Thoughts on Current Economic Headlines

If the Sensex or Nifty indices were the only criteria to judge whether an economy is on a roll, then India is riding a juggernaut. Ever since demonetisation got over, the indices have risen 10%. Let’s do a reality check of what happened over the last twelve months:

  • Real Estate companies still find it difficult to sell new projects, yet in 12 months their stock prices are up 250%. Have their unsold pipelines reduced or default risk got mitigated?
  • Public Sector banks have doubled in value, yet the quarterly results continue to be dismal, and looking at the Economic Times list of potential defaulters last week it may only worsen.
  • Information Technology services sector remains in a state of flux with a large part of conventional Infrastructure Services (nearly 25-30% of revenues) undergoing cannibalisation by the Cloud.
  • The consumption story remains very strong with Auto, FMCG and Healthcare Services (as distinct from Pharma) remaining a bright spot.
  • Infrastructure sector in the form of Roads and Railways is booming driven by government spending.

Domestic flows into the equity mutual fund sector have been very strong, and in the last 12 months the FII as the “erstwhile decider” of India’s stock market fate has been made pretty much irrelevant. So where is this money coming from? Is there a change in funds deployment by domestic savers, and is this a sustainable pattern? Very few data points are available to support it, yet the outcome of the action is dramatic in creating a feel good factor.

The GST has been hailed as the best thing that has happened to the Indian economy. Conceptually this argument is compelling, yet the manner in which it is unravelling is leaving one wondering on the hurry to implement it. Will we undergo the same pains as during the demonetisation period? The next twelve months will tell.

The Supreme Court has held that States are not appendages of the Centre and can levy their own taxes. The current legislation involves the Centre passing a GST in parliament and the States passing their own 29 GST Acts. The Governing Council is an advisory body. We have gone in for 5 slabs plus subsets in each, leaving a play for Governments as to where they will categorise which products every year, or more frequently. Nothing stops a State from levying its own taxes in addition to the above by law. We are hence dependent on the thought that good sense will prevail and uniformity will ensue.

While the implementation proceeds on a very tight deadline given that on Sept 16, 2017 the law will lapse if not notified as implemented by then, we really hope that adequate thought and preparation has gone into data security and fail-safe uptime infrastructure. This is a mammoth task as the entire nation’s supply chains will be online. A statement by the government that these issues are being looked after by organisations who are not just branded certifiers, but have requisite depth to handle it would go a long way in building confidence.

Trade especially the distribution sector has responded to the transition rules very negatively. They are running down market pipelines normally 6-8 weeks down to under a week by 30th June, and Companies may have a very challenging time building pipelines again once Trade gets used to a lower number and resists reverting to earlier levels of investment in working capital. We expect an 8-12 % drop in invoicing for the quarter for such sectors.

Is GST good for the economy – it’s a no brainer that it is. However why does the USA not have a GST? The largest capitalist country chose not to have it recognising that the resourcing needs and development needs of each state is different. Petrol taxes in California are double those in some other states. Yet the time for such musings is over as we are in action mode.

Do we have to undergo implementation pains? Perhaps some could have been avoided, but now it’s a fait accompli. Will transit times improve dramatically as theoretically octroi/entry tax delays should go? Will the traffic police and enforcement departments give up their lucrative postings without a fight? Will state excise departments reconcile to eventually becoming redundant, and will government choose to redeploy them will test the political will of even this government.

Will we ever graduate to one or two rates instead of 5 + cesses+ sub categories? We really hope it happens in our lifetime!

Is there reason to feel optimistic? YES, it’s a move forward and hopefully irreversible, leading to slow and steady improvements.

Managing Partner, S&S ASSOCIATES

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