficial owner of the business. Prima facie it
sounds illogical why should someone who is actually transferring his risk, be
rewarded with lower (or no) taxes?
...argument in favor weak
It is extremely difficult to support the argument that holding a listed stock for
more than one year in any way helps the economy or the markets.
The logic of holding a security for longer term, if at all, enhances the chances
of higher returns for the investor. Why should the investor be given tax breaks
for enhancing his return prospects?
One could appreciate the "development of capital market" argument in
case of investing in IPOs, PE funds, or venture funds etc., as in such cases the
businesses get the much needed risk capital. But the secondary market
transactions do not pass this muster.
The incentive for longer term holding period has, in my view, failed miserably
in improving market liquidity or minimizing market volatility.
...has been "misused" more than "used"
It is common knowledge in market place that the LTCG exemption for tax has
been abundantly misused for money laundering purposes.
In fact last year, the regulator and taxation authorities have also initiated
action in many cases for misuse of LTCG taxation provision for money
laundering.

Day traders, jobbers and unsecured creditors deserve it more

In fact, to the contrary, the day traders, jobbers and market makers who
provide the much needed liquidity to our shallow markets, and hence
motivate risk taking, deserve serious tax incentives.
Abolition of Securities Transaction Tax (STT) may actually lead to material rise
in daily volumes and deeper markets, thereby materially lowering the
transaction cost.
Similarly, providers of unsecured debt take much higher risk and therefore
deserve more tax incentives.
In absence of a functional retail debt market, companies depend heavily on
"fixed deposits" from household investors for meeting their working capital
requirements. These deposits are fully unsecured and entail high risk for
investors, in lieu of marginally higher interest rates as compared to bank
lending rates.

26 February 2016

Reforms go much beyond New ITR forms

I have been insisting that "reform" must be distinguished from mere
administrative correction. A policy measure in order to qualify as "Reform"
must change the status quo materially.
Reform do not mean higher profit or higher Sensex
The businesses, investors and consumers need to assimilate that economic
reforms do not necessarily result in more profit in the immediate term. To the
contrary, economic reforms are more likely to cause pain and inconvenience
in the immediate term as these involve fundamental changes in the
processes and practices of doing business and consuming goods & services.
Reforms must change status quo materially
From this view point, I suggest the following 10 illustrative reform measure that
may change the status quo materially. If you find these are highly idealistic,
and impractical to implement, I beg to differ.
(1) To exploit the demographic dividend fully and generate demand,
accelerate the wealth transfer process. Defining the upper bound of
wealth and introduction of material estate duty on people above the
upper bound could be one method.
(2) Transfer the power to impose direct taxes, to the local governments.
(3) Transfer the ownership of natural resources to local governments.
Encourage industry and investors to partner with local governments for
setting up business ventures.
(4) Introduce competition in Railways. To begin with allow point-to-point
private railways for intercity travel up to 100kms.
(5) Transfer all PSUs under a listed holding company. Majority voting power in
this listed holding company may be owned by Indian citizens with no
individual owning more than 1%. All these companies should be
professionally managed with no intervention from the government
whatsoever.
(6) Allow and encourage the federal states to have bi-lateral trade, labor
and resource (water, energy, logistics etc) sharing treaties.
(7) Bring the Return on Investment (ROI) for elected representatives close to
Zero level, by stripping all their discretionary powers.
(8) Constitute a Clean India Regulatory Authority (CIRA). Make all elected
representatives from local government level to the members of
parliament accountable to this authority. Each member should be
mandated to submit a quarterly return of cleanliness in their respective
constituency to this authority. The authority should cause an
independent audit of such certificates. A wrong certificate should
disqualify the person from contesting elections for 25years.
(9) Enhance the Right to Education (RTE) to the Right to Uniform Education
(RTUE).
(10) Reorganize farm sector with "collective farming", "cooperative food
processing" and "national market" at the core.

26 February 2016

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