Choice between capitalism and socialism for India?

In this issue:
» India's financial system can become vulnerable
» What the Feds didn't understand about the crisis
» Will higher diesel prices fuel inflation?
» Greece is not out of the woods yet
» ...and more!

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00:00

The 'rich set' in societies across the world have always attracted attention for a variety of reasons. For some they are people to be envied, for others they are associated with corruption and so on. And they certainly become easy targets when countries are in a state of flux, be it because of revolutions or massive economic downturn. What is happening in the developed world is a case in point.

As the US and most economies in Europe are struggling to combat the problems of massive debt burden and recession, the rich have come under focus like never before. Taxing the rich more to prop up government revenues is an idea which is spreading like fire. For instance, tax rates were recently raised in the US (the top marginal rate is 39.6%) to levels prevalent during the Clinton era as part of the talks over the fiscal cliff. France has imposed a tax of 75% on those earning over Euro 1 m. The fallout of this is that most of these people or even organizations for that matter are looking to move out abroad.

Can this trend catch up in India too? After all, the country is also grappling with a widening fiscal deficit with the government desperate to augment revenues. If it does, it may not necessarily be a success. The trend over the last three decades has been towards lower tax rates and deregulation. Despite this, problems of black money and tax evasion abound in India. So a hike in taxes for the rich most likely would compound the problem further. Moreover, in India's case, there is the likelihood that people in the higher income bracket would look to establish themselves abroad where the tax regime is more benign.

The problem of flight of capital applies to companies and businesses too. Indeed, an uncertain business environment and higher tax regime would mean that companies would rather choose to make investments overseas. This does not bode well for an economy which needs capital investments of a long term nature to take growth to the next level. We have already witnessed disparity of this kind within the country itself. For instance, states which have encouraged investments and economic development such as Gujarat have certainly grown at a faster rate than others such as West Bengal and Orissa.

Ultimately, increase in taxes has to go hand in hand with public services offered by the government. Raising taxes on the rich alone will not solve India's problem of fiscal deficit. A much broader approach will have to be adopted. This means that revenues from taxes will have to be diverted towards productive expenses such as ramp up of infrastructure, education and healthcare. All these factors alone would certainly go a long way in improving the prospects of any country including India.

Do you think that raising taxes in India will result in a drain of its resources and capital?Share your comments or post them on our Facebook page / Google+ page

01:26		Chart of the day

The industrial production data for the month of November 2012 was bleak for most countries. Except for one country. As today's chart of the day shows, growth in industrial production was the highest in China making the others pale by comparison. While declining industrial growth has bogged down developed countries for quite some time now, India has also not been spared. Poor performance of the manufacturing sector has certainly impacted overall GDP growth, slowing it down in the last two quarters.

*Growth in India was flat with a negative bias Data Source: The Economist

01:56

'Decoupling' is now no longer a word that can be associated with global economy. Not even with the developing world. For crises in the advanced nations has a ripple effect on others almost instantly. And that is the reason one cannot get callous about stability in Indian financial system. No doubt RBI has done a fantastic job of keeping the Indian banking system resilient to liquidity crisis. It is still firefighting the government and other regulators with regard to banking regulations. But without added measures, India's financial backbone may soon get vulnerable. In its latest report, the International Monetary Fund (IMF) has aired similar concerns. It recommends independence of regulatory agencies and supervision of financial conglomerates. In addition IMF is wary about large exposures and related-party lending limits in bank. Compliance with reporting, auditing and accounting standards is also a must have for a rapidly developing economy like India. We could not have agreed more with IMF's views. The sooner the government pays heed to these the better.

02:31

What would be your first thoughts about the top central bank officials of the world's largest economy? You would probably think they would be the all-knowing, brightest minds of world, right? After all, how otherwise would they have gotten into such elite positions? But sadly, there couldn't be anything further from the truth. Yes, the top officials of the US Federal Reserve are either clueless from the economic reality or choose not to see it. As per an article in Money News, top Fed officials couldn't sense the probable magnitude of the impending subprime housing disaster for most of 2007. They felt that problems in housing and banking would remain isolated and short-lived. They did not expect any adverse effects on the overall US economy. It's been over 5 years since the crisis first broke out and we know what happened to the US economy. This just goes to show how policymakers and economists are disconnected from the real economy. Or is it merely politics overriding economics?

03:01

The government has decided to hike diesel prices by Rs 0.5 each month, for the next 18 months. This will lead to a Rs 9 increase in per litre diesel prices at the end of this period. This move is aimed at ending the under-recoveries of the oil marketing companies. With these price hikes, concerns over higher inflation levels have started looming. Planning Commission Deputy Chairman Montek Singh Ahluwalia is of the view that it should not be a problem. His argument is that while diesel prices may be higher, this would lead to less disposable income levels. And therefore leading to lower demand for other products - thereby reducing their prices. All this would help towards curbing inflation levels over the long term.

We do not buy Mr. Ahluwalia's argument given that diesel price hike would increase prices of nearly all commodities - including the essential ones whose demand cannot be easily lowered (food in particular). Given that the RBI monetary policy review is planned in the next few days, this statement seems to be an indirect message sent across.

03:44

Whether to bail out Greece or not was a big question for European policy makers. Since the country was reeling under debt with no structured plan to reduce the same euro zone partners were apprehensive in lending out support. However, leaving Greece alone to fend for itself would have created further trouble. On the other hand, lending money for bail out was also not feasible (for the fear of no recovery) as there were lack of reforms and no strict austerity measures. Despite that, Greece has received billions of dollars as bail out from the member nations. That's because if no help was extended then Greece would have had to exit Euro Zone. And this could have had serious repercussions on other member nations. But it seems that bail out which continued for long requires further doses of additional liquidity.

Recently, International Monetary Fund (IMF) estimated that Greece would face a financing gap between 5.5 bn to 9.5 bn Euros in 2015 and 2016. And this gap is most likely to be filled by the member nations. Other help is also extended in the form of lowering interest rates on the loans already given out. The Greek debt buyback program is also being considered. Thus, while EU is taking all the steps to extend support to the ailing country it remains to be seen whether the Greek government is able to re-instill fiscal sanity in years to come. If not, the trouble may deepen further.

04:07

Global stock markets witnessed a week of gains except a flat closing for Singapore and Germany (both were down by 0.2%). In the US, the stock market indices were at their 5-year high on strong earnings and hopes that a bill will be considered to deal with federal debt limit issue. The limit of debt ceiling may be raised so as to enable US to pay its bills for another 3 months. This would imply more time for the Senate to work out a budget plan probably one with spending cuts but not too harsh on the country's economy. The Dow Jones was up by 1.2% over last week.

The Indian equity markets ended the week higher by 1.9%. The hike of diesel prices (up by 45 paise per litre) brought buying interest in oil & gas stocks specifically which jumped by almost 9% during the week. Earlier in the week, Finance Minister's decision to defer implementation of General Anti-Avoidance Rules (GAAR) from April 2014 to 2016 too boosted investor sentiments.

Amongst, the other markets too there was optimism all around with only Singapore and Germany reporting minimal losses (down by 0.2%). China (up by 3.3%) was the biggest gainer.

Source: Yahoo finance, Equitymaster

04:56

Weekend investing mantra

"If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." - Philip Fisher