Thursday, November 26, 2009
Finance panel for 12% GST
Finance panel for 12% GST
The Financial Express, November 26, 2009, Page 1
KG Narendranath, New Delhi
The proposed goods & services tax (GST) could turn out to be a far more benign impost than anyone expected. In what would amount to a radical tax reform, the 13th Finance Commission is understood to have arrived at a revenue-neutral rate of around 12%, at least 4 percentage points lower than what most believed the combined Centre-state rate would be.
According to official sources, in a technical paper the commission is going to release shortly, it would also recommend a substantial broadening of the tax base by including hitherto untaxed—but potentially high-revenue—areas like real estate deals, high-end education and healthcare services. If the proposals are accepted, India Inc’s tax liability will see a major dip.
In the commission’s ideal model, GST would subsume taxes on petroleum and alcohol, both of which states want to keep outside the new comprehensive, multi-point tax on value added. Levies on petroleum account for a third of the tax revenues of both the Centre and states. The commission, headed by Vijay Kelkar, even wants the beedi industry, which forms a large chunk of the domestic tobacco sector, to be brought under GST.
The commission’s mandate is to recommend a formula for fiscal resource distribution between the Centre and states, as well as states inter se. It is, therefore, bound to have a decisive say in finalising the GST structure, which is integral to the fiscal resource transfer policy. In fact, the commission has drawn inputs from senior finance ministry officials to prepare the technical paper.
The Centre and states continue to disagree on the structure and modalities of GST, with the former keen to use the new tax as a reform tool. So, by releasing the technical paper, the commission would help the Centre turn the table on the empowered committee of state finance ministers, which recently published a GST discussion paper that most analysts said reflected a compromise.
Real estate transactions now attract only stamp duty at the output level, whereas the output incurs input taxes like Vat on construction material and service tax on specified work contracts. “In most countries where a GST/Vat system exists, sale of property is taxed like any other transaction. All input taxes are recouped by taxpayers, except the final consumer, as credit,” said E&Y partner Harishanker Subramaniam.
The empowered committee’s model not only leaves many contentious questions unresolved, but also defeats the purpose of capturing most supply chains under GST to avoid a tax on tax. The Centre wants the two GST components--central and state--to apply on roughly the same base.
The committee’s discussion paper did not agree with this, and proposed that the threshold for goods be retained at the current level of Rs 1.5 crore for central GST and that a much lower threshold of Rs 10 lakh for both goods and services be applicable for state GST.
Another point of discord is the number of rates. While the Centre wants a single rate for all transactions on goods or services, the states have pitched for multiple rates by differentiating between goods and services, and also amongst various goods.
States have almost agreed on a lower 5% rate for merit goods, but are arguing for the higher standard rate to be 9%. Currently, items that constitute about half the state Vat base are taxed at a lower 4% and this comprises a large number of industrial inputs.
Sources said with the finance commission proposals to be out soon, states might strategically defer making any recommendations on rates to March 2010 or beyond.
Meanwhile, the Commission on Centre-State Relations, headed by Justice Madan Mohan Punchhi, is also looking into the need and relevance of separate taxes on production and sales of goods & services subsequent to the introduction of the Vat regime.
Asset-liability mismatch, a hitch in core sector lending: Subbarao
Asset-liability mismatch, a hitch in core sector lending: Subbarao
The Hindu Business Line, November 26, 2009, Page 6
Banks must hone their skills in appraisal, risk management.
Our Bureau, Mumbai
The asset-liability mismatch is a problem with bank financing to the infrastructure sector. Such loans typically require long-term funding, and deposits of banks are relatively short-term, said Dr D. Subbarao, Governor, Reserve Bank of India.
“This huge and growing demand of infrastructure finance will have to be met even as banks wrestle with expanding their traditional banking services. Apart from finding the resources, banks will also need to hone their skills in appraisal and management of risks inherent in infrastructure financing,” Dr Subbarao said, while addressing a banking conference organised by the Indian Merchants’ Chamber, here on Wednesday.
The Eleventh Five-Year Plan has targeted cumulative infrastructure investment of Rs 20 lakh crore. “Almost one half of this investment is to be funded through debt, and as much as 43 per cent of this total debt requirement (21 per cent of overall planned investment) is planned to be financed by banks,” he said.
High Operating costs
Stressing that banks have a lot of scope to increase efficiency, Dr Subbarao said that the intermediation cost in India is still high due to high operating costs.
“Banks will have to constantly reinvent business models and design products and services demanded by a rapidly growing and diversifying economy. Also, higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk will raise banks’ funding costs, even as they try to improve efficiency,” he said.
He pointed out that resources are not being utilised in an efficient manner by banks.
“Non-interest sources of income constitute a very small share in total income of banks in India. Although overall efficiency and productivity have improved, resources are not being utilised in the most efficient manner.” He said there is a degree of stickiness and non-transparency in bank lending rates.
Challenge
The challenge for Indian banks is to reduce costs and pass on the benefits to both depositors and lenders.
Dr Subbarao said that making banking ‘boring’ is neither a cure to the ills that the banking system was plagued with before the crisis nor an appropriate path for the future of banking. “Banking has to evolve, grow and innovate in response to the developments in financial markets and institutions. The excitement lies in responding to the challenges that this growth brings. He was referring to the views expressed by some economists that making banking boring (banks to do only traditional business of accepting deposits and providing credit and the whole business is regulated) will help prevent financial crisis.
He also referred to the remarks of the former RBI Governor, Dr Y.V. Reddy, calling for ‘back to basics’ in banking urging banks to focus on lending to real sectors of the economy, particularly agriculture and the small and medium industries.
Job market back on sunny pitch, Q2 sees 5 lakh opportunities
Job market back on sunny pitch, Q2 sees 5 lakh opportunities
The Financial Express, November 26, 2009, Page 3
fe Bureaus, New Delhi
The smiles are back in the sectors that were worst hit by the global slowdown last year. Almost 5 lakh jobs have been created in the second quarter of 2009-10 (July to September) as per a report by the labour bureau on the effect of economic slowdown on employment in India.
Significantly, though the bureau’s study was limited to units in 8 affected sectors in 11 states, overall employment in these sectors has risen by 1.51 lakh since September 2008.
The latest quarter’s numbers are in stark contrast to the 4.91 lakh job losses reported by the Bureau in its first quick survey after the Lehman Brothers’ collapse for the period of October to December 2008. The latest quarter’s job accretions also constitute a major reversal from the 1.71 lakh job losses reported in previous quarter of April to June 2009.
While the employment spurt between July and September 2009 can be buttressed by India’s improving factory output numbers in recent months, the latest report holds a good omen on the exports front where growth still remains negative. As many as 2.04 lakh of the 5 lakh total jobs created in the quarter are in exporting units.
“In the earlier quick employment quarterly surveys, the results show that the export oriented units were the most affected and major job losses were registered. During the current survey, employment in export oriented units is showing signs of recovery with an increase in all the sectors, except leather,” the Bureau’s report notes.
In fact, prospects for exporters of gems and jewellery and handloom and powerloom products seem particularly bright.
All the 15,000 jobs added in the handloom sector and 75% of the 58,000 jobs added in gems are in exporting units. Ironically, textiles was the worst-hit in the previous quarter, with 1.52 lakh employees eased out.
Overall, the maximum job creation has been seen in textiles and metals, which employed 3.18 lakh and 65,000 workers, respectively, between July and September 2009.
The only sector that reported a decline – leather – had seen a spurt in employment in the quarter from April to June.
The decline in leather sector jobs is attributed to the monsoon season as production typically slows down.
Construction equipment industry bets big on infrastructure spend
Construction equipment industry bets big on infrastructure spend
The Hindu Business Line, November 25, 2009, Page 15
Our Bureau, Bangalore
The construction equipment industry opened its showpiece event on Wednesday on the note that it was on a high-growth phase and would nearly treble to $15 billion (about Rs 75,000 crore) by 2015.
The growth was driven by the unprecedented public spend on infrastructure, Mr Vipin Sondhi, CEO of JCB India, and Chairman of the fifth two-yearly edition of EXCON, said.
The Union Minister for Road Transport, Mr Kamal Nath, said on the sidelines of the event that he would meet the the World Bank President, Mr Robert Zoellick, visiting on December 2, to discuss a $3-billion soft loan (nearly Rs 14,000 crore) for widening 6,300 km of national highways.
His Ministry had set a target of achieving 20 km of roads a day by March 2010, which would need Rs 2 lakh crore for 20,000 km of roads, Mr Nath said after inaugurating the event. The five-day trade fair is co-hosted by CII.
The domestic industry was a small part of the $100-billion global industry, However, all eyes are trained on us as the country is doing well economically, said Mr Ranaveer Sinha, Chairman, Indian Earth-moving & Construction Industry Association Ltd. India with its cost advantage, can also be the manufacturing base for equipment, components and design.
Mr Sinha said the construction equipment industry had to find solutions to reduce mishaps and emissions. “We have to move towards hybrids and battery operated vehicles,” Mr Sinha said.
Another issue was the import of used equipment, which needs to be regulated so that India “does not become a graveyard for yellow metal,” he said.
He said the huge Government investments in building infrastructure would drastically change the industry in the next decade.
Mr Sondhi said a year ago, this industry’s sales had plummeted 40 per cent during the third quarter, but had recovered sharply on Government stimulus.
This year, the event has grown 60 per cent in pavilion space to 1.6 lakh sqm and 55 per cent by participation to 456 exhibitors, Mr Sondhi said.
Mr C.R. Swaminathan, Chairman, CII-South, said the industry had entered a phase of quantum growth. With a work force of 31 million, it was the second largest employer after farming.
Check unplanned farm conversion, says panel
Check unplanned farm conversion, says panel
Business Standard, November 26, 2009, Page 5
Sreelatha Menon / New Delhi
The rapid conversion of agricultural land for non-agricultural uses is not the best way to food security. That is what the government-appointed panel on land reforms and agrarian relations says in its report, currently under the consideration of Prime Minister Manmohan Singh. It blames the conversion both on absence of land use policies, “opening up of economy’’ and also on the non-remunerative nature of farming.
The committee links the uncontrolled conversion to social unrest in Nandigram in Bengal and Kalinganagar in Orissa, where cultivated land was being sought for industrial purposes against the wishes of the local community.
It traces the fall in agricultural production to the beginning of economic reforms and cites a study to show growth in foodgrain production at three per cent annually in the decade ending in 1993 and at a mere 0.67 per cent annually in the decade ending 2005.
It says the remedy is to have a proper land use plan. It cites Karnataka as the ideal and cites its land use plans as worthy of emulation for the rest of the country, both at the national state and village levels. These plans should be based on present situation and future needs, it says.
“At the national level, securing food for 1.1 billion people is becoming a huge challenge for policy makers. Half of the world’s hungry population lives in India and feeding them requires at least 170 hectares of agriculture land. In a recent move to increase availability of foodgrain in the country, the government curbed food export,’’ it observes.
It further says the people most affected due to conversion are the tribals and other marginalised groups whose livelihoods are dependent on agriculture. Apart from large-scale conversion of their agriculture land, there are far more families that work as agricultural labourers whose livelihoods are threatened. Tribals and other groups already displaced still have not been provided any or adequate compensation.
An estimated 40 million people (of which nearly 40 percent are tribals and 25 per cent dalits) have lost their land since 1950 on account of displacement due to large development projects.They still await compensation and rehabilitation. This situation is aggravating due to addition of more number of people in this ‘inhumane’ category every year. These people are immensely dissatisfied with government’s apathy towards them, it says.
The report credits widespread social unrest to these factors and says inequitable distribution of benefits from the new land use, quantity of compensation not commensurate with market value, and social tradeoffs like rehabilitation not being done properly are leading to immense dissatisfaction among project-affected people.
“This is leading to gruesome social unrest, as witnessed in Nandigram and Singur in West Bengal and Kalinga Nagar, Orissa, where many people were killed. Such violence can escalate and spread in other parts of the country, too, if project-affected people are not properly consulted and compensated, it says. It also blames the decreasing incentive from agriculture as one of the major causes for the conversion. The total national income coming from the agriculture sector in 1951 was 55 per cent, whereas in 2003, it was merely 24 per cent.
It says more and more farmers every year are abandoning agriculture as their primary source of livelihood. Moreover, farmers are also become severely indebted to practice agriculture. More than 60 per cent of the surveyed households in Karnataka in the NSSO Situation Assessment Survey of Farmers, 2003, showed that they owed an average of Rs18, 000 each.
It says the foremost step to deal with the conversion issue is to make the agriculture sector more viable and profitable. So, addressing the concerns of the agriculture sector is imperative.
Finally, a more credible WPI
The Economic Times, November 26, 2009, Page 13
Tina Edwin, ET Bureau
The statistics ministry and the office of the economic adviser attached to the commerce and industry ministry finally got their way about a month ago (October 20) with the Union Cabinet agreeing to allow monthly release of the wholesale price index (WPI), the chief measure of inflation in the country.
As a compromise between those favouring and opposing monthly release of data, it was decided to continue with weekly reporting for two components of the index: primary products and fuel. And, the price data for the manufacturing sector was to be reported on a monthly basis.
A reasonable decision given that weekly data on primary products and fuel group experienced frequent volatility. Also, collecting data for these items is easier: weekly data on primary products is mostly sourced from mandis.
Similarly, as energy sector is dominated by government-owned companies and prices continue to be largely regulated, getting data of the fuel group is not difficult either. In contrast, getting regular data flow from the manufacturing sector was difficult.
Largely because the office of the economic adviser (OEA) depended on voluntary reporting by the manufacturing sector, populated mostly by the private sector, and small and medium enterprises. Many units would not file reports for weeks together, their contention being that there was no change in prices.
Of course, there have been instances when price changes were also reported with much lag, affecting the quality of data published. So, it was routine for the OEA to use the last reported data for the purpose of constructing the price index. For the OEA to follow up with manufacturing enterprises on a weekly basis was impossible: it simply did not have the adequate manpower.
Thus, it is not surprising that, overall, just about 18-20% of the items in the WPI basket were revised on a weekly basis.
Consequently, the revised data that was published eight weeks after the provisional numbers saw significant changes. Needless to say, often, the provisional numbers looked very different from the revised numbers and sometimes even led to unwarranted policy reaction.
It was to improve the quality data and policy response that the statistics ministry and OEA have been pushing for monthly reporting of the WPI data over the past year. Monthly reporting of WPI would have enabled the OEA to capture changes in prices of at least 60% of the items in the basket, as the officials would get enough time to follow up with business.
The working group for revision of the WPI set up under the chairmanship of Planning Commission member Prof Abhijit Sen had earlier recommended in its report that the WPI should be reported on a monthly basis. In any case, the norm across the world is to report inflation data on a monthly basis and most countries use consumer price index (CPI) as the primary measure of inflation in the economy.
India has been an outlier, not only does it use wholesale price as the primary measure but also reporting it on a weekly basis.
Sure, India has several CPIs that are released on a monthly basis — for industrial workers, for rural workers and for agricultural workers and the now-discontinued index for urban non-manual employees — but no comprehensive index covering the entire population. Work on introducing a comprehensive CPI for urban areas and for rural areas is underway.
Introduction of a combined CPI may take another two years, while CPI for urban areas (CPI-U) may be introduced next year.
The switch over to monthly reporting was delayed due to reservations of the finance ministry as well as the Reserve Bank of India, both responsible for anchoring inflation expectations as well as ensuring sustained economic growth.
They felt that monthly release of data would delay policy response, especially when prices were rising fast. One could argue that weekly data would have been made available to the finance ministry and the RBI on a selective basis for this purpose.
But bindings under the IMF’s Special Data Dissemination Standard (SDDS) does not allow signatory organisations to make such releases — much like the norms for dissemination of information by listed companies. Data on important macro indicators have to be made available to all users simultaneously.
This explains why the government chose the middle path, of releasing price data for primary commodities and fuel on weekly basis and manufacturing price data on monthly basis.
The real improvement in the quality of data in the sense of capturing price movements in the economy better may become visible only when the government shifts to the new series of WPI along with a change in the base year to 2004-05 from the current 1993-94.
This is expected to happen only in the new financial year. Shifting to the new series will mean more items that form the consumption basket will be counted and many items in the current series that have no or low demand would be weeded out.
The new series will comprise nearly 1,000 items compared to 435 in the current series. At the end of the day, the quality of the price index will depend on the response the OEA gets from businesses.