Here’s the countdown to the major 10 events that took the Indian economy by surprise and left an impact in the year 2016
10. CYRUS MISTRY CASE
Tata Sons’ board ousted Cyrus Mistry on October 24, 2016, and appointed Ratan Tata as interim Chairman. The reason for such an outing is not known. The Tata Group companies called for EGMs to decide whether or not to remove Mistry from their respective boards. After a bitter eight-week boardroom battle against Ratan Tata’s illegal coup, Cyrus Mistry stepped down from the boards of all its listed companies but signaled that he would take this dispute over the $100-billion salt-to-software conglomerate to the courts. This was in contradiction to steps taken by Ratan Tata, who led the group into some notable acquisitions, starting from Tetley by Tata Tea for $407 million in 2000, steel-maker Corus in a $12 billion deal by Tata Steel in 2007 and the Jaguar Land Rover in 2008 for $2.3 billion by Tata Motors.
Source: economic times and tata.co.in
9. DONALD TRUMP’S WIN
Trump has made various promises under the 15 point agenda if he fulfills them, India may win some battles as well as lose some.
Trump has vowed to bring back jobs to Americans. He terms the H1B Visa program as ‘unfair’ and has stated willingness to end the program. He promised to reduce the US tax rate from 35 to 15 per cent that will ring a bell for companies like Ford, GM and Microsoft running back to the US. Limiting outsourcing will impact IT companies like HCL, Wipro, TCS, and Infosys. There are a few benefits as well: Trump has called for higher tariffs on Chinese goods which are India’s biggest competitor in the export of pharma products to the US. His stance on terrorism, pitch against ISIS and countries that talk terror could result in deeper Indo-US defense ties. Also India, which is dependent on Organization of Petroleum Exporting Countries (OPEC) when it comes paying a price for oil, will benefit as opening up of the US oil sector will lead to price stability globally.
8. NEW RBI GOVERNOR
After the end of Rajan’s three-year tenure as the RBI Governor, that witnessed several charges on inflation, growth and interest rates and financial sector reforms. Urjit Patel, who was Deputy Governor in charge of the monetary policy, took over as the next RBI Governor. Unlike Rajan, who took over mid-crisis, Patel will inherit the economy in decent shape, with GDP growth at 7.9% and a stable currency. But he faced three immediate challenges. First being inflation as oil prices surged. Second was to combat against bad debt at state-controlled banks, which accounted for two-thirds of total loans. Third is to establish a new monetary policy committee.
7. VIJAY MALLYA’S ESCAPE
He has owned India’s biggest liquor company, private jets and many other riches. Then in 2005, Vijay Mallya launched Kingfisher, an airline to match his style and flamboyance but what led to his untimely escape?
Kingfisher being the second largest airline in India in terms of the number of passengers it carried. The service standards attracted many passengers in its initial years. But the aviation industry was already bleeding. The Deccan acquisition in 2007 was explicitly to allow the airline to fly internationally. In 2009, the bank provided a loan of Rs 900 crore to Kingfisher. Crude oil prices were high, with fuel costs making up half the operating costs of airlines. Kingfisher’s debt reached Rs 5,665 Crores and net losses to Rs 1,608 Crores.
Banks’ chances of getting their money back from Mallya are slim to none. Even if banks go ahead and sell the Kingfisher House in Mumbai, it will fetch only a fraction of what is at loss. The only hope for banks is if Mallya himself decides to pay back banks.
Source: The Indian express
6. THE CHINESE CRASH
Why did China’s stock markets experience a free-fall during the first week of trading in 2016? In China, its stock markets already use daily price limits and its marginal investors havent seen it fall below 10% and combined with the lack of accounting transparency that has been a long-running problem. If I am a clueless investor and i see that Chinese regulators have suddenly installed circuit breakers in fear of a market crash, then I am naturally going to panic. Also, the Chinese government needs to hand over their control of state-owned enterprises to private investors. The Chinese regulators now see it this way too, which is why they removed the circuit breakers.
Unfortunately, they are reluctant to become fully transparent, be it the Chinese firms, auditors or the government as they do not embrace full accounting transparency to protect their so-called state secrets. Due to little transparency, there is less investor confidence. Therefore, the markets can never fully reflect fundamentals, and is swayed by rumors. And this, of course, prevents markets from growing and expanding in a predictable way.
What we hear as soon as Britain exits European Union is “Pound is trading 31 years low”. It’s ‘once in a lifetime’ event and India being a lucrative market is affected by any major political or economic change across the globe. The value of India’s exports to the EU in FY16 stood at $45 billion. Of which, Britain alone accounts for 20%.
Majorly impacting Information Technology market; over $100 billion of Indian IT sector’s export, 15% of India’s automobiles exports, pharmaceutical sales of $0.45 billion and $1.50 billion to the EU were affected by lower demand. Albeit, tourism, studying abroad, real estate investments in the UK got cheaper. But India’s exports will continue to under-perform, if RBI doesn’t allow comparable fall in the rupee.
Source: The economic times
4. RELIANCE JIO TELECOM SECTOR
By continuing with the Welcome offer Reliance Jio is trying its best to reach the 100 million user base. It had come close to 52 million subscribers in the beginning of December 2016, which is huge considering the service was rolled out in September. Morgan Stanley analysts said Reliance Jio’s expenditure on capital and spectrum is justified, considering it drives four times the data on Bharti Airtel’s network and as much as 12 times on Idea Cellular Ltd’s network in terms of MBs. The analysts said in a note that even as the recent spectrum auction had boosted the health of the industry, it would result in a more intense competition in the data market without promising revenues. Therefore, the unpleasant effect of Reliance Jio’s freebies will be accelerated by the 1.5 Lakh crore expenditure incurred.
Source: The economic times
3. INTRODUCTION OF GOODS AND SERVICE TAX (GST)
Integration of existing multiple taxes into single GST will significantly reduce cost of tax compliance and transaction cost. Transparent and predictable tax regime will encourage local and foreign investment in India creating significant job opportunities. It will remove cascading effect of taxes imbedded in cost of production of goods and services. This will significantly reduce cost and will be beneficial to the sectors which have long value chain such as FMCG, pharma, consumer durables, automobiles and engineering goods.
Electronic processing of tax returns, refunds and tax payments through ‘GSTNET’ without human intervention. While GST will simplify tax structure, it will increase procedural burden as number of returns will increase. For instance, a real estate developer or contractor will have to file 61 returns in a year compared to 24 returns at present. Similarly a taxable person providing services from several states will have to take registration in all such states, instead of a single centralized registration. Services will become expensive .e.g. Telecom, banking, airline etc. as the proposed GST is about 18-20%.
2. INCOME DECLARATION SCHEME
Income Declaration Scheme came into effect on June 1, 2016. It was an opportunity for them who didn’t disclose their income and pay tax on such in the past. This scheme ended on September 30 and generated a coral sum of Rs 62,500 crore from those with black money, leading to tax windfall of close to Rs 30,000 crore for the government. “The object was to try and make India a more tax compliant society. Tax compliance leads to higher revenues, reduction of budget deficits and money collected is spent on infrastructure, social sector and the rural areas,” said Jaitley.
Source: Business Standard
Demonetization is the act of abolishing the status of a currency unit from its legal tender. Reasons include combating inflation, corruption and advancement towards a cashless society. On November 8, 2016, the Indian government decided to demonetize the 500- and 1000- rupee notes, which accounted for 86% of the country’s cash supply. Individuals and entities were forced to convert the old currency at a bank before 31 December. If the entity could not provide proof of making any tax payments on the cash, a tax penalty of 200% of the tax owed was imposed.
Pros: People who are holding black money in cash will not be able to exchange it all in the fear of getting penalized by the authorities. The existing white money of people will be known to the government. Limits prescribed for reporting to the IT Department of those bank accounts in which excess cash deposits are being made in this 50-day window (Rs 2.5 lakh in case of individuals and Rs 12.5 lakh in case of firms).
Cons: The liquidity crunch will be served as negative across sectors solely with cash transactions. Real estate, jewelry, retailing, restaurants, logistics, consumer durables, cement. Additional costs of printing currency, operating ATMs and bank operations. The thought is difficult to implement as 50 percent of Indian population is not well versed with card transactions.