Tax hikes around the corner if the FM has to keep his word - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Tax hikes around the corner if the FM has to keep his word 

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In this issue:
» Is India prepared for a QE taper off?
» The US$ 3.7 trillion reason for investing in Chinese Yuan
» Even in gloom, smaller firms outperform
» A fund manager who has lost faith in his own gold fund
» ....and more

In the Union Budget presented in February 2013, the Finance Minister had vowed to keep the fiscal deficit at 4.8% of GDP. Even then most of us were skeptical about this target. We were worried that it would be a long and difficult task for this target to be achieved.

And now it seems that we were right with our skepticism. In its recent report, the Finance Ministry has reportedly admitted that there have been fiscal slippages in the first half of the year. The findings of this report (as carried by Business Standard) state that there was an increase in expenditure. And a shortfall in revenue. As per the report, the fiscal deficit has already touched 76% of the budget estimates in the first half of the financial year.

The total expenditure for the six month period ended September 2013, was 48.6% of the budget estimates. This is higher than the 46.5% seen during the same period last year. On the other hand revenues, particularly the tax revenues, were much lower. The disinvestment target is not even close to being met as of now.

Even then there have not been any announcements on whether the government plans to cut down on its expenditure to achieve the fiscal deficit target. Given that the elections are due next year, cutting down any of the populist expenses like subsidies, etc, would not bode well. So how would the Finance Minister achieve his target?

In October 2013, Reuters had reported that the Finance Minister could push about US$ 15 bn worth of subsidy expenses of this year to 2015. This would help him achieve the target this year at least. But what would happen next year and the year after that? Guess the government has not really thought this through for the long run.

If the FM does not postpone the expenditure then what are the other alternatives that he has? One is to expedite the disinvestment program. As reported yesterday, the Finance Ministry is toying with the idea of introducing innovative financial instruments for this. Another alternative that the government has is to raise taxes.

The truth of the matter is that India is in a bad shape thanks to its government. And unfortunately the onus of satisfying the government's ambition would once again fall on the common man. Let us not forget that the high inflation and interest rates have already taken a toll on our pockets. At the same time the slowdown has made income streams volatile. With the way things are, the honest tax payers could be asked to stretch themselves even further. And all for what? So that the government can win popularity votes and come back to power!

Do you think the government would be able to meet its fiscal deficit target this year? Let us know your comments or post them on our Facebook page / Google+ page

01:10  Chart of the day
Indians are considered to be people sensitive to pricing. Since consumers are price sensitive, usage usually drops when prices go up and vice versa. This seems to be true for oil products as well. As per Petroleum Planning and Analysis Cell (PPAC), consumption of price sensitive products has taken a hit this year. The growth in consumptions this year (January to October period) is actually much lower than what it was during the same period last year. In fact it is not just the consumption of the 'sensitive products' like diesel and LPG that has declined. Even the growth of all other oil products has been subdued this year. The price of diesel has been hiked by 50 paise since January this year. But even these small hikes have hurt the consumption of the fuel. The oil minister has recently stated that he plans to deregulate the prices of diesel completely within the next 6 months. If the trend till now is anything to go by, any further increase in diesel prices would most likely hurt its consumption in the short term at least. But the high point of this is that it would also help reduce the fiscal burden to a large extent. Oil subsidies on products like diesel and LPG have weighed down on the country's fiscal position. Therefore any taper off in consumption and/or prices would be a welcome relief.

Price Hikes Hurting Fuel Consumption

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Will the US Fed taper its QE program or not? When will it taper? These questions have been on everyone's mind in the financial world. Ever since Ben Bernanke first hinted at a likely taper in May 2013, the world financial markets have reacted sharply to news pertaining to the Fed taper.

As we know, FIIs are the most important market movers as far as Indian stock markets are concerned. So an obvious question follows: How will the Fed taper impact India? Is India better prepared now to deal with such a situation?

Well, if you compare our present situation with what it was in May, you can say we are somewhat better off now. The government imposed curbs on gold imports. Exports are picking up. RBI took a series of measures to reign over the currency fall. So yes, relatively we are in a better position. But we have seen in the past how markets tend to come down like a house of cards when FIIs have dumped Indian stocks. So it's would be a bit presumptuous to say that the Fed taper will not impact Indian markets much.

Growth may have slowed down in China, but that has not stopped large asset management companies from investing in the country. As reported in an article in Bloomberg, one of the reasons for this is the massive US$ 3.66 trillion currency reserves that the dragon nation has amassed. The US Fed's decision to taper its QE program some months back had given global markets the jitters. As a result, there was an exodus of capital from emerging markets including India. For the latter, this posed a problem because it is burdened with a rising current account deficit. But China has no such problem. Some of the other factors that are in favour of investments in China include the country's intention of moving away from an investment and exports based business model. But that does not mean that there are no other problems. For quite some time now, China has been plagued by issues such as shadow banking, unregulated lending and increasing debt burden of local governments. Efforts to bring these under control have led to cash squeezes that helped drive up borrowing costs. Also, China is looking to make the Yuan fully convertible. But this may not be that easy given the opaqueness with which the currency is managed. Thus, investing in China is not without its share of risks.

They say good things come in small packages. Currently there is not a single economic statistic that is showing some sign of recovery. The global economic risks are expected to get worse, much worse, before they get any better. Large corporates are reeling under the pressure of low profitability and poor interest coverage. Banks at the same time are courting networth erosion with mounting bad loans. In the midst of this, few midcap and smallcap stocks, that are by nature a high risk asset class, are showing a ray of hope. As per an article in Business Standard, 274 companies listed on the BSE have surpassed their FY13 full year profits in first half of FY14 itself. Most of these stocks belong to the midcap and smallcap indices. Now, while this may be a reason to feel enthused about recovery, there is hardly enough case for investors to react.

Is the rise in profits reason enough for investors to jump at the opportunity of buying any and every mid and smallcap stock? We believe that the time is ripe for investors to exercise utmost caution. Instead of getting drawn to just the bottomline growth, investors must investigate if the growth is sustainable. More importantly if the companies recording high growth have safe balance sheets and good business models. Else going by such raw statistics to invest in such high risk asset classes can be a dangerous move we believe.

If you go shopping, you would certainly like to buy things that are flying off the shelves isn't it? You would buy the most popular thing out there. Not so when it comes to investing however. In investing, buying what's popular is not going to take you anywhere. Simply because if it's popular, it's more often than not fairly valued. Therefore the idea out there has to be to buy the most unloved asset and wait for the eventual upside to come. We believe gold could be a perfect candidate for this experiment. This is because its popularity keeps coming down with each passing day.

The latest to give the yellow metal the cold shoulder is billionaire investor John Paulson. Turns out Paulson has clearly told his clients he wouldn't personally invest more money in his gold fund. For he has no idea when inflation could accelerate, a scenario that usually makes gold the asset class of choice. Paulson can afford to do so for he already has gold in his gold fund. But those of you who don't, now is not a bad time to invest a small 5%-10% of your total wealth in the yellow metal. For as even Paulson acknowledges, inflation will eventually accelerate. It is only a matter of when.

Global markets gained modestly on favorable US economic data, including tame inflation and fewer-than-expected weekly jobless claims. Although the Fed has so far held off on tapering its monthly bond purchases, central bank officials still expect to begin to reduce the quantitative easing program in the coming months. The minutes of the Fed's late-October policy meeting indicate that officials are searching for other ways to provide support for the economy and that short-term interest rates are likely to remain low for a long time. The US markets closed at record high (up 0.6%).

China's central bank followed up this week on last week's announcement of significant economic and financial reforms. The Chinese equity market ended the week up 1.4%.Overall weakness in the Eurozone stood in contrast to rising business confidence in Germany. The Eurozone composite purchasing managers' index slipped to 51.5 in November, from 51.9 in October. All the major European equity markets closed the week in the red.

The Indian stock markets closed in red. Indian Indices lost ground during mid-week after starting the week on a higher note. The indications from the Fed signaling withdrawal of QE in coming months and persisting worries over the slowdown in FIIs investments into Indian shares weighed on sentiments of local investors. The BSE Sensex closed the week with 1.2% loss.

Performance during week ended Nov 22
Data Source: Yahoo Finance

04:55  Weekend investing mantra
"The true investor scarcely ever is forced to sell his shares and at all other times is free to disregard the current price quotation." - Ben Graham
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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8 Responses to "Tax hikes around the corner if the FM has to keep his word"


Nov 25, 2013

The FM will not be able to check inflation nor the 'populist' expenditure. The honest tax payer will have to take on addiional tax burden both direct & indirect for the Congree to get votes!



Nov 23, 2013

I do'nt think, the govt can achieve the targets. As you mentioned, the honest tax payer will be the victim.


nalin patel

Nov 23, 2013

yes he will do it , he is legal finance minister.... this is what he has done , he has applied finance act 2013 which becomes applicable from 1 april 2013, to income transaction for year ending 31 mar 2013, for which the finance act 2012 is applicable.... he has fooled tax payer and made section 115JC and 115 JD alternate minumum tax provisions to individuals and collected double the income tax payable for the year. refer ITR 4 on line form for ye. 31 mar 2013



Nov 23, 2013



SK Saxena

Nov 23, 2013

It (fiscal deficit as percentage of GDP)really does not matter as the target can well be met by resorting to a kind of jugglery of numbers in as much as shifting some expenditures beyond the current FY is not such a big task.
The real important thing is the quality of the Govt data and decisions that might result in decreasing the perilous impact of rising inflation on the vast majority of the people.


ajit maiti

Nov 23, 2013

The Govt led by this party will try to do whatever means possible to gain vote banks. It is not their issue. They experienced the vote bank advantage over last so many decades starting from independence. This party is very much experienced and keen than other party how to manipulate, where to manipulate, when and how to manipulate. Practically they are selling India to fill fiscal gap. They are selling companies to foreigners, that were built last few decades. I believe the Govt led by this is vulnerable to external threat. every dam thing is being imported and internal resources being sold to outside India. Earlier days only brain drain was going on, now everything is being sold out. So who is responsible in the country? We the people.


Vipul Ashara

Nov 23, 2013

I do not think that the government can achieve this target through any permutation and combinations withing this fiscal year. It is really shameful on the part of the government and painful for common man like us that ultimate sufferer is going to be common man who has to pay higher income tax also (Specially Salaried People), after paying for and satisfying his basic needs like food(High Vegetable Price), Fuel (Cooking Gas) and Fuel (For Car if he unfortunately possesses because now small car is now a days is possessed by so many common men. I am not counting education expenditure of children which goes on increasing every year.



Nov 23, 2013

It is only the common man ,especially the salaried class bear the brunt.Whatever reduction given in the last year on income tax as a relief is hardly anything when compared to the inflation and prevailing cost of essential goods.

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