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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.

Next Story

Despite Tariff War With U.S, China’s Economic Growth is Steady

The fight between the two biggest global economies has disrupted trade in goods from soybeans medical equipment, battering exporters on both sides and rattling financial markets.

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An employee working on the production line of an electronics factory is seen reflected on an equipment, in Jiaxing, Zhejiang province, China, April 2, 2019. VOA

China’s economic growth held steady in the latest quarter despite a tariff war with Washington, in a reassuring sign that Beijing’s efforts to reverse a slowdown might be gaining traction.

The world’s second-largest economy expanded by 6.4% over a year earlier in the three months ending in March, the government reported Wednesday. That matched the previous quarter for the weakest growth since 2009.

“This confirms that China’s economic growth is bottoming out and this momentum is likely to continue,” said Tai Hui of JP Morgan Asset Management in a report.

Government intervention

Communist leaders stepped up government spending last year and told banks to lend more after economic activity weakened, raising the risk of politically dangerous job losses.

Beijing’s decision to ease credit controls aimed at reining in rising debt “is starting to yield results,” Hui said.

Consumer spending, factory activity and investment all accelerated in March from the month before, the National Bureau of Statistics reported.

The economy showed “growing positive factors,” a bureau statement said.

A delivery worker pushes boxes of goods at the capital city's popular shopping mall in Beijing, April 4, 2019. The U.S. and China opened a ninth round of talks Wednesday, aiming to further narrow differences in an ongoing trade war.
A delivery worker pushes boxes of goods at the capital city’s popular shopping mall in Beijing, April 4, 2019. The U.S. and China opened a ninth round of talks Wednesday, aiming to further narrow differences in an ongoing trade war. VOA

Recovery later this year

Forecasters expect Chinese growth to bottom out and start to recover later this year. They expected a recovery last year but pushed back that time line after President Donald Trump hiked tariffs on Chinese imports over complaints about Beijing’s technology ambitions.

The fight between the two biggest global economies has disrupted trade in goods from soybeans medical equipment, battering exporters on both sides and rattling financial markets.

The two governments say settlement talks are making progress, but penalties on billions of dollars of each other’s goods are still in place.

China’s top economic official, Premier Li Keqiang, announced an annual official growth target of 6% to 6.5% in March, down from last year’s 6.6% rate.

Li warned of “rising difficulties” in the global economy and said the ruling Communist Party plans to step up deficit spending this year to shore up growth.

Beijing’s stimulus measures have temporarily set back official plans to reduce reliance on debt and investment to support growth.

Also in March, exports rebounded from a contraction the previous month, rising 14.2% over a year earlier. Still, exports are up only 1.4% so far this year, while imports shrank 4.8% in a sign of weak Chinese domestic demand.

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Chinese leaders warned previously any economic recovery will be “L-shaped,” meaning once the downturn bottomed out, growth would stay low. VOA

Auto sales fell 6.9% in March from a year ago, declining for a ninth month. But that was an improvement over the 17.5% contraction in January and February.

Tariffs’ effect long-lasting

Economists warn that even if Washington and Beijing announce a trade settlement in the next few weeks or months, it is unlikely to resolve all the irritants that have bedeviled relations for decades.

The two governments agreed Dec. 1 to postpone further penalties while they negotiate, but punitive charges already imposed on billions of dollars of goods stayed in place.

Even if they make peace, the experience of other countries suggests it can take four to five years for punitive duties to “dissipate fully,” said Jamie Thompson of Capital Economics in a report last week.

Chinese leaders warned previously any economic recovery will be “L-shaped,” meaning once the downturn bottomed out, growth would stay low.

Also Read: ‘Credible Threat’ Leads To Closing of Denver-Area Schools

Credit growth accelerated in March, suggesting companies are stepping up investment and production.

Total profit for China’s national-level state-owned banks, oil producers, phone carriers and other companies rose 13.1% over a year ago in the first quarter, the government reported Tuesday. Revenue rose 6.3% and investment rose 9.7%. (VOA)