Should the GST Bill Change the Way You Invest?

Dec 23, 2015

In this issue:
» Potential to be tapped by Indian NBFCs
» Fiscal deficit of states set to rise
» ...and more!
Radhika Pandit, Managing Editor of ValuePro

The goods and services tax (GST) is expected to be a game changer for investors, economists, political parties, and everyday citizens.

For the Modi government, this bill becoming law is crucial. After high expectations coming into power last year, the going has been tough for the government, and a hard dose of reality has prevailed. But the GST is expected to cement the government's stance on being serious about reforms.

It's not just the Modi government that thinks this bill must be passed. Despite stiff opposition from political parties, any investors, Indian and foreign, think so too.

That includes Mark Mobius of Templeton Group. In an interview with the Economic Times, Mobius made it clear he believes that among all the reforms the Modi government is focusing on, the GST is the most important. He went a step further and stated that, if the GST bill gets passed, Templeton would double their allocation in India.

Is the GST bill that important? I had a word with the co-editor of The Daily Reckoning, Vivek Kaul, to get his views.

This is what he had to say:

  • I think GST is not the be all and end all that it is being made out to be. The government has wasted too much political capital in trying to get it passed. At some level, the BJP is also to be blamed given that when Narendra Modi was the chief minister of Gujarat he was opposed to GST. In fact, Jairam Ramesh in 2013 even said that, 'It did not happen [the passing of the GST bill] because of single-handed opposition of Narendra Modi to GST.' So now Modi and the BJP are getting a taste of their own medicine.

    Further, GST is necessary to remove the inefficiencies of the current tax system where multiple levels of indirect taxes are charged by the government. Having said that, there is little evidence from other countries that suggests implementation of GST actually boosts economic activity.

Our view is that investing in the Indian equity markets should not be based on whether the GST bill gets passed. If the past is any indicator, India has grown at 8% plus rates even without a GST. Further, the GST is just one reform. A lot of work still needs to be done to ramp up infrastructure, make the real estate sector more transparent, and generally make India an easy place to do business.

So for us, the GST bill getting passed or not in no way changes our perception of businesses and the way we go about valuing them. In other words, we follow a bottom-up approach to selecting stocks.

The key is to evaluate every company on an individual basis - its track record, its execution skills, and its business model. And from this shortlist, only invest in those whose valuations are reasonable.

Do you think that the passing of the GST Bill will have a major impact on your stock-picking decisions? Let us know your comments or share your views in the Equitymaster Club.

03:03 Chart of the day

Non-banking Finance Companies (NBFCs) in India have scripted their business growth by lending in areas that are either overlooked or not adequately covered by their larger counterpart, banks. NBFCs that have successfully established themselves include the likes of Shriram Transport Finance in used commercial vehicle segment, Repco Home Finance, Gruh Finance and CanFin Homes in affordable housing segment, Bajaj Finance in consumer durable segment and Mahindra Finance in tractor financing segment.

One of the biggest challenges faced by NBFCs lies in the determination of the credit worthiness of customers that are either self-employed or employed in the informal sector. This segment is unable to access credit through the banking channel as it lacks formal income documents such as salary slip. The credit penetration of NBFCs in India at 13% of GDP is still low compared to other emerging economies, according to a report by Boston Consulting Group (BCG). This in turn presents a big untapped opportunity even as the quality of assets remains a point of concern. NBFCs have tried to overcome this problem by developing their own in-house techniques for credit appraisal.

Going ahead, NBFCs will have wider access to consumer data thanks to the new digital-age that will simplify their asset quality concerns as per the BCG report. Moreover, NBFCs can partner with payment banks and small financial banks and provide more financial offerings to customers thereby boosting their growth prospects.

Potential to be tapped by Indian NBFCs


Apart from greater financial inclusion, the government has also been striving to improve the fortunes of the beleaguered power sector. After years of inefficient operations, the State Electricity Boards (SEBs) are saddled with huge debt of Rs 4.3 trillion. The government recently unveiled a revival program for distribution companies known as the 'Ujwal Discom Assurance Yojana' (UDAY).

Under UDAY, states will have to take over 75% of the debt of SEBs over a period of two years against which bonds can be issued. The acquired debt will have interest rates restructured at around 8-9% (14-15% earlier) and will not be considered in the state's fiscal deficit until FY17. So far, ten out of 29 states have signed up for the scheme. The scheme is a more viable solution as compared to bail-out packages that have only added to the debt burden of SEBs.

But the actual fiscal deficit of states, under the scheme, is set to rise on higher interest outflows to service debt. Reportedly, the combined fiscal deficit of states will rise from 3% to over 4.5% by FY16 if all states join the scheme. The central government has made the scheme attractive for states by offering incentives such as relaxation in borrowing limits, provision of low cost power from NTPC and other utilities and priority in central funding in certain schemes. The success of UDAY will not only improve the financial standing of SEBs and asset quality of banks but also boost power purchase resulting in better utilization for power producers.


Indian equity markets began the day's proceedings on a firm note and the subsequent hours saw the indices maintain this momentum. At the time of writing, BSE Sensex was trading higher by 268 points and NSE-Nifty was trading up by 74 points. Mid cap and small cap stocks also notched gains and were trading higher by 0.3% and 1% respectively. Gains were largely seen in IT, metals, and oil & gas stocks.

04:55 Today's investment mantra

"I want to be able to explain my mistakes. This means I do only the things I completely understand." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

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Equitymaster requests your view! Post a comment on "Should the GST Bill Change the Way You Invest?". Click here!

4 Responses to "Should the GST Bill Change the Way You Invest?"

Sundaravaradan S

Dec 25, 2015

GST Bill:

Of course,in India, GST will have a MAJOR impact in investing decisions of myself & million other investors, for sure ! Will GST be the ONLY factor affecting Investment??? NO...! (Please note the Key words MAJOR, in capital letters). The entire investment world is waiting for GST Bill. In India, GST will streamline the entire Taxation system, improving the GDP. India is DIFFERENT from other countries... Proper GST system will bring great reforms, we all know it...! (Of course there are....Ifs & Buts..... but what is the probability of reforms, by GST...???? +1% GDP increase with 90% probability).


G M Kandoi

Dec 24, 2015

we are in total agreement with your view,GST could help improving economy, but not the last tools



Dec 23, 2015

I agree with the views expressed here. Too much hype has been created for introduction of GST. There is little likely hood of improvement in GDP on account of introduction of GST or vice versa. What is important is to improve governance, transparency in government functioning and transparency, accountability and efficiency in corporate sector which are going to be instrumental on overall growth of Indian economy.



Dec 23, 2015

yes, the sentiments will work for the time being and in a short period shall get vanished.

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