»5 Minute Wrap Up by Equitymaster

On This Day - 30 NOVEMBER 2015
What does GST really mean for you?

In this issue:
» Two key events this week...
» Market roundup
» ...and more!
Ankit Shah, Research analyst

The winter session of the Parliament is underway. And the key issue under the scanner is the passage of the much-hyped, much-awaited Goods and Services Tax (GST) bill.

You would recall that the monsoon parliament session was a complete wash out and the passage of the bill was stalled.

Before we delve into the developments with regard to the passage of the bill, let us broadly understand what GST is.

GST is an indirect tax that will be levied on manufacture, sale and consumption of goods and services across the country. The existing indirect tax system is highly complicated and inefficient. There are overlapping taxes levied by the Centre and the states. So, GST is expected to create a single umbrella uniform indirect tax code on goods and services across India.

It is worth mentioning here that the bill was first introduced by the UPA government in 2009. They failed to get the bill passed. After the BJP government came to power at the Centre, they got a slightly modified version of the bill passed in the Lok Sabha (Lower House of the Parliament) in May 2015.

Since such a major tax reform requires constitutional amendment, it requires to be passed in the Rajya Sabha (Upper House of the Parliament) as well with the two-third majority. The BJP has been struggling to get the bill passed in the Rajya Sabha where it does not enjoy a majority.

The beginning of the winter session of the Parliament is showing some positive signs. The political deadlock surrounding the bill appears to have been broken after Prime Minister Narendra Modi met Congress president Sonia Gandhi and former prime minister Manmohan Singh to resolve the contentions over the bill.

Now, the GST is intended to be implemented from 1st April 2016. This will be possible only if the GST bill is passed in the ongoing winter session.

So, will the wait for this historic indirect tax reform end now? If the GST is implemented, will it be a game changer for the Indian economy? How should you, as an investor, think about GST?

In principle, the GST does appear to be a move in the right direction. By simplifying the indirect tax code, GST is likely to ease the business environment and also create a level-playing field for all businesses.

Given this, the passage of the GST bill is quite likely to get a thumbs-up from the stock markets.

You can already find predictions about how many basis points of additional GDP growth the GST will drive. Several market participants are zeroing down sectors and stocks that would be the biggest beneficiaries of GST. In fact, some have gone so far as to predict the likely gains that the Nifty index could witness if the bill gets passed.

But wait...

If you are sold on the GST story...if you are optimistic that the bill will be passed in the ongoing Parliament session...if you believe that the GST will be a game changer (subscription required) for the economy and the stock markets...then wait a moment please. Let me share some of my views on the subject.

  1. Will GST boost economic growth?

    Let's ask a basic economics question. What is it that drives growth in an economy? Economic growth is driven by investments, productivity and consumption.

    Can a tax reform be the harbinger of economic revival? I don't think so. By reducing fiscal inefficiencies, easing the business environment, GST may improve the economic landscape of the country. And to that extent it may add to the country's economic output. But one must remember that a tax reform cannot form the basis of an economic revival.

  2. Modi = Magic :: GST = Game Changer?

    When I think about the enthusiasm surrounding GST, I can't help looking back to the time PM Modi-led BJP came to power at the Centre in May 2014. Mr Modi became the poster boy of India's economic renaissance. It was expected that the business-friendly BJP would bring in the much-needed big bang reforms and change the fortunes of the sagging Indian economy.

    A year and half later the enthusiasm has subsided. While the economy is in a better state than earlier thanks to lower commodity prices, the pace of government actions have not matched investor expectations. And you can see that from the lacklustre performance of the Indian stock market in the year so far.

    So, what really happened? Was it a failure of the Modi government? Or did investors set expectations too high? Whatever be the case, remember the old adage: 'Rome was not built in a day.'

    Even with GST, it would be a big mistake to expect things to transform overnight. Even if the bill gets passed now and is implemented in the next fiscal, the actual benefits will take time to show. Also, while GST appears pleasing in principle, we do not know the ground level challenges that it may face in a complex country like India. In short, if you build in too high expectations from GST right now, you might be in for disappointment later on.

  3. Is GST only about tax reforms?

    I think it is also important to see GST in the context of India's political discourse. GST is not just about tax reforms.

    The GST deadlock has become synonymous with the country's political deadlock. Investors are slowly losing faith in the ability of the country's legislators to put the economic agenda above political differences.

    If GST gets legislated, it will send a strong message that the policy making process in India is alive...that the government is serious about economic reforms...that the India story may not be over after all...

    In that sense, GST may be a powerful symbol of change and may help the government gain the confidence of foreign investors.

    But it would be a folly if you read too much into it and read too far into the unknown future.

Do you think GST will be a game change for India or a mere sentiment booster? Let us know your comments or share your views in the Equitymaster Club.

3:15 Chart of the day

There are two key events scheduled this week that the stock markets are watching with bated breath - GDP data for the September ended quarter and central bank's monetary policy. So, what should investors expect?

As per the analysts polled by Reuters, the GDP data is likely to show some improvement. Even as corporate results continue to disappoint, the broader economy is expected to do well. As per an article in Livemint, slight improvement in bank credit and healthy rail and air traffic are likely to offset the negative impact of contraction in exports.

While markets may cheer this in the short term, quarterly data is unlikely to reflect the long term trend in economic growth and recovery. Any improvement in growth in the quarter is more likely to be consumption-driven than investment-driven.

We believe investors would do well to focus on real reforms happening at the ground level and stick to bottom-up approach for investing in stocks rather than tracking quarterly data points and arriving at conclusions.

GDP growth trend : What to expect?

The Indian stock markets ended the day marginally in the green amid mixed international cues. The BSE-Sensex closed higher by about 17 points, while the NSE-Nifty ended lower by about 8 points. FMCG and pharmaceuticals stocks witnessed a decline, while those from the IT and realty spaces were favored. Further, the S&P BSE Midcap index and S&P BSE Smallcap Index closed higher by about 0.1% and 0.8% respectively.

4:45 Today's Investing mantra

"A public-opinion poll is no substitute for thought." - Warren Buffett

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