My year end investment audit for 2018

Every year I try to take stock of my life and my finances on the last day of the year. It serves two major purposes – firstly, it shows me where I am and what do I need to do in order to get to my desired state and secondly, it gives me an idea as to whether I am doing the right things by my money. 

Any way we look at it, 2018 was a bad year from a financial or investment viewpoint. In the beginning it had not appeared so, especially after the stellar 2017 we had for our markets. January was a good month, corporate earning was looking like turning the corner and politics was largely stable, BJP having won Gujarat despite some hiccups. It was unfortunately to go wrong very soon, the first blow being the equity taxation in the budget. This has been talked about in every budget over the past few years but the markets clearly did not think it would actually happen. Once it did a domino effect of bad news and sentiment followed which has damaged equity portfolios through the year. I will not go into a detailed commentary here but crude oil prices, withdrawal of FII money, BJP losing Karnataka and then the Hindi heartland states, corporate earning being rather flat all played a role to ensure that our markets did very poorly. Even when there was some recovery, it was seen only in the large cap stocks, the mid caps and the small caps have been battered out of shape.

The news was not much better on the Debt front either. The ILFS fiasco affected several debt funds poorly and the returns for this year will be well below par. Short term accrual funds, normally considered the safest bets, also had fairly bad cuts. Redemption from debt funds was sustained over the year and the fund houses were saved by the continuing SIP inflow into equity MF schemes. So, while it was good to see that the Indian retail investor had gained some financial maturity, from a portfolio return perspective there were hardly any financial instruments that you could rely on.

With this backdrop, let us see how my investments have done in 2018 :-

  • My direct stock portfolio suffered in a big way early on, recovered somewhat in July/August period and then went down after that. The large cap stocks are not doing badly now but the mid cap and small caps have tanked quite a bit. On the whole the portfolio would have hardly made any returns after adjusting for inflation, I suspect there may be some losses too.
  • Similarly my Equity MF portfolio has suffered too, more in the mid cap and small cap space while holding on in the large cap space.
  • Thankfully, since both of these portfolios are long term, they are still doing well in the overall sense. Also, given the fact that I do not really have any need to redeem any of my investments, I can wait and hope for things to turn around.
  • The markets and stocks tanking also presented a buying opportunity. I have started a secondary portfolio of stocks which I want to run for 10 years. My plan is to invest about 10 lacs in it and so far I have done about 7 lacs. There are some posts in my blog on this and you can go through those for more details.
  • I do have a few open ended debt funds and they have not done well. During the year some of my FMP schemes had matured and I invested the principal amounts into hybrid schemes such as Balanced funds and Equity Savings funds.
  • My fixed income instruments were the savior for 2018. The Tax free bonds, InvIT funds, PPF, POMIS performed as expected and generated the expected cash flows.
  • With the rise of the US Dollar, I sold off some Dollars that I had over the years. I used this money to kick start my secondary stock portfolio.
  • I also received the maturity proceeds of an old LIC policy and this was also used in my secondary stock portfolio.

So what is the overall verdict? This was a year of bad returns and high expenditure due to our travels which included trips to Bali and Mauritius. As I said in yesterday’s post my active income was also not as expected. Despite all of these issues, my cash flows were comfortable and I was even able to invest in a secondary stock portfolio. This gives me the confidence that my asset base is capable of supporting my financial independent state with some leeway. Hopefully next year will get better and the asset base will increase to an even more comfortable state.

What are my cash flow plans for 2019 and how will I plan to invest next year? These will be the subjects of my next 2 posts.

Wishing all my readers a very happy and successful 2019.

 

Advertisements

Society, Economy, Politics -how will markets react now ?

India of 2018 is a very interesting case study of contradictions in many ways. We have a government that was taken to be long term, at least till 2024, but with the election results this week it is clearly under siege. We have an opposition buoyed and flush with the recent electoral success but pulling in too many directions that may militate against it mounting an effective challenge. We are the fastest growing large economy in the world but our GDP growth rate is again under pressure. With so many things happening in the society, economy and politics, how are our markets likely to react?

Let us take society first – it is easy to see that we live in deeply divided times. The fault lines between different parts of our society is very clear. In terms of religion, the division is wide among Hindus and Muslims with both feeling they are hard done by. The non decision by the courts on the Ram temple issue has clearly caused a deeper divide and is like a festering wound that is now taking a heavy toll on communal harmony. The cow slaughter issue is central to a lot of disharmony and is not being handled properly by the governments. People today lack faith in law and order and are increasing taking the law into their own hands as evidenced by the spate of lynchings across the country, the latest being the sad death of a policeman. Religion is only one side of the coin though, caste is the other. Even today the dalits are treated atrociously in India and that is a great shame. As they get better educated and relatively improve their economic state, they are becoming more assertive, obviously to the chagrin of the upper castes. In general the society is also high on aspiration, education and jobs being the prime drivers. Sadly there is a clear disconnect between them and a lot of educated youth are not finding any avenues to use that education. Changes must be brought through an entrepreneurial revolution but even with government financing the success here is mixed as yet. This is leading to increased demand of more and more reservations, which obviously is not a solution. The societal disparities are also staggering and while the overall per-capita income and living standards rise have reduced poverty, the difference in how the various classes of society lives is mind boggling. All of these create a society in constant tension, reflected by so many unsavory incidents we get to hear of almost daily.

Coming to the economy, agrarian distress is definitely a cause for great concern. A lot of people even today depend on agriculture in our country and the reality is it is virtually impossible to make a living out of it, unless things are changed drastically. Elimination of middlemen and focusing on streamlining of the supply chain is the need of the hour but the vested interests are way too strong for it to get done easily. The focus therefore wrongly shifts to loan waivers which is akin to applying balm when you really need surgery. GST has been a much needed tax reform but the implications of it are that people need to pay taxes honestly after declaring their incomes – again something that most Indians are wont to do. It has to be accepted now that demonetization had a lot of short term pain for the economy and people, it unfortunately was also not followed up properly to get the tax windfall that was quite possible to achieve. Our GDP growth could easily have hit 8 % but for this step and the country is paying a heavy price for it. The tax system has really had no reforms other than the GST and compliance, though improved, have not really led to any game changing tax collection buoyancy. Finally, corporate earnings are still languishing and do not enthuse the markets. So if you had to evaluate the overall economy over the last 4 years, you will probably see a lot of long term initiatives but no great short term performance.

What of politics then? Well, about a year back BJP pretty much ruled most of India and it was a foregone conclusion that they will come back to power in 2019. However, the scene has changed rather dramatically in the last few months culminating in the Congress win of 3 states. BJP or NDA might still come back to power but it will be a tough battle and one they may well lose too. In democracy that is not an issue but the two opposing sides are so bitterly opposed to each other that any change of government will create a fair bit of upheaval throughout the country. Turbulent times ahead as the opposition will seek to hammer home the advantage they have got and BJP will try to take initiatives to win back the goodwill of people.

How will the markets take in all this? To begin with the markets have taken the BJP losses rather well as they were probably factored in. Over the last year the indices have not really gone anywhere, the mid caps and the small caps having taken the biggest hits. FII participation has been lukewarm at best and looks to continue in the same vein with other markets looking more attractive than India. SIP money coming in regularly into the markets courtesy retail participation has been a saving grace for the markets this year and this may well continue. As I see it the markets will take a pause for now and Nifty will be range bound between 10400 and 10800, maybe touching 11000 on the upper end. By the time we get into the budget exercise the markets will react one way or the other. BJP will be forced to take populist measures and this may cause markets to react negatively. My sense is that Nifty can get down to 9500 or so at the lower end and is unlikely to cross 11000 at the upper end. This will hold true till May, unless the budget is significantly positive for corporate India. The other aspect is of course the annual results and earning growth which is unlikely to be very enthusing. Beyond the May 2019 elections, markets will rise as long as there is a stable government.

So what should you do about your investments then? I will write about it in the next post.

 

Some crystal ball gazing for the next year

If you are an Indian then you are probably seized of the importance that the next 12 months, or even 11, have in store for the country. It is not easy to predict the outcomes in different aspects of life as much of these issues are quite complex in nature. However, it will be safe to say that whatever the outcomes, they are likely to change things for the country in a significant manner. In this post, I will try to do some crystal ball gazing into 4 important areas, namely Society, Politics, Economy and Markets.

Let us look at society first and, I think most of us will agree that we live in very divisive times today. Whether it is division along class lines or on community lines, there is a lot of basic mistrust that people have for each other today. This is manifested in the bitter invective political parties come up with, in communal skirmishes in several parts of India, lynchings on suspicion of kidnapping children and so on. The law and order machinery has pretty much broken down with rapes, assault and mob lynchings being a daily occurrence, as opposed to the exception they used to be earlier. The society is also divided along class lines – industrialists perpetrating big financial frauds on the banks seem to get away, while indigent farmers have to commit suicide as they are not able to pay small loans back to the banks. Nothing seems to be sacred any more – army men are pelted with stones, anti national slogans are shouted in the name of freedom and people cynically debate as to whether one needs to stand up to the national anthem.

Unfortunately, over the next 11 months or so I think the society is going to get more polarised along communal, caste and class lines. With the BJP in power, the right wing fringe groups have got emboldened and violence has become a way of life for both these people and the ones they oppose. For the political parties a divisive agenda is the only way to bring out a good electoral outcome and they will not do anything else. The court judgement on the Ram Mandir issue will add to the polarised atmosphere of the country and the movement towards an Uniform Civil Code will heighten communal tensions. The only way is to tighten law and order by being tough to all perpetrators of crime, without fear or favour. However, in an election year that will never really happen.

Politics is, of course, at the core of everything that is happening in our society today. For both BJP and the opposition the 2019 elections will be a game changing one. When BJP lost unexpectedly in 2004, it took them 10 years to come back in power, even though the UPA ran a shoddy and corrupt government. The opposition knows they have been lucky not to have their misdeeds exposed and judged in the current term of the government, but their luck will not hold if BJP gets another term. With this backdrop both sides will do everything possible, both fair and foul, to win at all costs. The by poll results have shown that if the opposition comes together, it is tough for the BJP to win in today’s scenario. However, a lot of this can change in the next 11 months, BJP will hope it does.

My assessment is that the opposition will never agree to the simultaneous election idea that BJP is so keen on. Congress knows that it has chances in MP and Chattishgarh, with Rajasthan almost certainly going to them. It therefore makes sense for them to show BJP on a losing wicket when it goes for the Lok sabha elections. The only way BJP has out of this is to hold elections in January or so and get these 3 states as well as Andhra Pradesh and Telangana clubbed. This has a definite element of risk as Bajpayee had found out in 2004 and many in the BJP will remember that lesson. In any case, BJP will probably have to bite the proverbial bullet as the alternative is certainly worse. Whichever way it decides to go, I cannot see it getting anything more than 250 and anything less than 200 seats. If it is the former then there will be enough parties who will tag along for them to form a government. However, anything less than 230 will really mean a Karnataka like situation where everyone will come together to keep the BJP from power. I think 250 is a possibility but for that to happen large sections of the society will need to support the BJP as they did in 2014 – the health program, MSP pricing, Kashmir having President’s rule, possible solution to Ram Mandir are all geared towards this.

What of the economy then? It is now clear that the corporate results are on the way up, though in a slow trajectory. The tax collections are fairly robust and the initial glitches with GST are improving now. Good measures like the bankruptcy code and declaring absconders as fugitives will make sure that people do not take banks for a ride. However, the expenses of the exchequer have increased manifold due to the Universal health scheme as well as the MSP increases. This, along with the refusal to reduce taxes on Petrol/ Diesel will unfortunately create an inflationary impact in the economy. The RBI may well be forced to increase the interest rates and coupled with the depreciating Rupee against the US Dollar, there is a good chance that the economic recovery might get stymied. The government is hoping that the effects of this will be only visible after the elections but people who know will be able to see this portent quite clearly.

Finally, how will the markets fare in all of these. Right now, I see the Nifty being in a range of 10000 to 10800, with a possible negative bias. If elections are held separately and BJP loses the assemblies then a fall to 9000 and below is quite feasible. In the event of BJP losing in the Lok Sabha and being unable to form the government, a 20-25 % downside from the 10000 figure is reasonable to expect. On the other hand the relief will be palpable if BJP somehow comes back to power and a rally to 11000 plus, maybe nearing 12000 can be expected.

So there you have it – a swing of 8000 to 12000 is possible. This is the kind of excitement that many expert investors seek in the markets in order to make money. For most of us though, such volatility is really not desirable. How should they deal with their investments in this turbulent period?

I will write about investor strategies in the next few posts.

Nifty outlook for 2018 – Troubled but with some hope

When I look at what has happened in 2018 with the Nifty so far, I definitely get a sense of deja vu. A decade back in 2008, the Indian markets were flying high with the Nifty having crossed 6000 in January. At that time too, there were global rumblings on the sub-prime crisis, though the Indian context was not really an issue. We all know from history what happened. We went into a sharp and brutal correction initially, followed by years of listless performance till 2014. What many investors are worried of now is whether there is a chance of history repeating itself and , more pertinently, what is likely to happen in 2018. Let me try and share my observations in this post.

To begin with, let us understand one major difference between 2008 and 2018. In the former year, Indian markets had a very strong dependence on FII money and they could crash the market by pulling out whenever they had any inkling of bad news. Over the years, with the domestic retail money coming into the market through SIP in Mutual funds, the dependence on FII money has reduced a lot. As of now we really do not know how the domestic retail investors will behave when they see sharp cuts in the markets. In the past few years, they have not panicked when there were some cuts but what we are looking at now is going to be more serious. My own take is this – given the increased knowledge about goal setting and financial planning, it is unlikely that there will be panic on a large scale. Yes, some people will book profits and take out money fearing deeper crash, others will lower their SIP contributions but these will not be impacting the markets in a serious way.

So what are the factors that will play a greater role? As usual one will have to look at performance of earning as well as the news driven sentiment in the markets. I can think of the following issues for 2018:-

  • The society and the polity are clearly divided along serious fault lines in India. The opposition will oppose everything and even try to manipulate to have any chances, the government is in no mood to listen to any advise, even if it is good one.
  • The impact of the budget will be important for elections in 2018. If BJP wins in Karnataka along with some North Eastern states they will be tempted to call for an early election. I somehow think this will not happen though and the General elections will be held in 2019 only.
  • The elections will definitely be fought along 2 large blocks in 2019. Throughout 2018, the election results for the states will have a high impact on the markets.
  • Budget implementations, especially on the GST and welfare schemes will have a positive impact on the markets.
  • Earning growth is clearly starting to happen now. If this goes well in the next few quarters, the Nifty will shrug off the current panic and move forward. However, this will not be the year of decisive growth, it will be incremental at best.

With these factors playing out, how do I see the Nifty move through 2018? Well, to start with, I think it will go down to 10000 or even 9500 over the next 2 months. If the yearly results are good and some of the election results and GST figures show BJP in a good light, recovery will start slowly. Even then, any decisive move is only likely if the BJP wins the Karnataka elections – this looks quite difficult as of now. In the absence of such a win, this will be slow going year for the Nifty, waiting for triggers in the form of quarterly results. Assuming that the current trend of earning improvement continues and there is a good monsoon as widely predicted, Nifty will probably recover at a faster pace in the latter part of the year. Here are my predictions for the Nifty then:-

  • 9500 by March end 
  • 8500 by May end if BJP loses Karnataka to Congress
  • 9000 by July end with good monsoons, GST collections and Q1 results
  • 10000 by October end with good agriculture news, welfare scheme implementations and earning growth for H1
  • 11000 by December end if BJP wins at least 2 out of the 3 state polls in Rajasthan, MP and Chattisgarh.

In a pessimistic scenario many things can go wrong – Oil prices can continue to rise, inflation can get out of control, Monsoons may play truant, earning growth may be muted and BJP may lose most elections. In such a scenario Nifty may well end the year 2018 languishing at around 9000 range.

On the balance though, I think we will be getting back to 11000 though the route will be rather tortuous as I have described in the post.

My take on the budget 2018

All budgets in India are a product of both Economics and politics and it was expected widely that this budget would be same. The Finance minister, I would say, has largely fulfilled this expectation. He has given a budget which is addressing almost all sections of society and tried his best to address the pain areas as best as he could. Yes, there are issues which the urban salaried middle class investor can grumble about, but they have had it good for several years now and could probably do with some hardships.

Before getting into the specifics of the budget let us try to understand the social, economic and political context under which it was being delivered:-

  • This is the last full budget of the current government as the next one can only be a Vote on account. Therefore, whatever policy decisions had to be taken could only be done in this budget.
  • The agrarian distress in rural India is all too real, evidenced by farmer suicides and loan defaults. This has given rise to social tensions and BJP had already felt the backlash in electoral terms in Gujarat.
  • In urban areas too, the general consensus is that the rich have got richer and the income inequality has grown significantly. It is easy to see, both through data and anecdotally, that one section of people have a lot and the majority have very little.
  • Job creation has simply not happened because the growth in GDP had been way less than we hoped for. To a large extent demonetisation and GST, fundamentally good measures both, suffered from serious implementation lacunae and was responsible for the muted GDP growth.
  • Though the government tried to promote entrepreneurship through Mudra loans and the like, the off-take was not at the desired levels. Also with Indians getting better educated the aspiration is nowadays for jobs in most families and this was not being met.
  • Politically the BJP was in a no win situation even though they were in power at the centre and 19 states. In most of north India they had maxed out in the 2014 elections and could only go down from there. Their main rivals, the Congress, on the other hand, had done very poorly in 2014 and could only improve.
  • Now that BJP is the incumbent government, they have to protect their turf and public anger would be against them. The veterans in the party were always wary of a 2004 like situation, where they lost heavily against all odds.
  • With this backdrop, the FM had to produce a budget that would enthuse majority of the Indian populace. In case the reactions were great this will give BJP a chance to advance the elections, if not they still had some time left for course correction.

Let us now look at the main provisions of the budget. You will notice that the first part of FM’s speech almost sounds like an election manifesto, except that these are not mere promises but announcements in a budget, for which financial allocations are there.

  • Better realisation for farmers in selling their kharif crop. MSP of at least 50 % more than cost may have an upward impact on inflation but will definitely go a long way to reduce farmer distress.
  • A humongous national healthcare protection scheme for 10 crore families. The poor often lose their all in illness and this will ensure that they are shielded from it.
  • Bigger outlays for SC/ST and education scheme for ST.
  • Free gas connections for 8 crore poor women.
  • Initiatives for fisheries, animal husbandry. Job creating incentives foe apparel, leather and footwear industries.
  • A big rail project for Bengaluru courtesy poll bound Karnataka.
  • Much of these are very good but they require resources which had to come from taxation in various forms. 

The fiscal slippage this year made the target next year a more conservative 3.3 %. Though corporate companies with turnover of less than 250 crores benefited from a tax rate of 25 %, there was nothing for larger companies. Similarly, individual tax payers got very little, the Standard deduction of 40000 Rs was in reality only a benefit of 30000 Rs. The LTCG on equities were an unkind cut, especially if you see that the STT has not been discontinued either. This can easily have a dampening effect on the huge MF inflows we have been seeing month on month, for the past few years.

The senior citizens have fared a little better this time. The 50000 Rs tax exemption from FD interest income, the 8 % interest on Senior citizen FD and the increased limit on 50000 Rs for health insurance are all good measures.

Finally, though this is an election budget there is really very little for the urban salaried investor in it. However, they probably are not too important in the scheme of elections and the BJP seems to have the other bases covered. If the monsoons are good, the BJP may well be tempted to call early elections. Will they win ? Only time will tell.

India in 2018 – the fault lines run wide and deep

There are moments in the nation’s history which can be termed as watershed moments. For our country independence/partition, Chinese war, Green revolution, Bangladesh war, Emergency and aftermath, liberalisation of economy, Babri masjid demolition, BJP coming to power and losing it, UPA winning against all odds and then making a hash of it are all such moments. These have had serious impact on India, but what we see today over the past few years is more of a path breaking phenomenon.

Let me explain – since independence till 2014, the overall Indian state was run along the lines of a socialist democratic state with some capitalist overtones. Yes, in 1991 we were forced to liberalise the economy which created a number of ultra rich people and a rather well off middle class. Also the BJP government between 1998 and 2004 was of a different quality in terms of doing things better than it’s Congress counterparts. However, UPA won the 2004 elections and India went back to the norm. If we look candidly as to how things were largely defined in India they were as follows :-

  • Majority of the people were living poorly, if they were Muslims or backward castes their conditions were even worse.
  • Most people were engaged in farming and poor again, though there were some farmers who were well off and a few who were really rich.
  • Infrastructure was poor – electricity, good roads and drinking water were still off for many living in villages.
  • Corruption was a way of life from lowly government clerks to high places such as the courts. It affected poor the most as they could not pay through it to get things done. The better off kind of accepted it as a way of life.
  • The nexus between politicians, crony capitalists, media houses with committed journalists was well established. If you were part of the system you benefited from it , if not you would simply have a rather hard time.
  • Tax collection was poor as most people who could avoid it did so, with the flawed logic that even if they paid taxes nothing much would happen anyway.
  • The ruling dispensation thrived by keeping people satisfied through various means – the poor through subsidies and MNREGA type programs, the industrialists through deeply discounted land and loans, the journalists through free foreign junkets, the minorities through Haj subsidies and allowing them to continue their regressive policies, the SC/ST and OBC through reservations  and the middle class through a vastly better lifestyle as compared to their earlier generation.
  • Corruption and black money were the hallmark of the economy. Both were needed for election funding which got more expensive over time. It was a secret all knew well but no one wanted to do anything about it.
  • While the Congress and other political parties largely perpetuated this state of affairs, we as citizens were equally responsible for allowing it to happen and taking part in it actively through avoiding taxes and black money of our own at times.

However, winds of change have been blowing through the country. Factors such as relative prosperity of one part of India driving up overall aspirations, brazen scams shaking up the placid Indian populace, the left liberal hypocrite narrative having run it’s course, the majority community getting tired of being used as punching bags for living their own faith, the proliferation of electronic and social media all contributed to this change. BJP would have done well in 2014 in any case but two factors stood it in great stead – Congress was clearly seen as the fountainhead of corruption, it’s leadership spineless and devoid of authority to do anything about it. On the other hand BJP did look like the relatively cleaner party and Modi a leader who would be able to turn things around in an effective manner.

To put it mildly, the last 3 1/2 years have been interesting for the society and polity of India. On the one hand several Hindu fringe outfits and their practitioners got emboldened with their own part coming to power and started acting like loose cannons. This resulted in the unnecessary controversies about Gau rakshaks and other stuff. The media hyped it up fully in collusion with the opposition. They needed to do it desperately as it was as though they were losing all relevance in contemporary India after having controlled the narrative for several decades. So you had attacks on Churches played up as Hindu intolerance with intellectuals returning awards over it and other issues. BJP too fell for it by bringing ordinances like cow slaughter ban without explaining it properly. Lies became the order of the day, facts did not matter any more. Through 2014 BJP won elections in Maharashtra, Jharkhand, Haryana to really spook the opposition.

The opposition did get back briefly in 2015 in Delhi and Bihar, the first through BJP’s stupidity of not calling elections immediately after winning all lok sabha seats in Delhi, the second through a completely unprincipled tie up between Nitish Kumar and Lalu Yadav. These losses were good for the BJP though as they were able to focus on a lot of economic fundamentals in 2016. The framework that has been put for opening bank accounts, insurance for the poor, Aadhaar linking of bank accounts and other financial instruments are seminal changes. With the help of data analytics available with CBDT and the GST framework being in place now, it is possible to hope for a quantum jump in tax revenues in the next few years. Focus on the infrastructure and better conditions for doing business will also create a positive environment. In 2017 the stellar performance of our stock markets indicate the confidence in this direction.

At the same time there are serious fault lines that are emerging in our society and polity. These will be exploited by the opposition and hyped up by the section of the media unfriendly to the BJP. Both of them are clear that a return to power for the BJP in 2019 will give it enough time to complete the unfinished tasks of the legal cases as well as dealing with black money and tax compliance. Once that takes place, it will be almost impossible to challenge the BJP hegemony in future elections. Already they control most of India and unless the trend reverses quickly, it may well be over for the Congress.

What are the fault lines? Let me try and outline them below :-

  • Weak governance by the BJP in Rajasthan and Maharashtra in addition to the poor handling of Vyapam scam in MP has taken some sheen off the BJP.
  • No matter what explanation BJP gives, jobs are an issue with so many youth being without jobs. While good work has been done through Mudra schemes etc, much more needs to be done on both skill development and start up facilitation.
  • Agrarian distress is again a reality and the government has to be accountable. It is not enough to say that the situation was bad earlier, the onus is on BJP to make it better. Losing rural votes will mean losing the elections.
  • Social tensions are on the rise. The incidents are not many but each one will be blown up and some unfortunate comments by unthinking party men mean serious image issue for the BJP.
  • While BJP is still seen as largely clean and Modi’s popularity remains high, it is true that no real movement is seen on the UPA corruption cases. The 2G case was a fiasco for the government and it cannot afford a repeat of it.
  • The Ram temple is an issue again. If there is no substantive movement on this in 2018, the BJP runs the risk of going into a general election with large parts of the population thinking it has not been able to fulfil any major promise.
  • Traditional support base of the BJP is miffed with the short term issues of GST and unless this settles down soon they will continue to be a factor in elections.
  • It is not easy to carry out disruptive changes, people who have never paid taxes but are expected to do so now will obviously have major negative feelings about it.
  • Any serious corruption scandal surfacing will be detrimental to the BJP.
  • The opposition, media houses, some parts of industry, Muslim and Christian organisations as well as some judges of courts will try and make things difficult for the BJP every step of the way. For them it is a battle for their existence.

It is important to understand that though the BJP has good support, there are many who are opposed to it too. The battle of perception is an important one over the next 18 months and it will be to the finish. In this period both parties will not cede an inch and try their best to trade punches. The Gujarat elections were replete with verbal skirmishes that were bitter and below the belt at times – it is very likely that we will have similar or worse in the days to come.

The unfortunate part in such an acrimonious battle is that, whoever wins, the loser will feel bitter about the loss and the winner may well gloat. It will be important as a mature democracy that both parties accept the verdict and move on. For the sake of the country as well as my own inclination I hope it is the BJP.

Why was demonetisation and GST an imperative for India?

If you are thinking as to why I am writing yet another post on demonetisation and GST, you will not be wrong in your thinking. I have already written about the first here and here. Also, there has been a lot written about GST by all and sundry. However, I have been looking at some data lately and it has become crystal clear to me that not only these steps were needed but that we need a lot more to fix the tax compliance issue.

It is a well known fact that our tax compliance is really poor. In a country of 130 crore people less than 3 % pay any kind of income tax which is ridiculous. I had written earlier about our poor tax compliance and also on the need for paying taxes and filing returns. But just how bad was the situation when these steps were contemplated by the government? Let us take a look at some actual data from CBDT on the Income tax statistics from the financial year 2014-2015.

  • 4.1 crore Indians filed IT returns for this year out of which 2 crores showed Zero taxable income.
  • Only 1 crore Indians paid income tax of more than 1 lac.
  • Taxable income in that year can be seen from these numbers :
    • Between 0 to 5 lacs were 2 crore people
    • Between 5 to 10 lacs were 3.7 lac people
    • Between 10 to 25 lacs were 1.8 lac people
    • Between 25 lac to 1 crore were 62,919 people

From the above, it is very easy to see that the declared incomes of people are very different from the factual situation. If I just take the IT and ITES industry in India, it will easily have people having more than 10 lacs income at more than 1 lac. So, it is safe to say that only people who are drawing a salary and do not have any way to avoid reporting their income correctly are doing so. I am not saying this out of a wild guess – in my financial blog I get queries from several Doctors, Lawyers and other professionals all of whom earn more than 25 lacs as taxable income. Apart from this there are several businesses which do not declare income properly. In the same year only 16000 companies had a taxable income of more than 1 crore – again quite absurd !!

What is the key reason for this? Well, for one our IT authorities need to be way better than what they are. However, the main issue is that transactions are mostly done in cash and there is often no record of it at all. In such a situation, it is easy to avoid taxes almost completely. Let me give a personal example. I am doing some consultancy practice for which I invoice my Clients every month. As long as I show the invoice, pay Service tax or GST on it and my Clients pay it through my bank account, there is a record. Tax gets deducted at source and I pay the rest of the tax on my own. Fairly straightforward if you want to do things in an honest manner. On the other hand, it is also possible to arrive at an arrangement with the Client, take less money in cash and avoid taxes. Unfortunately, in our country today, this is a great problem.

How will GST help? By getting all businesses under a regime of simple tax, it will be far easier to monitor than it is today. Yes, people will still try to avoid invoices and deal in cash but now that GST is all pervasive in the supply chain this will become more and more difficult to do. Over a period of time avoidance of taxes will grow less and this will result in more revenue for the government and therefore more resources for developmental agenda in the economy.

Why was demonetisation needed? While GST deals with the future, something had to be done to get all the cash lying around into the banking system. Now that it has been done it is far easier to trace the money flows than ever before. If the economy had a lot of unaccounted cash, sectors such as the real estate would continue to deal in cash.  At the same time, the real issue will be to tax the money available through the bank deposits. If this is not done properly and taken to the logical conclusion we will gain very little.

Could we have achieved the same without demonetisation, that definitely had an adverse effect on most people and small businesses? Note that a lot of things were tried over several years. Amnesty schemes were announced repeatedly, MAT was introduced so that small businesses had to pay very less taxes, compliance related procedures were simplified greatly. Unfortunately, none of these worked in any real sense and drove us to a situation where the government just had to bite the bullet.

What about Aadhaar and why is it an important piece of the puzzle? That is a different story, though a related one. I will cover it in my next post.