The Indian GST: What is needed

Image courtesy: indiamike.comThe bullish bear is back with a look at the Indian Goods and Services Tax (GST) legislation. With the observation that procedural simplification in the taxation system without taking a sledgehammer to taxation infrastructure is merely window dressing, concern is that, just like the enthusiasm surrounding the reduction in corporate tax rates (revenue neutral and phased in slowly) has fizzled out, the conundrum of the appease-all democratic mujra surrounding the Modi government’s trophy legislation, the GST Bill, may defeat its purpose entirely.

What’s the claim?

According to Finance Minister Arun Jaitley, the GST reform can boost economic growth by as much as 2 percentage points by way of introducing more efficiency in the movement of goods and services across state boundaries. It is also claimed that Automotive OEMs and logistics sector companies stand to gain as it may become easier to transport goods across India. However, the stock market drew mixed reactions, profit-taking, and amidst the disclosure of monthly volume numbers, the impact of the long-pending indirect tax reform on automotive stocks was unclear.

What is the process from here on?

The 122nd Constitutional amendment, having been passed by the Upper House (Rajya Sabha) with certain amendments, will have to be ratified once again by the Lower House (Lok Sabha), which should be a formality given the control of the House by the ruling party. The bill will then proceed to the state-level, where it will have to be approved by at least half of the states (simple majority). A detailed tax structure will then be appended and the legislation will once again go through the ratification process in the two Houses of the Parliament, followed by a presidential assent.

The earliest implementation of the GST will be by 1st of April, 2017 – and that’s assuming there are no technical hiccups on the technology side (The GST Network Company awarded a contract to develop & implement its system as late as November 2015 to Infosys.)


#1 Implementation issues encompass not only technology but also the lists of items to be included in the GST. The GST purportedly leaves out staples such as alcohol, petroleum, real estate, and there may be a separate higher levy on luxury items, which seems downright farcical! That’s right: let’s leave these utterly common items such as petrol and housing out, and then call it a unified tax structure.

Fresh concerns have been raised by the IT industry association, NASSCOM, which is claiming that the GST will replace the existing administration of single-point central service taxation with one consisting of as many as 111 different taxation agencies!

Moreover, if replacing 17 complicated state and federal levies with consolidated agencies at 3 levels (CGST, IGST, SGST) sounds complicated, it must be terribly more so to actually administer the system procedurally and technically. By April, 2017? And pigs can fly.

#2 The tax rate hasn’t been decided yet. If it is too low, the states will attempt to block the bill and legal ramifications could be very messy. If it is too high, the popular appeal of the GST will be lost entirely. Modiji’s BJP has to walk the tightrope with finesse – which cannot be taken for granted.

#3 Revenue-neutrality could scupper the longer-term benefits. If August 3rd was any indicator, political parties across the spectrum are willing to appease and to be appeased, except the AIADMK (the ruling party of Tamil Nadu, which stands to lose out as a primarily manufacturing state), but on the major condition that revenue neutrality be assured. Granted that satisfying a few tax authorities is easier than satisfying many, but without a meaningful reduction in the tax burden, this seems analogous to dealing with 3 kidnappers instead of 17, without any reduction in the ransom amount! And the 17 kidnappers are still there, enjoying the spoils with the first 3!

Take it to the limit

The issues discussed above aside, the whole objective of the GST is voided if the state-level infrastructure of taxation authorities is not dismantled. After all, what economic efficiency will we talk about if the overall federal level tax collection is unchanged and all these taxation authorities are preserved, still making a living off Indian businesses as earlier? Then, all the GST is, is calling for more bureaucracy at the center by concentrating taxation power, which until now, was dissipated among various states. To study the other extreme, if all the taxation power at the state level is demolished, the objective of revenue-neutrality will have been dealt with, implementation issues will be minimized, and there will be no tax rate to debate over! That is what a real tax reform should look like.

It’s that time of the year again: The NRF spin (It’s good despite it being bad)

Oddly enough, the National Retail Federation (NRF) did not choose to build on its 2014 ruse that Thanksgiving sales, which were down 11%, were disappointing because there is an “evolutionary change” of online shopping. If anything, this theme would have found stronger support in the media this year, with Amazon sales growing by 23% in Q3 and a MasterCard research citing holiday season online sales growth of 20%. Never mind the fact that online sales only account for a tiny portion of total retail sales.

NRF-holiday salesHowever, better sense prevailed. The NRF did admit, to a large degree, that the U.S. Retail sector has been weak. And don’t be fooled: despite U.S. holiday sales (sales in November and December excluding autos, gas and restaurants) growing by 4.1% in 2014 and an estimated 3.7% in 2015, the consumer is under pressure.

The NRF, in fact, went on to highlight in this article that although general retail prices were 2.9% lower in October than a year earlier, as per the U.S. BEA, rent, healthcare costs and even the amount spent on communications like smartphones, tablets and broadband Internet service had all increased. Much of the extra money freed up by lower gasoline prices would have plausibly gone to such higher costs and travel and restaurants rather than retail merchandise. In other words, the consumer is feeling the pain pretty much everywhere, leaving little room for discretionary expenditures to grow.

“All of this has combined to create a very deflationary atmosphere the past year or more, meaning retailers have needed to be competitive and drop prices to keep products moving off the shelves.”


Retail Sales in the U.S. increased 1.40% in November of 2015 over the same month in the previous year. The figures have been on a downward trajectory of late and missing forecasts significantly and consistently (Source:

US Retail Sales YoYUS Retail Sales Recent

From the NRF’s perspective, Retail sales for November — excluding automobiles, gasoline and restaurants — were up 3% from a year ago, also below its expectations.


Furthermore, a crucial indicator of corporate over-optimism, firms’ inventories to sales ratio, is rising rapidly.

Inv to Sales
Readers may be astonished to know the strength of this weakness – the October U.S. Census Retail Inventory to Sales ratio was at the highest point since 2008 at 1.57. This means that the retail industry, on an aggregate, was overstocked by an astounding 57% in the month of December.  Even more distressing is that the ratio is well spread throughout sectors – Clothing & Departmental Stores have inventory worth close to 3x the revenue they are generating. Motor vehicles, home appliances, building materials and general merchandise have on an average 1.86x the inventory than sales. Also, looking at historical trends, this ratio usually drops sharply m-o-m in December, but then picks back up again in January to beyond levels seen in October.

The pain, thus, is likely to intensify for corporations in a soft growth environment, in the March-2016 quarter.


U.S. corporate profits decreased by 1.7% to USD 1508.90 Billion in the third quarter of 2015 from USD 1533.90 Billion in the second quarter of 2015. Moreover, comparing retails sales y-o-y growth of 1.7% to CPI rise of 0.20% y-o-y and wage growth rate of 4.3% y-o-y in October 2015, corporations are clearly troubled. (Salaries as a percentage of operating expense varies from 18% in retail/wholesale trade to 52% in health care services. Source: Society for Human Resource Management). If one were to consider Shadow Government Statistics’ 1990-based CPI figure of close to 4%, coupled with the wage growth of also in the region of 4%, one can see that the retail sales did not rise enough to offset the increase in costs for the corporations.


Yet, our Christmas isn’t complete without that little twist in the headline by the NRF: “Consumers Win as Retailers Cut Holiday Prices”! It’s alright, because despite bad news for retailers (the very group that NRF represents) who are having to slash prices, it is good news for the customers “in the long term”. Gotcha!

Mining industry yearning for clues in CPC’s latest 5-year plan

INSIGHT into the OVERSIGHT: “ China’s new 5-year plan brilliant news for mining”

As the CPC’s (Communist Party of China) perspectives on growth, consumption and investments shift, can we draw any definitive conclusions about the prospects for the mining sector, as is implied in this article?

Image courtesy: Yahoo! Finance

Leading Chinese mining stocks reacted rather negatively to the series of news releases by the CPC on 29th of October. On the NYSE, Rio Tinto opened 2.13% lower and BHP Billiton dropped by 3.28%, whilst over on the Shanghai exchange, China Shenhua Energy opened 2.43% lower.

The objective is not so much to criticize the article itself, but rather more to give clear insights into market and economic trends, in the face of large scale public policy interventions in markets and other regulatory affairs.

To effectively evaluate the substance and message of this article, we will discuss recent announcements by the CPC and key developments in the Chinese economy. Being the first stage in the general industrial production process, mining is heavily exposed to general economic trends. We will, therefore, take a look at the most important concern of the global mining sector today –global growth – or lack thereof.

MUCH ADO ABOUT NOTHING? The obsession with GDP

“Beijing’s decision to let urbanization happen at a faster pace and to stick to its target of “medium-high economic growth” and to double-down on a long-stated commitment to “double 2010 GDP by 2020” is the real kicker.”

The government recently decided to target “medium-high economic growth” in its 13th FYP over 2016-2020 after GDP expanded by 6.9% in the July-September quarter, slower than a 7% increase in the previous quarter. This is in contrast to the 6.5% rate of growth required from 2016 in order to achieve the said goal of doubling 2010 GDP by 2020: a high asking rate. In reality, there is a more pragmatist view emerging from the central planners in recent times. In July this year, President Xi Jinping alluded to a “new normal” in growth rates: not fast growth, but an improved economic structure that relies more on the services industry, consumption, and innovation. He has been quoted as saying, “Of course, speed [rate of GDP growth] is not the only thing we care about. Actually we are more concerned about indicators such as employment, residents’ income and prices.” [emphasis mine]. Premier Li Keqiang has also repeatedly downplayed its importance and instead emphasised the focus on job creation and consumer confidence.

“CONSUMPTION-LED GROWTH”, or forced-feeding?

Continuing to “raise consumption’s contribution to growth” is still an important plank and there is also a promise that “government will intervene less in price formation,” a clear reference to its botched stock market meddling earlier this year.”

If intervention in 1,700 stock prices has not worked, then how can it be certain that an attempt to raise aggregate consumption levels for 1.4 billion people will be successful? Decades of rising savings and investment levels can be a pointer towards increase in consumption-led growth. However, interventions in this area may, once again, fail. At the very least, this statement and the intentions behind it should be heavily scrutinized & researched further. The Xinhua press release (CPC vows less government price intervention) also contained bizarre oxymoronic statements from the CPC such as “The government will deregulate pricing products and services… and intensify targeted controls.”

Nevertheless, the overall emphasis was more akin to, “the government will cut red tape, delegate more power to local authorities and improve government services. To this end, China will try to overhaul state assets management, establish modern fiscal and taxation systems, and reform financial supervision.” The intention to move away from interventionary econ-management can only be welcomed: apparently, a true market-oriented reform.

Original article: China’s new 5-year plan brilliant news for mining ( >>

NO TO OPEN MARKET; YES TO PRIORITIZE & ALLOCATE (i.e. yes to excel sheets)

“Wording from 2013 that mentions the establishment of “a unified, open competitive and orderly market system” which would play a “decisive role in allocating resources” is gone from the latest communiqué. For the next five years government plans to “encourage better allocation of resources” and the country will “prioritize quality and efficient development,” but tellingly it’s no longer (only) up to market forces to accomplish this.”

At this point, the Bullish Bear has a confession to make: it is an avid, unbounded, unapologetic lover of free markets – human activity thrives on the back of the price mechanism and the trial & error process of the marketplace. Little surprise then that this brazen admission of central planning can only be derided. Market manipulation can and has led to tremendous costs at the very least, and sometimes, outright disasters. The government’s forced lending policies and its central bank’s loose monetary policies have attempted to cushion declining real estate prices, which is a huge concern for the banking sector – Fitch estimates banks’ total exposure to property could exceed 60% of credit if non-financing is also taken into account. The Chinese government also took desperate measures to stop the sliding stock market, formed out of excessive margin lending, which in turn was an outcome of the shadow banking system’s speculative frenzy with easy money in slowing economic conditions.


“The communiqué issued yesterday provides only the basic frameworks of programs and policies with a more detailed plan only made public in March.”

If this is true, then it perhaps belittles common sense to appraise the so called communiqué as a de facto framework. Whatever happened to a bit of conservatism in stance: a bit of equivocation, which would demand that the view be qualified and constrained, somewhat, albeit temporally..?

Government policies are very often critical as they set the agenda for markets, industries and the economy. But analysts very often jump the gun and underestimate the flaws of central planning and the power of market forces.

What this article has completely overlooked and is becoming a bigger widespread concern, is the fact that global growth has been slowing dramatically. Last month, the IMF warned that global growth may slow to lowest since the 2008 recession. The US economy grew 1.5% in Q3, lower than a 3.9% expansion in the previous period and below market expectations. And growth in the EU fell to just 0.1% last quarter after a near 2-year recession. Growth in Australian Mining Production, heavily linked to Chinese industrial production, has slowed down consistently over the last four quarters from 14.6% Y-o-Y growth in 2Q2014 to 3.7% Y-o-Y growth in 2Q2015.

The Chinese economic story will take its own course, and the government’s policies lack clarity and conviction. Above all, we need some patience so as to be in a better position to evaluate opportunities in the Mining sector, and indeed, in other sectors. Let the chips fall where they may – sans the artificial stimulants and inflammatory interventions!

Original article: China’s new 5-year plan brilliant news for mining ( >>