 "Devangshu Datta: A contentious saga of tax reform ends")
The Rajya Sabha passage of the constitutional amendments necessary for the GST (goods and services rax) marks the end of one contentious phase in the long saga of tax reform. The next phase may be as arduous. The GST must now be formulated in detail with tax rates, while at least 15 states pass constitutional amendments in respective Vidhan Sabhas. Then the actual bill with the tax rate details, etc., will have to pass, along with an Interstate GST Bill and Bills in every state and Union Territory.
Side by side, state and central revenue/excise officers must retrain to implement the new system. Note that unlike the earlier VAT (value added tax), which was implemented with various states getting on board at different stages, GST must start simultaneously everywhere.
The finance minister reckons it could be rolled out by April 2017. This may be optimistic, given the amount of legislative coordination required. Whenever GST does come into force, some chaos is guaranteed.
It may take a year or more before it starts working as advertised. There will be scope for plenty of fudging and corruption in the interim period (and beyond). Some commentators also believe that GST could kick off with an initial inflationary phase, especially in terms of cost of services.
Given the fabled efficiency of Indian netas and babus, it is possible the difficulties are underestimated and the timeline to a stable new system will be extended. Now, there are several state elections in 2017 and a general election is due in 2019. If revenue collections in 2017-18 are a mess due to GST, the government will be struggling to recover lost ground in 2018-19 as it heads into the general election.
Speaking of inflation, we still have no idea who the next Reserve Bank of India (RBI) governor may be but the government has written the inflation target of 4 per cent (plus/minus 2 per cent) into law. This target rules out any chance of a rate cut at the RBI policy review on Tuesday. That will be Raghuram Rajan's farewell party.
Meanwhile, the Bank of England (BoE) has cut its policy rate to a record low of 0.25 per cent. This is effectively a negative rate, with core inflation at 1.4 per cent and overall consumer inflation at 0.5 per cent. The BoE has also pledged a quantitative easing of up to GBP 170 billion to counteract the bite of Brexit.
Some have calculated that 55 central banks have eased policy since January 2015. The US Federal Reserve is an outlier since it raised the US policy rate in December 2015. The July 2016 American employment numbers are strong with 255,000 new non-farm jobs and the May and June jobs estimates have been revised up. The Fed chairperson said that 100,000 jobs/month would be commensurate with the natural increase in workforce due to population growth. So, 255,000 is pretty good going.
US wages have also picked up. The consensus is that the Fed will hike rates again, by December. But the Fed is also expected to wait, one way or another, until the presidential elections are done in November. The USD was up after the Fed concluded its meeting in July.
The commodity markets are a little nervous ahead of China's macro-economic updates scheduled for the coming week. The price trends in metals could depend on the China numbers. Crude is sliding, due to weak global demand and high OPEC (Organization of the Petroleum Exporting Countries) supply. The cartel pushed out its highest ever monthly output of 33.4 million barrels in July.
Corporate results have, so far, been in line with (low) expectations. The website, Capital Mind, has done an analysis of 177 companies with over Rs 1,000 crore each in market cap. The combined turnover is Rs 4.6 lakh crore and the turnover increased by 8.8 per cent year on year (YoY). The YoY total net profit rose by 2.2 per cent. In the Nifty set, 25 companies have declared results till July 31. The net profits for this set are up by 5.5 per cent. Not bad but not standout either. Don't forget, these results are on a low base since Q1, 2015-16, was horrible.
Foreign investors' perceptions still seem be positive. The high liquidity in hard currency regimes means a continuing attitude of "risk-on". Valuations are at historically dangerous levels, at over PE 23.7 for the Nifty but Foreign Portfolio Investors (FPIs) obviously don't care.
The FPIs bought nearly Rs 20,000 crore of debt plus equity combined in July. They sold rupee debt in early August, which is another sign that a rate cut is not expected. Domestic institutions are net equity sellers. Technically speaking, the market continues to look strong. The Nifty faces resistance at 50 point intervals and the GST might have given fresh impetus to the ongoing rally.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
