GST article in Business Today - July 2017

GST impact: Business class can't avoid paying taxes; prices of most consumer items to come down

R.Kannan   New Delhi     Last Updated: July 7, 2017  | 08:24 IST

The Goods and Services Tax (GST) is a path-breaking change in the world's tax system. This type of large change was not effected in any part of the world earlier. The system will take two-three years to stabilise. In the beginning, there will be a lot of issues and several stakeholders, including state governments and industry associations, are not certain about the effects of GST on their finances and business models. Once it is introduced, there will be several changes in rates and classifications of commodities and services. The government has already set up an organisation to address the teething problems regarding GST.

Impact on the economy

GST is likely to bring many of the entrepreneurs, who are not paying taxes today, under the tax net and increase the government's revenue. Further, the transactions happening in the parallel economy will be captured in official statistics, resulting in higher GDP. It will increase tax collections and reduce the budget deficit, and the government will be able to spend more on economic development.

In the financial year 2016/17, services constituted 53.8 per cent of the Gross Value Added (GVA). Now, an increase in service taxes by 3 per cent will see an increase by Rs 40,000 crore. With an expected 10 per cent growth in services within the economy, service tax collections alone can go up to Rs 75,000-1,00,000 crore, a very large increase over the previous year. The cost of services provided by banks and non-banking financial companies (NBFCs), telecom companies and housing societies will also go up. There will be an increase in cost to the customers.

Impact on the consumers

In more than 50 per cent consumer goods, the cost is likely to come down. In case of services availed by the consumers like telecom, banking, financial Services, online shopping, insurance, eating out, airline travel and housing society, charges will go up. Consumers will have to brace themselves to pay higher bills for services availed. Since there is no pass through for fuel, they are likely to remain the same. Television, movie tickets, processed food and cement are likely to become cheaper. Car buyers can rejoice as the mid-segment cars will be neutral under GST. Small cars are likely to become cheaper. However, luxury or SUV cars are set to become expensive. Wherever the manufacturers see reduction in costs, they have to pass on to the consumer under the anti profiteering rule. Overall, the customer should see a net gain.

What it means for large corporate houses

As an anti-profiteering provision has been made, large companies have to pass on the saving in any of the costs due to the introduction of GST. In case the costs go up due to supply chains not being ready with GST registrations and filings, the costs will either have to be absorbed or have to be passed on to customers. However, no corporate can increase profits on account of GST. In the next three to six months, due to the uncertainty in demand and change in distribution models, inventory is likely to go up, and the working capital requirement is set to rise, which is expected to increase the cost of funds.

Several companies have availed investment benefits, which were for a 10-20 year period, and it is not clear how the transfer of benefits under the new system will pan out.

Will SMEs suffer?

Small and medium businesses have also been brought under GST. Here, the tax will be uniform for all and it will increase cost at the point of supply. As all transactions will be captured in the GST regime, it will have an effect on additional tax collections under the income tax. According to a provision, if the turnover is less than Rs 20 lakh per annum, there is no need for registration and payment of GST. However, many small companies are suppliers to large companies, and they have to register under GST if they want to continue with it.

Today, the distribution of goods is organised in sync with the rates asked by the states and the warehouses. As the rates will be synchronised now, there will be no need to keep so many clearing and forwarding (C&F) agents across the states, and warehousing and distribution could be optimised. This move will lead to consolidation of fragmented industries, and many small and medium industries will have to be consolidated.

In the short run, there will be a lot of issues and the small and medium enterprises will require guidance from the government and large buyers. In the long run, GST would be beneficial for all stakeholders, and it will be good for India's economic growth.

R. Kannan is Head of Corporate Performance Monitoring and Research, Hinduja Group

NPA article in Moneycontrol in May 2017

May 18, 2017 12:13 PM IST | Source: Moneycontrol.com

NPA ordinance – An innovative approach to faster resolution

Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

   

R Kannan 

Global Economy is yet to regain the normal after the 2008 economic crisis. Banking system across the world was affected by the global melt down and the Non-Performing Assets (NPA) in many countries in the world witnessed a sharp rise from 2008. The economies across the world are still pursuing the path of recovery.

In the last few years, Indian Economy’s integration into the world economy intensified and 2008 crisis also had an impact on Indian Economy and its performance. This has affected the banks in both Public and Private Sectors. Since lending by Public Sector was more to the sensitive sectors, Public Sector’s NPA level was much higher than the norms.

To strengthen the banking system and to increase the transparency levels, RBI brought new rules on provisioning and the banks have to provide higher provisioning compared to the earlier norms. Adopting this new rule resulted in reclassification and higher provisioning by banks for Non-performing assets.

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Considering the India’s high economic growth, the sectors affected will see an upturn in the coming years and will return to black. In India, many mechanisms are available for resolution of NPA’s and Government and RBI are bringing innovative approaches to resolve NPA’s from time to time.

One of the issues for faster resolution of NPA’s was the fear of future investigation on resolutions arrived with the borrowers. The other was the way the Joint Lender Forum meetings were held and the decision taken in these forums. This was a slow process and this resulted in funds being locked up and not earning any income for the Banks.

The Government’s decision to give powers to RBI to arrive at resolution in individual cases is an innovative solution. RBI also relaxed the conditions for decision making at the JLF meetings. The Advantages of RBI taking the lead are -

a)The time taken for resolution will come down

b) RBI has the information about all the borrowers in all the banks and it is easy to consolidate and arrive at a single view of a borrower’s total borrowings with credit history.

c) When JLF meetings takes place, there is an independent body looking at the issue brings a fresh perspective.

d) Being the Regulator, It will be easy for RBI to coordinate with other resolution bodies in India; use their expertise, ascertain their views and bring in a 360 degree approach to resolve the problem.

e) The decision will be a joint one, where even RBI will be involved. In case of large borrowers, RBI can take the opinion of the Government also. This will bring comfort to decision makers in banks and they can decisions on resolution without the fear of future investigations.

Doubts are being raised about the effectiveness of this mechanism and how the judiciary will look at this process. In any such situations, where NPAs are very high, faster resolution increases the chance of higher recovery. Any delay in resolution reduces the value of assets, increases the cost and keep the capital locked for a long time.

Since the purpose of the mechanism is to expedite the resolution and release funds into the system, RBI’s role will be a catalytic one and collective decision of all concerned should be looked at with very positive approach by all concerned.

In Indian banking system, most of the lending is asset backed and in many cases, the borrowers are having large land banks and assets and they can cover the principal. In many cases, it would be possible to even recover 90 percent outstanding, when companies are owning lot of assets. In 2000, China had a NPA which was very large and they were able to bring the NPA’s from 40 percent of lending to respectable level today.

Doubts are being raised about, who will be the buyers of the assets on Sale. The leading Cash rich companies in each sector, Sovereign Wealth Funds, Pension Funds, Foreign companies, Foreign Investors, NRI’s are all waiting for opportunity to invest in India. Considering that India will grow at more than 7 percent every year, in the next few years and the likely increase in GDP growth on account of demonetisation and GST, investors are very bullish in India. The high GDP growth itself will aid in reducing the NPA.

Most of the Indian banks now focus on Retail customers, where the scope for large NPA’s is limited. Further the development of Indian Bond market and introduction of INVITs and REIT’s is going to help in reducing the future NPA. Most of the sensitive sectors, will use other funding channels / new financial instruments for executing their projects in future. Through further capitalisation of banks and higher growth in Banking, the NPAs will be back to normal level in two to three years.

Author is Head Corporate Performance Management at Hinduja Group

Hidden Strengths of Public Sector Units ( PSUs) in India – Nov 2017

PSUs in India have played a major role in building the Indian Economy and the Industrial Development in India. After the Industrial Policy of 1956, many new PSUs were created in India serving the strategic needs and forming the base for Industrial Development. In each of the PSU in the sector , the PSUs emerged as  leaders in the  sector.

After opening of the Economy in 1991 and emergence of competition, many of the leading PSU’s lost their charm and started making losses. They had lost their leadership position and became marginal in the sectors they were the leaders.

Even today, some of the units are able to maintain the market leadership and operate very successfully keeping their competitiveness alive. PSUs including the loss making ones have lot of hidden advantages and their intrinsic value is much higher than the accumulated losses and there is a good scope for turning around them.

1. Land Bank. Most of the PSUs have land banks in leading cities in India and their value far exceeds their book value. Some times, the value could be even more than 10 to 20 times of their book value. Capitalising the land bank by sale, lease and joint development will provide the required competitiveness going forward. The concepts of REIT’s and Invit’s could be explored. In case of sick units, the land bank could be capitalised, the loans repaid and there will be scope for payment of dividend and meeting employee liabilities. Some of the PSUs sitting on huge land include Railways, BSNL,MTNL and the leading Public Sector banks.
2. Assets at low historical costs. In many cases, the equipments are in operations ,even after the economic life is over. The assets are reported at historical costs. Their replacement value and market value are much higher than the value in the books. Even after incurring high maintenance expenses, still they are able to produce products which are much cheaper than others.
3. Social Infrastructure / Town Development / Social Development. The PSUs in many cases are mega enterprises. While they were being formed about one third of their investments were towards , development of town around factories, schools, colleges , hospitals. Apart from serving the commercial objectives , they also served the social and economic development objectives. They have good experience in managing townships , social infrastructure and played a key role in development of towns and communities.
4. High quality Talent. PSUs pay one of the highest salaries, in the sectors they operate today. The selection process in PSUs is very good and through competitive examination, they were able to attract very good talent. Once, they are in the system, the continuing education is given lot of importance and the personnel are deputed to attend the world renowned courses in the sector.  Whenever Private sector have requirements for high quality personnel, PSUs become the hunting ground.
5. Wide distribution network. The consumer facing PSUs have the largest distribution network in the sectors they operate. Competitiveness of an enterprise is determined by the reach a corporate has. The network can be effectively utilised for cross sale of products of other PSUs and the complementary products from other corporates. This can help to earn fee based income using the distribution network.
6. Transparent accounts. PSU accounts are subjected to audit at various levels and various stake holders are involved in close scrutiny of the operations. The accounts reflect the real financial status of companies. There is no incentive , even to hide losses.
7. Technology. PSUs are the first movers in technology adoption and in India, most of the spending on Hardware, Software and R&D happens in PSUs. As a result , they have some of the good technologies. Companies like HAL, NTPC, BHEL ,etc are known for good technologies.
8. Systems and Procedures . They have very good well defined systems and procedures. Starting from preparing a Perspective Plan, they prepare Corporate Plans and Annual Plans and budgets for many years now.
9. Engagement of leading Management Consultants. PSUs have taken the help of leading management consultants in the World, to prepare their growth strategies and they get the best inputs for preparing robust growth plans.
10. Capital expenditure. Even during the Crisis, the Capital expenditure was happening only in PSUs. Most of the mega  projects valued at thousands of crores are executed by PSUs. This also helped in maintaining the GDP growth rate.
11. Large dividends. Government being the largest shareholder or sole shareholder of PSUs, the dividend declared by PSUs has emerged as one of the major sources of revenue for the Government. The oil PSUs also pay huge taxes and help generate income for the government.
12. Government backing. They have a strong share holder, the Government, which can continue to support the new initiatives towards higher business growth.

In the light of the above, the PSUs which still have competitiveness , should draw up aggressive growth plans to preserve their competitiveness going forward in future. In others, scope for capitalising the above strengths to be explored. The PSUs having large land banks have to draw up a strategy based on capitalising the land bank without losing much time.

Considering the increased uncertainties in the Economic Environment, PSUs have a  role to play in stimulating the investments in the Economy and need to increase their competitiveness to become agile. This will happen through culture change and improving the decision making process. The response to the fast changes in the environment is the need of the hour. The best practices in Private sector in bringing good decision making process across PSUs and sharing best practices from best PSUs will go a long way in making the PSUs relevant in future.

India Union Budget F 18

India - Union Budget F18

The economic survey and Union budget proposals have brought a feel good factor to the economy after the deep impact of the demoentisation on the Economic performance of India.  There was an effort to address most affected segments of the society including Farmers, SME’s and various measures were announced to ensure the development of various sectors of the society.

The budget proposal has 10 distinct themes: Farmers; rural population; energizing youth; poor and underprivileged; infrastructure; financial sector; digital economy; public service; prudent fiscal management; and tax administration. Under each of this, detailed action plans have to be drawn up and implemented faster with close monitoring of implementation of these schemes.

A Consolidated outcome budget for all ministries has been created. Fiscal deficit for F18 is projected to be at 3.2% of GDP and Revenue deficit for F18 is projected at 1.9%. The targets set are indicating the tight fiscal management.

There is a need to get back to 8% GDP growth and regain the growth momentum. Despite, the projection for GDP in the budget is lower, there is always a scope to look at measures which can take our economic growth back to higher levels.

One of the strategies stated in the budget is to use the data collected from Demonetisation process to bring more assesses into tax net and increase the tax collected from the existing assesses.  Apart from using measures like VDS  other schemes and penalties, even by brining to the notice of assesses that from the data government has the knowledge of the income, communicating the same to assesses that they have to pay higher, the compliance of tax payment could be increased by several notches.

The demonetization itself has brought the effects, which would have been realized if the GST was implemented. Again, introducing GST in the proposed form, is likely to create uncertainty in the environment and making the formulation of plans by Corporates.

The time frame for implementation of GST is very short and there is a need to build capacity not only with corporates and even with suppliers to the large corporates. This is a mammoth task and the government has to increase its reliance on professional agencies for capacity building.

There is a Surplus liquidity in banking system now after demonetization and the Public sector banks require further huge capital. The allocation of Rs.10,000 for recapitalization is very less and the government has to consider allocation of at least Rs.25,000 cr, which would help to raise additional Rs.2,25,000 cr through other sources of funding.

There is a proposal in the budget to spend more in rural areas, especially for improving the productivity of the farms and creating employment opportunities in other areas. This is the need of the hour and under every crop, we should set an objective to reach the best productivity of the crop in the world. This would help to increase the growth in agriculture to at least 6% p.a.  Farmer credit fixed at record level of Rs10 trillion, will ensure adequate credit flow to underserved areas in India.

The Mission Antyodaya to bring 1 crore households of poverty is a good move and it will increase the consumption levels in the Rural economy.

It is heartening to note that , the allocation to the MGNREGA is at the record level of  Rs48,000 crore and the participation of women now at 55% compared to less than 50% in the previous year. This will also keep many families out of poverty line.

In India, education is one of the sectors which had contributed to the development of IT and high tech sectors in India. There is an emphasis on Education and plan to introduce  System of measuring annual learning outcomes, emphasis on science augurs well for skill development. Innovation fund for secondary education is again a good concept.

Realty. The decision to  give infrastructure status for Affordable housing and redefining the scope  to take carpet area of 30 Sq.m in four metros and 60 sq.m in other towns is a good proposal , which will give a fillip to housing development.

Infrastructure. Now the government has decided to look at Transport sector in an integrated manner and brought a concept of Railway tying up all other modes of transport would bring down the logistics costs. Total allocation to transport sector at Rs2 trillion.

Total capex and development expenditure of railways is planned at Rs1.31 trillion and lot of emphasis on  Passenger safety. The government will set up a Safety fund corpus . Railway lines of 3,500km will be commissioned compared to just 800 Km in the previous year. There is also a plan to list the Railway related PSU’s , which will provide additional funds from issue of shares to the public.

Roads . There is an  Allocation for national highways of Rs64,000 crore and the road development will increase the connectivity . There is also a plan to improve the rural connectivity in a big way.

Civil Aviation. Airports Authority of India Act to be amended to enable monetization of land resources. 

Foreign Investment Promotion Board (FIPB) to be abolished. This is a good move and it confirms the government’s intent to open more sectors for FDI. This will attract more investors from abroad.

PSU’s. There is a plan to  List PSUs which are not listed today and   to create integrated public sector oil major. PSUs have lot of assets and market value will be running into many trillion of Rupees. Capitalisation of land available with PSUs have to be taken up on priority basis.

SME’s. Under Pradhan Mantri Mudra Yojana: Lending target at Rs2.44 trillion. Already , lot of funds were disbursed under this scheme. Increasing the target, would help to support the growth of SMEs.

Digital Economy. The intent of the government is very good. But trends across the world indicate that even developed economies have high reliance on cash transactions to support the economic growth. In India , the major entrepreneurial class is from the Trading sector and their dependence of cash as a working capital is very high. Restricting the cash payment to Rs.3 lakhs will constrain the trading activities in Tier II, III, IV cities and rural areas. Further , we are still not fully ready with Cyber security infrastructure to execute transactions on a country wide basis. In the light of the above, in addition to promoting digital , even the cash economy requires support to keep our economic growth at high levels.

Political funding. Maximum amount of cash donation that can be received is Rs2,000, political parties can receive donations by cheques or digitally; amendment proposed to RBI Act to issue electoral bonds, every party has to file returns within specified time. This is a radical reform as far as electoral reforms and political reforms are concerned.

Personal income tax: Rate reduced to 5% for income bracket of Rs2.5-5 lakh, All other categories to get uniform benefit of Rs12,500 per person and there is a proposal to  levy surcharge on income bracket Rs50 lakh-Rs1 crore.

FPI category 1 and 2 investors exempted from indirect transfer provisions is a good proposal to keep the interest of foreign investors intact. As expected , the capital gain treatment changes which would have affected the confidence of foreign investors was avoided.

Concessional withholding rate will be extended to 30 June 2020 for ECB’s and  rupee-denominated Masala bonds. This will facilitate issue of ECB’s and Masala Bonds.

·         The Revised Estimate (RE) for Total receipts is Rs.19.33 trn, which was 0.92% lower than the Budgeted Estimate(BE) and it was higher than the previous year by 8.96%. The projection for F 18 is Rs.21.21 trn, a rise of 9.72% over the RE for F 17. The growth in revenues were lower than the Nominal growth in GDP. The projection for Receipts is also lower than the projected growth in Nominal GDP.

·         The RE for Gross tax revenue for F 17 was at Rs.17.03trn, higher than the budget estimate by 4.41% and 17.04% higher than the previous year. This was mainly on account of the VDS scheme and the additional receipts arising out of Demonetisation impact. The projection for F 18 is Rs.19.11 trn, a growth rate of 12.21% over RE of F17.

·         After the share with the states, the revised net tax revenues in F 17 was at Rs.10.88 trn ,  3.22% higher than the budget. It was higher than the previous year by 15.3%. The projection for F 18 is 12.27 trn, 12.27% higher .

·          Due to poor performance of corporates, the corporate taxes were same as the budgeted level at Rs.4.94trn. The assumption is that , it will rise by 8.83% YoY in F 17. Budget for F18 is at Rs.5.38 trn, a rise of about 9%. Partly, the lower growth projected is due to reducing the tax rate for SME’s from 30% to 25%.

·         Taxes on income was at Rs.3.53trn, same as the budgeted levels in F17. They had assumed an increase over the previous year by 23% in F 17. This has assumed a sharp rise of 25% in F18 at Rs.4.41 trn. They have factored in the addition of new assesses in the light of demonetisation impact. Through data mining and better administration, they are planning to increase the revenue from this source by 25%.

·         There was a talk about brining back the wealth tax. Since this will not be a large sum and collection cost of the taxes would be higher than receipts, wealth tax was not brought back .

·         In Customs, the revenue was lower than the budget by 5.65% at Rs.2.17trn and higher than the previous year 3.33%.  This was mainly on account of  lower trade growth in the world and the softening of import prices and export prices. The growth projected for F 18 is 12.9%, at Rs.2.45 trn. Since trend witnessed today is one of protectionism by many countries, there is a risk that , the growth projected of 12.9% may not come true. The rise in oil prices, will contribute to higher customs duties.

·         On Excise, they were planning to collect Rs.3.87 trn. against the BE of Rs.3.18 trn and  34.3% higher than the previous year. The high rise in excise duty was mainly on account of increased excise rates on petroleum products. When we had witnessed low prices in imported Petroleum products, all the savings was not passed on to the customers. The government retained part of the savings in the form of additional excise duty. In F 18, they expect Rs.4.07 trn, a rise of 5.16% over RE of F 17. Since , the oil prices started rising and likely to be firm in the coming year, the scope for mobilising additional excise duty from Oil is limited. There is no proposal to effect many changes to excise duties since GST will be implemented soon.

·         Service tax collection was higher than the budget by 6.9% at Rs.2.47trn. It was higher than the previous year by 17%. The projection for F 18 is Rs.2.75 trn, 11% higher than the previous year.

·         Revised Interest receipts by the government was lower than the previous year at Rs.28.5% at Rs.18149.03 cr in F 17 and it was  39% lower compared to the budget estimate of F17.Projection for F18 is at Rs.19020.73 cr. The growth expected on this count is only 4.7% over the previous year.

·         In F 17 , they had assumed receipt of dividend of Rs. 1.53trn and it was higher by 23.4% over BE.  This was higher than the F 16 by 36.6%. Dividends have contributed a significant share to the overall kitty.  If the amount of old currencies received by RBI were lower by Rs.2 trn as was expected, through special dividend, this could have been much higher in F 17. In F 18 the assumption is that Rs.1.42 trn, a fall of 7.19% over RE of F 17.

·         Other non tax revenues. This includes Sale of air waves and disinvestments. The revised plan for F 17 was Rs.1.61trn, 3.5% lower than the budget and 43.3% higher than the previous year. The budget for F 18 is Rs.1.25trn, 22% lower than the previous year.

·         They had assumed revised ,miscellaneous capital receipts of Rs.45500 cr, a shortfall of 19.4% over the F 17 budget and 8% higher than the previous year. Estimate for F18 is at Rs.72500 cr.59% rise over the last year. This is a significant increase.

·         Resources from   Market loans In F 17, it was lower than  BE by 18.3% and 14.1% lower than the previous year at Rs. 3.47 trn. In F 18, it is assumed to be same at Rs.3.48 trn.level. Revised Short term borrowings in F 17 was lower than F 16 by 63.2 % at Rs.18629 cr. It was higher than the budget by 11.89 %. The plan for F 18 is a reduction of 89.2% and the plan is to mobilise Rs.2002cr.

·         The government internal debt at the end of F 17 is likely to be Rs.57.31 trn and it is expected to rise to Rs.61.80 trn. External debt will rise from Rs.2.25 trn to Rs.2.40 trn.

·         Total liabilities of the government is expected to be Rs.74.40 trn at the end of F 17 and likely to rise to Rs.79.63 trn.

·         The revised amount raised through securities against  small savings in F 17 was higher than F 16  by 72.2% and budget by 309% at Rs.90376 cr. There is a plan to increase this to Rs.100157 cr , 10.8% higher than F 17. They have kept the borrowing to the lowest possible level and emphasis on loans as a major source of funding is less.

·         Other Capital receipts in F 17 was revised at Rs.9948cr . In F 18 , it is likely to be higher by 438% at Rs.53513 cr.

·         In the expense category, Central expenses were likely to rise to Rs.16.16trn.from BE of Rs.16.01 trn., 11.5% rise over the last year. Budget for F18 is at Rs.17.23 trn, a rise of 6.62%. The increase projected for expenses is very low indicating that, the government will rely on working closely with State Governments and private sector.

·         Expenses through transfer of funds in F 17 was revised to Rs.3.97 trn, 5% higher than the budget. It was higher than the last year by 16.4%.  There is an assumption of increase and this is expected to be at Rs.4.23trn in F  18. They do not expect a big benefit from DBT and direct transfer scheme as the reduction is not substantial.

·         Total Expenditure for F17 is revised at Rs.24.21 trn, 1.89% higher than the BE. It was higher than the previous year by 15.17%.  Estimate for F18 is kept at Rs. 25.32 trn, 4.58% higher than RE. This indicates, there has to be an austerity drive as far as expenses are concerned.

·         In terms of assets at the end of F 17, the value is likely to be Rs.21.38 trn and it is likely to rise to Rs.23.39 trn. From the details given for various categories, it appears that the value of assets of the government of very much undervalued and they are at historical costs. If the strategy of capitalising the assets and increasing the credit rating of the country, there is a need to revalue the assets closer to the market rates.

India Union Budget - Challenges and Options

Union Budget – Challenges and Options – F 18

India is entering a phase of lot of challenges today, arising from developments around the world and in the Indian Economy. The New president assuming office in US has created lot of uncertainties for our IT , Pharma sectors and investments from US to India and India’s Exports to US.

The UK’s likely exit from Euro zone poses challenges for corporates which are operating in Europe.

The increase in commodity prices and oil price is a risk. Every $ increase in oil price, will increase the trade deficit by $ 1.4 bn and the government has to give an additional subsidy of Rs.1500 cr for every $ increase. If the Customs and Excise levies are kept at the present levels, this will increase the consumer inflation.

The demonetisation is a bold and progressive step by government but in the Short and Medium terms, the potential growth of the Indian Economy has come down and this year as per estimates China will regain the position of fastest growing large Economy in the world.

The advantages of demonetisation / digital economy are : Higher Tax collections, small Black Economy , less terror Funding, less fake currency , Higher Value Added for reporting ( GDP ) , Prevention Cross border Crimes , reduction of domestic crimes will come down and protection of environment.

The advantages of Cash transaction are It is the most common way of payment around the globe .1)cash does not involve third-party action for its immediate conversion into other forms value, 2)Cash requires no authorization for the person who carries it 3) Easy to make small payments,4)Feel Secure having cash , 5)Major form of Working capital for small firms 6) Accepted by Any one, any time, any where 7) Most liquid form 8) alleviate the risk of identity theft. 8) The use of cash does not involve any transaction fees 9) can foster good spending habits 10) Cash is 'easy-to-carry' form of payment 11) Cash payment does not require additional knowledge .

The fact is that, cash transactions in large economies are very high in China and Japan more than 90% and in US more than 50%. In countries around the world , the investment in sectors, where returns from investments are sub par, are supported by the cash economy where ROI is not the major consideration.

For a balanced growth of the economy both Digital and Cash transactions are required.

The demonetisation has already affected most of the sectors in the economy and SME’s are the most affected in a big way. The banks received higher deposits and they are in a comfortable position to lend . They had already reduced the interest rates. But the new NPA’s are likely to come from SME’s.

Government has seen a good increase in tax collection and this is likely to continue. Demonetisation has already had an effect, similar to the one which could have been achieved by GST.

The form of GST which is being talked about is one different from the initial concept, and many rates are being discussed and many exemptions are being considered. In the revised form, it may not fulfil the intended objectives and on top of demonetisation, it could reduce the growth rate further.  

In the light of above, Government could consider the following  while preparing the budget.

• The GDP growth objective for the year could be 8%.
• Higher Tax collection could be focussed on those who are still not on the tax net and focussing on the top 500 industrial / trading centres, the objective for higher Direct and Indirect tax could be achieved.
• Since already more have come into taxation net after the new measures by government, the corporate and Individual tax rates could be reduced to 28%.
• Through increased efficiency in tax administration , set a target to increase the tax collection by 20%.
• Due to increased level of Digital transactions, the banking model will undergo a change. Banks will lose one of the fee based incomes. Further, new exposure norms to large corporates will restrict the exposures to large corporates. The banks could focus on Government employees ( whose purchasing power has gone up due to pay commission recommendation implementations ), Retail customers and Micro Finance Institutions ( right now banks mostly lend to MFI’s and MFI’s in turn lend to groups. Instead of that a provision could be made for banks directly to MFI’s through creating a new SBU for MFI’s within Banks).
• The capital expenditure in the Corporate Sector and Infrastructure is yet to take off. Special incentives could be considered for kick starting the Capital investments, investments in Mining and other infrastructure sectors. Already lot of initiatives were taken in the Road sector. On the similar lines, enabling mechanisms could be created.
• To generate , more non tax revenues, as one option, The share holding in PSU’s , PSB’s above 75% could be sold in small lots through secondary market for the PSU’s / PSB’s which are listed and those who are not listed and have basic conditions for listing could be listed and 25% of shared could be sold.
• In each PSU / PSB through demerger, create Real estate subsidiaries. In the case of listed entities, even the other share holders will get the share. Then through sale / sale and lease back, lease , Invit, Reit, capitalise the value of the real estate properties.
• Create provisions for easy issue of Municipal bonds in India.
• Consider sale of Central government properties in prime areas with a target to mobilise at least Rs.20,000 cr through this route.
• Target a reduction of 25% in overall subsidies through Direct Benefit Transfer and micro – targeting of beneficiaries. Within a period of four years, set a target to stop all the subsidies.
• Since Individuals and SME’s are affected in a big way, measures to support these segments including increasing tax slabs , introducing more incentives for investments could be considered.
• Since the investment requirements for Infrastcuture and Industry growth are very high, the incentives available to Foreign Investors and Indian Investors should be continued. Any change in policy in this regard , will further increase the uncertainity.

Railways

·         This year, the railway budget would be merged with the General budget.

·         The government can consider creating a special fund and the tariff structure could be restructured in such way that, on an average for each journey, Rs.10 for investing in the equity capital of  Railway infrastructure corporation could be earmarked. The fund could be called Railway infrastructure development fund.

·         The amount collected would be Rs.8150 cr a year. This can be used to invest in additional capital of IRFC.

·         When it is routed through the fund, the fund has multiplier effect. That is the Corporation can borrow at least 6 times the additional capital. That is 48,900 cr.

·         The total amount mobilized would be Rs. 57000 based on the present numbers.

·         Assuming a growth of 5% every year, the total fund which could be mobilized for the next 10 years could be Rs.7,20,000 cr.

·         For the next five years, Rs.250,000 cr could be mobilized through this route and the remaining will come from other funding sources.

·         After the demonetization, there is an increased interest by pension funds to invest in India. Hence, IRFC can issue development bonds and SWF’s and Pension funds from abroad will invest in these bonds.

India Government Finances - October 2016

Central Govt. Finances: Apr.-Oct 2016 ( FY 17)

Highlights:

• Total receipts during April- October 2016-17 were at Rs. 1150843 cr, 12.6% rise over the same period last year. It was 50.7% of BE 2016-17. Out of which revenue receipts were at Rs.697988 cr, 18.2% rise YoY and Capital receipts were at Rs.452855 cr, 5.1% higher than the last year.
• Gross tax receipt was at Rs.818884 cr, 18.0% growth YoY. Net tax revenue retained by the Central Government was at Rs. 530015 cr, 23.6% higher than the last year and it was 50.3% of the budget estimate for whole year.
• Recovery of loans were at Rs.7938 cr, 16.2% higher than the last year.
• Total Government expenditure from Consolidated Fund of India was at Rs.1150843 cr, out of which, revenue expenditure was at Rs.1025884 crore (59.2% of BE) and capital expenditure was at Rs. 124959 cr (50.6% of BE). The share of Plan expenditure and Non-Plan expenditure in total expenditure was 29.6% (341219 crore), and 70.3 % (809624 crore) respectively.
• Revenue Expenditure increased from the previous financial year by 16.8% and Capital Expenditure decreased by 12.8%.
• Revenue deficit was at Rs.327896, 14% higher than the last year and it was 92.6% of total budget estimate.
• Fiscal deficit was at Rs.423507 cr, 3% higher than the same period last year and it was at 79.3% of BE.
• Primary deficit was at Rs.196700 cr, 0.4% rise YoY.It was 477% of BE.

·         Eight core infrastructure industries grew by 6.6 per cent in October 2016, as compared to 3.8 per cent in October 2015. The growth of these industries during April-October 2016-17 was 4.9 per cent, as compared to 2.8 per cent during the corresponding period of previous year

·         Foreign exchange reserves stood at US$ 361.1 billion as at end-November 2016 as compared to US$ 360.2 billion at end March 2016.

·         The growth rate of IIP in Oct. 2016 was at (-) 1.9 per cent is due to negative growth in mining and capital goods sector. Also lower growth in manufacturing sector affected overall IIP growth. During Apr- Oct.16 the overall IIP contracted by 0.3 per cent s compared to growth of 4.8 per cent during same period last year.

·         Foreign trade: Merchandise exports and imports increased by 2.3 per cent and 10.4 per cent respectively in US$ terms in Nov. 2016 over Nov. 2015. During Nov. 2016, oil imports increased by 5.9 per cent and non-oil imports increased by 11.7 per cent respectively over Nov. 2015. During April-Nov. 2016, merchandise exports increased by 0.1 per cent and and imports declined by 8.4 per cent respectively.

·         Balance of Payments: The current account deficit (CAD) narrowed to US$ 3.7 billion (0.3 per cent of GDP) in H1 of 2016-17, significantly lower than US$ 14.7 billion (1.5 per cent of GDP) in H1 of 2015-16. Net invisibles’ earning was US$ 45.7 billion in H1 of 2016-17 as against US$ 56.7 billion H1 of the previous year.

·         External Debt: India’s external debt remains within manageable limits as indicated by the external debt-GDP ratio of 23.4 per cent at end-June 2016. India’s external debt stood at US$ 479.7 billion at end-June 2016, recording a decline of 1.1 per cent over the level at end-March 2016. Long-term debt was 397.6 billion at end-June 2016, as compared to US$ 401.7 billion at end-March 2016. Short-term external debt was US$ 82.1 billion at end-June 2016, as compared to US$ 83.4 billion at end-March 2016.

·         As per the estimates of Gross Domestic Product (GDP) for the second quarter (July-September) 2016-17, released by the Central Statistics Office (CSO) on November 30, 2016, the growth rate of GDP in Q2 of 2016-17 was 7.3 per cent as compared to the growth of 7.6 per cent in Q2 of 2015-16 and 7.1 per cent in Q1 of 2016-17. The growth rate for the first half (H1) of the current year works out to 7.2 per cent as against a growth of 7.5 per cent in H1 of 2015-16.