Archive for Finances

Suggestions Towards Steps To Revive Indian Economy

SOME SUGGESTIONS TOWARDS GIVING A KICK START and TO BOOST India’s ECONOMIC GROWTH

By……. Mr. Amal Dhru (FCA,MBA(IIMA) , amaldhruv@amaldatt.com (M) 9825015534

1.. The Union BUDGET

a…. It is round the corner. Many suggestions are already made towards reduction in Personal as well as Corporate Income Tax. However it has to be noted that Tax to GDP Ratio in our economy is very low .
So we have to look at corporate rates separately. As far as lowering the Income Tax on Corporate are concerned, lower taxation rate will certainly attract not only Indian but also international investments. A recent clamp down on Tax Heavens by many countries including developed countries have directed the funds towards countries with lower tax rate, since relaxed (nearly nonexistent) compliance based locations will be scarce and very vulnerable .It is an opportunity for India to tab these openings particularly when there is an increasing realization about difficulties in the exit route for investments from China.
On the other hand, the highest income Group needs to be taxed heavily, as it is . They can be given a relief if they invest in Infrastructure Bonds of large ticket size
Similarly one sector of economy vis. Agriculture Income is not taxed at all. It would be worth considering to expand the net of Corporate Farming and bring the corporate farming along with large farmers (by deeming them as corporate farmers) into the Income Tax net. This aspect, though touches the Constitutional provisions narrowly, but is critical enough to be thought of seriously, since the need to mobilize Revenue is alarming

b… The recent thoughts of doing away (reducing, at least) the exemptions is a positive thought. The exemptions lead more towards litigation and mere paper compliances. Though there is a need to give special incentives for employment generation. Most of the exemptions are based upon capital investments in desired sectors etc . India is a country where Labour is ample and capital is scarce. We need to generate more employment. Employment generation should be focused while providing incentives. May be, that an incentive based upon the Employer PF Contribution (say a weighted deduction on employer contribution to PF, like R & D ).

c… Surprisingly, what the economy wants is employment generation, but the labour laws play a huge role in providing disincentive (if not a fear ) towards providing employment . Not only that the Minimum Wage Structure is too high for an average employer, to reduce employee strength is a herculean task. A simple principal of economics is to create more attraction towards the product that a producer wants to sell. But what we see here in India is quite a reverse trend. Why not to create a layer where minimum wages are lower than the unskilled level, call that layer a support level. Please reduce the cost of employing a person, in other words. MSMEs and start ups can benefit immensely and more jobs will be created for otherwise unemployed youth.
Similarly, the employers should be allowed more flexibility to adapt a practice of reducing manpower, in case of genuine difficulties like adverse business conditions. Currently it is a tough task to reduce the manpower strength even in case of genuine necessity to reduce unproductive expenditure. Such an atmosphere creates a disincentive towards generating more employment.

d… Giving direct cash or free bees to poor people is a charitable, noble act, but I feel that the same should be given against some work. Providing free money to people will form a very dangerous trend and will keep increasing expectation and will encourage laziness. Greece etc economies tumbled due to excessive freebees!!
Why not to create more jobs, say towards internal security (in semi police force ) , or swachchata mission, or construction etc like MANREGA scheme) , instead ? Why not to include Agricultural employment under a special scheme which is similar to NAREGA?

e… Dwelling further on employment generating proposal, I am surprised that under the GST Act, Supply of Manpower attracts full 18% GST. That too is on the entire amount of billing, without any abatement of gross salary, which includes PF and ESI . In other words if Mr X pays Rs 100 as Salary ( including PF, ESI etc ) and adds Rs 10 towards his services, he will be called upon to pay GST of Rs 19.80 ! This certainly increases to ultimate cost of his services. This is a clear disincentive towards generating employment. I sincerely plead that an abatement of salary component has to be provided while taxing the Manpower Supply Services.

f… While on the GST, it is to be painfully noted that the instances of claiming wrong input credits are not only rampant but are also huge. This has to be curbed. The recent amendment by the council of restricting the input credit is a welcome step but not sufficient and effective. I would suggest that the input credit claimed has to be populated within 180 days from claiming. If not populated, it should not only be reversed, with interest but should also attract huge penalty in case it is established that the same was recklessly or fraudulently claimed.

g.. Coming to the Macro aspect of budgeting, I think the economists are overly obsessed with control over deficits . So long as the deficits are generating more output, employment and spending power in the hands of the masses and idle, uneconomic expenditures are curtailed to minimum; there is no need to panic if the deficit number is high. In any case, in economy like ours, where there are huge uncovered services (domestic services of housewives etc) , the GDP number is always likely to be understated, an additional reason not to panic with deficit .

h… What is stated above raises an important point towards controlling and managing the Expenditure side. Most of the thoughts from the economists and public particularly, in a budget are guided towards the revenue side . But the need to have control over expenditure by strictly following the OUTMOME BUDGETING (a lot is talked about it, without much headway) and setting and ensuring physical Targets should Not be lost sight of .

2… BANKING, MSME AND NPAs

a… A lot is also talked about the huge quantum and frankly a continuing inflows of NPAs in the banking sector . The economy is not doing so badly. The cause of such rise in NPAs should be investigated . I would also see a big role of improper sanctioning, lax documentation and careless monitoring the Bankers. The promoters are not the only culprits. I doubt whether adequate actions to book such instances except in a few cases where the quantum was embarrassingly large. In other words, smaller NPAs do add up to large numbers and they can be addressed quickly and effectively. More attention on this line may yield good results.

b… The recent Insolvency Code has really been a promising step in a right direction. It has opened up the vistas for a quick resolution of NPAs and ailing assets. What is now needed is a strong framework of TURN AROUND SPECIALISTS, who can quickly and effectively help in restarting productive activities. A separate, illustrative organization for the same can be initially set up in public sector

c… The sanctioning authority, the documentation machinery, the monitoring authority and the recovery authorities are concentrated , I believe within a bank itself .This is against the basics of Control Mechanism. A plan has to be implemented where more than one set of people/ agencies are involved in carrying out different functions of the total activity load of a loan or advance .

d… MSMEs and Start Ups play a crucial role in the economy like ours . They need timely and adequate financial support for their progress which can generate huge employment. Realizing this, there are various schemes that are already being implemented by State Governments, banks, Union Governments etc. This has created a flood of schemes, making it more and more difficult for the entrepreneurs to even get to know about existence of various programs, schemes, exemptions and support. I think a time has come to properly codify these schemes and make adequate awareness about the same.

e… As we understand the bankers are in tremendous pressure to reduce the NPAs and improve their profitability. The MSME and Start Up financing, for them is time consuming and does not show quick results. In fact same, if not more time is taken in financing an MSME than the larger advances .As a result, there are many paper schemes for these sectors, without pushing the schemes, they remain in dormant mode .I would suggest a separate Bank ( can be a subsidiary of a bank) can be set up for large advances alone, so that due focus is available on each separate entity .

f.. Monitoring of an advance or a loan is a crucial part of banking activity . This requires a pool of officers, who have an expertise in different industries, who can understand the nuances of the business of the borrower. The current system of placing Nominee Directors has not yielded the desired results. The Banking and Corporate Governance efforts of the Government badly needs a pool of qualified, experienced and reliable professionals who can act as effective Nominee or Independent Directors .

g. Our economy and our products have to remain competitive in the world market. But if we see the cost structure of our products, one finds that the indirect taxes and interest costs are nearly half of the total costs. Special care has to be taken to provide more waivers /exemptions for reducing the costs of export products for increasing exports and also for reducing the costs of essential items for the ultimate domestic consumers.

3… Other Areas :
a. Agriculture Sector offers a huge scope towards employment generation as well as in pushing the GDP. Corporate Farming needs to be encouraged by allotting at least the UN Cultivated Land blocks. Similarly Agriculture Co operatives and Producer Companies need very special encouragement and monitoring.
Distribution channels with inbuilt competition and margin controls are badly required to ensure that a reasonable portion of the market price is available to the farmers. Waiving of loans is a temporary, one time solution. It Can Not and should not be a Norm.
Agro Industries, with modern facilities should be improved along with better storage and transportation network .

b.. Corporate Sector no doubt is a backbone of our economy . The tightening compliance requirements and computerization has added to the cost of compliance, not only to the corporate sector but also on the entire business sector. Lapses, of course should be punished, but providing a power of taking criminal action to the law enforcing authorities to come down heavily on non compliance should be used only sparingly. There are numerous instances where Non Operating and Independent Directors are dragged into Criminal Proceedings, even when they had No role to play in the wrong doings of the promoters or Non Payments of the dues or in bouncing of cheques . Such avoidable actions taken out of zealous and high handed bankers and Officers have created a fear psychology amongst the business community. There needs to be some screening mechanism, when criminal actions are initiated particularly against Non Operating or nominee or independent Directors. Criminal cases should be initiated only against the persons directly involved in the wrong doings. They should be initiated more as an exception under extreme violations rather than as a routine. In addition to creating a fear, it has made it more difficult to attract good talents to act as Independent or nominee or non operating directors, which goes against the very purpose of creating the cadre of Nominee and Independent Directors.

c.. Education Sector has, if said plainly, has let us down, barring of course the IIMs, IITs and some few more shining examples . The Research initiative has nearly vanished and some sparks of students have to cross the shore to seek opportunities.
What we need is a quality School Education and purposeful Education .The British rule has successfully implemented a system of education and curriculum which produces clerks and obedient mass, by restricting imagination and creativity. A sea change in moral based atmosphere needs to be built up through revamping the curriculum and method of teaching.

d.. On Health Care side AYUSH initiative needs greater push along with creating a cadre of skilled manpower who can work at village levels also to at least provide first aid type of Basic Healthcare and spread awareness about good public health . The initiative to popularize Generic Drugs has been showing a very slow progress. A sincere push is really required particularly since the Generic Drugs have to compete with large corporate when it comes to reaching the ultimate consumers

e.. At Judiciary Level , a relook at the procedural aspect of Law and Litigation needs a relook . This is a Must, if we want to reduce the pendency of litigation and transparent justice delivery system.
At the Administrative Level also a relook at the procedural aspect is necessary for efficient and effective implementation of various schemes and programs initiated by the Government.
A robust and Strong MIS system needs to be introduced along with Administrative reforms both in Judiciary and Administrative network, which has remained untouched, perhaps since the British Raj.

Prepared by … Mr Amal Dhru .
amaldhruv@gmail.com (m) 9825015534

SHOULD YOU BE AN EMPLOYER ?

The recent news that even CAs, engineers, MBAs applied for a job of a peon.
This news set my mind on a thinking mode.

Why should one not be satisfied with a Small Time job and take up minimum responsibilities? Why should one always aspire to be an employer and not an employee?

Set your standards of living and earn enough to meet them. If your Ego and Needs are reasonable, finding a suitable employment is perhaps better than taking up the headache of running a 24*7 outfit, full of responsibilities and unsure success

I am sure this thought goes through the minds of many, particularly if the person is a Start Up or an MSME entrepreneur.

To understand the issue, one need to understand the basic assumptions that one makes .Many of them may not hold true and one MUST re affirm them.

1. All entrepreneurs do not Make Awful lot of profit .It is not necessary that you will always be successful as an entrepreneur in making the two ends meet.

2. If you default in meeting your obligations under any of the applicable laws ( it is a task to even finally know what all laws are applicable to you and your business ) , the law enforcing authorities are certainly not over sympathetic or generous towards any defaulters, not even towards start ups or MSME . Corrupt practices to overcome default are certainly not advisable nor are they economical and sustainable in the long run.

So please take up a good risk assessment and use the financefundas.com smartly before plunging.

I am sorry if someone finds this thought demotivating but one cannot and should not overlook realities.

Knowing this well, those who still plunge into “going on their own”, certainly should be sure of a good success in taming the known and unknown risk in satisfying their need of achievement, desired standard of living and fulfillment of their dreams .

I do compliment them and wish them luck.

BLACK MONEY … ” CATCH ME IF YOU CAN “

At the onset of the recent Demonetization of Rs 500 and Rs 1.000 currency notes ( called SCNs ), it was expected that the entire lot of SCNs in the circulation will not be banked . The fake notes will be identified and naturally will not be able to enter the banking channel. Similarly , the SCNs held by black marketeers will also not be banked due to fear of being taxed and penalized. It was estimated that nearly Rs.4 Lakh crore worth of SCNs will not be deposited, which will represent the balck monies held backin the system. Now at the end of the deadline of 30th December 2016, it is estimated that only Rs.50,000 odd crore remain “un deposited “.
This is , by any imagination is a ridiculously low figure of Black Money that was in the system before demonetization. Even the GOI estimation was that nearly Rs 4 to Rs 5 Lakh Crores are held back in the system , representing Black Money.

In reality,as it is well known, the Black Money has actually been deposited in the bank accounts by adapting various dubious methods including opening dummy accounts,depositing benami SCNs etc methods so skillfully adapted!. It is therefore for the Income Tax Department now,to identify such deposits and catch the errant persons . This is a huge and painful task . The benami account holder ( a poor Jandhan account holders, in many cases ) and the Beneficial depositor, both will come under scrutiny . The number of such cases will be huge and it will be near impossibility for the IT department to reach out for all .

Similarly, many black money holders have re written their cash books, generated higher cash balances and deposited SCNs which were held illegally till than. Such cases are as large and wide spread . This by itself will be a memoth exercise to cover all such cases for the IT Department .

But the reality will be that the IT department is also not going to give up the chase so easily . I can quite see that there will be a huge increase in IT notices and almost all of them will result into lengthy litigation.

Again, it is equally important for the RBI to exactly reconcile the Monies ( SCNs ) deposited with the Banks , with the monies (SCNs) which were in circulation as per their records. RBI will have to be sure that Fake currencies have not been pushed into the banking system and will have to tally the genuine physical notes collected by the banks with the book figures that are being provided by the bankers . These reconciliations , reaching upto branch level is another herculean task , particularly when it is equally well known that several banks and bank officials have not been so praiseworthy. It will not be a huge surprise if initially it is noticed that more SCNs are deposited in the Books of Banks and RBI than the Actual numbers of SCNs in circulation . The Fake notes pushed in the system will have to be segregated and wrong book keeping will have to be corrected before closing this exercise .

I feel the stage is perfectly set for a Catch Me If You Can type of chase . It is shameful and painful , but unfortunately true .

Demonetization… Isn’t it a Success ?

A lot is being said about the wisdom of demonetization by many wise people . Frankly, it is being criticized in direct, indirect ,polite and not so polite words .
Those who try to speak a bit in its favor are almost considered “Blind Followers “.

The critics have been harping upon the hardships faced by almost all of us in varying degrees, the lack of efficient implementation efficiency, the confusions that prevailed almost throughout. They also question its basic necessity for India, suggesting that it had more political objectives to serve than the economic objectives The issues of the jobs that have been lost in the process and arguments that the black economy will once again come back very soon are going round all over .

Having considered all these arguments , one can still observe that the entire exercise has drawn the mass attention towards the existence of black money and black economy and the concerns of the Government to curb the same at any cost .Even a slight dent in this direction means a Huge achievement . People have shown unique support towards the efforts and the hard core defaulters have also taken a good beating in the process . Digitization no more looks an impossibility as it looked a few months earlier. A momentum in this direction , if continued for at least a few months, will be a great gain. The jobs have not been lost permanently. The stricter monitoring of doubtful transactions coupled with the likely ( i really hope so ) removal of administrative hardships and reduction in tax burdens and reduced costs of compliance will make generation and advisability of indulging in black money transactions less attractive and less prevalent.

So let us not be blind critics of all that is different/new/changed . Let’s also look at the change in a positive way. There is still a long way to go and let’s carve our own destiny with a positive attitude .

Start Up India.. Whats So New About It ? What More is Needed ?

What I feel is that there does exist a good bit of confusion about who exactly is a Start Up.

Simply put, any newly started business is a start up. As far as way of doing business, and the complexities of business is concerned, a start up is on the same grounds as that is there for any other new ventures.

But in order to encourage budding entrepreneurs the Government and certain organisations are offering certain free bees , training ,incentives, concessions and even financial support . For receiving entitlements for such advantages one needs to see that his or her new business venture falls within the definition of a Start UP.

Looking to the past history of incentives, one sees that giving concessional finance, providing infrastructural support at a concessional rates , giving subsidies etc have always been there. For instance, in Gujarat, GIDC, GSFC, GIIC, GSIC etc Government Organisations have played this role quite effectively in the past.

So what new is happening now ?

It is the participation of government and even the private sector by opening up their purses for providing business incubation and hand holding support that is note worthy. Earlier this role was being played by relatives and friends, which kept many budding , but not so well connected entrepreneurs at a clear disadvantage.

Secondly, over time, investors have realized that there are many brilliant ideas which , if nurtured to a business reality, has unbelievable possibilities of growth. Google, flip cart, etc speak for themselves. For investors there is a huge possibility of making good money if they take an equity exposure at the right time in right venture.
This business arena is fast catching up and there are real hectic activities growing between newer entrepreneurs with good ideas and opportunity seeking investors.

It is this Eco system that being nurtured and developed under the name and style of Start UP .

At the same time, we should look at the hard realities of actually doing business in India. The Administrative lethargy, the small time corruption, the end less delays and the evasive attitude in the real time world puts off many new entrants. These factors have resulted into numerous closures of potentially viable units. We need to also develop an Eco system that enables the picking up of potentially viable units and separating them from truly nonviable units. The BIFR experiment has failed to live up to its expectations. I see it as a great opportunity for the private sector to evolve a business model for reviving such units and share the fruits .Encouraging and setting up of merger mechanism and mechanism for taking over of the management of identified units is an area worth looking at .

There are units which go Sick and are not viable. Sometimes the promoters lack honesty and integrity.
For such units, the Bankruptcy laws and speedy legal actions will go a long way in unlocking the precious assets that get entangled with such ventures through revival.

Such holistic approach towards the entire field of industrial and service sector development will go a long way in giving a further boost to the economy .