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Arvind Subramanian rubbishes govt arguments; sticks to claim of India overestimating GDP growth

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Sticking to his analysis that India's economic growth has been overestimated, Arvind Subramanian said he had raised doubts about the GDP numbers in 2015 when he was the chief economic adviser of the Modi government as he found inconsistency between projected growth and other macro indicators.

In a new paper 'Validating India's GDP Growth Estimates', the former CEA said he had indicated his doubts on the growth numbers in the Economic Survey in 2015 as well as mid-year Economic Analysis.

During 2011-2016, the period he deduced to have seen GDP growth being overestimated by 2.5 percentage points, the Indian economy was hit by a series of shocks - export collapse, twin balance sheet problem, drought, and demonetisation.

"Growth in real credit to industry collapsed, falling from 16 per cent to minus-1 per cent, mirrored in the official figures for real investment growth, which declined from 13 per cent to 3 per cent; Real exports fell from 15 per cent to 3 per cent; Overall real credit slowed from 13 per cent to 3 per cent; and real imports slowed from 17 per cent to minus 1 per cent," he wrote.

But the new GDP series, adopted in 2015, suggested that "despite all these large shocks, economic growth declined by very little, slipping from 7.7 per cent to 6.9 per cent. This situation invites a question: is it really possible that these five large adverse shocks had such little impact on GDP growth?" he asked.

India's gross domestic product (GDP) growth rate between 2011-12 and 2016-17 should have been about 4.5 per cent instead of the official estimate of close to 7 per cent.

"In January 2015, the CSO released new estimates using a new base year (2011-12 versus 2004-05), new data and new methodology. My team and I reviewed these estimates carefully - and immediately had questions about the new numbers. We consequently investigated the matter, but still could not find convincing answers, so we began to express our doubts internally and then externally," he said, pointing to a box he had put in the Economic Survey of 2015 raising doubts on the numbers.

Countering the government arguments that had rubbished his June research on GDP numbers, Subramanian said the NDA government did bring reforms such as GST and new insolvency and bankruptcy law but these would "deliver growth benefits in the medium term".

He rubbished productivity surge argument saying if that was so benefits accruing to firms in the form of higher profits would have been seen.

He also rubbished the consumption surge argument advanced by the government to counter his claim, saying if India had suddenly developed a unique model of sustained consumption-led growth it would have reflected in consumer confidence being high but the RBI's monthly Consumer Confidence Survey paints a different picture.

On the government argument that India's tax-GDP ratio rose post-2011 period, he said revenues are affected by more than just economic growth - "they are also affected by changes in tax policies and administration. Amongst the latter were the spate of measures to unearth black money, including demonetisation which led to a spike in collections in 2016," he said.

Stating that a variety of evidence suggests that it is likely that India's GDP growth is being overestimated by the new methodology, he said the country's sustained high measured GDP growth after 2011, despite large negative macro-economic shocks, is in contrast to the experience of other large emerging markets.

Also, India clocked significantly higher measured GDP growth than all other countries in the post-1980 period, with the same export and investment growth rates, he said.

"The evidence suggests that measurement changes likely caused India's GDP to be overestimated in the post-2011 period. Moreover, while it is not possible to say precisely what India's GDP would have been absent the measurement changes, the evidence suggests that the discrepancy in measured GDP growth post-2011 is likely to be significant," he added, suggesting the GDP methodology being re-visited.

BS VI petrol, diesel likely to pinch more due to higher refining costs

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Customers may have to shell out more for petrol and diesel from April as fuel retailers are looking to pass on the higher cost of producing Bharat Stage VI-compliant fuel, said two senior officials at the companies.

This would help the state-run fuel retailers recoup their investments in upgrading their refineries to produce the cleaner fuel, the officials said, requesting anonymity. They said a final decision would be subject to government approval. The refiners are estimated to have spent more than Rs 30,000 crore to improve their facilities, with India set to implement BS VI emission norms, the equivalent of Euro VI, from 1 April.

“We have made large investments in upgrading to BS VI and we need to get a return on our investments. This is only logical. The thought process is to recover cost and not profit-making," one of the two officials cited earlier said on condition of anonymity.

“The price increase could be anywhere between a few paise to a maximum of Rs 2, which is likely to be charged in the form of a special cess or duty," said the second official. The Auto Fuel Vision and Policy 2025 in June 2014 had recommended a 75 paise cess to recoup additional investments projected for producing cleaner fuels.

“Pricing for petrol and diesel would be different and it will be averaged out according to what each company has invested,” the second official said. “The pricing would be decided closer to the launch and discussions are on to suggest to the government that we have made such huge investments and would like them to find a method for us to recover the same.”

Another increase in auto fuel prices would be a double whammy for consumers. Petrol and diesel prices rose by about Rs 2 each after the government imposed an additional special excise duty of Rs 1 per litre as well as a road and infrastructure cess of Rs 1 per litre on the fuels in the Union Budget for 2019-20.

“A fuel price increase is certainly required by the oil marketing companies given they have invested substantially to upgrade to BS VI. They need to recover at least their cost," said K Ravichandran, Group Head for Corporate Sector Ratings at ICRA. “Though it will be an additional burden on the consumers, it would be beneficial for the environment as the fuel will help reduce pollution. However, if the extent of fuel price increase is anything more than Rs 1 per litre, it would be a stretch for the consumer given the Rs 2 per litre hike in prices recently on account of additional cess/duties.”

Retail prices of petrol and diesel in India are linked to their prices in global markets and not that of crude oil. However, the price of crude, which makes up about 90 percent of the cost of these refinery products, is the biggest determinant in their retail prices.

Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) did not respond to queries emailed on July 12. A spokesperson for Indian Oil Corporation said in an emailed response that the “pricing of BS VI (is) to be decided in due course”.

India is shifting to the stringent BS VI emission norms as the government seeks to arrest rampant pollution in most of its major cities. BS VI fuel is said to significantly reduce greenhouse gas emissions, especially carbon dioxide, unburnt hydrocarbons or methane and oxides of nitrogen. It has sulphur content of 10 parts per million (ppm) against 50 ppm in BS IV.

Emissions from vehicles are one of the top contributors to air pollution, which led the government at the time to introduce the BS 2000 (Bharat Stage 1) vehicle emission norms from April 2000, followed by BS II in 2005.

BS III was implemented nationwide in 2010. However, in 2016, the government decided to meet the global best practices and leapfrog to BS VI norms by skipping BS V altogether.

To ensure a smooth transition to the proposed emission norms, the automotive industry, along with its representing body, Society of Indian Automobile Manufacturers, has requested the fuel retailers to provide BS VI grade fuel at least 30-45 days ahead of the April 2020 deadline.

Pawan Goenka, Managing Director of Mahindra & Mahindra (M&M), said prices of BS VI-compliant petrol vehicles are likely to rise by Rs 25,000-50,000 and diesel vehicles by about Rs 1 lakh over the existing BS-IV models.

With prices set to rise, some automakers are rejigging their portfolio by either discontinuing diesel-powered vehicles or those which have low sales volume.

Finance Ministry to look into applicability of 20% tax on ongoing share buybacks by listed cos

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The Finance Ministry on July 12 said that it will look into the applicability of 20 percent tax proposed in Budget 2019 on the going share buybacks by listed companies.

Finance Secretary Subhash Chandra Garg, speaking at a CII event, said the proposed tax on listed companies is aimed at discouraging share buybacks and encouraging investments.

Asked if the government would consider grandfathering those share buybacks which are already underway from the proposed levy, Garg said, "I am not in a position to say whether that (grandfathering) can work or not, but we will discuss it with the revenue department."

In her Budget speech, Finance Minister Nirmala Sitharaman proposed that listed companies shall be liable to pay additional tax at 20 per cent in case of buyback of share, as is the case currently for unlisted companies.

The move was aimed at discouraging the practice of avoiding Dividend Distribution Tax (DDT) through buyback of shares by listed companies. DDT is paid by companies who distribute their profits to their shareholders in the form of dividends.

Garg said that buyback is mainly undertaken by those companies which have cash but see no investment opportunities.

"Our preference would be they invest so that there is no need to do a buyback. In this economy, how the buyback is being done in digital economy space, there also an enormous opportunity (for investment) to exist ... Our objective was to close the arbitrage ... the intent is to encourage investment," he said.

Share buybacks offer a route for companies to return some wealth to their shareholders, while potentially boosting their stock prices. In a share buyback, a company will absorb or retire the repurchased shares, and rename them as treasury stock.

Buying back stock is also a route to make a business look more attractive to investors. By reducing the number of outstanding shares, a company's earnings per share ratio are automatically increased.

Budget 2019: OMCs may save Rs 500 crore a year on withdrawal of merchant discount rate

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Oil marketing companies will save Rs 400-500 crore annually every year with the proposed removal of merchant discount rate (MDR), two company executives said.

MDR is a card transaction fee paid by the merchant — in this case, the fuel company—and shared by banks which put up the swipe machine and issue the card, and payment networks like Visa and Mastercard.

MDR is not passed on to customers.

In her maiden Budget speech, Finance Minister Nirmala Sitharaman said that no MDR shall be imposed on merchants who allow their customers to make payments through low-cost digital payment modes.

“There are low-cost digital modes of payment such as BHIM UPI, UPI-QR Code, Aadhaar Pay, certain debit cards, NEFT, and RTGS," she said.

The Finance Minister said the Reserve Bank of India (RBI) and banks will absorb these costs from the savings that will accrue to them on the account of handling less cash as people move to these digital modes of payment.

Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation, have been bearing MDR on behalf of their dealers for more than a year now.

“Withdrawal of MDR is a welcome move. This will result in a yearly savings of up to Rs 500 crore for the oil marketing companies," said a senior official from an OMC, one of the two people cited earlier on the condition of anonymity.

Surcharging and high MDR charges are two of the reasons impeding growth and sustenance of digital payments despite measures being taken to promote it, according to a study by the Indian Institute of Technology, Bombay, released in March.

Unauthorised surcharging has burdened the payment system users with huge additional costs, according to the study by Ashish Das, a professor of statistics.

It is estimated that the merchants were burdened with nearly Rs 10,000 crore towards credit card MDR fee in 2018 alone as against the overall cost of Rs 3,500 crore towards debit card MDR, even as in value terms, credit and debit card transactions are almost similar at Rs 5.7 lakh crore each in 2018. “We had been in discussions with the banks to reduce this financial burden, but to no avail. It’s a good move," said the second official mentioned above on the condition of anonymity.

Budget 2019: Here is what corporate India wants from the Finance Minister

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Our Finance Minister, Nirmala Sitharaman is all set to present her first Budget. Though she has the benefit of unhindered support from the legislation due to a stable government, coming to power with a clear and substantial majority, there are a lot of expectations from her.

She has to ensure that the Union Budget not only fulfils the electoral promises made by the ruling party but also ensure a revenue-neutral budget so that there are no substantial losses incurred by the exchequer; and the long term economic objective of the government can be met.

Therefore, in consideration of these current contexts, the Indian corporate sector, with which the present finance minister has engaged on several occasions to discuss budgetary provisions, has the following expectations:

  • Reduction in corporate tax rates:

India has one of the highest corporate tax rates, amongst competing economies, which clearly affects its score in the ‘Ease of Doing Business’ index. To address this issue, the erstwhile Government, in 2015, had proposed a reduction in corporate tax rates, along with the corresponding withdrawal of exemptions in the next four years.

Presently, the diminished tax rates are only applicable to a certain category of corporates which fulfil some specific criteria. Corporates expect that the government will implement a universal corporate tax rate of 25 percent.

They also expect the benefit to be extended to partnerships firms and Limited Liability Partnerships, as well thus allowing the benefits to flow into the Micro, Small and Medium Enterprises (MSME) sector.

  • Road map to Direct Tax Code:

The stipulated date for the task force to submit its draft report on the Direct Tax Code has been extended till July 31, 2019. Since this is close to the Budget day, it is expected that the government may clarify the possible direction of the code so that the nation and general populace gets a preview of what may be the direct tax structure of the country in the near future.

  • Angel Tax woes:

Start-ups have been a part of the political agenda since the erstwhile NDA-led government declared its flagship, Make in India programme.

Start-ups are seeking greater convenience of creating and doing business, which in turn allows them to focus more on innovation rather than compliance issues, thus fostering growth in the economy.

They expect single-window clearance to be available for compliance. Moreover, to boost employee retention and wealth creation of employees, they seek undemanding regulations on Employee Stock Option Schemes (ESOPs).

From a tax perspective, the present scenario with regard to the issuing of shares by closely held companies is fraught with unnecessary challenges.

If a closely held company issues its shares at a price more than its fair market value, then the amount received in excess of the fair market value is taxable as income from other sources, under section 56(2) (vii) (b) of the Income Tax Act (the Act).

To motivate and invigorate budding entrepreneurs, the government relaxed the interpretation attributed to the definition of start-ups and has made companies with sales of up to Rs 100 crore (previously, the exemption limit was Rs 25 crore) eligible for angel tax relief.

However, in this budget, the start-up community expects a complete exemption from tax under Section 56(2) (vii) (b) of the Act.

  • Transition to Ind-AS:

One of the major developments in the accounting arena recently has been the migration of companies from I-GAAP accounting standards to Ind-AS. This entails a major shift from the principles of traditional accounting with which Indian corporates are still in the process of reconciliation.

In addition, the Indian tax laws are geared to handle items of adjustments under I-GAAP. However, there are no clear principles of treatment of typical adjustments arising from Ind-AS.

A majority of the Ind-AS adjustments are fair value adjustments and it would be desirable to have specific treatments being prescribed in the Act to account for such adjustments, to ensure uniformity of taxation and reduction in potential litigation.

  • Thermal power sector:

The sector, which is the major contributor to India’s energy demands, faces gnawing concerns over the availability of fuel, the poor financial health of distribution companies and competition from the renewable energy sector.

The sector is expecting a re-institution of the deduction of an amount equal to 100 percent of the profits and gains derived from power generating business. The government may consider extending the sunset clause to provide relief to the power industries.

However, such expectations may be overly optimistic, considering the government’s clear intention to rationalise corporate tax rates and eliminate incentives gradually.

  • Anti-avoidance and anti-abuse measures:

India has been the tip of the spear, in the battle against tax avoidance, with Indian policymakers constantly augmenting the legal framework counter mechanisms used for tax avoidance and treaty abuse.

A recapitulation of the Budget proposals made in the last decade is a clear indication of this intention and showcases several important measures adopted by India in consonance with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans.

The key anti-avoidance measures include General Anti-Avoidance Rules (GAAR), Place of Effective Management (POEM), indirect transfer taxation. The prominent BEPS related measures include equalization levy, Country by Country Reporting (CbCR) for transfer pricing, and Significant Economic Presence (SEP) based concept. One may expect further such adoptions, in the upcoming Budget.

India, in an attempt to tackle the problem of taxing the digital economy (Under BEPS Action Plan 1), introduced the concept of SEP in the Union Budget 2018. This was a gratifying step as far as taxation of the digital economy was concerned. However, the implementation of SEP provisions, especially in its current form, may create some concerns.

Previously, the government had invited comments and suggestions from stakeholders on the revenue and user thresholds, for the application of SEP provisions, but the final clarification/notification from the government is still awaited.

As these provisions are likely to impact key global digital economy players, the international tax community is watching with interest. The government is expected to introduce the clarifications/rules in the upcoming Budget.

  • Issue of tax refunds:

Currently, there exists the practice of issuing a tax refund through cheques. This method should be completely substituted by direct online fund transfers. This change should be implemented on a war footing, as this would end many taxpayers’ grievances regarding refunds. This change in method will also reduce/eliminate manipulation and corrupt practices.

It remains to be seen if the government can meet all these expectations while ensuring sound economic growth.

Copy Denmark, and good jobs will follow

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There is a view that export-led growth will enable India to increase the supply of quality jobs and the country’s problem is not high unemployment, but low wages. This argument points to the experience of the Asian Tigers which have all been able to experience long periods of high growth, along with rapid growth in trade.

First, globally in recent years, the link between growth and jobs has become weak so that the current development experience is in part one of jobless growth. If the pace of creation of fresh jobs lags a respectable economic growth rate, then creation of enough jobs becomes the key concern. The quality of jobs created then takes second place.

The US economy has been experiencing an extended period of good growth and gradually falling unemployment levels to now historic lows. For long, both growth and falling unemployment had no impact on wage rates. It is only recently when all the slack in the job market has been reined in that wage rates have started to go up.

In the post-war period, first Japan, and then South Korea and Taiwan, began with poor levels of domestic demand as they slowly crept out of war-induced poverty. To grow fast, these economies had to perforce look beyond borders for demand and markets to address. Conversely, the large US economy grew nicely on the basis of ample domestic demand with foreign trade accounting for a rather small part of its GDP.

India, with a similar large domestic market, did not have to look outward for demand and growth momentum. Additionally, economic priorities were different during the years of planning and low growth. It is only after the policies of economic liberalisation came that India lowered trade barriers and adopted a supportive exchange rate policy. This caused exports to boom and the economy to grow fast.

Modi Sarkar 1.0 was marked by rising trade barriers, stagnant exports, high unemployment and, as it now turns out post-Arvind Subramanian’s calculations, very average rates of growth. Where do we go from here?

Additional jobs in India are created not by high tech large and medium industries, but right at the bottom of the economic structure by micro and small enterprises. At the grassroots, units employ maybe a handful of people, are unincorporated, and the proprietor’s family budget and that of the business are indistinguishable.

As ease of doing business at this level prevails and there are no shocks like demonetisation and GST, successful businesses will grow, slowly get incorporated and then started bringing their employees under provident fund, thus taking the first step in creating quality jobs. The recent rise in provident fund memberships, which was first wrongly interpreted as a sign of more jobs being created, has been in fact a sign of pick-up in the creation of formal jobs with stability returning at the bottom of the business pyramid after the twin shocks mentioned earlier had spent themselves out.

But there is still a long way to go. The current reality on the jobs front, as pointed out by Mahesh Vyas, is depressing. Over three-fourths (77 per cent) of employees have vulnerable jobs and the unemployment rate among the young (15-25 age group) is three times the overall unemployment rate. A recent rise in employment is seen as largely unregulated sectors adding jobs by accommodating footloose or low skilled workers.

What Modi Sarkar 2.0 must do is contained in the exhortation of Praveen Khandelwal, Secretary General of the Confederation of All India Traders, who said “there should be one licence instead of more than 28 licences for conducting businesses and their yearly renewal should be abolished as it causes great harassment and corruption”.

While such a step will create informal jobs, a World Bank-ILO study finds that policies to expand exports and improve workers’ skills can be very effective. It finds that increased exports will boost average wages, in particular for skilled, urban, experienced and male workers. To widely share the benefit of exports, it is necessary to particularly help women and the youth in raising their skills levels.

But simply raising the ease of doing business and lowering trade barriers will not be enough. Policy making will have to be far more proactive. In this, there is a global model to follow – Denmark. It has a unique combination of high mobility between jobs, low job security, and high rates of unemployment benefit which make up its unique “flexicurity” model. Plus, critically, there is a well-developed system of adult vocational training.

Thus, what India must work towards is the following combination -- labour market flexibility, limited period of unemployment dole and workers knowing they have a life ahead of periodic retraining to acquire new skills which can find them jobs in firms that have adopted new technology. Once this model slowly gets into place, exports will do well as will the availability of quality jobs.

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