Anand Srinivasan is an Investment Consultant and Financial Strategist. He has authored books called The Investor – Ordinary Stock Extraordinary Profits & Alchemy of Money. He is the Founder & Principal of the Think Rich initiative India, Chennai.
In an exclusive interview with The Policy Times, Anand S, Founder and Principal of the Think Rich Initiative talks about PM Modi’s three years in Government, how to save India’s stressed banking and agriculture, and why Indians are worried about GST.
Q. How do you see Prime Minister Narendra Modi’s three years in office? Is Indian economy on the right Direction under the current political leadership? Where are we going wrong?
AS: There was tightening of interest rates by Raghuram Rajan in the initial days of this Government to contain and reduce inflation. This resulted in declining of growth. The Government increased indirect taxes by service tax rates, this resulted in less money in the people’s hand. Neither has Government given significant relief in direct taxes.
The drop in oil prices has been mopped up as indirect taxes by the Government. The resultant gain has been used for fiscal consolidation and not passed on to the people as fiscal stimulus. Demonetization has been an indirect monetary tightening and has resulted in further slowdown. GST will result in further tightening of fiscal policy.
Thus, the nominal growth of the country has been cut in half. The high growth claimed by the Government is a result of using a very low deflator. These figures have been questioned by several economic experts around the world.
Q. Seeing the current scenario, two most important sectors – banking and farming / Agriculture are heavily stressed. Is the government taking economically rational steps to deal with them?
AS: No, the public sector banking needs a capital infusion of at least one lakh crore. The government is promising 10,000 crores as capital infusion into public sector banks in the current financial year, this is totally inadequate in the current scenario. Agriculture sector needs a new national policy. 60% of India’s working population cannot be supported by 15% of GDP. Loan waiver is not a solution. RBI actions in resolving the Non Performing Assets (NPA) will lead to a deflationary spiral, because there will be a fire sale in assets across industrial and real estate sect
Q. The ruling government hasn’t taken any strong step against large defaulters. Where are the solutions?
AS: Several large defaults have taken place simply because the projects are not viable after the sharp correction in commodity prices. In the case of projects generating electricity the inability of the state discoms (State owned distribution companies) to pay for the electricity they have contracted to buy means that the project is unviable also the general slowdown in nominal growth has resulted in a lower demand for electricity.
Both the above causes have wiped out the equity contribution of the promoters. The only solution is for bankers to take a large hair cut in loans and covert the balance to equity. For this to happen Public Sector banks badly need capital. The government due to its budgetary constraints is unable to provide the required capital.
Q. Was demonetisation a big blunder? Do you think farm stress is largely due to demonetisation?
AS: Yes. Demonetization has led to demand compression. With no money in the hand of middle and lower middle income group, the spending had been drastically reduced. Street vendors, farmers, hawkers, small enterprises were seriously affected.
As there was no physical cash in the financial system, the farmers were not in a position to sell their produce. Barter system cannot be an alternate to meet requirements of all their products and services. We have witnessed in newspapers and in social media that farmers who produced potatoes, tomatoes and other products have thrown their produce in the streets, this is due to non availability of cash with traders to buy the produce and the inability of transporters to transport goods where they would have fetched a good price.
Demonetization has affected the cycle of sowing and harvesting in the agriculture sector for six months. Even today farmers have no money to restart the process of agriculture. These farmers took to the streets in Madhya Pradesh and Tamilnadu. Loan wavier is a temporary solution for the ills caused by demonetization.
Q. While India is ready to adopt GST, why are Indians worried about it?
AS: The Goods and Services Tax (GST) is universally a single tax for all goods and services traded in an economic system. This rate is normally a revenue neutral rate. However the current GST proposals have the following problems:
- We have 7 tax slabs from 0 to 28 + cess
- More taxes means less money in hands of people
- The Technology platform of the GSTN is not yet ready for transition
- Migration for small traders and manufacturers is proving to be difficult.
- There are several Draconian features in this bill. The responsibility to collect tax has been shifted from the Government to the distributor and retailers. The penalty provisions for delayed filing are usuriously high.
- Most services used by the middle class are becoming costlier due to the fact that service tax rates are moving up from 15% to 18%.
Q.We have always heard, tax rate comes down under GST, almost every businessman is saying indirect tax is going up. Why?
AS: Indirect taxes will go up because of three reasons.
- Service tax for consumers is going up to 18% from 15%
- Excise duty was exempt for manufacturing with revenue of less than 1.5 crores. Under the new proposed the limit has been reduced to 20 lakhs, resulting in lot of small manufacturing units being brought under the tax bracket.
- Most of the Pharmaceuticals manufacturing industries take place in backward states which have tax exemptions. In the new GST regime all such exemptions had done away with
Q. Stock market is doing good. FIIs are investing heavily but FDI inflow remains a challenge. Where are we going wrong?
AS: The stock markets are buoyant because of the following reasons.
- The Rupee has been very strong in comparison to the US Dollar. This has enabled foreign institutional investors to execute a carry trade by borrowing cheap in the US Dollars. The domestic institutional investors have been buying equity stocks due to heavy retail flows.
- Lower deposit rates for retail investors have resulted in more funds being diverted to equity markets via the mutual fund routes.
- Excess liquidity due to lose monetary policy in the western markets has resulted in the Indian markets rallying in spite of there being no earnings growth in the large cap companies over the last three years.