GST and Economic Boost

GST Bill, despite all claims and hopes, is going to be the biggest damp squib in recent times. It will create chaos, confusion, tax terrorism, and mar the next 2 years of Narendra Modi Govt. Whatever said and done, Indian mandarins are not mentally ready to let the habit of fleecing businesses go, and are least bothered about the cause of businesses or general welfare other than their own benefits. If one is that naive to believe that by just one stroke of law, all Indian officials will become honest and business will function smoothly, then they are living in a fool’s paradise.

GST will increase costs, create a massive nightmare in terms of compliance, and will lead to more heartburn for businesses and the public.

Overall, a disaster in the making!!!

Now only time will tell whether I will have to eat my words or this will be the actual course of the future! Though I will love to be proved wrong in this instance, as our economy can’t really afford any such misadventure.

GST and the end of hope

“Road to hell is paved with good intentions.”

GST – good and service tax, summed as India’s biggest tax reform in the last many years, is finally here. GST empowered committee in one of their last meeting, finalized rates on pending items with Gold getting taxed at a new rate of 3%. The empowered committee other than creating an additional layer of tax also proposed to impose levy/cess etc beyond specified 5 slabs of taxes.

Multiple tax rates, levy, cess, additional taxes!! It seems that somewhere the present Govt just lost the plot and caved into interested parties by enacting the same complicated rules as they were there before GST. Somebody summed up the situation correctly saying that it would have been better to rename the existing taxes as GST rather than going through this administrative nightmare.

If the multiple rates are not enough, Govt has gone ahead and created, even more, confusion by having multiple rates within a single service i.e. look at multiple tax rates at hotel rooms. Zero tax for rooms up to INR 1000, 28% on rooms above 5000 and few more slabs in between. These multiple rates are going to create litigation, an opportunity for corruption and money laundering. For example, a room priced at 999 for two people, get triple occupancy and now move to 10% tax bracket. The customer not willing to pay additional tax will force hotelier to adjust and hotelier, in order to not lose business, will accommodate and end up doing a crime which was not needed.

Adam Smith, the revered economist said that for taxation to be helpful in building nation-state, it needs to have three things in place. First, tax rates shall be reasonable. Second, it shall be easy to pay taxes and the third penalty shall be severe in the case of noncompliance.

If existing tax regime in India was the antithesis to all of three preambles of an efficient tax structure, GST has made it even worse. Multiple tax rates, the filing of tax report every month and on top of it almost draconian powers at the hand of tax officials.

It seems Indian govt is not working to create “ease of business” but is rather trying to ease out small businesses. For example, a trader has a turnover of 30 lakh will come under the ambit of GST and will have to do all compliance including having service of some CA firm which seems reasonable. However, a turnover of 30 lakh will hardly generate a net income of INR 30,000 to 40,000 even at 10% net margin. Can a person earning 30,000 per month, afford all IT infrastructure and have the mental capability of accounting for multiple rates, adjustments, input credits? Can he or she afford the services of a qualified CA to do all paperwork? While life becomes massively complicated for small vendors, it becomes a nightmare who is operating in multiple states. If a company was filing some 15-20 returns a year, it will be now filing 400 returns a year!!

Probably this explains as to why Business papers / Indian Inc, leading consulting firms and Share market are going gaga over such complicated GST regime. GST by virtue of complex compliance regime will wipe out small/informal business in one stroke and will shift all the market to big organized firms while at the same time simplify business/tax rates to a great extent for big businesses. This will boost the income of organized sector, will create more wealth for big players and boost GDP for sure but will also render all small businesses out of circulation. We might see a replay of the present scenario where SENSEX is creating new record every day and India is among the fastest GDP growth nation but there are no jobs!! This push by present complex GST system will create massive unemployment and will open India to global shocks as the informal business will not be there to absorb millions of youths looking for jobs every year.

Hence one wonders what is the intention of Govt behind GST? Off course one aim was always to plug the leakages, collect more taxes (8th Pay Commission is due) but why no attempt or thought to simplify life for small businesses.

Conspiracy theories among us will jump and say that it has been planned by big business to rob the informal sector etc. However, it seems that it is more a case of Hanlon Razor (Never attribute to malice that which is adequately explained by stupidity) than anything else.

Every year Govt leaders/bureaucrats tour developed nations showcasing India and pleading for investments while offering many sops to companies and one wonder why not same sops to SMEs in India? Free industrial land, no inspector raj, freedom from onerous compliance and one window scheme for starting the business?

Rather than simplifying life for small businesses, every move of the Govt is aimed at creating more litigation, collect more taxes while doubting every step of small businesses with zero trusts? Why a democratic govt chosen by popular vote, would like to make life more traumatic for the majority of its citizens (share of the small business / informal economy is far more bigger in India compared to OECD countries)?

The answer does not lie in NDA or UPA but is hidden in India’s history. India which was ruled for almost 1000 year by foreign rulers always had laws which were designed to rule and not to govern.  The rulers (foreigners with no empathy for local population) wanted to collect maximum taxes to fill their coffers ( look at growth in British GDP and decline in Indian GDP from 1800 to 1947 or wealth of Mughals who came on a bare horseback to India). Moreover, the rulers and their agents have a very low view of natives and minimal trust ( all are thieves).  This led to the creation of a governance model which was heavily rule-driven with an idea to plug any possible loophole with maximum power at the hand of the government servant.

Unfortunately post-independence, rather than building a nation for Indians, the new government just continued with the traditions/rules of Britishers (that was worst crime of Pandit Nehru) and maintained the same thought process of the rule rather than governance. This policy ensured that Indian businesses crawl only with the burden of compliance/bureaucracy/inspector raj sitting on its head.

In 2014, the election of Narendra Modi who had no baggage of Western training led to a faint hope that India will finally see freedom from the British rule in theory and practice. The shackles of bureaucracy will be broken and laws will be made with a focus on governance rather than the rule. Unfortunately, rolling out of GST in its present format has shattered all the hopes. If a Right-wing party led by a strong PM almost with Superman image, cannot tackle bureaucracy and can not usher Regan era in India, then no will.

Hence the hope that India will be able to cut its past of 1000 years of slavery, move forward and join the league of big nations has dashed against reality.

GST in a simpler form would have ended the tyranny of tax officials/bureaucracy, unlocked the real potential of Indian business crippled by inspectors raj and would have taken India to another level of prosperity/wealth while creating millions of jobs and boosting consumption.

Sadly, the hope has ended, God Save the King.

Raghuram Rajan Controversy: Why Subramanian Swamy HAS a Point

There is a sense of anger among Indian intellectual class, stunned by the demand made by Dr. Subramanian Swamy for the sacking of Dr. Raghuram Rajan – the most respected, ever charming, hottest RBI Governor India has ever had. From Shobha De to newspaper editors to the average Joe, Dr. Raghuram Rajan commands a following rivaling that of Salman Khan.

Not only analysts, commentators and financial daily editors have come out in support of Dr. Rajan, but the even common public also seems to be completely unanimous in their support of Dr. Rajan and all the good work he has been doing for the Indian economy. Going by the number of editorials/articles and public forum comments posted in support of Dr. Rajan, one can easily conclude that India is in safe hands, or at least perceived by the general public to be in safe hands.

There is no denying the fact that Dr. Raghuram Rajan is one of the finest brains when it comes to Economics. Applauded by some as one of the very few economists to warn about 2008 crisis much ahead of the time, he is widely respected and credited with a sound understanding of complex macroeconomics issues.

The last time a central banker got so much respect and public support was Alan Greenspan in the 2002 era. The other Economist, who got so much respect from Indian public/experts/intellectuals, was Dr. Manmohan Singh as India’s PM in 2004-09 era. Needless to say, public opinion is hardly the right barometer for gauging long-term impact if one goes by the disdain both these gentlemen now attract from academia and the general public alike – as public opinion, fickle at best, is always swayed by perception rather than hard facts.

The arguments made in support of Dr. Rajan are multifold and cover almost every possible ground to demonstrate how Rajan is the best man for the job and how wrong is Subramanian Swamy. The main arguments given by supporters of Dr. Rajan are as follows:

1. Dr. Rajan has been able to keep inflation under control by keeping interest rates high initially and didn’t succumb to political pressure (greatest virtue in the country of Singham). This hard stance towards inflation kept cheap money out and didn’t allow the buildup of another sub-prime scenario in India.

2. He has cracked open the NPA issue of banks and brought out the muck in open. This cleansing of bank balance-sheets will usher in a new era of transparency and will fix the nexus of politician-banker-bureaucrat forever, as the public sector banks are the primary source of crony capitalism and high real estate prices in India.

3. He has published far more papers than Dr. Swamy and is cited / peer-reviewed many times more compared to Dr. Swamy.

4. He is very well respected by International media and considered to be one of the best brains in Economics

5. He is a far better economist than Dr. Subramanian Swamy who is more of a lone ranger/fringe politician.

All the above arguments seem quite valid on the face of it, but then keep in mind that the criticism of Raghuram Rajan is not made by some usual analyst but none other than Dr. Subramanian Swamy – one of the sharpest brains around with an enviable track record of proving his points. So rather than jumping in defense of Raghuram Rajan, it is much better to have a deeper look at the critique, since Dr. Swamy has a reputation of not making false claims without support from necessary data. So rather than debating on issues like nos of papers published, who is the better economist, etc., let us focus on the major issue of interest rates and inflation, which seems to be the bone of contention among fan-boys and Dr. Swamy.

There is no debate that inflation has remained within limits since Dr. Rajan took over RBI in 2013; however, the low inflation has been more of a function of the massive drop in oil prices and commodity prices. Since 2013, oil prices have dropped from the heights of US$ 90 a barrel to US$ 40 a barrel (55% drop). Further, by choosing not to pass this price drop benefit to consumers, Indian govt has been able to manage its high fiscal deficit, which in turn calmed down its currency. Further, Modi Govt has been quite proactive in controlling food inflation by taking quick actions, be it the import of food items or action against hoarders. Hence, to say that inflation in India is down due to strong monetary policy and high-interest rates is nothing but a big myth. In fact, a little bit of movement in oil prices in last quarter has already perked up the inflation.

Hence, it is obvious that the high-interest rate regime has nothing to do with inflation and in fact everything to do with low growth faced by India. Interestingly, everyone has jumped on Subramanian Swamy, harping on the fact of rate cuts not passed by banks to consumers and talking of headline interest rate, while totally forgetting that Swamy is not talking of main interest rate but interest rate available to SME sector.  Interestingly, while interest rates for large corporate hover around 9%, interest rates for SME sector hover in the range of 16% to 22% and no attempt has been made to bring down this rate.

Worldwide, and especially in the Western world, monetary policies are effective tools to manage inflation; however, the economists trained in Western view need to understand that India is not West and does not have the luxury of enormous resources or well-oiled supply chain. Inflation in India is not a function of more demand but supply-side constraints, which become worse with higher interest rates and crony capitalism. So far, not only has RBI failed in bringing down overall lending rates in the general economy, but it has also not worked on main inflation which is plaguing middle class and poor in India.

Unfortunately, all discussions related to inflation in India revolve around food prices, while in actual the bigger share is consumed by the housing sector. On an average, almost 34% of a household income goes towards meeting the housing cost (Rent/EMI), and thanks to liberal policies/crony capitalism indulged by banks (primarily PSU Banks), the prices of housing have remained strong in India and in fact are much higher than even the prices in Dr Rajan’s adopted country. In 2008, when the whole world was reeling under severe liquidity crunch and asset prices collapsed like anything, Indian real estate and Indian economy remained insular and that was not due to sheer brain of Dr. Manmohan Singh but sheer luck in the form of 6th Pay Commission and crony capitalism of PSU banks (banks pumped capital in real estate firms and thus allowed them to keep prices high) that saved the day for Indian economy and builders.

However, this benevolence of Indian banks created other victims – that is overall economic growth in general and middle class in particular. The continued high real estate cost (EMI/Rent) left hardly any surplus cash in the hands of an average consumer and in turn led to continued slowdown in the Indian industry (a fact clearly visible if one goes by almost flat growth of white goods, commercial vehicles, etc.), which was already reeling under high interest costs.

Now one may argue as to what is the relation between housing prices with inflation and interest rates. By keeping interest rates for housing at 11% while the lending rate for SME at 14%, RBI has crowded out money from all sectors and diverted it to housing. Given the power of leverage and faulty income tax laws, investors are earning 30% to 36% returns from real estate and thus creating capital scarcity and higher interest rates. Today, an SME or a hospital or an educational institute pay interest rates in the order of 14%+ while housing loans are disbursed at 11% or lower, and on top of it get significant income tax rebate.

Dr. Rajan, in his 2005 address, had observed that ongoing financial developments had made the world a riskier place (no, he didn’t predict the 2008 crisis as believed popularly) and raised concerns regarding banks’ inability to handle risks beyond a limit due to flawed reward structure. Interestingly, despite deep insight into the workings of the banking system, the RBI Governor in India never restrained banks from providing additional liquidity to real estate or stopped fancy derivative schemes like interest subvention, etc. This continued liquidity given to the housing sector in the form of lower interest rates and subvention schemes has created a massive build-up of risk in the Indian banking system in the form of housing. Strangely, Dr. Rajan didn’t take any action in terms of normalizing exposure to the housing sector.

Hence, Dr. Subramanian Swamy is correct when he says that Dr. Raghuram Rajan has wrecked the economy by wrong policies since continuous 22% interest rate has wrecked SME sector due to high costs and low demand as an average household has hardly any cash surplus left after paying for real estate costs (Rent/EMI).

So rather than saving and steering Indian economy, the policies of present Governor have pushed India in a unique crisis with almost no industrial growth coupled with high-interest rates where there is massive unemployment or no job growth except some small slivers of hope on account of massive funding to startups.

Now with oil slowly limping back to US$ 50 per barrel and above, and 7thPay Commission on the horizon, Indian economy is going to face double whammy for which neither Indian Finance Ministry nor RBI is well prepared.

So why is there such wide support for Dr. Raghuram Rajan and so much disdain for Dr. Swamy? Interestingly, the reasons don’t lie in economics data or hard facts but in human behavior.

We all love Dr. Rajan because he is so much like us and represents our aspirations – be it his education (IIT, IIMA, MIT), his career path (Chicago Professor, IMF, RBI Governor), which we all aspire for us or for our kids to have. Not in the distant past, we all went gaga over a certain another economist who ruled this country for 10 years and despite all hard data/evidence about lack of moral compass and corruption, we kept him revered and on the altar of perfection. So this is basically about us and not at all about Dr. Rajan or Dr. Manmohan Singh.

Now on Dr Swamy – the reason for the disdain and smirks thrown at him by the great middle class is obvious as Dr. Swamy is that super-intelligent lone warrior in the class whom we all secretly admire but have none of the intellect, guts or courage, and hence mock him, because however hard we try, we can’t be him.

But then when was economics about data and not about human behavior!!!

E-Commerce Bubble vs Modern Retail ~ The perspective fallacy

1/6 Future Retail raised close to 6000 Cr ($1.5 bn) to build a business with a top line of $2.5 bn with marginal profit/loss #StartupBubble

2/6 @Flipkart has raised $3.5 bn to build a business with a top line of $ 3bn in its 6th-year #StartupBubble

3/6 In the time of crisis, between Flipkart and Future Retail, who will be able to cut their costs drastically? #StartupBubble

4/6 Which brand is touching more consumers and reaching remote parts of India? #StartupBubble

5/6 So despite all gyan by Bizz Gurus and all maths, e-commerce is for real and nowhere near bubble #StartupBubble

6/6 In any bizz, there r winners & losers, Some bizz will die & some flourish, that’s not a bubble but usual Darwinian world #StartupBubble

In the time of Euphoria

We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter fall upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking, “What time is it? What time is it?” but none of the clocks have hands.

                                                                               ~ Adam Smith, SuperMoney