India experienced 'the biggest tax reform' on August 8 as the Prime Minister Narendra Modi led government abolished all barriers coming in the way of a nationwide goods and services tax, or GST. The bill was being debated for long between the government and oppositions. As the Indian parliament okayed it, the prime minister "called a major step to make doing business easier," as per Reuters.
Why is GST So Important?
The step will blend a variety of state and central levies into a national sales tax, resulting in a solo customs union for India's 1.3 billion population. The move is expected to create a seamless business transaction, lower cost of production of goods and reduce inflation - an economic issue that India is typically burdened with.
However, there is another view as well. Citigroup Inc.'s (NYSE:C) economists analyzed "that countries like Canada, Australia and New Zealand saw a one-time increase in inflation after GST implementation, which normalized in a year."
However, Modi's advisers view little impact on inflation if the GST rate is capped at 18%. But if it spikes to around 22%, then inflation will likely grow 0.3−0.7%, according to those advisers. However, the details are yet to be discussed.
According to Indian finance minister Arun Jaitley, the implementation of GST will boost GDP by 1-2 percentage points. He also stressed on the fact that GST "is unlikely to lead to any major revenue loss for the states."
Especially, the passage of the GST bill is being viewed as Modi's success in enacting challenging economic reforms. And global investors may see this as the clearing of the bottleneck for other bills which are put on hold due to political gridlock.
Goldman Sachs Group (NYSE:GS) already sees the rupee as one of the top emerging market currencies while Standard Chartered Plc (OTCPK:SCBFF) expects gains in this currency, thanks to ultra-easy monetary stances in several developed economies, going by an article published by Bloomberg.
Forget August Blues; Jump on India on GST?
Normally, analysts see August as a subdued month for Asian currencies. As per economic times, the outflow of foreign portfolio investment from India was about Rs 8,050 crore in August over the past 10 years. Now it remains to be seen what GST brings for India ETF investing this year.
Many analysts are hopeful on the rupee's future run. The recent plunge in oil price also bodes well for India as the country is a huge importer of crude. Just one hitch lies ahead, i.e., the latest dollar strength following a strong U.S. job data, which raised the odds of a Fed rate hike in the near term. If this happens, rupee and India equities will suffer a setback, irrespective of GST clearance, even if it is for just a while.
Indian rupee logged a one-day gain of 0.7% on August 8, despite dollar strength. Though many analysts warned of a correction in Indian equities after a strong run-up, the new GST bill passage once again led many to believe in the investment proposition of that market, despite non-seasonality.
ETFs in Focus
Thus, GST-related success put India ETFs including EGShares India Consumer ETF (NYSEARCA:INCO), EGShares India Small Cap ETF (NYSEARCA:SCIN), iShares MSCI India Small-Cap (BATS:SMIN) and VanEck Vectors India Small-Cap ETF (NYSEARCA:SCIF) under consideration. All three ETFs were in the green on August 8. Investors should note that small-caps and consumer ETFs should be favored more by foreign investors as these are directly related to the domestic economy.
Over the last three months (as of August 8, 2016), INCO, SCIN, SCIF and SMIN added about 16.2%, 15.4%, 14.1% and 16.5%, respectively, compared with 6.6% returns offered by the S&P 500-based ETF (NYSEARCA:SPY).
Having said that, we would like to note that the clear impact of the GST bill will be felt only over the long haul. In the near term, earnings, other economic developments and global economic policies will set the mood for India ETF investing.