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Shiv Muttoo is an Investor Relations professional with over 15 years experience across sectors. Currently he is with Citigate Dewe Rogerson, a leading international consultancy specializing in financial and corporate communications.
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  • India's Taxing Conundrum

    Global data compendium CIA World Factbook puts India's tax collection at 9.3% of GDP, higher than only Nigeria, Syria, Sudan and Burma. So we rank #176 of 180 countries. India's own union budget document indicates tax to GDP of 7.4% which, despite public pronouncements to the contrary, continues to trend lower over the last few years. This can possibly be singled out as the one structural issue that is holding back the Indian economy and, unless addressed on a war footing, can keep us meandering aimlessly to an uncertain future.

    Along with our failure to equitably expand tax collections comes our inclination to behave like a welfare state. Subsidies rose to 2.6% of GDP last year from 1.4% five years ago, when our job guarantee program was launched. Now, we are introducing food for all. We need to understand that the welfare state model works best when economic development has reached the entire population, everyone contributes to the tax corpus and the Government redistributes efficiently through public spending. Unfortunately, India doesn't tick any of the above boxes.

    And this reflects in our high fiscal deficit, which was 5.4% of GDP last year as per CIA data. The U.S. deficit was higher at 6.9%. Realizing that this is unsustainable, the Americans are targeting a 40% cut over two years. Meanwhile, India's deficit in the first five months this fiscal year has already reached 75% of the yearly objective. At the same stage last year, we were hitting 65% before aggressive spending cuts came in.

    Normally, we exercise greater control over plan expenditure which supports the country's growth prospects, while non-plan expenditure (including subsidies) exceeds the budgeted figure. Then deficit financing requires the Government to push its borrowing program, which keeps interest rates high, inflates prices and reduces our global competitiveness, thereby deterring new capital investments and keeping the rupee under pressure.

    IMF now estimates India to grow at 3.75% this year based on the expenditure method of GDP calculation. While there is widespread outrage around this new data point, it is interesting to note that the country grew only 2.4% in the first quarter using the same method. So IMF actually expects growth to accelerate over the rest of the year.

    And while Q1 growth may have been the weakest in many years, half of it came from the Government's own consumption expenditure, which expanded by over 10%. This tap needs to be turned off if the yearly fiscal deficit target is to be met. Further, second quarter data suggests that both services and manufacturing growth are at 3-year lows. Looks like tightrope walking skills need to be quickly honed.

    Coming back to our extraordinarily low tax collections, it may be time for some creative thinking. While our direct tax collection seems to be based largely on individual compliance, indirect taxes are linked to transactions and less reliant on discretion. Scandinavian countries, well-founded welfare states with the highest tax to GDP globally, have successfully focused on indirect taxes. It may be worth an effort trying out this model in India as well.

    Oct 21 9:17 AM | Link | Comment!
  • Big Brother’s Watching His Own Back, Again
     In June this year, following a meeting with President Obama, BP agreed to create a $ 20 billion fund to compensate for the damages caused by the oil spill it created in the Gulf of Mexico, pre-committing two-thirds of its annual cash flows over a 3.5 year period. The spill had caused extensive damage to marine wildlife and prospects of the fishing industry in the region after the blast that started it killed 11 rig workers.

    In August, India was urged to go easy on its $ 300 million compensation demand made on Dow Chemicals, an American company, for causing the world’s greatest industrial catastrophe in Bhopal that took away thousands of lives a quarter of a century back, apart from inflicting debilitating injuries to many more thousands. The ‘noise’ around this issue was also seen to be positioning India in an unfavorable manner for further financial assistance from the World Bank.

    Clearly, American fish are more valuable and therefore deserve better than Indian people.

    And indeed the noise levels are down here in India. However, thankfully, our government remains firm in its resolve to bring justice to each and every victim and will put systems in place to ensure that a repeat of Bhopal does not happen. That’s the sense of purpose that runs through India's rulers and we are all richer for it, in life and in death!

    As though to demonstrate this, a panel of ministers has recently announced additional compensation of about $ 16 million that will benefit 4,000 people, previously not recognized as dead!

    This is not the only instance of the American juggernaut (derived from the Sanskrit word Jagannatha, which means the Lord of the Universe), though weakened from the strife of the last couple of years, asserting its might and using a different yardstick for itself.

    In the mid 1990's, the process of economic liberalization created the platform for globalization of world trade. The World Trade Organization (WTO), guided by industrialized/first world countries, developed a trade framework for all to follow. This meant that the lenient process patents regime applicable to the Indian pharmaceuticals sector had to go starting 2005. Many believed that domestic players in the sector would be rendered uncompetitive and eventually be run over by big pharma majors. However, the industry adapted well, focusing on global off-patent generics, low-regulation markets, contract research, clinical research, even drug discovery. While global majors have since included India as a market for their product pipeline, introducing drugs that are priced way out of reach of most Indians, the Indian pharma companies have done reasonably well too.

    The crumbling walls of world trade, while opening up emerging markets to global corporations, created huge opportunities for aspiring entrepreneurs in the developing world. The IT industry is one such, having grown from just over $ 1 billion 15 years back to $ 73 billion today. That's CAGR of 33 percent, including strong contributions from global majors such as IBM and Accenture! The targeted $ 225 billion in the next ten years may look aggressive today, but it's only 12 percent annual growth. Given Indian IT's exemplary track record, all targets have been met or exceeded through every business cycle and against all odds, this should be within the realms of reality.

    But there are stronger headwinds today. America, Indian IT's largest market,  is protecting its turf by building walls of protectionism around itself, the same walls that were dismantled twenty years ago. All the tricks of the trade - tariffs, quotas, restrictions - are being used to try and keep the Indian IT companies at bay. Mindful of weakening public opinion highlighted by the mid-term polls, the administration has focused its attention on IT outsourcing that is seen to be taking away jobs from a country facing unprecedented unemployment.

    At the same time, the President has urged American students to work harder and develop skills for greater global competitiveness. However, the issue here is not of competitiveness but of compensation. Median salary for fresh-out-of-college workers in America is $ 40,000, compared to $ 12,000 in China and only $ 5,000 in India. Whatever be the level of competitiveness, any skill is good at a price and at 3-6 times is priced out of the global talent market.

    With restrictions on the movement of goods and people lowered across the world, water continues to seek its own level. Not only does foreign merchandise continue to flow into America, but both jobs and cash fresh from the printing press are continuing to flow out. Mr Obama hopes to plug this leak. But he really needs to ask his countrymen curb their excesses and learn to live more frugal lives. Else, all he will end up creating is not jobs at home but valuation tsunamis in emerging markets.

    Disclosure: no positions
    Nov 10 12:12 PM | Link | Comment!
  • Promise of a New Day?

    Flashback to the brilliant blockbuster from a quarter of a century back, Ghostbusters (1984), which had a group of psychotic professors in jumpsuits, totting fancy atomic guns bent upon ridding the world of all paranormal activity. End of movie, all ghosts, ghouls, gargoyles, et al in question were sent packing and all was well with the world (at least with New York, the centre of the universe).

    The camera zooms to the present. A group of 20 seemingly important men and women bent upon whacking the stuffing out of the global economic crisis, the new age paranormal showspoiler. Armed with their economic stimulus bazooka, they will infuse the ultimate elixir to rid the global economy of all its wrongs. And all will be well with the world. Or will it?

    While the going was good, everyone joined the party and policymakers conveniently looked the other way. But now it sure is broke and needs a quick fix.

    And the remedy is a $ 1 trillion POTA (pulled out of thin air) package. The world will see more federally-backed, gilt-edged IOUs (currency notes) chasing a limited supply of hard resources. The fact that most of the G-20 recession fighters are deep in deficit does not seem to deter anyone. After all, balancing accounts may be out of our reach but the currency printing equipment sits right in our backyard. Who cares if this is inflationary, deflated demand from a recession-hit world will surely keep prices down. At least till such time that the current set is in their current jobs.

    I understand that America’s $ 14 trillion economy owes $ 60 trillion. If this is even remotely close to the truth, there’s no hope in hell of a payback happening. It’s not only the U.S., most of the developed world and EU is caught in the same whirlpool. Many of these countries are far more leveraged than the U.S. and therefore at greater risk of capitulation. A significant currency deflation is the only chance to get a foot in the door and somehow squeeze through it. I suspect that next we’ll see a race to deflate currencies by the world’s leading nations. Savers will see the value of their corpuses shrinking as inflated prices and deflated currencies eat into them.

    And where’s India in this melee? Being part of the G-20, and ably guided by a wise and wonderful prime minister (Barack Obama, no less, says so!), India is a key Ghostbuster, soon to lay the world economy’s gremlins to rest. What are we armed with? Quarterly current account deficit of almost $ 15 billion in the third quarter and rising. Balance of Payments deficit of $ 18 billion last quarter for the first time in many years, driven by a reversal in the trend of strong global inflows. Repatriating deposits parked in international tax havens (India has a leading share of over 10% in this $ 10 trillion market) could be the source of some succor in these cash-deprived times. But whenever there is an opportunity to push this forward, our Government has tended to look the other way. No prizes for guessing why!

    So, as Alan Parsons asked, where do we go from here? The Great Shenanigans Show (the general elections) is about to unravel. Divide and Rule, as a concept, did not really fade away with the British. It’s very alive much alive, being practiced everyday by our political masters, and will soon kick us into submission. A Government even more populist than the current one (is that possible, you may ask?) is about to descend upon us. Law abiding citizens of this country, however few and far between, are in for a further round of screw tightening. Not even the Ghostbusters can do much good in this situation.

    So just take a short on equities, take refuge in the primary source, and hope for the best.

    Apr 06 6:09 AM | Link | Comment!
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