Indian Economy - News & Discussion Oct 12 2013

chetak · Post by **chetak** » 30 Apr 2014 09:08

This must cause itching in some nether regions......

India displaces Japan to become third-largest world economy in terms of PPP: World Bank

30 Apr, 2014,

NEW DELHI: India has displaced Japan to become the world's third biggest economy in terms of purchasing power parity (PPP), according to a World Bank report released on Tuesday.

The 2011 round of the bank's International Comparison Program (ICP) ranked India after the US and China. The last survey in 2005 had placed the country on 10th place.

PPP is used to compare economies and incomes of people by adjusting for differences in prices in different countries to make a meaningful comparison.
India's share in World GDP in terms of PPP was 6.4% in 2011 compared with China's 14.9% and the US' 17.1%, the latest ICP showed. The survey covered 199 economies.
"The United States remained the world's largest economy, but it was closely followed by China when measured using PPPs. India was now the world's third largest economy, moving ahead of Japan," the report said. ..

Despite high inflation in India in recent years, prices in the country are still well below those in advanced economies, explaining the higher raking for India on the PPP measure. But according to the International Monetary Fund (IMF), India's economy is 12th largest and only about a third of Japan's in terms of absolute unadjusted dollars. "The economies with the lowest prices are either in Africa or Asia and the Pacific and include India, which has the third-largest economy," the report noted..

Because economies estimate their GDP at national price levels and in national currencies, those GDPs are not comparable. To be compared, they must be valued at a common price level and expressed in a common currency," the report said, giving out the rationale for the PPP adjustments

example, people in a country with higher average per capita income may not necessarily have a better quality life than a country with lower average per capita income.

This makes it a good tool to compare poverty levels across countries.

"One major use of PPPs is poverty assessment using the World Bank's international poverty threshold of $1.25 per day per person. National poverty assessments differ because the purchasing power of national currencies differs from one economy to another," the report said.
In terms of per capita GDP, even in PPP terms, India ranks very low at 127 in the 199-country ranking.

"The largest economies were not the richest, as shown in the ranking of GDP per capita. The middle-in-come economies with large economies also had large populations, setting the stage for continued growth," the report noted.

In the latest ranking, India's economy was 37.1% of the US economy compared with 18.9% in 2005.
The report said in terms of spending power, the differences have come down.

"The spread of per capita actual individual consumption as a percentage of that of the United States has been greatly reduced, suggesting that the world has become more equal," it said but cautioned some of this could be due to changes in the methodology.

Prem · Post by **Prem** » 02 May 2014 07:04

Indian Economy Now World’s Third Largest Says World Bank

http://www.india-briefing.com/news/indi ... 8341.html/

DELHI – A report released Tuesday by the World Bank’s International Comparison Program ranks India as the world’s third largest economy in terms of purchasing power parity (PPP). Based on this measure, the overall Indian economy is now worth more than US$ 5.75 trillion, displacing Japan’s hold on the number three position. This is a significant jump from India’s 10th-place ranking in the previous report issued in 2005.
Notably, the report also places China hot on the heels of catching up with the U.S. as the world’s largest economy, stating “The United States remained the world’s largest economy, but it was closely followed by China when measured using PPPs. India was now the world’s third largest economy, moving ahead of Japan.”The report evaluated 199 economies according to PPP, an economic index commonly used to compare economies by adjusting for differences in prices between countries – said to result in a more accurate comparison, as it takes stock of the fact that US$1 goes a lot further in India than in the U.S.Some analysts have questioned the accuracy of the report’s findings, however, on the grounds that PPP comparisons have been known to fluctuate greatly according to how local prices are determined. Further, in the previous report in 2005, prices are thought to have been overestimated, leading the economies of developing nations to appear smaller than was actually the case. It may be that price estimates in Tuesday’s report have swung the opposite way, resulting in exaggeratedly high rankings for India and China.For this reason, PPP is typically thought to be more suitable for the comparison of similar countries in terms of economic development. The report itself notes a margin of error of plus or minus 15 percent.In comparison, when viewed in terms of absolute un-adjusted dollars – net economic worth in U.S. dollars – the Indian economy ranks 12th largest globally.

subhamoy.das · Post by **subhamoy.das** » 02 May 2014 08:02

This is old news!

Suraj · Post by **Suraj** » 03 May 2014 01:35

Yes, India overtook Japan as of 2011-12 . This is primarily news for the 'China will overtake US soon!' part.

disha · Post by **disha** » 03 May 2014 01:51

Guys I need help.

I need bullet points on the following:

1. Why is the concept of NAC flawed
2. How did NAC run down the economy.

For item #1., I can think of transparency etc. One of the counter-argument is that Government may cause undue influence on policy bodies and hence this quasi-private councils can provide inputs. I therefore need counter-counter points to that.

I know about NAC influencing the demand side of economy via stupid NREGA and running the economy down. So in item #2, I need some more dirt on Aruna roy and Harsh Mander. The Jean Druize guy is useless., I know that - he basically used a wrong data set to come up with a wrong plan.

Suraj · Post by **Suraj** » 03 May 2014 01:54

The NAC was a shadow cabinet occupied by unelected people pushing their own dole agendas. On paper, it's not 'bad' - it was modeled on the Planning Commission. However, the NAC was a symptom of executive power being divested from the hands of the PM and into the hands of the head of the ruling party and the advisory NAC board.

Suraj · Post by **Suraj** » 03 May 2014 02:06

There's been a lot of discussion on which of the parties contributed most to the decade of high growth in the 2000s. Growth is return on investment. Investment is given by the gross fixed capital formation data, in actual data parlance. When GFCF is high, high growth can be sustained. The best possible definition to 'who was responsible for high growth ?' is 'who did most to push up GFCF ?'. Here's a very pithy graph showing who.

Note the massive increase in GFCF from a very average 23% in 1998, to 34%, in 2004 ? That change is THE reason for the high growth of the 2000s. The party in power since then has barely managed to keep the investment rate at that level. The 2013 data is probably below the 2004 data, indicating that in 10 years, they did nothing more that barely keep up and ride the investment wave created by the NDA between 1998-2004 .

disha · Post by **disha** » 03 May 2014 03:27

^^ Suraj thanks. I am going against a Wharton MBA. Person is a young sharp mind, with *too* good intentions.

Prem · Post by **Prem** » 03 May 2014 03:42

Three reasons to love the Indian rupee: J.P. Morgan

http://blogs.marketwatch.com/thetell/20 ... vate-bank/

n late August, a lethal mixture of taper talk by the Federal Reserve, a huge current-account deficit, and the threat of a U.S.-led military strike in Syria pushed the Indian rupee to multi-year lows.

Much has changed in the eight months since. The dollar USDINR recently bought 60.01 rupees, marking a decline of 2.9% on the year. The WisdomTree Indian Rupee Fund ICN has gained 6.1% in 2014 to date, in comparison with the exchange-traded fund’s 5.4% 2013 drop.

Here are three reasons Sara Yates, global head of foreign-exchange strategy at J.P. Morgan Private Bank, says the rupee is the bank’s highest-conviction emerging-market currency:

1. Raghuram Rajan, governor of the Reserve Bank of India
Rajan, a professor and former chief economist at the International Monetary Fund, took office in September. “The new central bank governor has really brought substantial international credibility to the role,” she said. One example is his push to establish a consumer-price inflation target, which is a global standard, as a guide for monetary policy, she said. India has typically focused on wholesale price inflation.
2. The misconception that India is part of the Fragile Five
The term Fragile Five, coined by Morgan Stanley, refers to Brazil, India, Indonesia, South Africa and Turkey. These countries saw inflows of foreign funds in recent years as investors flocked to riskier assets in the search for yield. Those flows could be at risk now that the Federal Reserve is on track to stop its stimulative bond purchase by year end, setting up an eventual rise in U.S. rates. Higher rates would also make it more expensive for these countries to borrow money to finance their current-account deficits. But the Reserve Bank of India under Rajan has narrowed India’s current-account deficit, in part by increasing India’s tax and import restrictions on gold, said Yates. For the three months ended December, India’s current-account deficit was 0.9% of gross domestic product, or 0.3% of GDP on a seasonally adjusted basis, according to data from Haver. The misconception creates a buying opportunity, she said.3. The rupee is a high carry currency
India’s key interest rate was hiked to 8% from 7.75% in January. The benchmark rate in the U.S., the federal funds rate, was held near 0% at the Fed’s most recent meeting. That interest-rate differential between India and the U.S. allows for the total return on an investment to be positive even if the Indian rupee exhibits weakness. “The rupee would have to underperform by more than the policy rate in order to get a negative return on investment,” said Yates. And India’s central bank has made it quite clear that it is willing to defend the rupee if U.S. rates should rise faster than expected, she added.

Vayutuvan · Post by **Vayutuvan** » 03 May 2014 04:05

Both times JD reversed the investment direction, i.e. fall in investment. Then 1998 in spite of the test the investment went up quite a bit then 2000 Pakistan hit India so things went down. Again a little bit of lull in the aftermath of Godhra burning but then the nice pick up in two years almost 10-12 points. Congress didn't too bad (though rate was lower) had they continued we would have been looking very good today, but no they have to screw it up through skimming scamming scamstery (Jhujar TM style).

Vayutuvan · Post by **Vayutuvan** » 03 May 2014 04:16

How balanced are the NAC members? You should look at their politico-economic disposition as well as their expertise in Economics - development or otherwise. What does Aruna Roy and Harsh Mandir know about Economics? They are political creatures first and foremost , aren't they? Roy is an Union organizer (though she is an IAS she did not work much in the babudom, IIRC) who did her deeds a small geographic locale sectorally as well. Mandir was a (competent?) IAS officer who would have had to administer a few districts and a man of India but would be confused with the forest that is Bharat. Are all dilli billis (or close enough)? Too close to the power centers both in ideology and geography leading to inbreeding and group think.

Suraj · Post by **Suraj** » 03 May 2014 04:46

matrimc wrote:Both times JD reversed the investment direction, i.e. fall in investment. Then 1998 in spite of the test the investment went up quite a bit then 2000 Pakistan hit India so things went down. Again a little bit of lull in the aftermath of Godhra burning but then the nice pick up in two years almost 10-12 points. Congress didn't too bad (though rate was lower) had they continued we would have been looking very good today, but no they have to screw it up through skimming scamming scamstery (Jhujar TM style).

East/SE Asian growth was characterized by sustained high investment/GDP of 35-40% for decades. The Chinese in fact pushed that even higher, to nearly 50% investment/GDP in some years, and sustaining 40-45% investment/GDP for years. That's why they have high growth. Invest a lot and invest it well, and you get a lot of growth in return. Indian growth was for a long time characterized by trying to make a small amount of investment go a long way.

The GFCF number is quite telling - Before the NDA, there was just one year of recorded history when GFCF exceeded the number in any year of the NDA administration (not counting the year they first came to power - 1998, when they had a 13-day govt). It took the NDA 2-3 years to undo the damage from previous weak governments, including the fiscal cost of the pay commission and finance commission, the dot com bust and the nuclear sanctions. Once the effect of their policies took effect, the change was dramatic - they left behind the economy in a shape no one else ever came close to doing.

India had never before seen >30% investment/GDP until 2002-03, a level the Asian tigers sustained for decades. Not even in the 1990s liberalization days, when the best we did was 26%. As of 2013-14, GFCF is down to ~28-29% (see Statement 4, Row 3, Q1-Q3 data for 2014, which means UPA1+UPA2 have more or less undone the entire foundation of the high growth of the 2000s - took an economy with a GFCF at 34.5%, rode the tailwind to 38%, and now passes it on with a GFCF of ~28.5%. One adminstration takes reins and generates a 11% GFCF/GDP gain, while the next presides over a 10% drop.

If there was more economic literacy, people would be shot for this kind of 'performance'. Instead we waste energy arguing about Adanis, Ambanis and $/BTU and dumb down this topic. There's a much bigger problem than the price of natural gas.

AbhiJ · Post by **AbhiJ** » 04 May 2014 14:03

The below article alone tears apart the Congress growth myth of the last 10 years:

http://friendsofbjp.org/content/inclusi ... ufacturing

Suraj · Post by **Suraj** » 06 May 2014 06:35

Not only has agricultural output remained resilient despite stagnant industrial output, but agri exports themselves contribute to 14% of overall merchandise exports now.
Agricultural products exports rise to $45 billion in 2013-14 from $25 billion in 2011-12

India's agro exports have zoomed to $45 billion in 2013-14 from $25 billion in 2011-12. The spurt comes on the back of cumulative efforts of farmers, relatively stable government policies and active involvement of the trading community, comprising small and medium enterprises (SMEs), small traders, large Indian corporates and Indian arms of multinational commodity traders.

sivab · Post by **sivab** » 06 May 2014 06:54

http://timesofindia.indiatimes.com/home ... 704071.cms

BJP's manifesto promises robust defence preparedness. Defence acquisitions are delayed because of red-tape, institutional risk-aversion and procedural delays which are often engineered by rival factions of arms dealers. How do you propose to get around the problem which has defeated so many honest intentions in the past?

Our armed forces and our men and women in uniform have always displayed highest valour and courage. The nation stands indebted to the heroic sacrifices made by our armed forces in protecting our land and borders. Historically we have always been a nation that has never been the aggressor but one which will fight to the last to defend itself against any aggression. We should take all steps to ensure that our defence preparedness is of the highest order to be able to meet any covert or overt aggression. We also need to ensure that the morale of our defence personnel remains high at all times, and for this, the government needs to take the extra steps to address genuine concerns of our officers and soldiers.

The last 10 years have seen our defence preparedness becoming weak on account of several procurement procedures mired by long delays leading to shortage of arms and equipment. The ideal situation is an efficient procurement system leading to timely and cost effective procurement of quality defence equipment, done in a transparent manner. In the past, we had instances of good quality arms being procured but lacking in transparency in their procurement. In the last 10 years have a paradoxical situation where there was hardly any procurement happening in time and still serious questions of transparency have been raised. I think the time has come when domestic production of defence equipment and machinery needs to be seriously incentivized by the government in a carefully calibrated manner so that we move towards indigenous equipment manufacturing in the medium term without compromising our preparedness in the short term. I am convinced that the time for this idea has come up.

We must start with indigenizing military equipment. The DRDO has several decades of experience but India still imports most of its military hardware. We should involve Indian corporates in PPPs for defence manufacturing. We have the scientific and technical knowhow but the arms lobby has prevented indigenization of military hardware. This must change, making Indian defence more self-reliant and also saving foreign exchange.

You seem to indicate that economy will be a big focus area for you. How will you address the problem of jobless growth? Is the decision opposing FDI in multi-brand retail final?

The first priority of the government will be to restore the health of the economy and put it back on track. This is not only important for reviving growth, but also important for generating employment. If there is one single thing that I feel needs maximum attention, it is generating employment for our youth.

To restore the health of the economy, a number of steps need to be taken. The first and the foremost will be to bring back the focus on infrastructure and manufacturing sector. For this we will have to move away quickly from the present state of policy paralysis and create an enabling environment to revive investor sentiment. We will also have to take steps to remove procedural bottlenecks and expedite decisionmaking process for clearing projects.

Even as we take effective steps to revive growth and generate employment, we will also have to take specific measures for controlling inflation. This will require addressing the supply side concerns. This, in turn, would mean reviving the agriculture sector and come out of the present state wherein agriculture is being seen as non-remunerative. Farmers of this country feed the nation. Just enacting legislations without adequately addressing the challenges that the farmer faces is nothing but a mockery of farmers and the poor. The farming sector has to be revived and we must try to usher in a second green revolution. This can be done only by investing heavily on irrigation facilities and beginning work in right earnest on the river linking project. On the issue of FDI in retail our position has been made clear in our party manifesto.

There is speculation that you will govern more through efficient bureaucrats than your ministers. Your comments.

I do not concur with this. In our democracy, the buck stops with the political executive. BJP and its NDA partners have several years of experience in government. We have the most experienced and talented people to run the government. As I have said on several occasions, we have to work as a team.

You have raised unemployment and jobless growth as a major issue against the UPA. In so doing you appear to have raised expectations of the youth who are looking for a quick solution. Can you tackle the challenge of employment generation swiftly?

The record of the UPA government on creating jobs has been very poor. While the NDA government created more than 6 crore jobs in its 6-year rule, the UPA government has created only 1.5 crore jobs in 10 years!

Job creation has to be our primary target. There is no point in talking about hollow development schemes when the people are not getting jobs. I understand the raised expectations of youth. This is because there was absolute pessimism in the last 10 years. They now have a glimmer of hope and that is due to our track record. I think our youth is extremely talented, capable and ready to work hard. They have a right to dream. They have a right to build their own lives and careers. It is our responsibility to give them ample opportunity. It is our responsibility to ensure that they get the right kind of education and skills so that they can be employed.

We are aware of the expectations and we are ready to work hard to meet those expectations.

Growing joblessness in the manufacturing sector is a cause for worry. More are finding work in the services sector. Do you think this needs to be reversed?

The UPA government did not focus on the manufacturing sector. We are very clear that we have to focus on the manufacturing sector because that is where jobs are generated. Even within the manufacturing sector, there has to be adequate focus on the micro, small and medium enterprises. The next war that is going to be fought globally is the "jobs war". We must prepare our country to face that challenge.

Homelessness is another giant challenge. Low interest rates helped many among the middle and lower middle classes to buy their own homes. But the rise in interest rates has put the dream beyond the reach of many. Can you make any commitments on easing the burden on the salaried class?

It is a matter of shame that even after 65 years of independence, we have not been able to provide shelter to our citizens. The Congress government never gave adequate focus on this issue. We are clear that by the time our country completes 75 years of independence, every family should have a house of its own. Not only this, we should aim that this house has access to toilets, water and electricity. To achieve this, there has to be a national policy on affordable housing. Any such policy has to creatively leverage land as a resource. We will aim at arriving at a policy which has a mix of public investment and private investment and the focus will be on easy access to credit including interest subvention, if necessary.

What about the economically weaker sections? Can existing schemes like Indira Awas Yojana be scaled up or modified, or will you like to launch new projects?

We have to examine all options in a comprehensive manner. Our focus has to be on addressing the issue of urban and rural housing in a comprehensive manner. We will focus on the economically weaker sections.

What do you think of NREGA? Opinion is split about its benefits. Its votaries say that it has set a floor for rural wage and has provided cushion to landless labour. Critics say that it has distorted the wage market, and the billions spent without any durable community assets being created. What is your view?

We are committed to the effective implementation of NREGA. However, there is a need to analyze the costs and benefits in a professional manner. Experts should be asked to find out the loopholes and plug them. One thing is clear: at present, there is hardly any creation of durable community assets. We cannot let so much public money be spent without creating any durable assets. It also needs to be examined whether part of the NREGA funds can be used for rural housing, rural sanitation and providing skills to the unemployed in rural areas. I feel that after the Act was passed by Parliament with the support of parties like BJP, the UPA government did not follow it up with proper implementation. They were more interested in reaping political benefit out of this scheme rather than focusing on effective implementation to provide employment support.

Indian agriculture faces the problem of low productivity and rising pressure on land. How can things be remedied at a time when wages are rising?

I have often said that we have to address the problem of low productivity in agriculture. Agriculture needs to be made remunerative to farmers. The entire methodology of fixing the MSP needs to be relooked at. The farmer has to be adequately compensated for his efforts. The UPA government has neglected the agriculture sector and has done nothing for farmers. We need to bring back the focus on agriculture and take effective steps to improve the lives of farmers.

The first step has to be adequate investment in the irrigation sector. The Pradhan Mantri Krishi Sinchai Yojana promised in our manifesto is a clear pointer to the focus that we are likely to give to the agriculture sector.

Secondly, we have to take research in agriculture from lab to land. For this there has to be massive increase in extension activity. In short, we are committed to bringing the agriculture sector out of the present state of government apathy and neglect. Our focus is going to be on increasing productivity and thereby the income of the Indian farmer.

We also need to invest heavily on agro infrastructure and create value addition for the products. This will not only create additional employment opportunities but also increase the income of farmers.

There has been in recent years an intense environment versus growth debate. Do you think it is possible to resolve the tension between the competing objectives?

I think that we can take care of environment concerns even while giving sanction to projects. The problem arises when the procedure for environment clearance is used in a malafide manner for rent-seeking. This leads to projects being delayed. In such a situation, environment protection is not the objective of the government and projects are also delayed. It is this lose-lose situation which prevailed in the last 10 years. I am convinced that we can move towards a win-win situation where all environment concerns will be adequately addressed, but not at the cost of project delays. All decisions, even rejection of proposals, should be taken in a transparent and time-bound manner.

Modi's views on economic issues ...

panduranghari · Post by **panduranghari** » 06 May 2014 19:02

http://www.thehindu.com/business/Econom ... 978735.ece

Why not move Gold into the capital account? Problem solved. China does that, Russia does that and so does Eurozone.

kumarn · Post by **kumarn** » 08 May 2014 21:46

panduranghari wrote:http://www.thehindu.com/business/Econom ... 978735.ece

Why not move Gold into the capital account? Problem solved. China does that, Russia does that and so does Eurozone.

This is a consequence of following the UN System of Accounts where gold is treated as a raw material for industrial use or for the preparation of jewelry or some other durable that is purchased by consumers for the durable services that it provides. In most countries around the world it is not purchased for inflation hedging or as an investment asset. Hence, gold is treated as a commodity and so on the current account and not as an asset that would otherwise be part of the capital account.

Prem · Post by **Prem** » 09 May 2014 10:08

Brics to Launch Contingency Fund in July
http://www.nasdaq.com/article/brics-to- ... 0506-01941

BRASILIA--Brazil, Russia, India, China and South Africa are set to launch a contingency fund during a July summit in Brazil, Brazilian Finance Minister Guido Mantega said Tuesday.The $100 billion fund is meant to be a buffer for the group of emerging economies known as the Brics countries.Answering questions on a television talk show, Mr. Mantega said Brazil's inflation will slow in the coming months. "It is already declining," he said, adding that the country's central bank has the power to continue fighting price increases with higher interest rates.

Theo_Fidel · Post by **Theo_Fidel** » 11 May 2014 08:00

Manufacturing in India is cheaper than in China. By quite a bit as well.

gakakkad · Post by **gakakkad** » 11 May 2014 08:36

^^ TF I have a different way of looking at the graph..Only labour is considerably cheaper in India...the bar showing electricity is thickest in India. and thinnest in Germany ,US etc...Point to note is that cost of labour would rise rapidly as per capita Income grows...then there would be no real incentive of export oriented manufacturing in India...

I am not sure that relying on cheap labour is the way to go... We need cheap electricity and a good mix of highly skilled (matching the germans in skill and pay check) and cheap semi-skilled workers ..Abundance cheap unskilled workers is an indictment on our governance ,rather than a sign of competitiveness .

Theo_Fidel · Post by **Theo_Fidel** » 11 May 2014 10:12

G saar,

You are misreading the graph. Note that 0-80 is the very bottom portion. As a proportion of the scale electricity is so small a difference as to be negligible.

Manufacturing competitiveness is a sum of many things. Right now India is cheaper. And by quite a bit. No qualifications necessary.

Austin · Post by **Austin** » 11 May 2014 10:50

Doubt even if India Manuf cometitiveness is cheaper or Indonesia is more cheaper Manuf from China in any major way will move to these countries ..considering these industries would have done major investement in China and the gains from shifting wont be as signigicant.

Newer Manuf though has better chance to move to India then to China.

nandakumar · Post by **nandakumar** » 11 May 2014 16:46

Earlier in the day, Rahul Mehta had posted in the Narendra Modi thread, about a Gujarat Government amendment to the Value Added Tax. He had contended that the amended law was inimical to the interests of the small and medium businesses. As a corollary, he had argued that Modi was cut off the same cloth as the dynasty in the sense that he too is an apologist for big businesses as much as the Congress party is. While it may or may not be appropriate to the Narendra Modi thread, certainly one of the Admins did think it was not, and hence I am posting my response in the Indian Economy thread.
Rahul Mehta referred to the amended law which denied the benefit of set-off of the the sales tax (VAT) paid on the inputs consumed, against the taxes payable on the output if the person deducting the tax on inputs (a supplier/producer up the value chain) had not remitted to the Government, the taxes thus collected. He would seem to argue that the benefit of set-off should still be available to an assessee (tax-payer) down the value chain no matter that the tax payer up the value chain had not deposited his dues to the Government. Now, how tenable is this proposition?
I would only draw attention of the members of this forum to a news report, that appeared more than a year ago, which talked of difficulties being faced by employees (most notably, pilots) of Kingfisher Airlines. Apparently, the income tax authorities were refusing to give credit for income tax deducted from the salaries of these employees, while assessing the tax due on their incomes because the airline had not deposited the tax deducted at source (TDS) with the Government.
In other words, the Gujarat Government was only trying to enforce under its VAT regime, a principle of tax administration that is in line with central levies of taxation. Indeed, this is in accord with tax laws, the world over. Of course, you could argue, as I suspect would Rahul Mehta, that it only proves that the entire global political structure has been captured by a cabal of big business entities. While that might well be the case, I would only venture to suggest that, at least in the context of whether Modi represents an alternative model of Governance, it is not compelling evidence.
That aside, as legislation goes, VAT is a still a work in progress. Its overarching principle is that every tax payer should be liable to pay tax only the value that he/she has created. In a common market as large as the Indian sub-continent it is entirely possible that goods may be produced in one State and some processes are carried out in another State and the final goods reach a consumer in the third State with each State entitled to collect tax only on that portion of value added in the ultimate good that is attributable to its own borders. Imagine steel produced at the Tata Steel plant in Jamshedput (Jharkhand) being used by a auto component manufacturer in Baroda (Gujarat) for eventual supply to Ashok Leyland's truck plant in Chennai (Tamil Nadu). In the scheme of things, a central computer will keep track of flow of goods across borders and make suitable adjustments through some kind of a clearing mechanism similar to how cheques flow across cities and get properly credited and debited to respective accounts through a clearing mechanism set up by the RBI.
Since this is still to come into place (which will happen when Central Sales Tax (a sales tax levy for inter state transactions where the tax accrues to the producing State and ignored by the Consuming State, for its own tax revenues) stands fully abolished, States need to have safeguards of this nature that they do not give input tax credit unless there is a bonafide inter-state transaction. A good computer system is needed for setting such accounting issues for even intra-State transactions. Even if such a system is in place, the larger principle that tax credit can be granted only if there is clear proof of revenues having come into the Government coffers.
Fiscal prudence demands nothing less.

Rishirishi · Post by **Rishirishi** » 12 May 2014 01:47

Boston Cunsulting Group usually has some very credible facts. If this is correct, US manufacturing will work out very better,, when you factor in transportation time, legal issues etc.

But I suspect this is for very energy intensive industries. I think the labour contant is much higher in your typical garment or shoe manufacturing industry.

Prasad · Post by **Prasad** » 12 May 2014 09:03

Has there been a single article written that makes a ma-behen takedown of upa's handling and grinding to a halt of the economy?

Austin · Post by **Austin** » 13 May 2014 18:01

No external debt crisis, please

Circumstances have forced the RBI to tighten curbs on borrowings by corporates, and on FII investment in short-term bonds

The Reserve Bank of India (RBI) recently issued a curious circular to all banks in India. It barred banks with overseas operations from giving foreign currency loans to Indian companies. It has also stopped them from providing Indian companies with guarantees that help raise loans from other overseas banks, so that they can repay outstanding rupee loans in India.

What’s intriguing about this notification is that it revokes a 2012 decision, which allowed Indian companies to raise money overseas to repay rupee loans.

But, when viewed in conjunction with a few other recent policy measures, a clearer picture emerges of the RBI’s attempts to fashion external policy — one that attempts to limit the Indian economy’s vulnerability to external volatility that may arise from the US Federal Reserve’s tapering policy.

Ballooning NPAs

There is, of course, the RBI’s obvious concern about the swelling non-performing assets (NPAs) on bank books. NPAs pose an impending risk to the banking system and the economy and, if left unresolved, could damage the credit markets for a long time. In January 2014, the RBI even released a framework for revitalising distressed assets.

The International Monetary Fund (IMF) too, in its latest instalment of Asia Pacific Economic Outlook, has struck a cautionary note about the high proportion of corporate NPAs, which it feels are a threat to economic stability. According to the Outlook, a third of India’s corporate debt belongs to highly leveraged companies — with a leverage of three times or more (for every Rs 100 of share capital, these companies borrowed Rs 300 or more), the highest leverage in the region.

Unfortunately, many of these companies also have a low profit-to-interest-payment ratio, also known as interest coverage ratio (ICR); meaning, they have few profits left, after taking care of operating costs, to pay interest and taxes.

The IMF report further says that for companies with external borrowings, any currency depreciation is likely to hit the ICR. And this is probably what’s giving the central bank anxious moments. There are clearly two strands to the RBI’s external strategy.

At a broader, macro level is India’s total external debt position, which amounted to $425.9 billion in December 2013 — a jump of 13.2 per cent from $376.2 billion in December 2012. India’s external debt has been rising — especially since the apex bank started raising benchmark interest rates to counter deeply-embedded inflationary trends. This prompted many companies to tap cheaper external markets for loans.

Commercial borrowings currently total $134.229 billion — a jump of over 90 per cent since December 2009: it was after January 2010 that the RBI increased interest rates 13 times in 18 months. Even NRI deposits saw a spectacular rise, especially after the central bank aggressively campaigned for them — starting in September 2013 — to counter the steep rupee depreciation.

NRI deposits amounted to $98.639 billion in December 2013, a clear increase of 107.7 per cent over the $47.490 billion in December 2009. These NRI deposits need to be repaid over the next two-three years.

The rising external debt number is bound to induce a sense of foreboding when viewed through the prism of critical macro ratios — the RBI’s total hoard of foreign exchange reserves can now service only 69 per cent of external debt (compared with 138 per cent in 2007-08), the total outstanding is 23.3 per cent of GDP (it has always been lower than this since 1998-99), and concesssional debt comprises only 10.6 per cent of total debt stock (which means a higher debt servicing burden).

Clearly, one of the objectives of the circular mentioned above — apart from avoiding the cosmetic transfer of risk from the domestic balance-sheet — is to keep a lid on external debt, especially since tapering by the US Fed Reserve is likely to keep the external economy volatile. Allowing Indian companies to raise funds overseas to repay domestic debt might aggravate the situation now.
RBI tightens the screws

The second purpose of the circular is to address the probable risks that might arise from short-term external debt, or loans to be repaid within 12 months. Short-term debt was 21.8 per cent of total debt as of December 2013, and is lower both as a percentage of total outstanding external debt as well as in absolute numbers compared to the immediate preceding months.

The country’s stock of short-term external debt touched $92.707 billion at end-December 2013, or close to 21.8 per cent of the total debt, compared with $91.881 billion in December 2012 comprising 24.4 per cent of total external debt then.

What could be worrying the RBI is the rush of money streaming into short term debt instruments — such as 91-day treasury bills issued by the government or commercial paper floated by companies. Such a deluge could be facilitated both by the interest rate differential between western markets and India, as well as the stronger rupee vis-à-vis the dollar.

One of the clear indicators to central bank strategy was revealed in RBI Governor Raghuram Rajan’s first bi-monthly policy statement of April 1. The RBI announced that henceforth foreign portfolio investors will not be allowed to invest in any government security, including treasury bills, with maturity less than a year. While the ceiling for investments in government securities remains fixed at $30 billion, the RBI wants it invested entirely in government paper with maturity of more than a year.

This, the bank hopes, will deter the yield-chasing, short-term investors and insulate the economy from volatility. To soften the blow, the apex bank has handed out portfolio investors a number of sweeteners that facilitate the process, and lower the cost, of investing in the Indian capital market.

One, portfolio investors can now open a local bank account and transfer investible capital into that account directly, unlike the earlier tedium of having to route funds through a custodian bank, which widened the time lag between intent and investment.

Also, portfolio investors can now hedge their currency risks in local exchanges, provided their investments are in government debt of more than 12 months maturity. This is bound to lower their costs, apart from providing them further inducement to invest in Indian paper.

The RBI’s moves clearly show its determination to keep a leash on short-term external debt. One of the reasons, forwarded by India Ratings, could be a rush for the exit by short-term lenders during the tumultuous and volatile period for the rupee between May and August 2013. At the same time, the RBI has shown it does not want to give up on foreign portfolio investors yet, especially given the enduring nature of the economy’s current account deficit.

The writer is Senior Geo-economics Fellow, Gateway House

Prem · Post by **Prem** » 14 May 2014 01:04

Forex reserves: why following China won’t work for India

http://www.eastasiaforum.org/2014/05/10 ... for-india/

Reserve Bank of India Governor Raghuram Rajan recently stated that India’s economy cannot be said to be insulated from external shocks unless the country’s foreign exchange reserves rise to the levels of China’s. ‘I think, if you focus only on reserves, there is really no point at which you feel safe … 400, 500, 600 … any level of reserves, until you get to Chinese level, it is probably not enough’, he said.Recent research, however, suggests that the myth of a ‘comfortable level of reserves’ is, at best, doubtful, at worst, misleading.The elusive comfortable level of reserves depends on the level of reserves of your reference group (the ‘keeping up with the Joneses’ effect). Having deeper reserves than your neighbour may signal that your neighbour is the better target for foreign-currency speculative runs. Alternatively, this may be the outcome of hoarding in attempts to delay real appreciations that may hurt relative competitiveness, leading to ‘hoarding wars’ between exporters, attempting to keep their export market shares in overseas countries.

South Korea presumed prior to the global financial crisis that having international reserves at about 35 per cent of GDP was ‘comfortable’. Yet, they found in 2008–09 that it was not enough to abate financial panic — it took the unprecedented US Federal Reserve swap extended to South Korea to mitigate the panic. The lesson: South Korea overlooked the key importance of balance sheet exposures. At times of panic and flight to quality, the provision of (preferably elastic) swap lines by the supplier of global liquidity acting as the ‘buffer of last resort’ is the ultimate stabiliser. The outcome was that South Korea adopted prudential regulations (in line with economists Valentina Bruno and Hyun Song Shin’s recommendations).Chances are that international reserves covering short-term hard-currency debt, reaching around 15–20 per cent of GDP, may provide a ‘precautionary buffer’ dealing with a typical exposure of an emerging market. Yet, this may not suffice to cover tail risks of the type exposed by the global financial crisis, a crisis with uncertain duration, and would not suffice to cover a run on the domestic banking system at times of internal instability.Commodity-exporting countries have found that adding sovereign wealth funds above a ‘precautionary buffer’ of international reserves is advantageous. In the case of India, however, this recommendation will likely not fit.

Reserve Bank of India (RBI) Governor Rajan’s reference to China is intriguing — Chinese hoarding took off in 2001, more than tripling its ratio of international reserves to GDP by 2010. This took place during a prolonged spell of running current account surpluses and GDP growth reaching about 10 per cent a year. Chances are that this unprecedented reserve accumulation was the outcome of mercantilist motive (delaying the on-set of real appreciation, prolonging export led growth of manufacturing), as well as sporadic massive inflows of capital. These developments led to the growing concerns regarding the unintended consequences of global imbalances.The global crisis put an abrupt end to these imbalances, and one doubts the feasibility and desirability of a strategy of massive hoarding foreign exchange reserves at times of global deflationary pressure and underemployment in numerous OECD countries. Also doubtful is the degree to which such a strategy fits India — underinvestment in infrastructure and labour-market rigidities have prevented India from exploiting its manufacturing potential. These bottlenecks would not be resolved by accumulating reserves.
Furthermore, the much lower saving rate in India and its tendency to run current account deficits does not support massive hoarding of the Chinese type. For sure, Rajan is aware of these factors — he noted that, instead of building just reserves, there is a need to focus on creating a policy environment that boosts investor confidence. Chances are that dealing with the infrastructure deficit of India needs much more than upgrading the RBI’s policies, or upgrading India’s reserves. Exploiting fully India’s manufacturing comparative advantage requires trimming costly labor market regulations, where high costs of firing reduce labor hiring. Access to reliable electricity and transportation networks are also necessary conditions for thriving manufacturing. India needs investment in efficient railway, highway, and air-cargo systems, integrated smoothly with navel ports and airports, with minimal red-tapes associated with export/import clearings.

The challenges associated with massive hoarding of international reserves are well known: sterilisation is needed to mitigate inflationary pressure, leading to quasi fiscal costs and potential monetary instability. China’s history suggests that there are ways to manage it, but none offers a panacea, and it’s too early to judge the degree to which dealing with past credit expansions in China will end with a soft landing. One also doubts whether China’s experience can or should be replicated by India — their fundamentals and institutions differ.Yet, Indian households follow a decentralised version of Rajan’s comments, hoarding massive levels of gold (with an estimated market value of US$1.16 trillion in November 2012). The gold position of the private sector reflects both tradition and possible under-banking in India. Chances are that better provisions of accessible, stable and secured banking services should allow substituting these large and probably wasteful private gold positions with higher hoarding of international reserves by the RBI. Better provisions of banking services in India is indeed a worthwhile goal for the country, and the Reserve Bank should facilitate such a process. Yet, this should be done not to match the reserves of China but to improve the provision of safer and cheaper banking services.

Anand K · Post by **Anand K** » 14 May 2014 13:09

Indian Hedge Fund hits 0.5B USD from 0.5M USD, in 5 years

Motorcycle maker Eicher Motors Ltd is among the companies in which Mehta invested. Eicher's Royal Enfield motorcycles, a bike brand similar to Harley-Davidson, has 95 per cent market share in that segment and over 40 per cent return on capital, he said. It's joint venture with Volvo AB will be producing engines for Volvo's trucks, sourcing engines from India instead of Germany.
Mehta is also focused on manufacturers that are ramping up exports or reducing imported manufactured items. Kitchen appliances maker TTK Prestige Ltd is one such company, which has cut down on imports from China.
....
Jubilant FoodWorks, which operates the Domino's Pizza brand with rights for India, Sri Lanka, Bangladesh and Nepal, is another big exposure for Steadview.

AbhiJ · Post by **AbhiJ** » 15 May 2014 19:33

Outgoing Finance Minister P. Chidambaram had won a reprieve from the agencies by narrowing
the deficit by 1.1 percentage points in the past
two years, yet critics question the quality of fiscal
consolidation. Last year, Chidambaram cut $13 billion in capital spending, deferred $16 billion in subsidies and
squeezed $15 billion in dividends from state
companies to lower the fiscal deficit to 4.6
percent in the fiscal year that just concluded.

http://www.business-standard.com/articl ... 189_1.html

dhruvM · Post by **dhruvM** » 15 May 2014 23:20

Reserve Bank of India to launch plastic notes next year: Raghuram Rajan

Plastic currency notes would be launched in the country in 2015 after field trials, Reserve Bank Governor Raghuram Rajan said today. "Plastic notes are coming. Tender bids have come for one billion notes. In five cities, pilot testing would be done, including Shimla. In 2015, it would be launched based on the results of pilot testing," he told reporters.

The other four selected cities are Kochi, Mysore, Jaipur, and Bhubaneswar. The field trial is expected to be launched in the latter half of 2014. Plastic notes have an average life span of about five years and are difficult to imitate. Also, currency notes made of plastic are cleaner than paper notes.

if we start replacing all paper cash in circulation with plastic notes (via banks by declaration of your cash and free replacement with equal amount of plastic currency - some sort of amnesty could be worked out. Is this even possible?), wouldn't that be a big boost in unearthing all the hard cash buried under baboos' mattress and floating in the untaxed shadow economy? If the answer is yes; this this may well turn out to be a genius idea!

Prem · Post by **Prem** » 16 May 2014 01:52

http://www.forbes.com/sites/kenrapoza/2 ... -election/
Ways To Play India Post-Election

On Friday, India and the world will know who will take the helm of this nation of 1.2 billion people. The likely outcome has the pro-business, pro-development guru from Gujarat state, Narendra “NaMo” Modi as Prime Minister. If all goes according to exit polls, Modi will oversee a parliament that is largely tilted in his favor through an alliance of parties known as the National Democratic Alliance.
The market has been anticipating a Modi victor for months. If he wins, investors are ready to hold his feet to the fire. Other than tackling the crony capitalism that governed India for the past five years or so, everyone is hoping Modi can deliver on developing what is far and away the poorest of the BRIC markets.What should investors pay attention to in Modi’s India?“We think infrastructure is the clear big story in India,” says Mukund G. Rajan, member of the executive council at Tata Sons Ltd, a holding company of the Tata Group conglomerate, one of India’s biggest corporate families. ”You’re looking at ten trillion dollars worth of infrastructure needs in India,” he says.A political flag representing the Sonia Gandhi-led United Progressive Alliance waves outside of Ranchi, India. Their opposition is expected to win hands-down on May 16. Investors are looking for a new development model in this country of 1.2 billion. From roads to rail, India trails more developed emerging market economies. It’s biggest cities, like Mumbai, are overburdened with traffic. Public infrastructure is poor. Waterways are crowded and littered with trash. Modi is seen as the clean up crew.The market looks to West coast Gujarat state as an example, which Modi governs. While it takes most of India an average of four years or more to get a permit to expand a roadway or build a steel mill, it has taken Gujarat two years or less. Modi might be a Hindu nationalist, but he is seen as more pro-business, including foreign business, than Manmohan Singh, the 81 year old economist and current Prime Minister.
Many in India have complained that the real power behind Singh was Sonia Gandhi, Chairwoman of the United Progressive PGR -0.51% Alliance and President of the ruling Indian National Congress, of which Singh is a member. Both Gandhi and Singh have been at odds when it comes to running the economy, so foreign investors are also ready for a change.With infrastructure seen as the big play in India, Joel Wells, a fund manager for the Alpine Emerging Markets Real Estate Fund (AEMEX), says housing will benefit. His fund is up 7.24% year-to-date. He gave FORBES four of his favorite Indian real estate developers to get in on now.The stock is up 20.16% in rupees year-to-date, beating the Wisdom Tree India (EPI) exchange traded fund, one of the preferred ways into India.Investors who like the Alpine call will need a broker in Mumbai, however.“Phoenix is a leading pan-Indian developer of mixed use developments focused on prime retail space and it is one of the only direct ways to play every real estate segment in India,” says Wells about this one-stop shop.Phoenix owns the Western-style malls “High Street” in Mumbai and “MarketCity” in Chennai. ”They also have a strong development pipeline and delivery schedule for new malls,” he says. ”The market is starting to see early signs of a recovery in the leasing market and Phoenix is well-positioned to capture that rental growth and improve cash flow visibility. Residential project launches and their own branded hotels create an even bigger draw.” The stock might have some room to move, up just 4.3% year-to-date.
From 2000 to 2005, then again in 2006 after the re-election of Singh, India saw a continued focus on wealth redistribution. At first glance, social welfare programs are a need in India, one of the poorest countries in the world. More than half of the residents in Mumbai living in squalor.Despite that fact, the focus of the United Progressive Alliance (UPA) was more on a rural agenda and not on an urban one. It worked to a large degree, lifting many people out of abject poverty, but creating a healthy dose of food and wage inflation in rural areas, without increasing productivity. India’s GDP per capital is under $2,000, compared to around $7,000 in China, according to the World Bank.From 2012 to today, urban wages have been flat and people are looking at Modi’s history in Gujarat where he emphasized urbanization trends.The infrastructure story is more than just as shift of people moving to cities and requiring decent housing and wider roads. The infrastructure story is about India’s focus on the city as an engine of growth.“At the risk of sounding like a pesky capitalist, the engine of growth is not going to be redistributing wealth to the poor, but by harvesting the ability of the middle classes to grow in Indian cities,” says Wells. ”I think that instead of government money going to wage reforms in the rural areas, we’ll see reforms to improve the urban side through infrastructure. Any type of reform on electricity, or on piped water will be big investment opportunities.”

neel · Post by **neel** » 17 May 2014 10:55

So, is this the appropriate thread to speculate about what economically significant policy changes we can expect from the new NDA government now that we know they will have the votes to adopt basically anything they want?

Rahul Mehta · Post by **Rahul Mehta** » 17 May 2014 18:03

neel wrote:So, is this the appropriate thread to speculate about what economically significant policy changes we can expect from the new NDA government now that we know they will have the votes to adopt basically anything they want?

GST is almost done deal. I thing GSt law will come in 3-4 months or latest by feb-2015.

GST has following rule. Say GST is 20%

Now say a factory owner makes goods and wholesaler W agree to pat price of Rs 10000 + taxes,. Then as per GST the invoice will be as
Price = Rs 1000
Tax = 20% = Rs 200
Then wholesaler W has to pay Rs 1200 to F

Now say wholesaler W sells the goods to retailer R for a profit of Rs 20. Then his invoice will be
Price = Rs 1020
Tax = 20% = Rs 204
Retailer will have to pay Rs 1224 to R

Say retailer decides to add Rs 50 profit. Then his invoice will be

Price = Rs 1070
Tax = 20% = Rs 214
Customer will have to pay Rs 1284 to Retailer.

Now Factory owner F has to pay Rs 200 to Govt, and wholesaler W has to write his GST chalan as follow

Tax to be payed = Rs 204
tax paid via factory owner F INPUT CREDIT = Rs 200
net tax unpaid = Rs 4
So W has to pay Rs 4

Now Retailer R's GST chalan will be as follows

Tax to be payed = Rs 214
tax paid via wholesaler W = INPUT CREDIT = Rs 204
net tax unpaid = Rs 10
So W has to pay Rs 10

Now if F doesnt pay Rs 200 to govt, then wholesaler W will have to pay Rs 200 again (plus penalty plus interest !!! ). IOW, if factory owner disappears or defaults or goes bankrupt, then wholesaler will be in serious trouble. And if wholesaler and factory owner both default, then retailer will have to pay the full Rs 214. And an interesting case is worse. Say factory does pays Rs 200 GST, but wholesaler disappears and doesnt file chalan. Then the retailer will have to pay Rs 204 extra, and will NOT get Rs 200 paid by the factory owner deducted !!!

This rule exists in Gujarat VAT and also in most state Govt. In feb-2013, NaMo made a law that "if vendor doesnt pay VAT, then VAT input credit to buyer will be disallowed.

This rule will also come in GST

=====

So say a wholesaler is dealing with 100 small factory owners at 2% margin, and GST is 20%. Say one of them defaults, Then wholesaler will lose all his profits that he made from other 10 factory owners. So over a period of time , many wholesalers will stop doing business with small factory owners. And same way, retailers will stop doing business with small wholesalers. In long run, most small factory owners and small businesses will go down.

=====

Motives behind GST and solutions are OST , and I have posted on my FB profile page. at http://facebook.com/mehtarahulc/posts/10152052939096922

TSJones · Post by **TSJones** » 17 May 2014 18:44

Rahul Mehta wrote:
neel wrote:So, is this the appropriate thread to speculate about what economically significant policy changes we can expect from the new NDA government now that we know they will have the votes to adopt basically anything they want?
GST is almost done deal. I thing GSt law will come in 3-4 months or latest by feb-2015.

GST has following rule. Say GST is 20%

Now say a factory owner makes goods and wholesaler W agree to pat price of Rs 10000 + taxes,. Then as per GST the invoice will be as
Price = Rs 1000
Tax = 20% = Rs 200
Then wholesaler W has to pay Rs 1200 to F

Now say wholesaler W sells the goods to retailer R for a profit of Rs 20. Then his invoice will be
Price = Rs 1020
Tax = 20% = Rs 204
Retailer will have to pay Rs 1224 to R

Say retailer decides to add Rs 50 profit. Then his invoice will be

Price = Rs 1070
Tax = 20% = Rs 214
Customer will have to pay Rs 1284 to Retailer.

Now Factory owner F has to pay Rs 200 to Govt, and wholesaler W has to write his GST chalan as follow

Tax to be payed = Rs 204
tax paid via factory owner F INPUT CREDIT = Rs 200
net tax unpaid = Rs 4
So W has to pay Rs 4

Now Retailer R's GST chalan will be as follows

Tax to be payed = Rs 214
tax paid via wholesaler W = INPUT CREDIT = Rs 204
net tax unpaid = Rs 10
So W has to pay Rs 10

Now if F doesnt pay Rs 200 to govt, then wholesaler W will have to pay Rs 200 again (plus penalty plus interest !!! ). IOW, if factory owner disappears or defaults or goes bankrupt, then wholesaler will be in serious trouble. And if wholesaler and factory owner both default, then retailer will have to pay the full Rs 214. And an interesting case is worse. Say factory does pays Rs 200 GST, but wholesaler disappears and doesnt file chalan. Then the retailer will have to pay Rs 204 extra, and will NOT get Rs 200 paid by the factory owner deducted !!!

This rule exists in Gujarat VAT and also in most state Govt. In feb-2013, NaMo made a law that "if vendor doesnt pay VAT, then VAT input credit to buyer will be disallowed.

This rule will also come in GST

=====

So say a wholesaler is dealing with 100 small factory owners at 2% margin, and GST is 20%. Say one of them defaults, Then wholesaler will lose all his profits that he made from other 10 factory owners. So over a period of time , many wholesalers will stop doing business with small factory owners. And same way, retailers will stop doing business with small wholesalers. In long run, most small factory owners and small businesses will go down.

=====

Motives behind GST and solutions are OST , and I have posted on my FB profile page. at http://facebook.com/mehtarahulc/posts/10152052939096922

Rahul, let's think this thing through shall we?

Granted that I don't know much about the Indian economy but where I come from a business expense is a business expense regardless if the other fellow pays his taxes. Cost of goods sold is a BONAFIDE business expense. It's the way the economy works. If the vendor who you bought the goods from cheats on his taxes, that is no relationship to you. What if the vendor declares bankruptcy and leaves his creditors unpaid? Does that transfer to you the purchaser? You paid the vendor his money so do you owe his creditors when you have received the goods? I think not. Please think this through.

Please note that criminal scams are excluded from the above example. I'm talking about normal day to day business transactions.

Rahul Mehta · Post by **Rahul Mehta** » 17 May 2014 19:42

Rahul Mehta

GST is almost done deal. I thing GSt law will come in 3-4 months or latest by feb-2015.

GST has following rule. Say GST is 20%

Now say a factory owner makes goods and wholesaler W agree to pat price of Rs 10000 + taxes,. Then as per GST the invoice will be as
Price = Rs 1000
Tax = 20% = Rs 200
Then wholesaler W has to pay Rs 1200 to F

Now say wholesaler W sells the goods to retailer R for a profit of Rs 20. Then his invoice will be
Price = Rs 1020
Tax = 20% = Rs 204
Retailer will have to pay Rs 1224 to R

Say retailer decides to add Rs 50 profit. Then his invoice will be

Price = Rs 1070
Tax = 20% = Rs 214
Customer will have to pay Rs 1284 to Retailer.

Now Factory owner F has to pay Rs 200 to Govt, and wholesaler W has to write his GST chalan as follow

Tax to be payed = Rs 204
tax paid via factory owner F INPUT CREDIT = Rs 200
net tax unpaid = Rs 4
So W has to pay Rs 4

Now Retailer R's GST chalan will be as follows

Tax to be payed = Rs 214
tax paid via wholesaler W = INPUT CREDIT = Rs 204
net tax unpaid = Rs 10
So W has to pay Rs 10

Now if F doesnt pay Rs 200 to govt, then wholesaler W will have to pay Rs 200 again (plus penalty plus interest !!! ). IOW, if factory owner disappears or defaults or goes bankrupt, then wholesaler will be in serious trouble. And if wholesaler and factory owner both default, then retailer will have to pay the full Rs 214. And an interesting case is worse. Say factory does pays Rs 200 GST, but wholesaler disappears and doesnt file chalan. Then the retailer will have to pay Rs 204 extra, and will NOT get Rs 200 paid by the factory owner deducted !!!

This rule exists in Gujarat VAT and also in most state Govt. In feb-2013, NaMo made a law that "if vendor doesnt pay VAT, then VAT input credit to buyer will be disallowed.

This rule will also come in GST

=====

So say a wholesaler is dealing with 100 small factory owners at 2% margin, and GST is 20%. Say one of them defaults, Then wholesaler will lose all his profits that he made from other 10 factory owners. So over a period of time , many wholesalers will stop doing business with small factory owners. And same way, retailers will stop doing business with small wholesalers. In long run, most small factory owners and small businesses will go down.

=====

Motives behind GST and solutions are OST , and I have posted on my FB profile page. at http://facebook.com/mehtarahulc/posts/10152052939096922

TSJones:

Rahul, let's think this thing through shall we?

Granted that I don't know much about the Indian economy but where I come from a business expense is a business expense regardless if the other fellow pays his taxes. Cost of goods sold is a BONAFIDE business expense. It's the way the economy works. If the vendor who you bought the goods from cheats on his taxes, that is no relationship to you. What if the vendor declares bankruptcy and leaves his creditors unpaid? Does that transfer to you the purchaser? You paid the vendor his money so do you owe his creditors when you have received the goods? I think not. Please think this through.

Please note that criminal scams are excluded from the above example. I'm talking about normal day to day business transactions.

As much as I like to discuss this in detail, you perhaps know that I get too many warnings on "thread violations" from so called anti-RM-elements. so I will answer this, and then close this from my side.

1. Income tax and VAT = GST laws differ when vendor doesnt pay his share of taxes

2. Say A pays Rs 1000 to B, and then B vanishes without paying income tax applicable on that Rs 1000 . Then income tax dept will NOT come after A

3. Now say A, who is NOT an end consumer but a reseller or manufacturer, pays Rs 1200 to B including VAT that B was supposed to pay to Govt, and then B vanishes without paying VAT to govt. Then VAT dept will come after A !!!

4. Now say A, who is an "end consumer", pays Rs 1200 to B including VAT that B was supposed to pay to Govt, and then B vanishes without paying VAT to govt. Then VAT dept will not come after A.

So income tax dept never chases buyers when sellers default on taxes. But VAT dept chases buyers (except end consumers) when sellers default in VAT.

====

1. Now say A buys goods from B , and amount has been paid. and then B defaults. Then creditor of C cant chase A

2. Now say A buys goods from B , and amount has been unpaid. and then B defaults. Then creditor of C can chase A upto the value of goods

====

Now I am sorry, but I cant discuss further, as too many people accuse me of thread violations.

Theo_Fidel · Post by **Theo_Fidel** » 17 May 2014 23:31

#1 item has to be labor law reform. NDA1 wiffed on that.

#2 has to be that land acquisition act. Needs to be redone.

#3 has to be institution of local bodies with the ability to raise taxes and invest in the area.
-----------------------------------

But before all this Modi and co need to leave dilli and fan out across India dealing with the 1000+ projects that are hung up on some technicality or another across India.

SK Mody · Post by **SK Mody** » 18 May 2014 02:48

Short interview with Modi on GST. Apparently he is not in a hurry to introduce GST but says that the networking infrastructure that is required should be developed first and that states should be given time.
http://www.youtube.com/watch?feature=pl ... o8LVYbqD-8

vina · Post by **vina** » 18 May 2014 10:01

Theo_Fidel wrote:#1 item has to be labor law reform. NDA1 wiffed on that.

#2 has to be that land acquisition act. Needs to be redone.

#3 has to be institution of local bodies with the ability to raise taxes and invest in the area.
-----------------------------------

But before all this Modi and co need to leave dilli and fan out across India dealing with the 1000+ projects that are hung up on some technicality or another across India.

No. Just like Thermodynmics has a Zeroth law (the other numbers were taken up , before the very obvious fundamental thing which was missed out had to be put in, hence zero)

#0 Make interstate commerce a Federal Subject like in the US . That way you will create a truly pan Indian market. What you have now is the market fragmented into individual states , each with individual barriers and myriad of tax laws and rates and entry barriers to keep "outsiders" out.

Get on the knees and ask Amma's support if need be, but the 2/3rd numbers for such a constitutional amendment is possible. This is vital, along with the GST.

This SHOULD be the first constitutional amendment. But you know how the frothing in the mouth wallahs think . Mandir first, Ordnance against Valentine's day and wearing jeans second, Article 370 constitutional amendment third. Hopefully Modi sidelines those nut cases (okay make it item # -1 ) first like he did Togadia.

gakakkad · Post by **gakakkad** » 18 May 2014 17:35

^ banning valentines day or jeans were neither in campaign promises of BJP nor in there manifesto...Perhaps a figment of your imagination.. Gujarat has a formidable textile industry and is a major producer of denim in the world..(Amongst the largest).. The industry has grown under Modi ... If you have heartburns take pepto bismol or digene ... But do not troll or flame bait...

RoyG · Post by **RoyG** » 19 May 2014 09:08

{Deleted}