The Budget plays and important role because it guides on what government expenditure, said Ridham Desai MD, Morgan Stanley India.
With the Union Budget 2018 just round the corner, it looks like the markets and the economy are waiting for the D-Day.
To lay out on what one should expect from the Budget, as well as in terms of economic policy in the year to come, CNBC-TV18 interviewed experts from the field of market, economics and tax. The expert panelist included Ridham Desai, MD, Morgan Stanley India, Abhay Laijawala, Head - India Research, Deutsche Equities, Nilesh Shah Managing Director Kotak Mahindra AMC, Sajjid Chinoy, Chief India Economist, JP Morgan and Dinesh Kanabar, CEO, Dhruva Advisors.
Desai said the Budget plays and important role because it guides on what government expenditure will be and with the economy on a recovery path, any acceleration on spending will give a further boost. So, market is bound to focus on what the government expenditure will be for FY18.
Economist Chinoy said 2017 year of valour – big reforms like GST, Bankruptcy Law, and Bank recapitalisation, so 2018 should be year of consolidation and the Budget has to send that signal that we have to consolidate the gains made last year.
According to him, what is different this is year is apart from expenditure pressures, there is also revenue uncertainty because of GST. The other big uncertainty is crude prices. From June, oil has been up 40 percent. Earlier oil had provided the fiscal authorities 1 percent of GDP windfall. However, some of that will go now away, said Chinoy.
Therefore, whatever boost India will get from global growth could be offset on a large part adverse terms of trade shock from oil being at USD 70 per barrel because we are a large commodity importer, said Chinoy.
Shah said it would be good if the government maintained fiscal prudence.
Kanabar said, as of now all the revenue raising measures on tax account are going to people who are paying taxes, as opposed to saying how do we expand the tax base.
According to Laijawala, there are many different ways to raise taxes and look at some innovative measures like focuses on non-tax revenues.
Below is excerpt from the interview.
Sonia: Great tidings for the market, but last time, when we were at the Budget, the Nifty was at 8,500 and despite it being a pedestrian Budget the market rallied 30 percent from there. Do you think the market even cares about the outcome of the Budget or is it all global liquidity that is driving us now?
Desai: It is primary global, so we should not make a mistake of thinking that this is an idiosyncratic bull market. It is driven by SPX and a host of other markets. Actually, the Nifty was a middling performer last year, so it was not like the top-notch market in the world. What was the top-performing index in the world last year was our smallcap index, up 65 percent in USD terms, the number one performing index in the whole world followed by China. But the Nifty was around 35 percent so it was in the middle of the pack. So you are right. The Budget in the end did not matter because the world was going up and so India went up.
But I think the Budget does play a role because it guides us on what government expenditure will be and as Latha pointed out, the economy is on a recovery path, so any acceleration in spending will give a further boost. So that is what the market will primarily look at, what is the government's expenditure growth for FY19.
Latha: Since we have been speaking about the India performance being part of a global phenomenon, world economy, the International Monetary Fund (IMF) says is actually likely to run faster . It scaled up the growth rate for the current year by 0.1 percentage point to 3.7 percent, next year's growth FY19 by 0.2 to 3.9 percent. If the global growth is going to keep this space then do you think 2018 will be as good a year at the bourses?
Chinoy: A couple of things. To start with, we should understand that I keep saying 2017 was the year of valour. Big reforms in India, GST, bankruptcy law, bank recapitalisation. 2018 has to be a year of consolidation and the Budget has to send that signal that we have to consolidate the gains that we made last year. Now, this is a delicate balancing act. To be fair, it is a pre-election year. Let us not forget that. There have been various constituencies that were impacted by the reforms of last year which may require some balm, agriculture, small medium enterprises, construction, you want to be mindful of that.
But what is different this year is apart from those expenditure pressures, for the first time, there is more revenue uncertainty because of the GST. We just do not know how much compliance picks up, whether it takes two quarters or four quarters or eight quarters, number two and number three, the big elephant in the room is oil prices. Nobody is discussing the fact that from June, oil is up 40 percent. That provided the fiscal authorities a 1 percent GDP windfall three years ago. Some of that goes away next year. There will be pressure on cutting excise duty. There will be subsidies going up at the margin, both fertiliser and fuel subsidies. So it is a very delicate balancing act.
Latha: So are you saying that the world, instead of being a help could actually be a bit of a bother in 2018 because of the crude price?
Chinoy: Let me start answering that question by looking at 2017. 2017 we saw synchronised global recovery. Strongest global growth in seven years. What happened to India? Net exports shaved off 120 basis points of growth. So rather than being a tailwind, they were a huge headwind. Exports, we estimate grew just marginally higher than the year before. Imports grew at 10 percent versus 3 percent. Next year, things will get better. Exports should pick up, imports should come down, but whatever boost we get from global growth has to be offset in large part by the adverse terms of trade shock from oil being at 70. That is the difference for India. Being a large commodity importer, if a strong global growth pushes up commodity prices and oil with in, that subtracts a little bit from India's growth. We have to be mindful of that balance.
Sonia: I wanted to get you in on the point that Ridham was making about spending. Even if we do not meet the fiscal deficit targets this time around, do you think that may not be construed negatively if the government manages to spend more efficiently?
Shah: Let me talk about the ways in which the government can raise revenue. I think it is important if government maintains fiscal prudence that differentiated India with China, with South Africa, with Brazil and our government is asset rich. My favourite topic has been bonus stripping. There is no other country in the world where bonus shares are valued at zero. It is only in India where we give this flexibility to rich investors to avoid paying capital gains tax. You plug the loophole, you will get probably between Rs 15,000 crore and Rs 30,000 crore. In 2002, we have divested a company called Videsh Sanchar Nigam Limited. Along with that, 700 acre plus of land had gone out. The market value of that is Rs 10,000-15,000 crore. It is now 15 years. Can we not monetise that and get Rs 15,000 crore in the Budget? There is an office called Custodian of Enemy Property.
It is supposedly containing Rs 25,000 crore of shares and financial assets and Rs 1 lakh crore of real estate. It is now almost five decades since Custodian of Enemy Property came. Can we monetise something from there? There are many ways in which government can raise revenue without raising taxes by plugging loopholes, by doing divestment and that will give them enough money to spend on pre-election spending and yet maintain fiscal deficit target. I think, if Finance Minister uses revenue raising innovatively, he will be able to achieve trinity of impossible, raise revenue, cut tax rates, spend money and yet achieve fiscal deficit.
Latha: Let us start with your first clause, bonus stripping. Are you asking only for bonus stripping to stopped and taxed or are you also asking for something like a long-term capital gains tax on shares?
Shah: You do not ask barber whether you need a haircut or not. If you ask fund manager on long-term capital gains, what do you expect me to answer?
Latha: I almost thought you said yes, that tax is called for, rich investors are not paying.
Shah: To be fair, the people have paid securities transaction tax (STT) in lieu of long-term capital gains tax (LTCG). Now if you go back on LTCG, what happens to STT on which people have paid?
Latha: You can get a setoff.
Shah: Setoff again, is in different context. My whole request is that why don't we plug the loopholes? Bonus shares, it has been used as an instrument of avoiding paying taxes forever.
Latha: No, I just asked you what was your point.
Shah: Plug the loopholes. Forget LTCG, what about agriculture tax?
Latha: Let me just take the bonus stripping part. Do you think that is a low hanging fruit?
Kanabar: Yes and no. There were two points which Nilesh made, both of which, to some extent – bonus stripping is only a timing issue. You get a setoff in a particular year. You are not going to hold those assets on forever and then when you realise those assets you pay full tax on it. So really what law allows you to do is to say that you attribute your entire cost to the original investment, be it cost of bonus shares as nil. So it is a timing issue. It is a deferment issue.
Shah: My point is that if you hold the shares for one year, after one year it becomes long-term capital gains tax which is tax exempt. So it is not deferment of tax, it is avoidance of tax.
Kanabar: So then that goes back to Latha's question that if it is taxed then that thing goes away in any event of the matter. So that is the point she was asking that if you are advocating long-term capital gains tax then in that sense the bonus stripping will become irrelevant because you are going to pay that tax at some point of time.
Shah: My point is that plug the loophole of the bonus stripping and let LTCG remain where it is.
Latha: Tax it when you are stripping.
Kanabar: Again I think your point on Videsh Sanchar is very well made, but to my knowledge, at this point of time, a scheme is already being filed with the boards to divest VSNL of land held going into the government.
Latha: But is there some gains to be made with respect to bonus stripping getting taxed at the time it is stripped or any other form in which the Finance Minister can make some money?
Kanabar: Absolutely. You and I had this discussion in a different context. One of the lowest hanging fruits is the amount of cash which has got deposited on demonetisation and it was Prime Minister's statement, which I totally agree, that this would scrutinised to ensure that appropriate taxes are collected. And I can say this with knowledge on the ground that nothing has happened on that. And the numbers that could come out there would be probably far, far excess.
So I would not be surprised if the revenues that could be collected on account of cash deposits would exceed actually Rs 1 lakh crore. It is an amount which is just lying out there. Putting the government mechanism to really ensure that those deposits are appropriately tracked and those deposits which represent unaccounted income is really brought into the net. Today, what is happening is that all revenue raising measures on tax account are going to people who are paying taxes. So you are trying to squeeze the juice out as opposed to saying how do we expand the tax base. And thanks to demonetisation, we now have the ability to expand the tax base and we are not doing that.
Sonia: Nilesh made a very valid point about agricultural income being taxed and that has been a subject of much debate, but I want you to come in on that because there is a lot of talk about taxing the rich farmer and that way widening the tax base or bracket. What is your view on that?
Laijawala: Prima facie, philosophically it is a great idea, but it is all about the timing. Would the government want to go ahead and impose this levy in a pre-election year? In addition, there are sensitivities of farmers also involved. Clearly over the last three years we have seen acute rural distress and if the government goes ahead and instead of resolving this distress is seen imposing a tax on agriculture, politically there would be a very low political threshold for the same.
We think that in fact, there are many other ways in which you can raise revenues. I completely agree that there is a need to look at innovative revenue measures and this is what we think the government is going to do because we have seen a widening of the term premium, so clearly that is challenging the finance minister as he goes ahead and presents the Budget. It is imperative that the government goes out and comforts the bond market.
Yet at the same time, the Finance Minister needs to walk the challenge of restoring growth in a pre-election year. So how do you do it? The ways are through innovative means of raising non-taxation revenue. Yes, we should focus on taxation revenue, but more than taxation revenue, there are ways and means of raising non-tax revenue and in addition, we think that there are ways of looking at expenditure as well, for example, why can't some of the infrastructure expenditure be moved off the government consolidated fund, off the Budget? That is an idea that we think will be explored again in the Budget.Desai: There is another easy way actually. The bond markets which Abhay talks about can be assuaged very easily. Just open the foreign limit and sell the recap bonds outside India. You are done with the yield. The yield will come right back into the sixes.