Dear FM, this is what India wants - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Dear FM, this is what India wants 

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In this issue:
» Simple tax regime is what FM needs to offer
» Emerging markets continue to rock-n-roll
» India challenges the dollar's status
» Krugman says US stimulus isn't enough
» ...and more!!


00:00
 
From about the middle of January each year, we Indians, regardless of our stature or knowledge, get caught in the whirlpool of anxiety about the 'possible' announcements of the Finance Minister (FM) in the impending budget, which is generally released only at the end of February (July this year on account of it being an election year).

During this period, a flurry of guesses, both educated and uneducated, are made and even a small remark of the FM is dissected and analysed threadbare by the pundits and finally blown out of all proportions. Then follows a stream of advises as to what should be included and what not. All this while, the stock markets, the barometer of the economy and policy making (in some ways), add a measure of nervousness to the already 'feared' atmosphere.

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And the situation is no different this time around. After the current UPA government (minus the Left) came into power in May, there has been increased optimism all around that the FM will present a pro-reform budget that will lead India to the 'next stage' of growth.

Well, while the FM must do what he is supposed to do rather than what he is expected to do, we at Equitymaster hope that fixing the tax regime must be high on his task list. Simply put, what he needs to do is fix the tax regime for all its complexities (and unending schedules) so that 1/6th of the human race does not remain on tenterhooks every year between January and February.

We also wish that he simplifies the tax rules so that the aam aadmi is not at the mercy of the tax department for clarity on how much is he liable to pay 'this year'. And then, the tax administration that has been poor over the years requires a serious consideration.

As the noted constitutional lawyer, (Late) Nani Palkhivala once said, "It is my firm conviction that no nation living today or which has flourished in the past would remain honest under the giddy rules and rates of direct taxes which prevail today in India. Our people, like any other, fall under three segments:
  • Those who would be honest however heavy the burden;
  • Those who would be dishonest however light the burden; and
  • Those (and they constitute the overwhelming majority) who are basically not dishonest but the nature of whose response to the law is conditioned by the quality of the law."
We believe that our tax legislation ignores the first class, is preoccupied with the second, and alienates the third. This is all we wish from the FM, as he rises on Monday (July 6th) and presents the Union Budget for 2009-10.

By the way, on Monday, you can read our analysis of Budget measures for the impact they will have on the Indian economy.

01:52  Chart of the day
Of the three big crises that have hit the Indian markets in the past (1992, 2000, and now), the slowest recovery in the BSE-Sensex was seen post the dotcom bubble burst of 2000. It took the index around 33 months to come back to its pre-bust levels. As compared to this, the index had regained its highs in just about 12 months after the Harshad Mehta scam in 1992. As for the current crisis, well, we are already into its twelfth month and the index is still down around 29% from its highs!

Data source: Yahoo Finance

02:08
 
The sharp upsurge in stock prices that started in March 2009 especially benefited investors in the developing/emerging markets. As per Bloomberg, this has led to their (emerging markets') share of worldwide equity value climbing to a record level of 24% of world market capitalisation, as against 18% at the start of this year.

China's market cap (at around 8% of world market cap), for instance has topped the US$ 3 trillion mark. This follows a sharp 70% rise in the country's benchmark index since January 2009. While the latest data for India is not available, the country's market cap (at less than 3% of world market cap) at the end of June stood at around US$ 1 trillion, up almost 60% from its 2008 end levels.

Data source: Bloomberg.com

Investors' rising appetite for risk and the fact that economic stimulus have shown some impact in countries like China and India, are the most likely reasons for the surge in these stockmarkets. In fact, the International Monetary Fund had recently predicted that developing economies will grow by 1.6% as a group in 2009 and 4% in 2010. As against this, developed world economies are expected to contract 3.8% in 2009 and have zero growth next year.

02:59
 
Anyways, as compared to the global markets, India put up a decent performance during the last week. The benchmark BSE-Sensex increased week-on-week by almost 1%. The Chinese index performed even better, recording gains of about 6%. Weakness was witnessed in other global markets with Hong Kong, US, Germany and Brazil leading the pack of losers, recording losses in the range of 1% to 2%. Also, while gold fell by 1% during the week, crude oil prices were down by around 6%.

Data source: Yahoo Finance


03:21
 
As you would have known, the dollar's status has recently come into question as policymakers in Brazil, Russia, and China have voiced their concerns regarding the ballooning budget deficit that will keep the US dependent on foreign financing. China, for that matter, owns around US$ 744 bn of US Treasury bonds among its US$ 2,000 bn of foreign exchange reserves.

Now, even India has joined its BRIC peers in questioning the dominance of the US dollar as a reserve currency. As reported on Bloomberg, the government's economic advisory wing is urging the government to diversify its US$ 265 bn foreign exchange reserves and hold fewer dollars. Though for all the complaints about the dollar, emerging markets such as India remain dependent on this currency.

However, we continue to wonder how a currency of a country crushed under the weight of its own debt and unemployment around decade high levels can actually live up to its haven status during times of economic and financial turmoil in the years to come.

03:59
 
Ever since the global financial crisis broke out in the US, a lot of comparisons were made to the Japanese economic crisis, which resulted in what is now famously known as 'The Lost Decade' for the Japanese economy. Although far more aggressive steps were taken by the US authorities, sadly, they aren't proving to be effective enough. This isn't us but the Nobel Laureate Paul Krugman talking. Writing in an op-ed piece for the New York Times, Krugman mentions that the US economy requires more than 8 m jobs just to keep itself above water and there aren't any indications that job creation of this magnitude will take place.

Indeed, there is the Obama administration's fiscal stimulus program. But that is likely to create more than 3 million jobs at best, not even remotely enough. And to make matters worse, all the stimulation at the federal level is being undone by the huge budget cuts being implemented at the state and the local level. Under such a scenario, the government's only hope could be to dramatically increase the size of the stimulus.

As Krugman's parting line points out, "You need to get both your economic team and your political people working on additional stimulus, now. Because if you don't, you'll soon be facing your own personal 1937." A rehash of 'The Great Depression' anyone?

04:54  Weekend investing mantra
"Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised" - Warren Buffett
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4 Responses to "Dear FM, this is what India wants"

yv appa rao

Jul 6, 2009

The congress is always for pro poor and employees. Of course rich are their basket.

left with middle class who are always shown with the stars.

Let's see if any quality comes down other than pro equity market.

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mpsingh

Jul 5, 2009

Senior citizen's cutoff age should be rationalized to 60, for the purpose of Income Tax also, similar to Rlys, banks etc.

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Markand

Jul 4, 2009

Please convey if you can to FM that
1)Do not subsidise industrialist nd rich at the cost of midle incom and poor.
2)Be rational in prevailing subsidies That is its rediculous that one who buys car costing 96 lacs also gets subsidised petrol and disel.
lET THERE BE LIMIT FOR PROVIDING SUBSIDIES AND FREE COMMON MEN TO SUPPORT BURDON FO RICH.
3)Let government be sold out to industry and FII at large while formulating rules and regulations.
It is NOT required to follow FAILED MODEL OF US while de regulating and liberlisaing the regime.
4)MOst important India lives in villages and 90% of population (any religion)is still striving to balance between income and expenditures so use wise senses (HE MAY REFER MAHAMTA GANDHIJI for economic vision of free India)While sanctioning GOVERNMENTAL EXPENDITURES.PM electric bill can support so many poor lives.so on so forth...
LET THOSE WHO WORKS(IRRESPCIVE OF POLITICAL PARTY)should be honored for ideas.Get GOOD policy ideas from GUJARAT CMwho gave growth of 17% in last 5 years against folling growth of nation.

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kashinath paul

Jul 4, 2009

well this is most wanted prior to the B day i.e 6/7/09.
Thank u very much for your endeavour.

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