Review - Union Budget 2007-08

The much talked about union budget 07-08 for India was delivered yesterday 28-02-07. As expressed in the Indian Express this budget is just politically correct. Many execs believe that people will easily forget this budget within a few days, as there are very few changes in the overall condition for a common man. Due to many reasons including current levels of inflation, this budget was supposed to remove the fallacies in the economy including taxation reforms, viz. double taxation, removing futile exemptions. So on the front of public and corporate expectation this budget was a failure.

For your own referral here are some of the niceties of the budget, courtesy CNBC-TV-18 and moneycontrol.com.

Direct taxes: -

• Tax exemption limit extended by Rs. 10000/- reducing tax liability of an individual by Rs. 1000/- irrespective of age or sex. Pittance!
• Adding education cess of 1% on all sorts of tax liabilities, which will be spent on development of secondary education, making total cess 3%. Taking away the pittance, too!
• PAN will be compulsory and the sole identification number for capital market transactions. Lesser but compulsory complications!
• Tax exemption under section 80D is extended to Rs. 15000/- for normal individual and for senior citizen it’s Rs. 20000/-, little relief!
• Tax concessions under section 80IB for construction are scrapped which were beneficial for the buying of houses of area till 1000 sq. ft. in metros and 1500 sq. ft. in secondary cities. Unaffordable houses for middle class in cities.
• Cash transaction tax exemption raised from Rs. 25000/- a day to Rs. 50000/-. Still a pain… you know where!
• Investments in liquid/money market funds are taxed higher under Dividend Distribution Tax. Rose from 20% to 25%. DDT for companies’ declared dividend also rose from 12.5% to 15%. Absolutely uncalled for and baffling!
• ESOPs are now under FBT, rates fro which are not determined. Wasn’t FM supposed to clarify or even scrap FBT?
• The 10% surcharge has been removed for Corporates whose taxable income is less than Rs 1 crore. Expected to benefit SMEs!
• 11.22% MAT is now applicable to IT industry also. Wasn’t IT supposed to enjoy the tax holidays till 2009?

Indirect taxes: -

• Biggest story is the Excise duty on cement. For the companies that sell cement below Rs. 190/- a bag excise is reduced to Rs. 300/- from current Rs. 400/- a tonne, while for those that sell cement above Rs. 190/- a bag, it will be Rs. 600/- a tonne. Attempt is to bring cement prices below Rs. 190/- but unlikely to be taken by cement companies as welcome change!

Service Tax

• Service tax exemption for tech business incubators. Little relief!
• Drug testing clinical trials exempt from service tax. Big boost for research!
• Service tax on rental of property for commercial use. What’s the idea? Hitting business profit! Adding problem to already overblown real estate bubble!
• Service tax on works' contract service. Extending service tax net!

Excise

• Excise duty on pan masala without tobacco cut to 40%. Minor change!
• Excise duty on pan masala without tobacco cut to 40%. Minor change!
• Non-electric water filters fully exempt from excise. Save power!
• Umbrella, footwear excise duty cut to 8% vs. 16%. Get ready for monsoon!
• Bio diesel, food processing exempted from excise duty. Fuel alternatives and cheaper food products!
• SSI excise exemption raised to Rs. 15 mn vs. Rs. 10 mn. Benefit for Small Scale Industries!
• Excise on plywood cut to 8% from 16%. Supply support!
• Petrol, diesel ad valorem excise duty cut to 6% vs 8%. Expected and delivered!

Customs duty

• General customs duty on medical equipment 5%. Caring for health at last!
• Customs duty on animal feed cut to 20% vs. 30%. Be happy if you’re a dog or a cat! Can poor be fed with dog or cat food if the grains and pulses become more expensive?
• Customs duty on watch dials, umbrella cut to 5% vs. 12.5%. Care for time! Again Monsoon will hurt!
• Coking coal exempt from customs duty. Not a great solution for fuel alternative!
• Customs duty on cut, polished gems cut to 3% from 5%. Boost for Gems business!
• Customs duty on PFY cut to 7.5% from 10%. Little change!
• Crude, refined edible oils to be exempt from customs duty. Supply support!
• Customs duty on steel cut to 12% vs. 20%. The Tata effect!
• Customs duty on drip irrigation cut to 5% vs 7.5%. Caring for Agriculture! Supply support!
• Customs duty on polyester fibre yarn cut to 7.5% vs. 10%. Boost for textile industry!
• To cut peak rate for non-farm products to 10% vs. 12.5%. Supply support!

The explanation for such a budget would be that our FM stuck to his promise of making budget a non event. But at what point of time and at what cost? At this point economy is poised between high growth and high inflation. FM says that the inflation can be controlled with 3 points, viz. Money supply (this part is well taken care of by RBI with 4 increases in Repo rate and CRR each), Fiscal policy and Supply crunch. FM proposed few measures on fiscal side but they are all on mid term level, nothing to control inflation in short term! Agricultural sector is offered with many benefits to check on the supply side in course of 1/2 seasons, but it seems inflation would not have mattered after 1/2 seasons anyway. So nothing on offer for controlling the inflation!

On the other hand what seems is that in effect FM might add to the current level of inflation. Cement industry is in no mood of lowering the prices. Construction companies are out of tax haven, so the cost of construction goes up, in effect the prices of houses will increase by 15-20% in opinion of some builders. Interest rates for housing loans are already touching 13%. 4% short of pathetic socialistic rates of 17%. So it’s now impossible for middle class to buy a house. It was costing already Rs. 25 lakh for 500 sq. ft. now it will cost Rs. 30 lakh. Where the sense in the prices is and what calculations did the FM make to come up with these arrangements in budget.

There were many tax reforms expected to clear the regressive methods of double taxation like the DDT, which is over and after a company pays corporate tax. Instead what we get is increase in DDT. Thank god he didn’t decide to take the service tax to 15% i.e. to the level of global GST. He was supposed to bring down the duties to the level of SAFTA which did not happen at all. I believe that might have taken care of supply side in short term. He could have reduced the double taxes which should have been phased out after the introduction of VAT. He could have thrown light on Capital gains tax which still is a huge conundrum for many Corporates also. Thank god he did not tinker with STT. He just banned Wheat and Rice from MCX futures trading. That surely will come back once the inflation comes down. He should have shifted the tax slabs by at least Rs. 50000/- on higher side (optimistically Rs. 100000/-). That would have taken care of the pinch of the prices common man feels. He should have increased the tax rebate for housing loans under section 24 to Rs. 200000/- which went nowhere.

The FM has tried to be Robin Hood but in the end he has just become a marauder who’ll end up taking the money away from each and everyone. The budget is typical congress style which used to be from year 1947 to1991; it means lot of scope for MPs, MLAs and bureaucrats to launder money under many schemes announced by central government. It is all right for advanced polities to make budget a non event but for polity like India when poised at such a delicate manoeuvre which could make or break the backbone of our economy, to make the best opportunity into a non event is the most pathetic decisions ever taken by Mr. P. Chidambaram. This was 10^th time he was presenting budget and he too had an opportunity to go into Indian history like our respected PM did in 1991, but he decided otherwise.

There seriously is lapse in the performance of FM in this budget which could have simplified many things that were begging for it. On a scale of expectation FM’s attempt should be rated -3 on a scale of 0 to 10. I know this sounds as ridiculous as this budget itself!

Inflation in India Growth Story

The events started unfolding from last Friday February 9, 2007 when Indian government came up with weekly inflation numbers. It came out to be whopping 6.58% over the same week last year. This is highest for last two years. At the same time Standard and Poor’s (S&P) upgraded India to Investment grade. The estimated GDP growth for financial year 2006-07 is also upgraded to 9.2%. So we are posting a nominal growth of about 16% and this all in spite of the Repo rate being increased to 7.5%, Reverse Repo rate to 6% & CRR (Cash Reserve Ratio) to 6% (on February 13, 2007).

All these numbers give a clear indication that the economy is overheating. There is excessive demand for loans, particularly corporate loans and home loans. But the banks are coming under liquidity pressure as there are not enough Fixed Deposits to balance these loans. The government is trying to curb this boom but obviously it is having no effect as far as slowdown is considered.

Let us see why the corrective measures are not working even though they are all short term measures. Ostensibly this inflation is due to commodity prices going up including essential commodities like wheat-paddy and pulses, probably because of erratic monsoon we had last two years and also the commodity trading in cash and derivatives in MCX (Multi Commodity Exchange). So government is taking all the corrective measures looking at this sector. But what prima facie seems to be the truth, is not necessarily the whole truth. There is huge share of services in pushing the inflation up so high. The service sector forms 52% of total GDP of India. Increase in prices of services is going to have greater impact on the prices. The services are highly intangible. There is no pricing commission working for keeping the prices of services down. Adding to that our respected Finance Minister Mr. P. Chidambaram has brought plethora of services under the Service Tax. This helped the service sector to increase their prices further. This is to such an extent when a service was tax-free it was Rs. 100/- but now after taking it under 12.5% Service Tax it is quoted at Rs. 150/- inclusive of taxes. So inflation is about 30% in sevices.

They can afford to increase the prices so high because of our IT generation who are earning hefty amounts and have lost a sense of prices they are paying. Same is the case of real estate. The builders and brokers here are asking for Rs. 5000/- per sq. feet like asking for a glass of water. There is no pricing commission working over real estate also. Clearly the prices have gone way beyond sense in the metros and there no way other than facing a pricing meltdown, the way it happened in California, US. And adding to that in today’s scenario a person earning above Rs. 2.5 lakh p.a. is taxed at 33.66%. In this situation a person earning Rs. 3 lakh p.a. cannot give a proper shelter and feed a family of 4 properly in a metro.

The growth story is all right, but when it stops making sense in prices you should open your mouth and say, “it’s ridiculous!” and this is not all with the economy. The government has decided to let the rupee appreciate to curb the inflation. But this rupee appreciation is directly going to affect the export oriented businesses on profit margins. Also we are carrying a hefty 4+% of GDP current account deficit and about 2% of GDP fiscal deficit. With export hurting and imports getting cheaper, this gap will further widen and eventually it will make India an unattractive investment destination. So while making short term corrective actions we have to take into account long term implications of it. If we let this economy overheat, it eventually will end up in recession (even though it will be a short one). And if we have a recession in a period of 5 years since 2002-03 then again it will show a weak character of economy and lack of control of government over the economy. And all this when highly respected economists like our Prime Minister Mr. Man Mohan Singh, our Finance Minister Mr. P. Chidambaram and our RBI Governor Mr. Y. V. Reddy in the top spots. If they are not in the position to keep a check on it, then it is sure that our economy will never be in our control.

So, along with the current short term measures some long term measures are also necessary to avoid occurrence of such events in future. But now some serious thoughts have to be put in and some drastic measures are to be taken. If US economy can manage a soft landing after overheating then we have every reason to believe that we can, too.

मराठी बाणा

HDI and India

HDI i.e. Human Development Index is said to be the indicator of the standard of living in a country. The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrollment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income). Internationally it is accepted that this is not a comprehensive representative of the total quality of the life in a country. It does not, for example, include important indicators such as inequality and difficult to measure indicators like respect for human rights and political freedoms.

As mentioned above if you consider two factors, inequality and education together then the point arises of depth of the education available in a country. This particularly will be true in case of India. Let us first see the calculated parts of HDI as Life expectancy at birth ranked 121 with 63.6 years. Adult literacy rate for age 15 years and older ranked 107 with 61%. GDP per capita PPP US$3139 ranked 114. Gives HDI value 0.611 and overall rank combining all the factors above is 127. But this does not by any means take into consideration the level of skills and the depth of education available in the country.

After due consideration it seems necessary to reformulate the calculation of HDI with added weightage to the inequality of society, as almost unanimously we have accepted the capitalism as part of our global society and on the same principle the facilities of education available within the country. It seems highly plausible that there will be considerable shuffle in the current HDI listings. This surely will give India a little higher level than rank 127. It seems more important especially with the emergence of India as a global outsourcing hub with specialization in IT and financial services and educational institutes like IIMs and IITs with a global recognition. Indian human resource is one of the most sought after entities in the world. This chasm of global demand and HDI rank 127 has to be filled. No definition can be eternal; it has to evolve with time. And now is about time we pay attention to HDI rankings.

With emergence of the powers like BRIC (Brazil, Russia, India and China) countries, many such definitions need to be looked into. Let us kick start the mission with HDI.

Courtesy http://hdr.undp.org/hdr2006/statistics/countries/country_fact_sheets/cty_fs_IND.html

Indian cricket and Dada

At last Sourav Ganguly (dada) is getting the chance to come back to the highest earning cricket team in the world. Well that is the best I can praise this team. The money they make is by no means an indicator of their performance. This team just reminds me of the state of business in India for so many years till the Indian economy opened up since 1991. You keep protecting an ill performing organization for any amount of time, there is no scope for such an organization improving. Applying the same principle to this cricket team you should have shut down this business a long ago.

The point most difficult to understand is that how can such a pathetically performing team can earn the most by such a huge margin over the second best Australian team. There are so many sponsors running behind to put their money on. Real Madrid lost a lot of sponsors since they started the current stint of ill-performance. Applying the logic Indians never started performing, still the money started pouring in this absolute waste of time – cricket. (I’ll elaborate on this opinion of mine in some other blog, bear with me!)

There was the time when John Wright retired as coach to Indian team, when dada was leading the side. Then came the nuisance called Greg Chappell. The first thing he did with a well performing, rather the best performing team for a long time is that he chopped and changed around it. They say in US, “if it ain’t broken, don’t fix it.” That’s what he did. He tried to better the best. There were ill performing players including the ‘Prince of Calcutta’ himself, but the problem was not limited to him only. Rather he was solution to many other problems and undoubtedly he was the best motivator on the field. Instead of locating all the problems together Chappell pinpointed and played the politics with dada. There was a time when Sachin and dada together had made 16 opening partnerships of more than hundred runs, better than any other pair in the world. With the entry of the crap called Sehwag this stint was terminated. (I can never accept Sehwag as a batsman, just does not fit in definition.) Now as the crap is out of team I hope the sense prevails and sachin and dada come back with their previous form.

Another point I feel for dada is that he seems to be more matured and avoiding all the controversies altogether. If he just keeps doing it, there is a good chance that he would be leading the side, in the light of his motivational qualities and experience. May god bless dada. Amen!

A Question to Mr. Thomas L. Friedman

Do you really believe that India has the potential to become one of the superpowers of the world and can she realize it? Especially juxtaposing with Chinese strength and capacity. I have heard Mr. Friedman say this umpteen times, “Chinese roads are smooth now but there lies a big bump on those roads, that is social equity and stability, how they’ll land after hitting this bump will decide their future and for India the road is full of potholes without even footpaths along it, but on a distance it looks smooth and widens into a freeway of prosperity! Just the thing to worry is if the picture is a mirage or a reality. Reason behind this is that India has already setup a good social structure with democracy and a sound judicial model.”

What I would like to request Mr. Friedman is to reconsider his extra optimism about India’s social stability and democratic structure. If he could come back to India and this time not to Bangalore or Bengaluru as it is denounced to be. Well, for example this is our mentality, there oxford adds ‘to be bangalored’ as a new phrase in their dictionary and here we kill the brand that has fetched us most income. The IT story of India is too much different from the core reality of rural and non IT urban population. Including Bangalore we still haven’t figured out any solution to India’s crumbling infrastructure. The most advanced and arguably the richest state of India, Maharashtra is facing 6-12 hours of power cut daily as we just don’t generate enough electricity to fulfil the demand of our industries and our populace. The roads in the country are not even mentionable as Mr. Friedman himself has explained it better.

The things about the infrastructure that he did not consider is the state of our education in the country. We have at least a million engineers and more than 50,000 MBA’s passing out of our universities, still our best of the companies are facing talent crunch, simply because the depth and practicability of the education we provide here is abysmal. The crème class of engineers that get admissions in the IIT’s is just 7,000 and in the IIM’s it’s just 2,000. No wonder these are the most sought after institutes. With simple statistical analysis will tell that the seats available in these institutes are far below the minimum requirement. As if these problems were not enough our horrid government lead by congress, who had been sucking blood out of the subjects of the country, are still not done with it. Now we have passed a resolution in our parliament where 50% of the seats mentioned above will be reserved for so called oppressed class of the society . If you ask anyone in the cities now, the real oppressed class since the freedom has been the so called upper cast, as they have been most neglected by the political parties, though they have been fetching the maximum revenue for this country. What this means that not even 99% of the marks in the competitive exams for these institutes can fetch a seat for you if you belong to the so called upper cast. While for the reserved students the scores are abysmally 40-50%. Now wouldn’t this explain the talent crunch we are facing. As if this is not enough our good for nothing politicians are proposing to bring reservation in jobs also, which will undoubtedly kill our profitability.

The state of our democracy is such, that there is so much intervention by the government in the mundane life of the populace that we cannot imagine a life in a developed country like US or any country in Europe. This is the reason that started the brain-drain from India. Now as the picture started changing with the reverse brain-drain back to home, we have started ruining our future. The politicians are making sure that our poor remain poor even below poverty line so that they will have someone and something to control and manipulate. A common man being literate and knowledgeable is not in their favour, as who will vote for them in such condition. Our learned class doesn’t believe in voting as they know, no matter who becomes the ruler the policies are going to be so called minority oriented.

With given conditions, I would like to ask you Mr. Friedman, does our political and social structure still seems stable to you? Because, if you ask me there are more chances of revolution taking place in India as compared to China and as the history has shown that the only winner that emerges from a revolution is communism or a dictator, which is pretty much the same, taking into account the outcome for the populace. I have another strong evidence backing my claim up. Which party seems to be driving the policies of this country? Which party seems to be growing in confidence and in power? Undoubtedly CPI(M) – Communist Party of India (Marxist), who now are adopted by the Chinese communist party. They call for strikes more regularly than ever. They are stopping any and every reform that will make this country progress through capitalism, liberalism eventually to prosperity. They feel proud about the abysmal era of socialism, brought to you by Pandit Nehru and sponsored by the red army of USSR, the KGB and Stalin. Even though the Russians got rid of that red monster eating their lives, we are getting closer day by day to adopting this monster. Especially when the other nationalist parties like Congress and BJP are in complete disarray, they are the ones seem to be taking control of the situation and as always our businesses are sitting, doing nothing, just waiting for the day when we might be free of this political oppression.

This grim scenario points towards nothing but a prelude to a revolution which will take us Indians back to bleak age of socialism and make us live the miserable communist life for few more years at least. So kindly add this angle to your vision and try to see the picture we fear is just round the corner. If we miss that turn then I see what you are trying to show us, but this turn is imminent and unless we speed up fast enough to miss this turn we might catch the freeway of success and prosperity.