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Making sense of falling currencies, oil prices and effect of waving-off MAT in India

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By Gaurav Sharma

The world economy is at crossroads. Hit hard by the yuan depreciation and the slowdown of growth in China, the world currencies have pummeled under the fear of currency wars being waged to boost the domestic export market.

Vietnam and Kazakhstan have already loosened the grip on exchange rates. Russian rouble has declined between 4-7 per cent while the Indian rupee has fallen more than 3 per cent in the last two weeks.

Economists’ take on it:

However, economists have warned against such a move while pointing out that the Great Depression of 1930’s, a period during which economies raised import tariffs and cut currency rates through competitive devaluation of currencies further exacerbated the slowdown in growth.

multi-currencyExperts say that such tactics are a zero-sum game, which would lead to a race to the bottom. This is due to the fact that in any market situation, exports must be equal to imports, and therefore, cutting imports and boosting exports would be a futile gambit in the global scenario.

What does this mean in India?

In the Indian context, economists such as C Rangarajan, Prachi Mishra, Jehangir Aziz and Sajjid Chinoy have clarified the fact that the Indian export is not driven by exchange rate but is rather influenced by global growth.

Furthermore, the apparent devaluation of global currencies is more due to the strengthening of the dollar against other currencies rather than a deliberate devaluation by central banks.

Instead of succumbing to such a desperate measure, the country should smoothen out the kinks in its tax structure. But the failure to pass through the much-anticipated Goods and Service Tax (GST) Bill in the Parliament has prevented that eventuality from taking place.

The passage of the bill could have boosted the investor sentiment and would have given a fillip to growth in the country. Moreover, the development would have had the effect of erasing the haunting memory of retrospective tax levied on firms such as Vodafone, an image makeover which would have cemented Narendra Modi led BJP government’s commitment to a stable and fair tax regime.

If GST could not have been passed due to certain contentious clauses in the bill and the blockade by the opposition, another relief has been announced by the finance minister Arun Jaitley in the form of scrapping of the minimum alternate tax (MAT) retrospectively.

currency_83 by priyanka--621x414

Jaitley had earlier exempted capital gains made by FPI’s from the levy of 20 per cent MAT from the current year but not retrospectively.

Foreign companies had come under the MAT bracket when the Authority for Advance Ruling in 2012 stated that the Income Tax law did not make a distinction between Indian and foreign companies and therefore, MAT applied to them as well.

The ruling meant that the tax authorities started chasing foreign investors, demanding taxes on capital gains from the sale of securities.

Mauritius-based Castleton Investment Limited was subsequently asked to pay MAT, a decision whose validity will be tested in the Supreme Court in late September this year.

Is the government doing anything?

Now, with the government likely to accept the AP Shah panel’s recommendations,  the Foreign portfolio investors (FPI) will likely be saved from paying the tax even before April 1, 2015 and not just after the date mentioned in the next budget, by amending the tax law.

“The government should quickly issue a circular stating that MAT should not be applied to FPI’s from the period prior to April 1, 2015 as well”, said Suresh Swamy, partner, PwC while speaking to ET on the need for removing arbitrariness in the tax regime.

124119132Along with the clarity on tax structure which will reduce red-tapism in the country, the fall in global fuel prices will bring much cheer to the Indian economy. New shale gas discoveries in the US, record volume production of oil by OPEC and lifting of sanctions on Iran has meant that Indian oil imports (almost 75 percent of the domestic demand) would be lower in dollar value.

The current account deficit (difference between imports and exports) would fall and therefore, fuel (transport) and other prices would also decline, cooling down rising inflation which has brought much tears to the aam aadmi.

A $1 fall in global crude prices means India’s import bill falls by Rs 6,700 crores. This, coupled with the shift to direct benefit transfer (DBT) of LPG subsidy and deregulation of diesel price would rekindle the fortunes of oil marketing companies (OMC) such as OIL, ONGC, Reliance and Essar by overturning their under-recoveries.

It has been reported that the under-recoveries of OMC’s have been slashed by Rs 139,869 crores in 2013-14 to Rs 72,314 crores last financial year due to the above measures.

So, the big picture is that the Indian economy is on the right track. The hidden problem of burgeoning import dependence can be further ameliorated by removing bottlenecks such as bureaucratic sloth and complex regulatory processes.

Obliterating MAT for foreign portfolio investors is a step in that direction.

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Big reforms made India fastest growing major economies globally: Garg

It also has enormous implications for emerging markets and developing countries

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The RBI building in Mumbai. Photo credit: AFP/Sajjad Hussain

The major reforms undertaken by the Indian government for raising economic growth and maintaining macroeconomic stability have made the country one of the fastest growing major economies in the world, said Subhash Chandra Garg, Secretary, Department of Economic Affairs (DEA).

Garg was addressing the Special Event hosted by US-India Strategic Partnership Forum on ‘Indian Economy: Prospect and Challenges’ in Washington D.C on Friday.

Indian economy needs big reform.

He said the launch of the Goods and Services Tax (GST) represented an “historic economic and political achievement, unprecedented in Indian tax and economic reforms, which has rekindled optimism on structural reforms.” He further emphasized that India carried-out such major reforms when the global economy was slow.

“With the cyclical recovery in global growth amid supportive monetary conditions and the transient impact of the major structural reforms over, India will continue to perform robustly,” Garg said.

During his meetings, Garg highlighted that the digital age technologies have profound implications for policies concerning every aspects of the economy. It also has enormous implications for emerging markets and developing countries.

Also Read: Biggest Bank Frauds Which Shook The Indian Economy

He expressed that the response to such a transformation will have to shift from ‘catch up’ growth to adoption/adaption of digital technologies for development and growth.

Garg also informed that India has started adopting policies and programmes for transforming systems of delivery of services using digital technologies and connecting every Indian with digital technologies and access through Aadhaar and other such means.

Indian economy should be on rise. www.mapsofindia.com

While citing the example of expanding mobile data access, he mentioned that India is now the largest consumer of mobile data in the world with 11 gigabytes mobile data consumption per month. He informed that India is investing in digital technologies, encouraging private sector to adapt these technologies and also addressing the taxation related issues by introducing equalisation levy.

Garg is currently on an official tour to Washington D.C. to attend the Spring Meetings of the International Monetary Fund and the World Bank and other associated meetings. He is accompanied by Urjit Patel, Governor, Reserve Bank of India and other senior officials. IANS