IMF says global growth recovery an opportunity for Indian economy

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IMF expects the Indian economy to recover sharply in 2018 to grow at 7.4%, though 30 basis points lower than its earlier estimate in April.

The International Monetary Fund (IMF) on Tuesday pared its growth forecast for the Indian economy by half a percentage point to 6.7% for 2017, blaming the lingering disruptions caused by demonetisation of high value currencies last year and the roll out of the Goods and Services Tax (GST).

However, IMF said the structural reforms undertaken by the Prime Minister Narendra Modi-led government would trigger a recovery—above 8% in the medium term.

In its latest World Economic Outlook, IMF said the global economy is going through a cyclical upswing that began midway through 2016. It raised the global growth estimate marginally for 2017 to 3.6% while flagging downside risks. The upward revisions in its growth forecasts including for the euro area, Japan, China, emerging Europe, and Russia more than offset downward revisions for the United States, the United Kingdom, and India.

“In India, growth momentum slowed, reflecting the lingering impact of the authorities’ currency exchange initiative as well as uncertainty related to the midyear introduction of the countrywide Goods and Services Tax,” it said in the WEO.

However, IMF expects the Indian economy to recover sharply in 2018 to grow at 7.4%, though 30 basis points lower than its earlier estimate in April.

One basis point is one-hundredth of a percentage point.

In its South Asia Economic Focus (Fall 2017) released on Monday, the World Bank reduced India’s GDP growth forecast to 7% for 2017-18 from 7.2% estimated earlier, blaming disruptions caused by demonetisation and GST implementation, while maintaining at the same time that the Indian economy would claw back to grow at 7.4% by 2019-20.

Both the Asian Development Bank as well as the Organisation for Economic Cooperation and Development (OECD) have also cut their growth projections for India to 7% and 6.7%, respectively, for fiscal 2017-18.

IMF said a gradual recovery in India’s growth trajectory is a result of implementation of important structural reforms. GST, “which promises the unification of India’s vast domestic market, is among several key structural reforms under implementation that are expected to help push growth above 8% in the medium term,” it added.

The multilateral lending agency said India needs to focus on simplifying and easing labour market regulations and land acquisition procedures which are long-standing requirements for improving the business climate. It also called for briding the gender gap in accessing social services, finance and education to accelerate growth in developing countries like India.

IMF said given faster-than-expected declines in inflation rates in many larger economies, including India, “the projected level of monetary policy interest rates for the group is somewhat lower than in the April 2017 WEO.”

In its monetary policy review last week, the Reserve Bank of India (RBI) kept its policy rates unchanged and marginally raised its inflation forecast for rest of the year.

Highlighting the growing income inequality within and among emerging market economies, IMF said a country’s growth rate does not always foretell matching gains in income for the majority of the population. “In China and India, for example, where real per capita GDP grew by 9.6% and 4.9% a year, respectively, in 1993–2007, the median household income is estimated to have grown less—by 7.3% a year in China and only 1.5% a year in India,” it said.

Source: Live Mint

GST crashes even money lenders’ usurious rates

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Rates have dipped to a third to 6 per cent from 9-18 per cent about 6-9 months ago.

Interest rates that money lenders charged borrowers hardly budged for decades irrespective of policy decisions. But even that is collapsing faster than what it is in the formal banking system, thanks to the implementation of Goods and Services Tax.

Borrowing in the informal market is no more lucrative.

Lenders who fund small traders and merchants have lowered their rates to just a third of what they were charging, but still the demand is not showing up.

Rates have dipped to a third to 6 per cent from 9-18 per cent about 6-9 months ago, said two dealers aware of the market dynamics.

“Those businessmen have now limited options to run operations in cash especially after GST implementation and demonetisation,” said a textile business owner, who did not want to be identified.

“From a local politician to an industrialist or local trader whoever has additional unaccounted cash are normally the lenders in this informal loan market.”

A huge army of businessmen borrowed in an informal market from money lenders to avoid getting trapped by the banking system and the tax department. This was known as ‘Kachha Credit’ among practitioners.

With the implementation of GST which produces a chain of transactions till it reaches the ultimate consumer, merchants have little scope to escape accounting for their trades.

So, instead of funding their purchases through informal credit at high rates which was beneficial since it allowed escaping the tax net, they are choosing to fund businesses through formal credit. To keep businesses running, money lenders have lowered rates.

Since the tax department is keeping close watch on businesses, all traders preferred anonymity. This market is known as a plat form for lending and borrowing unaccounted or untaxed money without any collateral. Traders now shy away from availing such credit amid cash squeeze triggered by reform measures like GST and demonetisation. Sometimes, people take highly leveraged positions borrowing such money, which a bank would have declined.

A garment trader who may be eligible to borrow say, Rs 10 lakh in the absence of creditworthy balance sheet, can take a loan up to Rs 50 lakh due to personal knowledge of businesses, dealers said. The practice is prevalent in the garment industry.

Mumbai’s Bhiwandi, a business centre, used to be the hotbed of it. It has died down after the Central Value Added Tax, a central government tax levy introduced by Vajpayee led NDA, was introduced.

 

Source: Economic Times

 

Govt wants early warning system on shell companies

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Qualified accounts can be flagged on the ministry’s portal, thereby, helping regulators to keep a check on suspicious entities

The ministry of corporate affairs (MCA) says work has begun for an “early warning system” regarding shell companies.

 

The term is used to refer to a company without active business operations or much of assets. This by itself isn’t illegitimate but they could be used as a manoeuvre for financial operations of a suspect or illegitimate nature.

 

Currently, there is no way to check shell companies systemically, an official said. Chartered accountants (CAs) do come out with qualified accounts of such companies but these come in a random way on the ministry’s MCA21 portal. Qualified accounts refer to bits of information about which CAs have doubts or disagreement with the audited entity’s management.

 

After the hoped-for early warning system comes, qualified accounts would be flagged on the ministry’s portal, helping it and other regulators to check on such entities. “We are yet to work out the nitty gritty of this system but are on the job,” another official said.

graphHe said this would do away with the current system of random inspections to identify such companies. The portal will have filings by CAs in such a way that regulators will be alerted, he said.

 

Earlier, minister of state for corporate affairs P P Chaudhary had said the government would try to use the information technology tool of artificial intelligence in this regard.

 

CAs told Business Standard that an early warning system by itself wouldn’t change things by much. There should also be stringent norms to make auditors more independent. One of them said it is a company’s promoters who appoint the auditor, which means the latter does not retain the independence to openly report facts. So, a CA’s appointment would need to move away from promoters.

 

The ministry had recently issued rules to limit the number of subsidiaries a company may have — no more than two layers. This will apply prospectively but existing companies have to disclose details of their entire list of subsidiaries to the registrar of companies within 150 days. Banks and insurance companies are excluded from this rule.

 

With no limit on the number of subsidiaries, regulators found it difficult to track illicit transactions.

 

Source: Business Standard

India growing pretty robustly: World Bank President Jim Kim

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Jim Kim said Japan, Europe and the US along with India were growing and there was a levelling-out in developing countries.

India has been growing “pretty robustly”, World Bank President Jim Yong Kim has said as he predicted a strong global growth this year.

Speaking at the Bloomberg Global Business Forum meeting here on Wednesday, Kim also called for more cooperation among the multilateral system, private sector and the governments to take advantage of the current win-win situation.

“That dormant capital will earn a higher return, where developing countries will have access to much more capital for the infrastructure needs, even for investing in health and education, investing in resilience to climate change and other factors,” Kim said.

He said Japan, Europe and the US along with India were growing and there was a levelling-out in developing countries.

“A country like India is growing, has been growing pretty robustly. We think, Japan is growing. Europe is growing in a much more healthy way. The United States continues to grow. There is a levelling-out in developing countries,” he said, adding that the growth will be more robust this year.

In June, the World Bank predicted a 7.2 per cent growth rate for India this year against 6.8 per cent growth in 2016. India remains the fastest growing major economy in the world, the World Bank officials had said.

“It used to be that commodity importers were doing much better than commodity exporters. But that’s levelling out. So the growth is relatively more evenly distributed,” Kim said.

He said in terms of indebtedness, the bank was watching very carefully the debt-to-GDP ratios of every single country.

“In Africa, the debt-to-GDP ratios are still very manageable…We would not be moving toward providing more financing for countries if we thought there was a real problem with over indebtedness in the countries. Because we follow this very closely, along with the IMF,” he said.

“We think that there are tremendous opportunities for investment. But sometimes, purely based on perception, investors in sovereign wealth funds – I’ve heard them say, Africa is risky. Right, as if Africa was a single country.

Africa’s not a single country and the risk profiles from country to country have enormous differences,” he said.

Source: Economic Times

 

Only Rs 12,000-cr Input Credit claims valid

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GST regime allows tax credit on stock purchased during the previous tax regime

The government on Friday said only Rs 12,000 crore of the Rs 65,000 crore of input tax credit claimed by assessees for the pre-GST stocks were valid.

The governments, both the Centre and states, had got Rs 95,000 crore of revenues from the goods and services tax (GST) for July, the first month of the indirect taxation system. But after claims of Rs 65,000 crore were made for refunds of taxes paid on stocks lying with businesses as of June 30, the government was startled, as that would  have meant just Rs 30,000 crore of revenues from GST, which would be shared between the Centre and the states. The finance ministry said Rs 95,000 crore was the amount actually paid in cash, other than availing credit.


The Press Trust of India reported the government has estimated valid transitional credit claims of taxpayers in July were just Rs 12,000 crore and not Rs 65,000 crore, as previously claimed. This would give the government a short in the arm in its efforts to mop-up additional resources to perk up a subdued economy.

 

Only Rs 12,000-cr credit claims valid

The GST regime allows tax credit on stock purchased during the previous tax regime. This facility is available only up to six months from the date of the GST roll-out. Even these claims could be adjusted in future months, a statement by the finance ministry suggested.

An expert explained that some of the credit available in earlier taxes would be blocked in the new regime. For instance, he said, the credit for taxes paid on purchasing vehicles were not available for businesses under the new tax unless it was a dealership or business of carrying passengers. Also, credits claimed might be under litigation and, therefore, it might not be available to the assessee to carry forward or for utilisation.

Earlier in the day, the finance ministry had issued a statement to allay concerns about high transitional credit claims, saying the Centre’s revenue kitty would not go down because of these claims. It said claims worth Rs 65,000 crore does not mean that businesses would have used all of this for payment of their output tax liability for July. In other words, the credit, which now stands reduced to Rs 12,000 crore could be utilised for future tax liability.

On how the government would stagger the adjustment, Abhishek Rastogi of Khaitan & Co cited the example of banking services. In the earlier regime, banks had to pay a centralised service tax. Under GST, they will pay state-wise tax as well. So adjusting credit for pre-GST stocks may take some time as tax liability in one centre, which used to pay earlier taxes, might not be as huge this time.

The ministry also said Rs 65,000-crore transition credit claimed was “not incredibly high” as Rs 1.27 lakh crore of credit of central excise and service tax was lying as closing balance as of June 30, 2017.

The statement said some assessees would have committed a mistake in filing the form TRAN-1 and hence, the government will allow facility of revision of TRAN-1 by the middle of October.

The GST Council has already extended by a month the date for filing TRAN-1 form till October 31.

Archit Gupta, CEO of ClearTax said while the move to extend the deadline is a good step, there would be confusion to reconcile the credit available in the old regime with the one in the GST system.

Source: Business Standard

FDI likely to rise further after GST: Moody’s

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FDI in India grew by 18% during 2016 to touch $46 billion, data released by the Department of Industrial Policy and Promotion showed.

India is likely see increased foreign direct investment (FDI) inflows on the back of reforms such as introduction of the goods and services tax and the bankruptcy code, international ratings agency Moody’s said in a report on Monday.

“Combined with reforms such as the introduction of a goods and services tax, which lowers the cost and complexity of doing business, and a simplified and clarified bankruptcy code, FDI is likely to rise further,” the agency said in its report on how structural reforms by Asia Pacific sovereigns could become more effective from stronger global demand.

In India, Moody’s said, the government has raised ceilings for authorised FDI in a number of sectors. “FDI has already increased substantially, albeit from a low base,” the report said.FDI in India grew by 18% during 2016 to touch $46 billion, data released by the Department of Industrial Policy and Promotion showed.

The Narendra Modi government has liberalised FDI framework for a number of sectors including insurance, defence and civil aviation and also taken steps towards the ease of doing business. Moody’s said the positive economic impact of India and Indonesia’s measures to attract higher levels of FDI, combined with steps to improve business conditions, are likely to be more apparent in a stronger global macroeconomic environment. The agency has maintained India’s sovereign rating at Baa3 positive.

“India and Indonesia’s governments have both implemented reforms over the past few years to improve the overall business climate and, more specifically, to attract FDI,” Moody’s said, adding that a robust global environment is likely to amplify the positive impact of the reforms on the two countries’ attractiveness to foreign investors.

Moody’s Investors Service said the strengthening in global demand since the end of last year has buoyed Asia Pacific’s trade-reliant economies, but added that faster export growth has yet to feed into a sustainable acceleration in output growth.