3rd Millennium – Opportunities, Issues and Challenges

3^rd Millennium – Opportunities, Issues and Challenges

R.Kannan , Hinduja Group

International Research Conference conducted by Indian Accounting Association, University of Mumbai and Chadrabhan  Sharma College on 7^th April 2018 .

Hon’ble Member of Parliament, Shri Dr. Kirit Somaiyaji, Prof.Shiware, Prof Chitra Natarajan, Prof. Ashok Joshi,  Prof. Madhu Nair, Prof Pratima Singh, Members of Indian Accounting Association, Faculty  Members and Researchers from all over the world , Ladies and Gentlemen, Good morning to all of you.

I am very happy to be part of the 4^th International Multi-Disciplinary Conference on Transition and the Transformation in 3^rd millennium.  I would like to thank Prof.Shiware and Prof.Chitra for inviting me to deliver the key note address.

I am happy to know that in this conference, research papers relating to:

i)                    Strategic Marketing and Planning

ii)                   Business Ethics

iii)                 CSR

iv)                 Global Management

v)                  HRM

vi)                 Digital Strategies

vii)               Innovation

viii)              Empowering Women

ix)                 Telecommunication, etc

Will be presented. It is very heartening to note that more than 400 research papers were received from various parts of the world and am happy to see , many dignitaries have come from abroad to attend this conference.

Am sure with these wide variety of subjects and perspectives, the participants including me will benefit a lot from the proceedings. The topic today is of utmost relevance in the context of continued disruptions and uncertainty in the Economy.

The advancements in the first 17 years of the 3rd  millennium are breath taking.  We are living in an age where continued disruption, uncertainty, volatility, complexity and ambiguity are part of our daily life. The advancement in recent past is much larger than the advancement witnessed in the earlier few thousand years in the past.

Few hundred years ago China and India were the leading economics in the world. According to some sources, both countries had more than 50% of the world’s GDP.

Later when Britain started expanding its operations globally, it became the leading economy in the world. Technology revolution catapulted USA to the leading position in the world. Afterwards, we witnessed the rise of Europe, Russia, Japan and South Korea.

From 1980 onwards, China started growing fast and India started reporting higher growth after liberalisation. Then we started hearing Acronyms like BRICS, MENA, CIVET, etc. In 1980 , China and India were of the same size  .  The breath taking reforms undertaken by China and the fast growth it was able to sustain for many years have made China , a global power today.

US and Europe and countries like Japan, Singapore and Hong Kong were contributing to the growth a few years ago. Even today, because of its large size, US contribution to the Incremental economic growth in the world is substantial. Since the growth potential in these countries have become less, the countries like China, India, Indonesia, Middle East and Arica have started growing fast.

According to predictions for 2050 by various experts, China will be the leading economy with a GDP of about $ 50 trillion, followed by US at $ 36 to 40 trn and India $ 27 to 30 trn. Indonesia will be the fourth largest economy in the world.

In the next 2/3 years, India will become the country with the maximum population in the world. It has the largest number of youth  in the world. The largest number of entrepreneurs in the world are living in India. We create  the maximum number of entrepreneurs in a year  in the world.

As per the forecast by all the leading financial institutions and Economists through out world, India will continue to grow at a rate of more than 7% p.a. for many more years. The high growth will create many opportunities for people from across the society. The path to the growth is paved with lot of challenges.

Indian society had gone through a fast transformation in the last few years. From total dependence on Agriculture and rural areas, the growth has shifted to services, manufacturing and cities. Despite, the level of urbanisation is only at 32%, what we find today is that lot of developments taking place in villages also. They are being provided with electricity, water, road connectivity, media and digital connectivity. The penetration of mobile phones in rural areas is taking information to every nook and corner of the country. The concept of joint family is giving way to nuclear families. In a family, many go to work, resulting in multiple income and high earning capacity. People have started spending money and India has become one of the high consumption economies in the world today.

The entry of e-commerce players has increased the consumption level.  Unlike in the past, today people spend lot of money on Education, Health , Leisure, Entertainment and Travel.

In an Economic Growth model, the growth of an economy is initially dominated by Agriculture and then manufacturing picks up. Finally, the services takes the dominant position. In the case of India, even without creating a big manufacturing base, the initial fast growth was supported by services. As the services grew, it gained its share from Agriculture in proportion to the lost share of  Agriculture. Whereas the share of industry and manufacturing remained at the same level for many years.

The fast growth in services was mainly supported by Trade. India has got one of the largest and deepest Retail systems in the world. There are six levels of trade before it reaches the final customer. At the retail level itself there are more than 15 million establishments. If we take the other six levels, it adds up to a lot in terms of number of entrepreneurs. This has created lot of business and entrepreneurial opportunities in India. Most of the jobs in India are created in the unorgainsed sector and too in the area of trade. At the global level, India becoming the leading country in the world for IT outsourcing , has created many businesses in the area of services. An entire eco system of businesses has been created around IT and ITES.

Whereas China’s growth strategy was anchored on manufacturing. With the low cost of all factors of production, China was able to become the manufacturing hub for the world. Now China wants to build its service sector and aspires to compete with India , in services.

If India has to grow at more than 7% p.a and the fast growth has to be sustained, manufacturing has to be developed. The share of manufacturing in our economy is only 16% and the Government has formulated a programme“Make in India” to increase the share of manufacturing share to 25% of GDP.  25 thrust sectors have been identified for increasing the share of manufacturing in GDP.

To achieve this objective lot of skills are required. When there is availability of lot of people for work, there  is also a big demand for specific skills to develop industries. Realising this need, Government has created a Skill development programme to fill the gaps in the skills required. Skill development programmes are in place at the National, Regional, Local levels and the target is to train 500mn people in the next few years  in more than  43 areas.

To develop manufacturing, a conducive eco system needs to be developed. To address this issue ,National level Industrial corridors spanning  across many  states and industrial corridors  within the  states were identified and in the process of implementation. These initiatives will help to develop the industrial clusters and infrastructure required for industrial development. This  will go a long way in accelerating the growth of manufacturing and  the economy.

Countries across the world have recognised the importance of fast economic growth. The ruling parties/rulers across the world , irrespective of the form of government ,  drawn up ambitious plans for the growth of their economies. They conduct road shows to attract investments into their countries.

Political climate across the world is becoming business friendly and the culture has changed. Earlier , investors used to visit the government offices to obtain permits. Now, the Government authorities , visit , various countries in the world and inviting the investors to invest.

In India every state Government has a plan to grow fast and each state conducts Road Shows/Investment meets to attract investments in the state. This will go a long way in increasing the competitiveness of states and formulation of  robust economic growth strategies.

Digitisation and Technology. The latest development in technology has created a lot of opportunities for growth but at the same time  has destroyed several industries. The fast penetration of mobile technology has advanced the social/financial inclusion and today even a person living in a rural area can use a smart phone to read and receive a high quality content which is of global standard. The advancements in AI, IOT, VR and block chain are going to improve the productivity several times.

At the same time, faster adoption of these technologies will destroy many jobs. Further , misuse of these technologies is threatening the privacy of individuals. The exploitation and profiteering is also a big threat. Cyber security has become one of the major areas of concern. The adoption of these technologies should be handled with great care and measured approach to adopting these technologies will ensure a balanced Economic Growth .

To ensure a balanced development of any industry and an economy, regulation and regulatory agencies play a major role. As the world becomes more and more complex, new regulations have to be formulated and new regulatory authorities have to be created. The time  taken and procedures to be adopted to adhere to regulations results in significant costs for an enterprise. Regulatory costs have become one of the major costs of doing business today.

The adoption of new technologies / manufacturing techniques has resulted in degradation of the environment. Higher level of manufacturing will result in higher pollution. Now that , we have set a higher target for manufacturing, there is always a dilemma, which one should be given precedence over the other.

The opportunities before us are accompanied by several challenges. Considering India has a large population, all our future economic strategies should be based on use of the available manpower. Considering the large number of work force, even a small improvement in productivity in India will lead to big gain. This is the moment for India. We have very good economic development programmes in India. By formulating workable implementation plans and effective implementation, India can regain the global leadership in the third millennium. To realise this dream, all the stake holders in the society should work together and Make India  a leading force in the world.

Thank you.

FDI in India

FDI – Astute Conduit for Trade Integration and Sustainable development – 2nd March

Keynote Speech Delivered in the International Conference on FDI Held by Department of International Business, Alagappa University.

R.Kannan, Hinduja Group

Shri. Prof. Subbiah, the Honble Vice Chancellor of the Alagappa  University, Shri.Karunakaran, Secretary to Government of Tamil Nadu, Dr. Narayana Murthy, Member of the Syndicate, Prof. Guru Mallesh Prabhu, Registrar of the University, Prof. Manickavasagam, Dean , Faculty of Management, Prof. UthayaSuryan, Prof.Muthuswamy, Ladies and Gentlemen, Good morning to all of you.

Indian Economy plays a major role in the growth of the world Economy today. Investors across the world are interested in investing in India . In the last four years, the FDI received by India crossed $ 200 bn. The interest of international investors in India is increasing and in Conferences organised by various states, Foreign Investors are committing billions and billions Dollars of investments in the states.

In this context, Department of International Business , Alagappa University is conducting an international conference on FDI, Trade Integration and Sustainable Development. In these two days, apart from the Speakers from Other countries, Experts from India are also participating. Several paper presentations were scheduled during this conference.

I am happy to be part of the programme and look forward to learn new concepts and perspectives on FDI . Am sure , all the participants will benefit a lot from the proceedings.

I would like to Congratulate Department of International Business, Algapppa University in Choosing this important Subject for the Conference and  wish the Seminar a great Success.

Global Economy

Global growth outlook is benign and augurs well for India, particularly for its export prospects. Both the IMF and the World Bank note a tangible improvement in the growth prospects of the US, the Euro Area and Japan. As per the World Bank (Global Economic Prospects, January 2018), global growth is estimated to pick up from 2.4% in 2016 to 3% in 2017 and further to 3.1% in 2018. This recovery is broad-based and largely attributable to a rebound in global investment. Growth in advanced economies is projected to moderate during 2019-20 while that in emerging market and developing economies (EMDEs) is expected to increase further to 4.5% in 2018 and average at 4.7% in 2019-2020. In the Euro area, growth is estimated to improve to 2.4% in 2017 with broad-based improvements across member countries supported by policy stimulus and strengthening external demand. In Japan, GDP growth is estimated to recover to 1.7% in 2017 supported by a recovery in consumer spending and investment as well as the implementation of a fiscal stimulus package but growth is projected to slow down to 1.3% in 2018 as fiscal stimulus is withdrawn and export growth moderates.

Global trade growth is expected to decelerate in 2018, to 4.3% from 4.6% in 2017. Reflecting the broad-based acceleration in the global economy, trade growth picked up in both OECD and non-OECD economies in 2017. According to the Netherlands Bureau for Economic Policy Analysis, export growth was especially strong from emerging markets—where exports grew by 4.8% year on year in January to November, compared with 3.8% export growth in advanced economies. Despite the global economy seeing continued strength in 2018, the global trade growth is expected to slow modestly in line with a deceleration in China's economy, given its outsized role in global supply chains. It is expected that  the authorities' move in 2017 to tighten credit conditions to have a lagged impact on investment and consumption growth in 2018, particularly as regulators tighten controls over household loans.

Indian Economy :

India’s growth prospects have become stronger both in the short and the medium term. Last quarter, the Economy grew by more than 7% , again , becoming the fastest growing Major Economy in the world.  The World Bank has projected India’s growth in FY19 at 7.3% and IMF has projected it to be 7.4%. . The opportunity for India re-emerging as a major contributor for global growth and sustaining this position for many years is the prediction by the leading Economists in the World. India will continue to do well and contribute to the Global Economic growth in the coming years.

Global FDI :

Global flows of foreign direct investment (FDI) had fallen by 16% in 2017 to an estimated US$ 1.52 trillion, from a revised US$ 1.81 trillion in 2016. While FDI in developing countries remained at a level similar to the previous year, more investment in sectors that can contribute to the Sustainable Development Goals is still badly needed. Promoting FDI for sustainable development remains a challenge. FDI to developed countries slumped by (minus) 27%, inflows into developing countries remained stable, at an estimated US$ 653 billion, 2% more than the previous year. Flows rose marginally in developing Asia and Latin America and the Caribbean, and remained flat in Africa. Developing Asia regained its position as the largest FDI recipient region in the world, followed by the European Union and North America.

After three years of growth, cross-border mergers and acquisitions declined in 2017. Their growth had already slowed in 2016, and they went on to contract by 23% in 2017, to US$ 666 billion. However, this still represented the third-highest level since 2007.

FDI to Developing Economies remained Stable at $653 bn, 2% more than the previous year. FDI to transition Economies declined by 17% to $ 55bn. Value of announced Green field projects showed a decline of 32% to $ 571 bn. The number of projects declined by 17%. In developing countries , project values announced halved.

The tax reforms announced by FDI are likely to affect the investment decisions announced by US MNEs, with consequences for global investment patterns. I was attending a meeting on SelectUSAsummit day before yesterday in Mumbai, where US officials want more investments into US from India. At present FDI from India in US stands at $ 12 bn. They feel this can be multiplied several times. They say, they regained their competitiveness through lowered energy costs which off sets the lower cost of labour in China. They had prepared an ambitious plan to revive their manufacturing sector.

In 2017, inflows to US reduced due to reduced inflows from a number of offshore financial centres.  In UK, inflows declined by 90% due to the uncertainty created by Brexit.

Higher economic growth projections, trade volumes and commodity prices would point to a potential increase in global FDI in 2018. However, elevated geopolitical risks and policy uncertainty could have an impact on the scale and contours of any FDI recovery in 2018. In addition, tax reforms in the United States are likely to significantly affect investment decisions by US multinationals, with consequences for global investment patterns.

India FDI

From the year Apr 2000 to Sep 2017 , for which the data is available, India attracted FDI of $ 518 bn including Equity flows, Re-invested earnings and other capital. The FDI equity Inflows alone amounted $ 353.34 bn. In the first six months of this fiscal $ 21.62 bn was received as FDI, which was 17% higher than the previous year. This was a very good growth considering the lower growth for other countries.

The countries which have the leading share in investment of FDI in India in the last 17 years  include ; Mauritius 34%, Singapore 17%, Japan 7%, UK 7%, Netherlands 6% and USA 6%.

The sectors which have received the maximum FDI include , Services sector 17%, Telecom 8%, Computer Software 8%, Construction Development 7%, Automobile 7%.

The States which received the maximum FDI were : Maharashtra 31%, New Delhi 20%,Karnataka 8%, TN&Pondy 7% and Gujarat 5%. Now the states including UP, AP and Telengana are attracting lot of FDI.

Factors Favouring High FDI in India

India will continue to attract very high FDI due to the following reasons.

1.      High Economic growth. All the leading agencies in the world predict that Indian Economy will continue to grow at more than 7% in the coming years and this will exceed Chinas growth rate. High Economic growth rate provides opportunities for high sectoral growth rates.

2.      Rapid Urbanistion of Metros, Cities and even Rural Areas. Due to digitization and penetration of mobile and data services is enabling transformation of Metros, Cities and Villages. Apart from Agriculture, several other opportunities have arisen on account of Digital Revolution.

3. Ambitious development  targets set by the Government for various infrastructure Sectors. The Central Government and State Governments had drawn up ambitious projects in the areas of, Industrial Corridors ( Centre and States ) ,  Smart cities , Port Development, Railways Development, Road Development, Affordable housing Development. This has attracted the interest of Several countries around the world.
4. Manufacturing Mission. India wants to increase the share of Manufacturing from 16% in GDP to 25% in GDP. With this in view, detailed strategies to develop 25 sectors under Make in India Mission were formulated and in the process of implementation.
5. Apart from that Several programmes like Start Up India, doubling Farmers Income, Digitising the nation and several well defined and well thought out development programmes were introduced by the       Government to increase the GDP growth.
6. Now Commerce Ministry has drawn up a plan to look at Industrial Development from Each Districts perspective and District wise Industrial Developments plan would be made.
7. Liberalisation of FDI. The government has lineralised many sectors for FDI. In many sectors today, 100% FDI is allowed. This has attracted the interest of investors across the world.
8. DIPP under the Ministry of Commerce has an Agency called invest India, whose main role to attract investments into India. They have a detailed database of opportunities for investment in India, which foreign investor can use. The data base is organized in terms of Opportunities in States, Sectors and Sub Sectors. There are expert desks created for different countries. In international investments, one of the issue is , availability of information. The Agency plays a major role in facilitating investments.
9. Introduction of  good governance system by government through new regulatory agencies. Indias regulatory agencies are highly regarded by others in the world. When the whole world was under stress, due to prudential policies developed by the agencies, India withstood the global melt down. New agencies were created in many sectors today. This protects the investors as well as customers. This enables a fair competition.
10. Emergence of Several Globally competitive Businesses. In the initial years, only Textile was globally competitive. Now we have many sectors, which are globally competitive. The sectors which have become globally competitive include Automobiles,Telecom, Chemicals, pharma, IT, Gems and Jewellery, R&D, etc. Several more industries will become competitive as we go forward.
11. When large investments are made, it should give good returns. In India, several sectors are profitable because of the large population we have and the large volumes it provide. This is one of the reasons for India’s attractiveness in the Global Scenario. Apart from the large Size, Constant movement of people to higher categories of income from one category at  all levels, creates demand for products at various price points.There is also an increasing propensity to spend  by  people.
12. Competition between States.  Every state in India has drawn up a plan to grow by more than 10%. Every year, they have started holding investment meets where they invite investors from all over the world. In these conferences, the investment opportunities are show cased and MOUs are signed with the potential investors. They sign MOUs with both Indian and Global Companies to increase the investments in the states.
13. Increased  Foreign Investor Interest in  India and India sectors. Considering the big potential for growth, Investors around the world are coming to India and exploring the scope for investments. In the last year, I had met more than 60 Foreign Delegations , which had shown interest in Investment in India. But one concern today is due to increased protectionism, every country wants investments in their own country. This is not going to affect the investments into India.
14. Role of Government AID Agencies /Pension Funds / Mutual Funds and Sovereign Wealth Funds. Japanese Government Agency, JICA in collaboration with JBIC has provided lot of funds projects in Infrastructure sector. Canadian Pension funds in India have invested more than$ 10 bn. Abudhabi SWF has decided to invest $ 1 bn in the  Infrastructure Finance Arm of the Government. There is lot of low yielding funds across the world have to be deployed in attractive investment opportunities and India provides a good scope for deployment of these funds.
15. Part of the Global Value Chain. India has become a part of the Global Value chain in many sectors and many MNEs have set up a part of their operations in India or adopting a strategy of outsourcing from India.
16. Ease of Doing business. India is one of the countries where ease of doing business is within top 10 in the world as reported by AT Kearney FDI investment Index. India ranks 7^th in the Index. If result oriented indicators like Economic growth rate, Growth rate of different industries, profitability, Ease of obtaining finance and number of entrepreneurs created every year , India’s rank should be in top 5. This is one of the reasons, why FDI investments are increasing in India faster than other countries in the world.

India has got one of the highest savings rate in the world. At 30% of GDP and on $ 2.5 trn, our savings in a year amounts to more than $ 750 bn a year.   All of our future investment needs could be met from only domestic sources. But investment pattern of savings is biased towards investment in Real estate and Gold. Accumulated savings in India is very high , which makes India a very strong country for investments.

In Conclusion, India has a highly favourable Eco system for   investments and other countries can not ignore India’s attractiveness and MNEs around the world should look at India for their global growth . The MNEs in India, should draw up aggressive plans for growth in the Indian market and invest more in India. Indian companies should have more participation in global value chains and more Indian companies should go global and manufacture products in India to serve global markets. .Thank you.

  

Blue Economy - 21st February 2018

• CIDCO under the Magnetic Maharashtra Celebrations, organised a symposium on Affordable housing and Blue Economy.
• The programme was held in CIDCO Convention Centre, Vashi.
• My observations in the conference were :
• India was the leading Economy in the world few hundred years ago due to our Naval Strength.
• Was happy to be part of the opening of Rajendra Chola's Portrait in Mazdock reviving the plans for making building a more strong navy in India.
• Capitalising the blue Economy should start with setting a vision for the Economy. Now , Maharashtra Government has set a goal of $ 1 trn Economy, the Blue Economy could be 30% to 40% of the total Economy. Once the vision has been set, the detailed action plans could be drawn up.
• We have to develop four port based cities like Singapore and Hong Kong in India. One could be in Maharashtra and in New Mumbai.
• Blue Economy strategy could reduce the cost of Logistics from 14% of GDP to 9% of GDP.
•  There are instances where, Corporates in India were using water for transportation to reduce costs. Gujarat Ambuja was the first company in India to use water to sell cement in other states, which made their products competitive in many states. Similar strategies are being adopted by  other corporates in India and recent examples are transportation of vehicles to Bangladesh through water.
• India has a very good eco system for development of blue Economy . We can build ships at very low costs . The required eco system in terms of Engineering Institutions, Marine Institutions, Raw material , IT Industry, Digital initiatives , Make In India and vibrant finance industry / insurance industry,  can support the initiatives of ship building.
• In all the leading institutions in the world, Indians have shown their competence and we have developed a vibrant IT and Digital industries. Industry 4.0 initiatives will also help in developing a robust ship building industry.
• From the experience of taking training sessions for Ship building institutions , there is a need to reduce the time to build a ship and this would be possible by creating core competences using the available resources in right blend and reduction of cost would help to build many ships.
• This will reduce the cost of transportation. Now we are planning to bring gas and oil from US and Canada. The logistics costs will become attractive. Now the market share of Indian carriers in our trade is only 15% and this can go up. 

India Union Budget Challenges

India Union Budget Challenges – 27th Jan 2018

India had the highest economic growth among the major  economies  in the world and in 2017, China became the fastest growing major economy in the world. Recent World Economic Outlook by IMF predicts that India will regain the position in 2018. The initiatives on Infrastructure development, Affordable housing and improving sentiments on economic growth should help to achieve the desired high growth in the next financial year. Since the budget is prepared in the year before the election year, there are many challenges in achieving the desired balance in budget.  

The government will not be able to plan for a very big increase in revenues and since the revenues will be growing at a slower pace, Governments expenditure has to be restricted.

GDP growth. In FY 17, the Economic growth was at 7.1% and in FY 18 it likely to end with 6.5%. Growth in Agriculture , Industry and Services, all of them witnessed a fall in growth rate. Higher growth in GDP is very important for achieving higher level of tax revenues. Industries are still operating at less than 75% of the capacity and before they start investing in new capital investments, the capacity utilisation has to go up above 85%. Stimulating the rural growth will help to achieve a higher economic growth.

Fiscal Deficit. Government was committed to meet the Fiscal targets. It appears that it would be difficult to achieve the fiscal targets this fiscal year and the next fiscal year. Government has to postpone the target date to bring the deficit below 3%.

US withdrawal of Stimulus. US started increasing the interest rates and the cheap money which has been deployed in Emerging markets would be gradually withdrawn from the markets. Further, USAs new found plan to make US regain its manufacturing competitiveness and reduction of income tax rates , will reduce the capital flows on account of FDI and FII, which was a good source of money to achieve a higher industrial growth.

GST. When the GST was introduced, the assumption was that it would help to increase the revenues from the indirect taxes. There is a mixed performance in collection of GST and at every meeting of the GST council meeting, many items were brought under the lower GST slab. Still the visibility of higher revenues is to be witnessed. Many more iterations on the rates have to be undertaken, before the GST rates stabilise. The rate of growth in indirect taxes has come down and it is likely to be lower in the next fiscal year also compared to earlier years.

Direct Taxes. The rate of growth in direct taxes also has shown a decline. Many large corporates reporting profits have seen their profit dwindle. The government has set a target to move towards lowering taxes. Already for companies having a turn over of less than Rs.10 cr, income taxes were lowered. But the scope to reduce taxes further on a large scale is very limited.

Government Expenditure. To support the Economic growth , the government was spending more money to sustain the high economic growth. This has helped to keep the economy growing at a good growth rate. To continue to spend more , the revenues have to continue to rise. To make up the shortfall in taxes, the government was able to mobilise more resources through disinvestment. It would be possible to raise large resources from disinvestment in the coming fiscal also. The major role played by government in sustaining the economic growth has to continue through government expenditure. There is a need to review the scope for reduction in expenses relating to non development expenses by the government.

Subsidies. Food Subsidies, Fertilizer subsidies and other subsidies continue to be at similar levels. Food subsidy alone is likely to cross  Rs.150,000 cr  and Fertilizer likely to cross Rs.70,000 cr . Since the large scale digital initiatives are in place both at the Centre and states , the scope for targeting the subsidies and reduction has to be explored with great speed. This will help to reduce the government expenditure.

Oil and Commodity Prices. When the oil prices were going down, Government was able to keep the final product prices and earn more revenue from the indirect taxes. Now that the crude prices are at much higher levels, the scope for increasing final products is very limited. The government has to cap the indirect taxes raised through keeping the prices at present levels. There may be a need for the government to reduce the indirect taxes to keep the oil prices at lower levels. Any rise in oil prices is likely to increase the inflation . Commodity prices , this year also at high levels due to synchronised up turn in economic growth across the world in 2017 and expected continued good performance in 2018. Since India imports commodities on a large scale, this will increase the import bill. But at the same time, exports continue to grow at much lower rate than imports . Government has to consider giving incentives to increase the export growth. This will put further pressure on government finances.

Infrastructure Projects. Government has drawn up a big plan to execute projects relating to Roads, Ports, Railways and Metros. The demonetisation has helped to increase the allocation of investors to financial products diversifying their portfolio away from Gold and Real estate . This is reflected in more money flowing into mutual funds and increased retail investor in the Capital markets. The government has big plans to raise bonds , long term loans directly from investors instead of seeking the bank borrowing . This is going to crowd the debt market and there will be lot of issues of debt at higher interest rates. This will keep the interest rates at high levels in the economy. Since the government is the largest borrower of funds, even the cost of funds for government will go up. The mobilising resources for implementing infrastructure projects at low rates of interest will be one of the challenges.

Since government has got lot of operating Infrastructure projects with  operating revenues, these projects should be taken through many InVits and the government should issue many Invits to make this product a success. Similar strategy could be thought of for the leased government properties for Issuing REITs. Apart from disinvestment, these sources also will aid in increasing the overall revenue of the government.

Jobs. About 15 million in a year are entering the Job market every year. More than 90% of the jobs in India are created in the informal sector and there is a limited scope for increasing jobs in the formal sector. Many new jobs in the informal sector is also in the form of entrepreneurship. After demoentisation / GST, the rate of growth in creation of new entrepreneurs has come down. India has one of the largest Unemployment Management Programmes in the world and schemes like MGREA is helping to create jobs for more than 50 million people. Already a big budget is provided for supporting the employment programmes. Further action plans have to be identified by the government to ensure no loss of jobs and new opportunities for creating entrepreneurs. Through start up initiatives, jobs are being created in new age sectors. But , there need to be action plans to create jobs in the traditional sectors.  

The government is likely to balance the interest of all the segments of the society and likely to continue its contribution to the development expenditure. It has already liberalised many sectors for FDI and it is likely to announce stimulus measures to increase the industrial , services and agriculture growth. The government can target a GDP growth rate of at least 7.75% and working backwards could identify the measures required in every sector. It would be necessary to keep the interest of investors on the capital markets high and continue the present sops given to Equity and Debt investors.

My Article on Crypto Currencies in Money control

Cryptocurrency a boon to digital transactions & financial inclusion

R. Kannan Cryptocurrency and its rapid valuation strides have made headlines globally. Forcing governments and regulators to take note of digital currency as an emerging asset class luring the average investor. Cryptocurrency is a digital asset created to be used as a medium of exchange -- like cash. Bitcoin, the most popular cryptocurrency has send ripples across global markets as it crossed the landmark $ 10,000 threshold. While most governments and regulators have cautioned investors against investing in Bitcoin and other cryptocurrencies, they continue to evaluate introducing their own digital currency. A group of experts at the Reserve Bank of India are examining the possibility of a fiat cryptocurrency which could be used as a digital currency. According to a few media reports the RBI’s digital currency is rumored to be called Lakshmi. Regulators across the globe including United States, Singapore, Japan and China are looking at regulatory measures to rein in the growth in cryptocurrency or digital currency.  In China cryptocurrency exchanges are shifting and improvising their business for domestic cryptocurrency traders. China allows private individuals to hold and trade bitcoin, but prohibits participation by banks and other financial institutions. Some countries explicitly permit the use of bitcoin which includes Canada and Australia. The US has adopted a positive stance in regards to Bitcoin. Meanwhile, it also has ordered several government bodies to assure that transactions in Bitcoin are carried out only in legal terms. In April, markets cheered Japan for recognizing bitcoins as legal tender and license 11 exchanges. India is on the brink of a digital revolution after the revolutionary reform –Demonitisation. Digital transactions in the country has seen an 80% jump during 2017-18, with the total amount expected to touch Rs 1,800 crore. The value of digital transactions till October this year stood at Rs 1,000 crore, which was nearly equal to that for the whole of 2016-17, according to the ministry of information technology. If the numbers are anything to go by there could be merit for the Indian government to weigh the pros and cons of floating its own digital currency to further boost digital transactions. Cryptocurrency or digital currency can revolutionize digital payments in India. Transactions through digital currency are cost effective, fast and transparent. Since, the transactions is traceable due to a public ledger it ensures transparency. Blockchain technology ensures the transactions are secure and hence the chances of frauds are minimal. Hassel free instant settlement of transactions in the age of smart phone penetration and internet connectivity has led to the increased acceptability and popularity of digital currency. Digital currency with the right regulatory environment could also help promote financial inclusion. It’s easier for individuals to open an e-wallet account than a traditional bank account given the increased mobile and data penetration. The usage of Aadhar in the country has made it easy for individuals to execute digital transactions and open e- accounts instantly. With the operationalization of payment and small banks the introduction of digital currency could change the way India banks or avails off and conducts financial services.  Regulators and governments globally are concerned that in the present form the digital currency is being used for money laundering and tax evasion. The concerns are valid considering this technology is new and its acceptance is increasing among the average investors. Considering the many advantages of this technology, Governments can no longer ignore its existence and there’s a need to frame a regulatory mechanism to monitor its usage. It’s not just individuals; corporates have also started using this technology for intra company transactions to reduce the cost of operations. Regulators and government in India need to collaborate and evaluate if this emerging asset class can be regulated by the current regulations of Know Your Customer, money laundering, foreign exchange and GST norms. Author is Head Corporate Performance Monitoring & Research, Hinduja Group Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

15^th December 2017

India Government Finances Apr17 - Nov17

Central Govt. Finances: Apr.-Nov. 2017-18

Highlights:

Total receipts during April- October 2017-18 were at Rs.1292648 cr, (LY: Rs. 1150843 cr), 12.3% rise over the same period last year. It was 60.2% of BE 2017-18. Out of which revenue receipts were at Rs.728768 cr (LY: Rs.697988 cr), 4.4% rise YoY and Capital receipts were at Rs.563880 cr (LY: Rs.452855 cr), 24.5% higher than the last year.

The revenue receipts are not growing as expected and the collections from GST was much below the expectations. To make up the shortfall in revenue receipts, the government has to opt for increasing the capital receipts which had shown a good growth over the previous year.

Gross tax receipt was atRs.973412 cr (LY: Rs.818884 cr), 18.9% growth YoY. Net tax revenue retained by the Central Government was at Rs. 633617 cr, 19.5% higher than the last year and it was 51.6% of the budget estimate for whole year.

Recovery of loans were at Rs.8394 cr, 5.7% higher than the last year.

Total Government expenditure from Consolidated Fund of India was at Rs. 1292648 cr (LY: Rs.1150843 cr), out of which, revenue expenditure was at Rs.1129853 crore (61.5% of BE) and capital expenditure was at Rs. 162795 cr (52.5% of BE).

Revenue Expenditure increased from the previous financial year by 10.1% and Capital Expenditure increased by 30.3%.

Revenue deficit was at Rs. 401085 cr (LY: Rs.327896), 22.3% higher than the last year and it was 125% of total budget estimate. This is an area of concern.

Fiscal deficit was at Rs.525321 cr(LY: Rs.423507 cr), 24% higher than the same period last year and it was at 96.12% of BE. Considering that another , four months to go , this will far exceed the budget.

Primary deficit was at Rs.267412 cr, 35.9% rise YoY. It was 1140% of BE.

Eight core infrastructure industries grew by 4.7 per cent in October 2017, as compared to 7.1 per cent in October 2016. The growth of these industries during April-October 2017 was 3.5 per cent, as compared to 5.6 per cent during the corresponding period of previous year. In Dec, there was traction and the expectations are that , the growth rate will rise. The forecast by various international and domestic agencies indicate that the growth going for ward will pick up.

Foreign exchange reserves stood at US$ 400.7 billion as at end of 24^thNovember 2017 as compared to US$ 370.0 billion at end March 2017.

The growth rate of IIP in Oct. 2017 was at (+) 2.2 percent. During Apr- Oct.17 the overall IIP contracted by 2.5percent compared to growth of 5.5 per cent during same period last year.

Foreign trade: Merchandise exports and imports increased by 30.5 per cent and 19.6 per cent respectively in US$ terms in Nov. 2017 over Nov. 2016. During Nov. 2017, oil imports increased by 39.1 per cent and non-oil imports increased by 14.6 per cent respectively over Nov. 2016.

Balance of Payments: India’s current account deficit (CAD) at US$ 22.2 billion (1.8 per cent of GDP) in H1 of 2017-18 increased from US$ 3.9 billion (0.4 per cent of GDP) in H1 of 2016 -17. During the H1 of 2017-18, the net invisibles balance (invisible receipts minus invisible payments) was US$ 52.5 billion as compared to US$ 45.7 billion in the corresponding quarter of 2016-17. Net FDI inflows during H1 of 2017-18 moderated to US$ 19.6 billion compared to US$ 20.8 billion in H1 of 2016-17. Portfolio investment recorded a net inflow of US$ 14.5 billion during H1 of 2017-18 as compared with US$ 8.2 billion in H1 of 2016-17. Net capital flows remaining higher than the CAD, there was net accretion to India’s foreign exchange reserves (on BoP Basis) to the tune of US$ 20.9 billion in H1 of 2017-18 as compared with US$ 15.5 billion in H1 of 2016-17

External Debt: India’s external debt stood at US$ 495.7 billion at end-September 2017, recording an increase of 5.1 per cent over the level at end-March 2017. Long-term debt was US$403.0 billion at end-September 2017 as compared to US$ 383.9 billion at end-March 2017.

Short-term external debt was US$ 92.7 billion at end-September 2017, as compared to US$ 88.0billion at end-March 2017.

As per the estimates of Gross Domestic Product (GDP) for the second quarter (July-September) 2017-18, released by the Central Statistics Office (CSO), the growth rate of GDP in Q2 wasat 6.3 per cent as compared to the growth of 7.5 per cent in Q2 of 2016-17.

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