Morgan Stanley

Wheels of Rajya Saba May Not Turn As Fast As Morgan Stanley Expects Them To

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One of the things that I have written about in the past is the fact that the Bhartiya Janata Party(BJP) led National Democratic Alliance(NDA) government is likely to continue to be in a minority in the Rajya Sabha until 2019. The next Lok Sabha elections are due in 2019.

Even if one were to be very optimistic, the NDA would touch around 100 seats in the Rajya Sabha by 2019. Why is that? Unlike the Lok Sabha, the Rajya Sabha is not elected all at once. A certain section of the members keeps retiring, elections are held for these seats and new members are elected. Hence, the composition of the Rajya Sabha keeps changing gradually unlike that of the Lok Sabha, which changes all at once.

Given that NDA does not have numbers in the Rajya Sabha, it has not been able to get key legislation passed. In a recent research report titled GST, The Way Forward, analysts Sheela Rathi and Ridham Desai of Morgan Stanley, suggest that this is about to change and by July 2016, the government may be able to push through key economic legislation like the Goods and Services Tax (GST), through the Rajya Sabha.

So what is it that Rathi and Desai are seeing which others can’t. Before we get into this, it is important to understand how the composition of the Rajya Sabha will change in the months to come. Every two years around one-third of the total members of the Rajya Sabha retire and new ones are elected.

Between March and July 2016, 75 members will retire from the Rajya Sabha. New members will be elected. These members are elected indirectly through an electoral college consisting primarily of the elected members of the state legislative assemblies. So you and me, dear readers, elect the members of legislative assemblies (MLAs) who in turn elect the members of the Rajya Sabha.

After these elections, the numbers of seats the BJP led NDA has in Rajya Sabha will go up. As Akhilesh Tilotia(the author of The Making of India), Sanjeev Prasad and Sunita Baldawa of Kotak Institutional Equities, write in a research note titled Wheels of Rajya Sabha Turn Slowly: “[In July 2016] core NDA allies will have 68 Rajya Sabha MPs (currently 61), almost similar in number to what the INC is expected to have (65)…After this round of elections in the Rajya Sabha, the next large round of elections will be in April 2018 and by then the NDA government at the Center would have completed four years of its tenure. The government will continue to have a minority position in RS until late in its term.”

So, the NDA will have 68 members in the Rajya Sabha by July 2016. While this is better than the 61 members they currently have, it is too small in a house of 245. It also needs to be mentioned here that in order to get a Constitution Amendment Bill, like the GST, passed, the approval of two-thirds of the members of both the Rajya Sabha and the Lok Sabha is needed.

A joint sitting of both the houses of Parliament cannot be called in order to get a such a Bill passed, if the houses do not agree on the Bill. Article 368 of the Indian Constitution basically mandates that both the houses pass the Bill separately with a two-thirds majority.

Currently, the Rajya Sabha has 242 members instead of the sanctioned strength of 245. A two thirds majority would mean getting the support of 163 members. So how will NDA with 68 members in the Rajya Sabha get a constitutional amendment which needs the support of 163 members passed?

Rathi and Desai make a huge leap of faith here. As they write: “Currently, BJP and its allies have 60 seats in the Upper House, and, along with parties supporting GST, there are 97 votes in favour of the bill. This count increases to 110 by the end of July with the upcoming retirements…In the first scenario, all members participate in voting. The BJP and its allies see their seat membership increase to 110 from 97 seats. There are another 44 members that are currently supporting the bill. Supporting votes add up to 154. There are another nine who are neutral at this point and could swing either way. If the government can garner support from these members, then getting to the 163 vote mark becomes likely by July 2016.”

QED.

One of the parties which Rathi and Desai list as supporting the BJP on GST is AIADMK. The party currently has 12 members in the Rajya Sabha. The Kotak analysts expects the party to continue to have 12 members even after July 2016.

Further, the AIADMK is against the GST. As AIADMK leader A. Navaneethakrishnan said in November 2015: “The GST in its present form will have a huge impact on the fiscal autonomy of States and the revenue loss it is likely to cause to Tamil Nadu will be considerable.”

Also, the party’s main leader J Jayalalitha is known to be mercurial.

Rathi and Desai also list Samajwadi Party as one of the supporters of the GST Bill. The party currently has 15 seats in the Rajya Sabha. This is expected to rise to 19 by July 2016. Samajwadi Party is the biggest party in the Rajya Sabha after Congress and the BJP.

Does the Samajwadi Party actually support GST? As Akhilesh Yadav said in early December 2015: “Without thinking much, anyone is expressing support to GST Bill in the parliament. State would be at loss.”

The analysts also assume that the Peoples Democratic Party(PDP) of Kashmir is in the NDA camp when it comes to GST. If that was the case, why haven’t the BJP and the PDP been able to form a government in Jammu and Kashmir, after the death of the chief minister and PDP leader, Mufti Mohammed Sayeed.

Also, the state finance minister Haseeb Drabu has spoken against GST in the past. As he had said in May 2015: “Jammu and Kashmir is unlikely to implement GST regime as it compromises its special position…. J&K is the only state that has the authority to legislate on all taxes and this will go with the new GST regime.”

Given this, I really don’t know how Rathi and Desai have assumed that AIADMK, PDP and SP are supporting the NDA on GST. Also, the assumption here is that the Congress party will keep sitting and not do anything about the BJP led NDA trying to get other parties in favour of GST.

Further, the Morgan Stanley analysts write: “In the second scenario, the INC (i.e., 67 current Upper House members) abstains from voting, and then the government needs 123 votes. In this situation, the bill can even pass during the second part of the budget session, between April and May. By April, we think the BJP and parties supportive of the bill will have 107 seats. in Rajya Sabha; they need another 16 seats to get the votes in the favour of the bill, which are already available to them.”

This is a politically naïve assumption which has been made to arrive at the conclusion that the NDA will get the numbers to get the GST Bill passed. Why would the Congress party give a walkover to the NDA? Beats me.

Further, the report does not take into account the state assembly elections which are due to happen in April and May 2016. The counting for four assembly elections (Assam, West Bengal, Tamil Nadu and Assam) and one union territory election(Puducherry) will happen on May 19.

The results of these elections will also have an impact on whether political parties will continue to support the BJP in its bid to get the GST Bill passed in the Rajya Sabha. If the BJP performs well (i.e. it wins in Assam, does well in West Bengal and manages to open its account in Kerala) the hawa will be in its favour.

If it doesn’t do well, the hawa will go against it. In this scenario, many small political parties who are in the ‘supporting’ camp may decide to desert it. Even if the BJP does well, some parties might still want to stay away, in order to portray that they are not giving in, to the BJP. This is something that cannot be known in advance.

Once these factors are taken into account it is safe to say that there are way too many holes in Morgan Stanley’s prediction of the BJP led NDA being able to get the GST Bill passed in July 2016. It’s a nice story, but on the current evidence, it doesn’t seem plausible.

The column originally appeared in the Bangalore Mirror on March 9, 2016

Why the foreigners are not impressed with Budget 2013

P-CHIDAMBARAMThe foreigners aren’t impressed with the budget presented by Finance Minister P Chidambaram yesterday. These include the rating agencies as well as investors who pour money into the Indian stock market.
As Ruchir Sharma, head of the Emerging Markets Equity team at Morgan Stanley Investment Management and the author of Breakout Nations told NDTV in a discussion yesterday: “On the fiscal side..a lot of the assumptions are being torn apart when people are analysing this budget.”
Government income is essentially categorised into two parts. Revenue receipts and capital receipts. Revenue receipts include regular forms of income which the government earns every year like income tax, corporate tax, excise duty, customs duty, service tax and so on.
Capital receipts include money earned through sale of shares in government-owned companies, telecom spectrum, etc. Capital receipts are essentially earned by selling things that the government owns.  Once something is sold it can’t be sold again and that is an important point to remember. Borrowing by the government, which is not an income, is also comes under capital receipts.
Revenue receipts for the year 2013-2014 are expected to be at Rs 10,56,331 crore. For the year 2012-2013 revenue receipts were budgeted to be at Rs 9,35,685 crore when the last budget was presented. This number has now been revised to Rs 8,71,828 crore. Hence, the government expects the revenue receipts to grow by 21.2 percent in 2013-2014. This projection has been made in an environment where the government is unlikely to meet its original revenue receipts target for the year. Also the revenue receipts this year will grow by 16 percent in comparison to last year.
So a 21 percent growth in revenue receipts is a fairly optimistic assumption to make. So if revenues collected are lower during the course of the year and the expenditure continues at the same rate, the fiscal deficit will be higher than it has been projected to be. Or expenditure will have to be cut, like it has been done this year. And that is not always a good sign.
Another point that this writer made yesterday was on the side of subsidies. For the year 2012-2013 subsidies were expected to be at Rs 1,90,015 crore. This has been revised to Rs 2,57,654 crore, which is almost 36 percent higher. This makes it very difficult to believe next year’s subsidy target of Rs 2,31,084 crore, especially when more subsidies/sops are likely to be announced during the course of the next financial year in view of the 2014 Lok Sabha elections.
As I said in the piece, the understating of subsidies has not been a one-off thing and has happened every year during the second term of the Congress-led United Progressive Alliance (UPA) government. So higher subsidies than budgeted might again mean a higher fiscal deficit or a cut in expenditure.
Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management, in a report titled The Art of Balancing, make an interesting point. They feel that the finance minister by projecting a fiscal deficit of 5.2 percent of GDP for this financial year and 4.8% of GDP might be giving an impression of fiscal prudence, but a closer look at the math reveals a different story.
As they write: “As trained accountants, we have learnt that sale of assets from the balance-sheet are one-off or non-recurring items. It is interesting that if we add back the estimates from sale of (telecom) spectrum and divestment of government companies (both non-recurring in our view), the ‘real’ fiscal deficit/GDP ratio for financial year 2014 shows no improvement over financial year 2013.”
The table below sourced from the Morgan Stanley report gives the complete story.

Table from Morgan Stanley
Table from Morgan Stanley

Once we take away capital receipts like divestment of shares and sale of telecom spectrum, which are essentially one-off sources of income from the equation, the real fiscal deficit  to GDP ratio comes in at a more realistic 5.6 percent of the GDP and not 4.8 percent or 5.2 percent that it has been projected to be. The point is that people aren’t buying the numbers put out in Chidambaram’s budget.
There is also very little acknowledgement of the mistakes that have made by the government over the past few years.
Ruchir Sharma, in his discussion on NDTV, put up a very interesting slide. The slide shows that India has consistently held rank 24-26 among 150 emerging market countries when it comes to economic growth over the last three decades. We thought we were growing at a very fast rate over the last few years, but so was everyone else. As Sharma put it: “The last decade we thought we had moved to a higher normal and it was all about us. Every single emerging market in the world boomed and the rising tide lifted all boats, including us.”

India's growth has remained consistent in the last three years
India’s growth has remained consistent in the last three decades

But now that we are not growing as fast as we were in the past, it is because of the slowing down of the global economy. As Chidambaram put it in his budget speech “We are not unaffected by what happens in the rest of the world and our economy too has slowed after 2010-11.”
Sharma pointed out the self-serving nature of this argument thus: “When the downturn happens it is about the global economy. When we do well it’s about us.” This is a disconnect that still persists, as is evident from Chidambaram’s statement.

India in the last four years was fed with artifuical fiscal stiumal, which led to high inflation
India in the last four years was fed with artificial fiscal stimulas, which led to high inflation

Another slide put up by Sharma makes for a very interesting reading. “Between 2008 and 2010 we implemented a massive stimulus, both fiscal and monetary, and that artificially inflated our growth rate to 13th in emerging market (as is evident from the slide). We were thrilled about it. It led to a massive increase in inflation and now this is payback time. Between 2010-2012, we fell to the 40th position,” said Sharma. So as more money was pumped into the economy, it chased the same number of goods and services, which led to higher prices or inflation.
So the massive spending by the government came back to haunt us. Inflation went through the roof. India’s rank among emerging markets when it came to inflation used to be around 60th. In the last few years it has fallen to the 118-119th position.

Chart:Morgan Stanley
As Sharma puts it: “This is the problem that India has today. India does not have an explicit inflation target. Most emerging markets and central banks work with explicit inflation targets. We have gotten away with it. I think the time is coming now for a more rules-based system. If we had an inflation target I doubt if we would have allowed inflation to increase at such a rapid pace”

Nations which have grown in the past at rapid rates have never had consistently high inflation. “And whenever inflation persisted over a period of time it always meant that the economy was headed for a major slowdown,” said Sharma. High inflation continues to be a major reason for worry in India.
Inflation in India has been a manifestation of a rapid increase in government spending. The total expenditure of the government in 2006-2007 was at Rs 5,81,637 crore. For the year 2013-2014, the total expenditure is expected to be at Rs 16,65,297 crore. The expenditure thus has nearly tripled (actually it’s gone up 2.9 times). During the same period the revenue receipts of the government have gone up only 2.5 times. The difference, as we all know, has been made up by borrowing leading to a burgeoning fiscal deficit. The next slide tells you how hopeless the situation really is.

Chart:Morgan Stanley
So India is really at the bottom when it comes to the fiscal deficit.

The point is very basic. We don’t earn all the money that we want to spend. As Chidambaram admitted to in the budget speech: “In 2011-12, the tax GDP ratio was 5.5 percent for direct taxes and 4.4 percent for indirect taxes.  These ratios are one of the lowest for any large developing country and will not garner adequate resources for inclusive and sustainable development.  I may recall that in 2007-08, the tax GDP ratio touched a peak of 11.9 percent.”
And this budget highlighted very little on how the government plans to increase its revenue receipts. In fact, Chidambaram even admitted that only 42,800 individuals admitted to having taxable incomes of greater than Rs 1 crore in India. This is a situation that needs to be set right. More Indians need to be made to pay income tax.
To conclude, let me say that the foreigners are worried and so should we.
The aritcle originally appeared on www.firstpost.com on March 1, 2013.
Vivek Kaul is a writer. He tweets @kaul_vivek

Downgrade fuss's overdone. Who cares?

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India’s fiscal deficit has reached worrying proportions. During the first six months of the year it had already crossed 65% of the year’s target of Rs 5,13,590 crore. Fiscal deficit is the difference between what the government earns and what it spends.
The government’s effort to raise revenues has barely gone anywhere. During the half of the year only 40% of the targeted revenues had been raised. The recent 2G auction was a damp squib and the disinvestment process has barely started.
So what is the way out? “You know you always find some way out. Nobody quite believes the fiscal targets as yet. It is still all about hope and let’s see what happens in the next few months,” says Ruchir Sharma, the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management. “Only thing that which makes me sound a bit positive in terms of hope that at least they have recognised the problem. Till a year ago, even till April, there was no recognition of the problem. And that to me is at least a positive that we can look on.”
Given the slackening finances of the Indian government there has been a lot of talk about the rating agencies downgrading India, something, if media reports are to be believed, even the finance minister P Chidambaram is worried about.
But Sharma feels the threat is majorly overblown. “I just feel this fuss about that is really overdone to be honest with you because who cares! They (the rating agencies) are far behind, so whether we get downgraded or not, to me it just doesn’t matter and that doesn’t change anything for us,” says Sharma.
Explaining his logic Sharma says “Let me put it this way. If growth is less than 5% etc, that would be horrendous. But I think the reasons for the downgrade are already well telegraphed. If it happens it will be a formality. It will be a short term negative undoubtedly.”
The other big worry in India right now is inflation. “Commodity prices are generally down globally and that should help inflation. The problem is the same that unless we put an end to this populist surge in terms of spending you can’t get a meaningful decline in interest rates,” says Sharma.
“That really is at the core of the problem as far as inflation and interest rates are concerned. How do you put an end to that culture? That genie is out of the bottle. How do you put it back in?,” he asks.
The main problem that remains for inflation is just that there is too much government spending going on and too much of it is inefficient, feels Sharma. “This at a margin is a problem that is getting better,” he adds.
But the real test for the government would be whether they are able to put off the food subsidy kind of schemes. As Sharma puts it “To me the real signal will come if they back down on these populist schemes. Such as the whole food subsidy bill etc. The real fear that I have now is that we do all this now and this is only preparing for another populist scheme at the end of it, at the first sign when things are manageable or things are brought under some control. The fact that they can postpone such things or put them completely away will be a very positive sign. But until then I don’t know.”
The realisation that needs to come in is that government spending as a share of India’s gross domestic product is too high. “You can’t carry on this way. Not because it’s bad thing to do but you can’t keep writing cheques which the exchequer can’t cash. To me that is the bottomline. That spending now for a country of India’s per capita income level of $1500, government spending as a share of GDP is too high.”
Government scams have also been a major issue in the recent past. Sharma feels that this does impact India’s perception in the West. “For them it reinforces the fact about two issues that they have had with India. One is the fact that it is a tough place to do business in. And that shows up in all the metrics like the ease of doing business that World Bank and IMF put out, India ranks in the bottom quartile of most of these things. It also highlights that in India it is very difficult to do greenfield projects and set something up. You might as well be a partner with one of these guys who can get stuff done in India,” says Sharma. “But this is something that people have known and this just reinforces their perception,” he adds.

The interview originally appeared in the Daily News and Analysis on December 3, 2012. 
(Vivek Kaul is a writer. He can be reached at [email protected])