Through the Looking Glass

As the Centre and States try to find GST compensation cess monies, it is time to look beyond the present, to see how the future could unfold for State finances Financial Express The financial relationship between states and the Centre has been in news recently. The Fifteenth Finance Commission submitted its report to the president; there have been some delays in payment of the GST compensation cess, and there were some discussions on whether the Centre will honour its commitment of assuring a 14% revenue growth in the agreed-upon transition period. Constitutionally, Centre-State fiscal relations come up for review quinquennially (once every five years). States have ceded significant taxing powers to the Centre via GST. Earlier, the states had their own tax bases and could manage revenues by juggling taxation policies. This led to a large number of state-specific tax rates, a lack of uniformity in the tax structure in the country, and sometimes, a race to very low-tax regimes to

The evolution of India’s tax-to-GDP ratio will require significant political and social consensus—a strategic modelling and planning of tax POLICIES is required Financial Express India’s tax-to-GDP ratio at the government level has hovered around 18-19% of GDP over the last few years (between FY17 and FY20E). Coupled with disinvestments, dividends, and other receipts, the central government mops up another 5-6% of GDP, taking the total revenues of the government to about a quarter of GDP. The government is committed to spend, on account of both revenue and capital expenditure, 29-30% of the country’s GDP, leaving it with a fiscal deficit in the 4-6% range. The revenue percentages for the government have remained reasonably sticky, and the expenditure items are also committed. As India works its way towards a $5 trillion economy, or double its current size, in the next few years, it is worth considering what the fiscal landscape could look like. As Esteban Ortiz-Ospina and Max R

Financial Express The product design strategy of a financial service firm revolves around ‘maturity transformation’, ‘liquidity transformation’ or ‘risk transformation’. There is excitement about fintech eating traditional finance. The incumbents are institutions with legacy systems and older-generation leadership while the new-age challengers are building models on open APIs and have modular, scalable platforms. In the new world, customer engagement is expected to hold the audience captive—this is expected to create a strong distribution pipeline via which products of increasing complexity can be sold. A publication by the Boston Consulting Group earlier this July, “Banks Brace for a New Wave of Digital Disruption” talks about the need for the banks “to redefine themselves and change how they operate”. However, it adds an important caveat: “given the fundamental strength of many leading multinational banks, banking’s inherently high barriers to entry, and the extent of the indu

Financial Express A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area. Housing is a fundamental requirement of human existence. The requirement of shelter is so basic that in common parlance in India, it is clubbed together with food and clothing as the troika of basic human needs of roti, kapda, and makaan. It is no wonder that housing is a key social demand, and a priority area for governments, both at the Centre and the states. Housing as a socio-economic construct The development of housing is a function of the economic reality of a location and its era. India has seen, and will continue to see, significant urbanisation. Where people choose to live is a complex optimisation of how close houses are to their places of economic activity (work, business catchment area, etc), how conveniently

Financial Express This requires confidence, coordination and capital; resolution can't be imposed using policy actions When commemorating anniversaries, we tend to reserve our special attention for round-number, decadal years. Last year, around this time, the world—and India—remembered and recounted its lessons from the Great Financial Crisis (GFC) that reverberated across the globe in September 2008. Since it is the nature of history to repeat, but not to rhyme, decadal recounting of experiences and learnings serve as good markers, but may not be timed to perfection. The challenges in the local banking and non-banking finance companies 11 years post the GFC require us to take a relook at the learnings, especially, on the aspects that eventually led to the calming of the markets. India is nowhere near the situation that the world witnessed 11 years ago—however, GFC offers helpful pointers on how to navigate the sometimes choppy waters. The business of finance is built on t

Financial Express The onus falls on business to continue to engender society’s and regulators’ trust in the usefulness of technology. New technologies bring with them challenges of regulation. The key challenges facing regulators in the context of drones are privacy, safety and security. Drones have captured headlines this week. The spectacular drone attack on Saudi Arabian oil facilities knocked out ~5% of daily oil supply. The Maharashtra government announced that it signed up with a global private firm to “use a logistics network of autonomous delivery drones to help transform emergency medicine and critical care”. The Economist, on its latest cover, highlighted that ‘flying taxis take off’ even as earlier this year, the Gatwick airport closed for a day and a half over “drone sighting”. Drones, or unmanned aerial vehicles (UAVs) or remotely piloted aircraft systems (RPAS), have become common in a wide variety of more beneficial, mundane and practical applications in agricultu

The Financial Express Large digital databases like the GST Network can give granular insight, create predictive models; this can lead to more grounded interventions A lot has been said about the current economic slowdown. Econometricians have opined on whether the fall in growth rate is structural or cyclical; economists have wondered whether the response has to be from the supply side or whether demand needs a boost; politicians have traded barbs on whether the issue is the mismanagement of the local economy or the impact of the global trade wars and suchlike; industry and stock market participants have loudly called for succour, fiscal prudence be damned, as their profits and positions suffer even as bureaucrats and government think-tanks continue to talk of India becoming a $5 trillion economy. Since the macro-economy affects all participants, it is natural for all of them to have an opinion and voice it out clearly. As they perceive the current slowdown from their own vanta

The Financial Express From purely a financial perspective of current account deficit, the distinction between goods and services does not matter The exports performance of Vietnam continues to be contrasted with that of India: the most recent example being the editorial in this newspaper, “Can India learn from Vietnam to manage export-led growth?”. The article, similar to other analyses on this topic, focusses on the significant ramp-up in the exports of Vietnam, especially over the last decade or so. With Indian merchandise exports remaining range-bound over the last few years in the $300-330 billion annual range and Vietnamese exports having risen from $150 billion in FY14 to $244 billion in FY18, there is hand-wringing for India having missed a trick. It is important to acknowledge the growth of exports in Vietnam but before we jump to conclusions and recommendations for India, we need to explore this growth more deeply so that we can draw the right lessons. Exports is one p

The Financial Express The announcement of this policy statement in the Budget follows the release of the ‘Rupee Raftaar’ report at the Global Aviation Summit in Mumbai in January earlier this year. The Finance Minister, in her maiden budget, laid the foundation of building an important component of the aviation sector: “As the world’s third largest domestic aviation market, the time is ripe for India to enter into aircraft financing and leasing activities from Indian shores. This is critical to the development of a self-reliant aviation industry, creating aspirational jobs in aviation finance, besides leveraging the business opportunities available in India’s financial Special Economic Zones (SEZs), namely, International Financial Services Centre (IFSC). Government will implement the essential elements of the regulatory roadmap for making India a hub for such activities.” The announcement of this policy statement in the Budget follows the release of the ‘Rupee Raftaar’ report at

The knife-edge balanced nature of Government finances means that there is little leeway available for the Central and State Governments whenever there is a shortfall in receipts or an increase in expenditure. In both cases, they automatically reflect in a substantial change in the fiscal deficit. As India moves towards a US$5 trillion GDP economy, the current slowdown and the longer-term runway offers two ways to recast the current fiscal architecture. For the time being, we can park the debate on whether it makes more sense for the governments to run a counter-cyclical fiscal policy (i.e. pump in more money in the economy in times of slowdown even if it busts the fiscal deficit commitments) or keep true to its commitment on fiscal deficit numbers (irrespective of any slowdown in collections or in the economy). We take it is as a given that commitment to the fiscal deficit number matters more, especially since this is a number tracked closely by investors, credit rating agencies and

Since the implementation of Goods and Services Tax (GST) in India, the Central Government is now a primary decision-maker on almost all the taxes in the country. With an effective veto power in the GST Council and its ability to set the income and corporate taxes and various custom duties, the Central Government now has a say on the rates at which taxes are levied across almost all commodities. Of the total revenues collected by the States and the Centre, around four-fifths of it is decided for by the Central Government. The taxes collected by the Central Government are then shared with the States in the ratios laid down by the Finance Commission (FC). What this the practical application of the above mean? In FY2020, the total receipts collected by the Central Government is budgeted to be Rs 26 lakh crore (or Rs 26 trillion). If the budgeted number holds, Rs 8 trillion will be shared with them as part of the FC formula. This leaves the central government with receipts of Rs 18 trill