Month: November 2015 | Page 3

19 November, 2015

More reasons on why Swacch Bharat cess is a bad idea

In the November 16 edition of The Daily Reckoning I had written a column on the recently implemented Swacch Bharat cess. In this column I had talked about how the Swacch Bharat cess is an example of maximum government.

In today’s column I want to make give more reasons on why the Swacch Bharat cess is a bad idea. Just to recount for readers who hadn’t read the earlier column, on November 6, the Narendra Modi government decided to implement a Swacch Bharat cess. The cess amounts to 0.5% on all services, and has pushed up the effective rate of service tax to 14.5%, from the earlier 14%. The cess has come into effect from November 15, 2015.

Any tax that the central government collects needs to be shared with the state governments. But that isn’t the case with cesses as well as surcharges that it collects. The money raised through cesses as well as surcharges is not shared with the state governments.

In fact, take a look at the accompanying table. In 2013-2014, the cesses and the surcharges collected by the central government amounted to Rs 71,713.7 crore. This formed 8.79% of the total tax revenue remaining with the central government after handing over the share of the state governments.

Cesses and surcharges (in Rs crore)	2013-2014	2014-2015	2015-2016
Total cesses and surcharges	71713.7	102859.4	117460.5
Total tax revenue remaining with central govt after sharing with states	815854.2	908462.8	919842.3
Cesses and surcharges as a percentage of total tax revenue remaining with central govt	8.79%	11.32%	12.77%
Source: www.indiabudget.nic.in

In 2014-2015, the cesses and surcharges collected by the central government jumped by a huge 43.4% to Rs 1,02,859.4 crore. They formed 11.32% of the total tax revenue remaining with the central government after handing over the share of state governments. In 2015-2016, this number is projected to further jump to 12.77%. That’s a jump of close to 400 basis points (one basis point is one hundredth of a percentage) between 2013-2014 and now.

What does this tell us? Since the Narendra Modi government has come to power a greater proportion of the central government’s tax revenue is coming from cesses and surcharges. Take a look at the following table. Look at the last two entries which are in bold (The entries before that are exactly the same as in the earlier table).

Cess and surcharge (in Rs crore)	2013-2014	2014-2015	2015-2016
Total cess and surcharges	71713.68	102859.4	117460.5
Total tax revenue remaining with central govt after sharing with states	815854.2	908462.8	919842.3
Cess and surcharges as a percentage of total tax revenue remaining with central govt	8.79%	11.32%	12.77%
Total tax revenue of the central govt	1138734	1251391	1449491
Cess and surcharges as a percentage of total tax revenue	6.30%	8.22%	8.10%
Source: www.indiabudget.nic.in

In 2013-2014, cesses and surcharges formed around 6.30% of the total tax revenue earned by the central government. After the Modi government took over, the number has jumped to more than 8%.

This has been made possible through several things. In the budget presented in February earlier this year, the finance minister Arun Jaitley had subsumed the education cess and the secondary and higher education cess in central excise duty. “In effect, the general rate of Central Excise Duty of 12.36% including the cesses is being rounded off to 12.5%,” Jaitley had said during his budget speech. The clean energy cess was hiked from Rs 100 to Rs 200 per metric tonne of coal. The existing excise duty on petrol and diesel to the extent of Rs 4 per litre was converted into a road cess. And there was an enabling provision for the Swacch Bharat cess as well.

What is the problem here? The Modi government made a lot of song and dance about increasing the share of state governments in the tax revenues collected by the central government from 32% to 42%. After having done that, it has also managed to increase the amount of money collected through cesses and surcharges which it does not need to share with the state governments.

This goes against the entire idea of cooperative federalism which Narendra Modi had passionately espoused after coming to power. In fact, the 14th finance commission report released earlier this year had pointed out: “Almost all States have argued that cess and surcharges should form part of the divisible pool, with some suggesting that this should be done if cess and surcharges continue for more than three years.”

The education cess which brings in a bulk of the money collected under cesses, has been around for a very long time. In fact, the Comptroller and Auditor General in a recent report had pointed out that not all the money collected through the education cess went towards education.

As a news-report in The Economic Times points out: “The CAG report said that against the total collection of Rs 130,599 crore as primary education cess, only Rs 119,197 crore was transferred to the Prarambhik Shiksha Kosh in public account from 2004-05 to 2013-14, resulting in a short transfer of Rs 11,402 crore in the Prarambhik Shiksha Kosh.”

The cess on education as well as the new Swacch Bharat cess which will be used for improving sanitation, raises a very important question. If cesses have to be collected for things as important as education and sanitation, what is the government doing with all the actual tax revenue that it is raising? The tax revenue is essentially being used to finance what we can safely call maximum government. While Narendra Modi had promised to change that, up until now he has operated more or less similarly like the Congress governments before him.

For a cess to be effective it is important that it be ring fenced properly. Take the case of the cess on diesel implemented by the Atal Bihari Vajpayee government to finance the national highway development programme. It was a proper ring-fenced cess where there was total clarity of what the money collected under the cess will be used for.

In comparison, the definition of the Swacch Bharat programme remains very vague and given that it will be very difficult to ring-fence it properly. Also, it needs to be asked how effective can a central government be in implementing a cleanliness and sanitation programme at the local level throughout the country. And given that wouldn’t it make more sense in sharing the money raised with state governments?

To conclude, in order to woo foreign investors to invest in India, the finance minister Arun Jaitley has been talking about a fair and predictable tax regime. In fact, at the 11th Indo-US Economic Summit in September earlier this year he had said: “We can evolve into fairest and predictable taxation regime in India.”

How about offering a fair and predictable tax regime to the Indian tax payer as well, Mr Jaitley?

The column was originally published on The Daily Reckoning on Nov 19, 2015

18 November, 2015

Why exports have been falling for 11 months

Exports for the month of October 2015 fell by 17.5% to $21.35 billion in comparison to October 2014. In October 2014, exports had stood at $25.89 billion.

This is the eleventh month in a row when the exports have fallen. In fact, between April and October 2015, exports have fallen by 17.6% to $154.29 billion, in comparison to the same period last year. Between April and October 2014, the exports had stood at $187.29 billion. And this is indeed a worrying trend.

So why are the exports crashing? Much has been written about how India has benefited from falling oil prices. On April 2, 2015, the price of the Indian basket of crude oil had stood at $54.77 per barrel. Since then, it has fallen by 27.2% to $39.89 per barrel.

This has pushed down the oil import bill. And that is the good bit. Nevertheless, there are negative impacts of falling oil price as well. The export of petroleum products in October 2015 crashed by 57.1% to $2.46 billion, in comparison to a year earlier. In October 2014, the petroleum exports had stood at $5.73 billion.

The petroleum exports amounted to 22.1% of total exports in October last year. Since then, they have fallen to 11.5% of exports. In fact, in October 2014, petroleum products were India’s number one merchandise export. In October 2015, they came in third behind engineering products and gems and jewellery exports. So this is the flip side of falling oil prices. Surprisingly, this doesn’t get mentioned much in the media.

While writing this column, I heard an economist who works for a big American bank say on one of the business news channels that we should be considering exports data stripped of petroleum exports. If we do that a much better picture emerges. Exports (without petroleum products) have fallen only 6.3% between October 2015 and October 2014.

Nevertheless the thing is that such suggestions were not being made when petroleum exports had been on their way up because of the rising oil price. And they are being made only now, when the petroleum exports have crashed because the oil price has crashed. If a certain basket of products makes up for our exports, the need is to look at the complete basket and not remove certain items as and when it suits.

What is worrying is that exports by sectors like engineering goods, gems and jewellery and leather and leather products have also fallen. Exports of engineering goods has fallen by 11.65% to $4.58 billion. Exports of gems and jewellery has fallen by 12.84% to $3.49 billion. Exports of leather and leather products has fallen by 6.6% to $417 million. It is worth remembering that these sectors especially gems and jewellery and leather and leather products, are fairly labour intensive.

The finance minister Arun Jaitley explained this fall in a statement he made on November 17, 2015: “One aspect of India, which is adversely affected, is our exports because of shrinking global economy. The headwinds are against us.” This is yet another of those motherhood and apple-pie kind of statements that Jaitley specialises in. As he had said in May earlier this year: “The country has the potential of taking the economic growth to double-digit. The government will take appropriate action in the regard.”

In fact, exports are a very important part of economic growth and no country up until now has seen sustained economic growth without rapid export growth. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “While optimists like Jaitley talk of getting to double-digit growth, it is worth bearing in mind that no country has achieved this on a sustained basis without rapid export growth—which, in an uncertain world economic situation, is not likely to materialize especially with continuing deficiencies of India’s physical infrastructure.” Hence, falling exports are a very worrying trend.

How are things looking on the imports front? Imports for the month of October 2015 were down by 21.15% to $31.12 billion. The total imports in October 2014 had stood at $39.47 billion. The fall in overall imports was primarily because of a fall in oil and gold imports.

Also, if we look at non-oil non-gold imports, an indicator of the strength of domestic demand, the situation doesn’t look great. The non-oil non-gold imports for October 2015 stood at $22.57 billion. This number is an improvement on the August 2015 number, but it is down from the September 2015 number. The non-oil non gold imports are down 0.76% from October 2014. This is a good indicator of flat domestic demand.

The total imports between April and October 2015 stood at $232.05 billion, down by 15.17% from $273.56 billion between April and October 2014. Despite this fall, the customs duty collections are up 16.8% between April and October 2015 to Rs 1,22,448 crore.

One explanation for this might be a fall in the value of the rupee against the dollar. But that doesn’t explain the whole thing. As TN Ninan recently wrote in the Business Standard: “Perhaps the import mix has changed, or there is some other explanation — the government has been upping import duties on specific items to combat imports. The point is, an explanation is due; an increase in the collection rate usually points to increased protectionism.”

To conclude, things aren’t looking good for India on the trade front.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag.com on November 18, 2015

18 November, 2015

Why oil prices have fallen by 63% and petrol prices by only 17%

One good news for the Indian economy during this financial year has been the huge increase in indirect tax collections. Customs duty, excise duty and service tax together form the indirect taxes collected by the central government.

Data released by the ministry of finance earlier this month showed that indirect taxes as a whole have grown by close to 36%, during the course of this financial year (April to October 2015). The accompanying table provides a breakup of the different kinds of indirect taxes collected during the course of this financial year.

Indirect Tax Collection: April- October 2015

(Rs. in crores)

Tax Head	B.E. 2015-16	For October			Up-to October			% of BE achievement
Tax Head	B.E. 2015-16	2014-15	2015-16	% Growth	2014-15	2015-16	% Growth	% of BE achievement
Customs	208336	16800	18998	13.1	104831	122448	16.8	58.8
Central Excise*	228157	13569	22550	66.2	87588	147685	68.6	64.7
Service Tax	209774	12528	17143	36.8	89379	112727	26.1	53.7
Total	646267	42897	58691	36.8	281798	382860	35.9	59.2

*Exclusive of cess administered by other departments.

What is interesting is that customs duty, central excise duty as well as service tax collected have grown at very good rates. The increase in the collection of indirect taxes between the end of 2013-2014 and the end of 2014-2015 had been just 9.1%. Also, the government failed to meet the indirect tax target of Rs 6,24,902 crore in 2014-2015. It managed to collect only Rs 5,42,325 crore.

Also, the indirect taxes collected during the course of this year up until now indicate that the government seems all set to meet its target of Rs 6,48,418 crore. This target is an increase of 19.6% in comparison to the indirect taxes collected during the last financial year.

Given that the indirect taxes collected have grown by 35.9% this year, meeting the indirect taxes target for this year, should not be a problem at all. As finance minister Arun Jaitley said earlier this month: “One of the greatest positives I can see is a huge increase in indirect tax revenues.”

The question is how genuine and sustainable is this massive growth in indirect taxes. As the ministry of finance press release put out earlier this month points out: “These collections reflect in part increase due to additional measures taken by the Government from time to time, including the excise increases on diesel and petrol, the increase in clean energy cess, the withdrawal of exemptions for motor vehicles, capital goods and consumer durables, and from June 2015, the increase in Service Tax rates from 12.36% to 14%. However, stripped of all these additional measures, indirect tax collections increased by 11.6% during April-October 2015 as compared to April-October 2014.”

Once we take these factors into account the rise in indirect tax collections is a much muted 11.6%. To be honest, the finance minister Jaitley acknowledged this recently.

The 68.6% jump in central excise duty is the main reason behind the massive jump in indirect tax collections. In fact, the jump in excise duty makes up for close to 60% of the overall jump in the indirect taxes collected this year.

This jump has primarily come due to the government increasing the excise duty on petrol and diesel five times between last year and now. In fact, the latest increase in excise duty on petrol and diesel came about earlier this month.

With these increases in excise duty on petrol and diesel, the government has more or less fully captured the fall in oil prices for itself, and not passed it on to you and me. A litre of petrol currently costs Rs 68.13 per litre in Mumbai. It was at Rs 80 per litre around the time, Narendra Modi was elected to power in May last year.

Between then and now, the petrol price has fallen by just 17.4%. In comparison, the price of the Indian basket of crude oil has crashed by 63%. On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude oil was $108.05 per barrel. On November 16, 2015, the price was at $39.89 per barrel.

This clearly shows that the government has captured almost all the benefit of falling oil prices. A 63% fall in the price of oil has led to just a 17% fall in the price of petrol in Mumbai.

There are multiple problems with this approach.

The government talks about having dismantled the administered price mechanism on the pricing of petrol and diesel. But that is clearly not the case. A fall in oil prices does not immediately lead to a fall in petrol and diesel prices. The government has captured the fall by increasing the excise duty on petrol and diesel.

Further, the government has become heavily dependent on the revenue coming in from an increase in excise duty on petrol and diesel. What will it do if and when the oil price starts to go up? Will it cut the excise duty in order to ensure that price of petrol and diesel does not rise? Given that it did not pass on the benefits of a fall in the price of oil to the end consumer, isn’t it only fair that it shouldn’t be passing on the increase as well?

Also, it is worth remembering here that trying to forecast the price of oil remains tricky business. As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Further, if it cuts the excise duty, as and when the oil price goes up, it will have to borrow more and that will create its own set of problems. The fiddling around with excise duty on petrol and diesel, shows a lack of a stable policy on the tax front. The finance minister Arun Jaitley has often outside India talked about a stable tax regime for foreign investing in India. Why forget us Indians, who live in India?

Another impact of this massive increase in indirect tax collections has been the junking of the disinvestment programme, though no politician will admit to the same. At the beginning of the year, the government had set a disinvestment target of Rs 69,500 crore. But that is not going to be achieved. Meanwhile, the government will continue to waste the taxpayer’s hard earned money on dud companies like MTNL and Air India. Minimum government and maximum governance will continue to remain a slogan.

On the good side, the fiscal deficit number will look better than 3.9% of GDP it was projected at, in the budget document.

The column originally appeared on The Daily Reckoning on November 18, 2015

18 November, 2015

Mr Modi, govts can’t do everything

Various Indian governments over the years have tried to run many businesses but have been unsuccessful at doing the same. In fact, the trend continues even now, despite the fact that one of the key promises made by Narendra Modi in the run up to the Lok Sabha elections last year was “minimum government maximum governance”. But this promise like a few others now seems to have taken a backseat, around eighteen months after Modi was sworn in as the prime minister of the country.

Like the previous governments, the Modi government also wants to do many things. But is that possible? As veteran journalist TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “Governments have tried to do great many things, from running watch and scooter factories to making shoes—all unsuccessfully. They continue to try and run airlines, telecom companies, hotels and banks—all of which have found it difficult to compete with private competitors, losing ground to the latter when they come on the scene.”

There is a fundamental problem in the government trying to run businesses. The economist Friedrich Hayek called it the knowledge problem. He explained it in a seminal article called The Use of Knowledge in Society which was published in the September 1945 issue of the American Economic Review.
In this article Hayek wrote: “The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.”

Hayek further wrote: “The economic problem of society…is a problem of the utilization of knowledge which is not given to anyone in its totality.”

What does this mean in simple English in the context of governments usually being bad at business? The knowledge required to run a business successfully is dispersed among many individuals and not concentrated with a central authority like a government. As Matt Ridely writes in The Evolution of Everything: “The knowledge required to organise human society is bafflingly voluminous. It cannot be held in a single human head”.

This is a basic point that governments tend to forget when they decide to be present in all kinds of businesses, like is the case in India. And whenever this happens, businesses lose money and need to be subsidised by the government.

Take the case of Mahanagar Telephone Nigam Ltd which offers internet and telephone services in Mumbai and Delhi. For the financial year ending March 31, 2015, the company’s income was at Rs 3,400 crore. Its expenditure on the other hand stood at a much higher Rs 5,284 crore.

Or take the case of the government owned airline Air India. The company has accumulated losses of Rs 20,000 crore. Every year, we hear that the airline is planning to turn profitable over the next few years and gets more money from the government in the process.

More than the money losses, these companies are distractions for the government. They get more government attention than they deserve and in the process other more important things tend to get ignored.

As Ninan writes: “There is too little of government attention paid to core areas like law and order, education and health—too few judges, too few teachers who teach, too few hospital beds; also too few trade negotiators and too few policemen, especially those with proper training. It should be obvious that there are many things that the state does inadequately or badly, and many tasks that the state has needlessly taken on itself.”

The tragedy is that no Indian politician seems to believe in focussing on the few important things and leaving out the rest. And this includes Narendra Modi as well. His promise of “minimum government and maximum governance,” like a few other things that he had promised, is turning out to be an electoral jumla at the very best.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on Nov 18, 2015

17 November, 2015

The success of Make in India will lead to more jobs in services and not manufacturing

This column is essentially an extension of the column Devanshu Sampat wrote for The 5 Minute Wrapup on November 13, 2015. In this column Sampat talks about the challenge automation will create for the Make in India programme.

As he writes: “The costs of robots fall every year. At the same time, their complexity is on the rise. It won’t be long before cheap robots will be catering to the needs of a wide range of manufacturing firms.”

This Sampat believes “will prove to be major challenge to the government.” “Will ‘Make in India’ be successful if a large number of people remain unemployed despite a manufacturing revolution?” he asks.

As I have said in several previous columns, nearly 13 million Indians are expected to join the workforce every year. This trend will continue up to 2030. Given this, the government needs to create an environment in which jobs are created, in order to accommodate this workforce at a fast speed.

With automation and robots taking over manufacturing the number of new jobs being created will come down. And this will mean trouble for the Make in India programme given that ultimately it’s a job creation programme.

So what is the way out? The socialist mind-set of India’s politicians will look at it in a way where they may want to make it mandatory for businesses to hire and employ a certain number of people depending on the size of a firm.

To be honest I haven’t heard of such suggestions being made up until now but I won’t be surprised if such suggestions are made in the years to come, if the Make in India programme starts to fail due to automation and various other reasons.

Also, it is worth remembering here that any businessmen will automate if he can. A businessman is a capitalist and he works for ‘more’ profit and if there is an opportunity to make more profit he will try to cash in on it. And stopping that behaviour isn’t the best possible way to operate.

Further, given India’s surfeit of labour laws which make the business environment even more challenging, automation may be the best way out for any businessman.

Having said this, the question that arises here is that why should we expect the manufacturing industry to solve India’s employment problem? This is a fair question to ask. A straightforward answer for this lies in the fact that every country that has gone from being a developing country to becoming a developed one, has gone through a manufacturing revolution. India is possibly an exception to this, given that we have had a services revolution before a manufacturing one.

Nevertheless, even with automation we should not be so worried. TN Ninan in his book The Turn of the Tortoise—The Challenge and Promise of India’s Future offers a very interesting perspective on the basis of his interactions with some leading industrialists.

Take the case of RC Bhargava, the chairman of Maruti Suzuki, India’s leading car maker. As Ninan writes: “The chairman of Maruti Suzuki says, in response to a question on the greater automation that exists in newer car plants, that car factories should not be expected to solve India’s employment problem.”

So what about job growth? “If job growth is to come, according to Bhargava, it will have to be in associated areas—manning petrol pumps or maintaining and repairing vehicles, which are service sector jobs and don’t compare with high paying factory jobs.”

Bhargava also points out that every third car bought in India is not driven by the owner but a hired driver. Data from the Society of Indian Automobile Manufacturers (SIAM) points out that 2.6 million cars were sold in India in 2014-2015. If every third car is being driven by a driver as Bhargava talks about, then that means 8.5 lakh new jobs for drivers were created just in 2014-2015. And that is a substantial number.

The broader point is that even though manufacturing jobs may not grow, the setting up of new factories will lead to an increase in jobs in services. As Ninan writes: “The ratio of non-factory to factory jobs in the car industry is said to be 7:1. The head of another car company puts the figure at 16:1. Other manufacturers of engineering goods endorse the view that shop-floor employment in the engineering goods sector is unlikely to grow rapidly because of steadily increasing automation as well as gains in productivity.”

Ninan also recounts an interaction with Jamshyd Godrej, chairman and managing director of Godrej & Boyce, the diversified engineering company. Godrej “recalls a time early on when the majority of his company’s employees worked in the factory.” Now, the number of employees working outside the factory are four to five time the number of employees working in the factory.

The moral of the story, as Ninan puts it is “Success in quite a lot of manufacturing sectors, therefore, leads to employment growth in services, not manufacturing. Not that it should matter, since incomes will be better in both than in agriculture.”

In this scenario, it is important that the government realises that the success of Make in India, should not depend on the number of manufacturing jobs it ends up creating. Even if it does not create manufacturing jobs, it will create jobs in services.

Hence, the government should keep working towards a better ease of doing business environment. The labour laws need to be simplified. The physical infrastructure needs to improve. The roads, railways and ports need to improve. The contracts need to be honoured. A bankruptcy law needs to be in place. The courts need to function well.

The simple things need to be done well.

(The column originally appeared on The Daily Reckoning on November 17, 2015)