Will anti black money move impact stock markets? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Will anti black money move impact stock markets? 

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In this issue:
» Should gold still be a part of your portfolio?
» Rail freight hike to cause ripple effects across the board
» Sugar industry gets a shot in the arm!
» Gas price hike : Is new Government ready to bite the bullet?
» ...and more!


00:00  Chart of the day
 
With a size that could exceed the accounted money in the economy, it would not be an exaggeration to say that black money has been a black hole that has hugely affected the growth prospects for India. The issue of black money has haunted the Indian economy for a long time now. The UPA Government had faced a lot of flak for not being able to bring this money back. Retrieving it was on the top of the agenda for NDA Government and one of the major highlights of its election campaign. Now that Mr. Modi's Government has come to power, it is apparently doing its best to crack whip on the offenders. In fact, it constituted a Special Investigation team (SIT) to track black money abroad on the first day in office.

As per different estimates, the illegal assets of Indians abroad could be double India's GDP. As we all know, a bulk of it is stashed in Switzerland. The latter has been one of the tax havens where the untaxed money is held.

Black money remains an overhang on India's economic prospects

As per recent news, finance minister Arun Jaitley has asked for the details of Indians that have stashed unaccounted money in Swiss banks. In contrast to its earlier stand of keeping such details secret, Switzerland has softened under sustained pressure from all quarters. It seems it is ready to unveil the tax related details.

While this is a positive development, it can hardly be the remedy for the deep rooted rot of black money. As an article in Business Standard suggests, what Government needs to target is the policies and incentives that generate black economy in the first place. First of all, tax treaties that have so far allowed such free laundering of black money should be modified. Further, better disclosure norms; such as for Participatory notes (P- notes) should be ensured to make it tough for offenders to bring back this black money, thus killing the incentive to launder money in the first place. It is important to note here that P- note is an instrument issued by registered FIIs to overseas investors. The latter in turn invest in the Indian stock markets without registering themselves with the Securities and Exchange Board of India (Sebi).

However, doing this would be a real test for the Government. Such a move could impact flow of black money into the Indian stock markets that have been surging to new highs on huge FII money inflow. This would likely impact the market sentiments in the short term and burst the stock market bubble, something that has spooked the Governments of the past. Still, we believe it's a bitter pill that the new Government should pop to ensure growth and stability in the economy and Indian stock markets over the long term. Meanwhile, investors would do well to not to get carried away by bullish sentiments in the stock markets but focus on bottom up stock picking approach.

How do you think the issue of black money can be effectively tackled? Let us know in the Equitymaster Club or share your comments below.

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02:00
 
With stocks touching new highs both here as well as in the US, very few people seem to be focusing on gold these days. However, this changed as the yellow metal went up the most in nearly 9 months last week. This was presumably on the back of the announcement by the US Fed Chairperson that low interest rates are here to stay. Besides, the crisis in Iraq is also lighting some kind of fire for gold these days. Will the trend last though? A lot of experts don't seem to feel so. They argue that the surge in gold prices is temporary. And therefore people will soon start looking at other avenues that are doing much better. But what if the geo political situation turns worse? Besides, the easy money policy of the US is not going to end any time soon. And therefore should inflation flare up, isn't gold one of the best places to hide? We believe that a lot of people are getting too enamored by the rise in assets like stocks and real estate. They seem to be taking the recovery for real. However, as we've pointed out time and again, we have our fair share of doubts about the quality of recovery. As per us, it is mostly liquidity and artificially low interest rate driven. And thus will not be sustainable once these supports are removed. As a result, in a scenario where paper money is likely to get significantly devalued, one's best bet is to have a small portion of one's portfolio in gold we reckon.

02:40
 
With the new government coming to power, there also came a lot of hope and enthusiasm. That India's fortunes would finally turn. That a decisive, reform-driven government would rein in inflation. And so on... But it's been just over a month and people are as angry as ever what with the massive rise in railway fares announced recently. Ever since, there have been long queues at Mumbai's suburban railway stations as people scramble to get their season tickets before the fare hike kicks in tomorrow.

But this is not bad news for consumers alone. The hike in passenger rail fares and freight rates is set to have ripple effects across the board. As per an article in Business Standard, this decision by the government is likely to push inflation up by 50 basis points (0.5%). Take steel prices for instance. The 6.5% hike in freight rates has led to a price hike of Rs 300 per tonne in steel products at major spot markets in the country. In fact, as per the financial daily, traders are mulling over an additional increase of Rs 700-1,000 per tonne. Similar trends could be witnessed in other essential items as well since railways play an important role in the transportation of goods and materials across the country. For now, it seems that 'good days' are still a long way from here.

03:30
 
The ailing sugar industry seems to have received a shot in the arm from the new Food Minister. To bail out the sector, the minister made a few announcements which include hiking the duty on raw sugar imports to 40% (from 15%). The government also raised the mandatory ethanol blending rate to 10% from 5% earlier, which would increase the overall demand of the byproduct of sugar production. Further, it also allowed manufacturers to take interest free loans to clear their long pending dues of Rs 110 bn to cane growers. This would improve their cash flow position. While these measures are expected to lead to higher sugar prices, profitability of the sugar companies is not expected to improve drastically given the high production costs; including that of sugar cane prices. The financial performances of the major sugar manufacturers were quite poor in the year gone by with some major players reporting massive losses. As such whether these steps are good enough to revive the sector is something that remains to be seen.

04:10
 
First we had the railway fare hike. Then import duty on sugar was raised which might result in sugar price hike. And now we have the gas price hike. Though the quantum is expected to be lower than what was earlier proposed by the UPA government. It appears that the hike will be from US$ 4.2 per unit to about US$ 5.5-6.8 per unit as against US$ 8.4 per unit proposed by the UPA government. Yet, the hike will obviously raise the cost of living. Cooking gas will become expensive. And so will transportation expenses. Electricity expenses will also rise for gas fired power plants.

By implementing these tough measures it seems like the Modi government is ready to bite the bullet without any fear of public backlash. Though most of these decisions were taken earlier, their implementation became an issue due to non-decisiveness, election code of conduct and fear of antagonizing vote banks. Though they make economic sense and are rational in nature to improve government finances, they create inflationary tendencies in the economy. Thus, it would be interesting to see how the government plans to curb the inflationary pressures that may engulf the common man amidst rise in cost of basic necessities. It appears that the Modi think tank will have its task cut out in the near future.

04:40
 
The delayed rainfall has been a concern for the new government as well as for consumers. Prices of food items have already begun to spike. While the issue of food inflation is a concern for us all, there does appear to be certain disconnect when it comes to its impact. We are referring to the rural-urban debate. Rural consumers tend to pay less for farm produce than their urban counterparts. Thus, whenever there is a spike in food prices due to drought, urban consumption tends to be affected to a greater extent. As per an article in the Business Standard, during drought years of 2004 and 2009, consumption of pulses increased faster in rural areas. This was despite the sharp increase in the price of pulses in those years. This decoupling of rural consumption from the monsoon is largely due to the reduced dependence on agricultural incomes in rural India coupled with rural development schemes and better irrigation methods. But there has been no such respite for urban consumers. It appears that the people in Indian cities continue to remain at the mercy of the rain Gods.

04:50
 
In the meanwhile, the Indian stock markets continue to surge ahead. At the time of writing, BSE-Sensex was trading higher by 331 points (up 1.3%). All sectoral indices were trading higher with realty and consumer durable stocks being the biggest gainers. Most of the Asian stock markets were trading strong with indices in China and Indonesia being the major gainers. Majority of the European markets opened the day on a positive note.

04:55  Today's investing mantra
"In stocks as in romance, ease of divorce is not a sound basis for commitment." - Peter Lynch
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5 Responses to "Will anti black money move impact stock markets?"

Lt Col (Retd) BS Harneja

Jun 25, 2014

Black money implies money generated on which requisite income & other taxes are not paid. Besides catching black money, the Govt. should generate ways & means to reduce its generation.
In India, direct taxes like income tax form a major part of Govt.’s income, but being paid only by a very small percentage of its population, that too mostly by salaried middle class. Major money generators like private & business class income earners’ avoid paying full income tax by false or no declarations.
On the other hand indirect taxes appear invisible to and are difficult to avoid by most people, except may be by business class themselves, through whom these are collected.
One of the major ways to reduce black money in a vast country like India, would be scrap or reduce direct taxes like Income Tax to a nominal value (with a purpose to know the quantum of incomes earned) and to increase indirect taxes, with lower scales on items of common consumption by lower income groups, gradually increasing on items of consumption by high & luxury income groups. This would result in money either being deposited in banks, visible & available to authorities for investments and reduction in demand of luxury items. The Govt. would also then have to monitor a much smaller no. of people collecting & paying taxes.

Like (3)

HARSHADRAI

Jun 25, 2014

Share profit;long term capital gain;NO TAX. If anybody want to convert BLACK MONEY INTO WHITE, sevices are available from some Brokers,Directors etc. Exmple; Some companies shares are available @5/-,within 12 months the same are systemetically enhanced to 100/- and after 12 months they purchased the shares @ 100/- or above.As per Income tax act NO TAX.All this are fabricated for conversion of black money into white by charging some percentage. 2. REAL ESTATE transaction should be transparent. In many area rate are above Collector's guidelines.Seller & purchaser should give details to Collector and anybody want to purchase this property then he should offer atleast 5% above price,bythis way nobody want to sale the property below real price,previously the deals have black money but now saler afraid and all transaction are in white money.

Like (3)

Rasikbhai Gandhi

Jun 25, 2014

Owing to very heavy noise for the few years black money storer might have withdrawn the money from Swiss bank and could have invested some where else. Under the circumstances instead of resorting to penal action the depositors should be given monetary benefits to bring back their deposits in India. Perhaps we will be able to reinvest the same in India.
Regds
Rasikbhai Gandhi

Like (3)

KRISHNAN

Jun 24, 2014

Friends, Money earned in India stashed outside is to avoid tax liabilities. We need not bother much about who are the tax evaders; but take from them tax and penalties due thereon. There must be no laxity/delay in settlement of cases. S

Like (3)

Suraj Prakash

Jun 24, 2014

Banning p-note may have -ve short term effect but in the long term it have a +ve effect

Like (3)
  
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