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| September 23, 2016 |
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Impact 
Can you imagine yourself eating Vada Pav, Samosa or Pani Puri at a classy multi-cuisine restaurant? Well, you might prefer to stay at a five-star accommodation while you are travelling but when it comes to eating desi chat and other fast-food items, you are likely to prefer roadside footstalls, like most of Indians do. Looking at tiny and rather untidy nature of the roadside eateries if you judge the earning potential of food stall owners, then you are making a gross mistake. But don't worry, you are not alone. The Income Tax Department has committed this mistake for all these years. The mistake of ignoring these "cash generating machines".
When you eat Sev Puri or Pani Puri which costs anything between Rs 15 to Rs 40 depending on the popularity of the stall, you always pay in cash. Do you remember having used your debit or credit card anytime? In many cases, the food joint operators do not even maintain records. The result is, these "cash machine owners" don't bother to pay income tax and those among them who pay, take all liberties at their discretion to manipulate income and expense figures. But that seems to be a past now.
As the Income Declaration Scheme (IDS), 2016 nears its deadline of September 30, 2016, tax officials are trying to improve the response to the scheme by raiding such eateries, confiscating unaccounted cash from the roadside food joints. The Economic Times dated September 22, 2016, based on information gathered from the tax officials, has reported that the income tax department has identified 1 lakh such shop owners who are the possible evaders. The tax office is likely to up the ante in coming days by conducting at least 1,000 seize operations across the country as IDS 2016 will end in a week's time.
Looking at the unprecedented raids and search operations carried out by the tax officials these days, it seems, sunny days are over for the food stall owners. The tax department is reportedly acting on the source-based information they gathered over last 6 months. The question that a genuine taxpayer might ask the Government is where these officials were till now? What has changed so dramatically that all sources of the department have started hitting a bull's eye?
Small shop owners managed to escape from the eye of law for so long or probably they were greasing the palms of officials who conveniently let them go till now. The target-based performance appraisals and rigorous follow ups by the revenue department appear to be leaving limited options open to the eatery owners and the tax personnel.
Honest taxpayers can only hope that this drive doesn't end soon after IDS gets over. In fact, tax department may set the precedent in such a manner that other tax evaders, especially corporates, learn lessons and become law-abiding.
Chartered Accountants will have a tough task at hand, without any doubt.
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Impact
The ration cards issued to citizens are supposed to be used only to avail ration at a subsidised rate. They should ideally be not accepted as the proof of residence. Unfortunately, in practice, ration cards are accepted as a proof of residence even by the Government authorities. The malpractices and corruption has led to the creation of bogus ration cards. Many a time, address quoted in the ration card looks real, but it's fictitious indeed. The other extreme is, those running ration shops, create fake ration cards to be able to cook their accounts. Bogus ration cards help them channelise the subsidised food stock in the open market and earn more profit.
Bogus ration cards is such a serious issue that it can't be ignored as ration cards can be misused by anyone, even by the terrorists. Courts have been hearing cases of fake ration cards. The bench of Justice A M Khanwilkar and Justice R D Dhanuka guided Maharashtra Government to think about linking up the ration cards with Aadhaar cards. Addressing a Public Interest Litigations (PIL) filed two years ago in the same context in the Bombay High Court, the bench took a firm stand.
The Court reprimanded the State Government saying, "Aren't two years enough to unravel the mystery of bogus ration cards?" the bench asked, adding the government was short on staff and vision. "Will it not be a prudent approach in the matter to make it compulsory to produce the Aadhaar card for the issuance of a new ration card? Why is the government not considering this? Unless you put a verification process in place, you cannot track the duplicate or bogus ration cards."
When the additional public prosecutor tried defending the State Government providing an excuse of shortage of manpower, the bench rebuffed the claims again. In response, the Court stated that "Link everything to the Aadhaar card scheme and make one team run it. No great changes need to be made. The state will have to only link both the cards via software."
It seems now the State Government has no choice but to do what the Bombay High Court bench has asked for. Interestingly, the Central Government has already decided to link all ration cards to the Aadhaar cards by March 31, 2017. So the Public Distribution Systems (PDS) are expected to follow the Aadhaar-based biometric authentication to allow the ration card holders buy at subsidised rates. High failure rate to ensure the biometric authentication would indicate the greater instances of false or duplicate ration cards.
It is noteworthy that by transferring the subsidy benefits directly to the users, Government successfully, the Government successfully blocked duplicate, fake and inactive LPG connections. This translated in huge savings. If the Central Government takes all states on board and successfully links all ration cards with Aadhaar Cards, it will be able to lower the subsidy bill substantially. This effort may also help in curbing the black marketing.
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Impact
The Financial Stability Report released by RBI in June 2016 indicated that the Gross Non-Performing Assets (GNPAs) of the Indian banking system may rise to 8.5% in March 2017 from 7.6% recorded in March 2016. The worst case scenario may take this figure upto 9.3% if the macroeconomic conditions worsen. In other words, this means out of Rs 100 lent, Rs 8.50 may not be recovered. This is a scary situation. Banks will have to buckle down and take serious measures to improve the asset quality. Unless this happens, the risk taking the ability of banks is unlikely to improve. This means banks can think about higher credit growth again only when they clear up the mess of bad loans on their balance sheets. Reading this, if you inferred that Indian banks may still be unattractive investment propositions, then be ready to receive a shock. And the Indian mutual fund industry will beg to differ.
Mutual funds are betting big on banks
As reported by Economic Times dated September 19, 2016, the industry collectively held a staggering investment of over Rs 1.05 lakh crore in banking stocks as on August 31, 2016. This accounts for 20.90% of the total equity Assets Under Management (AUM). In the Financial Year (FY) 2015-16, mutual funds were dumping banking stocks for reasons such as muted credit growth and a chronic problem of NPAs.
The outperformance of banking sector
Data as on September 19, 2016
(Source: ACE MF, PersonalFN Research)
However, it seems the rally that started in the last week of February 2016 lured them to one of the most important sectors of Indian markets.The banking sector is believed to be a proxy for India's economic growth.
Over the last 1 year, S&P BSE Bankex has generated 14.3% returns while S&P BSE Sensex has yielded 9.2% returns. Moreover, from the February-lows the S&P BSE Bankex has rallied ferociously, posting 48% gains whereas S&P BSE Sensex is up just 24.8% from the lows it made in February 2016. This might give you an idea about the appetite for banking stocks among investors.
To read more about this story and Personal FN's views over it, please click here.
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Impact
While expensive valuations of Indian equity markets is a hot topic of discussion among savvy investors these days, what goes completely unnoticed is the unprecedented rally in Indian bond markets. The yield on India's 10-year 7.59% 2026 G-Sec yield has fallen nearly 82 bps (basis points) over the last 7 months -- a steep decline considering that RBI has cut policy rates just by 25 bps since the beginning of this calendar year. Bond yields and interest rates share an inverse correlation with bond prices.
Yield softened…and rather fast! 
Data as on September 16, 2016
(Source: Investing.com, PersonalFN Research)
This led to a rally in the bond market – especially at the longer end of the yield curve—Primarily driven by the expectation on moderation in inflation on the back of prediction of good monsoon. An equally major contributing factor was easy liquidity conditions. And even now, RBI (as per the third bi-monthly monetary statement for 2016-17) has decided to infuse durable liquidity in the banking system to neutralise the liquidity position. This is aimed at improving the monetary policy transmission in the economy.
The rally was further supported by protracted, flat, and/or negative bond yields in developed countries. Between April and June, the U.S. 10-year sovereign bond yield fell from 1.72% to 1.38%, while the 10-year Germen sovereign bond and Japanese bond yield, during the same period, entered the negative terrain. And these factors made India bonds more attractive to the global investors.
To read more about this story and Personal FN's views over it, please click here.
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The World Economic Freedom Index suggests that India still has a lot of scope for improvement on almost all fronts that decide the economic freedom for any business. They include, legal system and property rights, sound money, freedom to trade internationally and regulation among others.
Annual report 2016 of Economic Freedom of the World positioned India 112th in the list of 159 countries considered for ranking. In the continent, India fared better than China, Bangladesh and Pakistan who were ranked even lower. However, Bhutan, Nepal and Sri Lanka outpaced India to claim better positions.
For India to improve its ranking, the Government must introduce legal reforms and ensure speedy implementation. However, political consensus needed for constitutional amendments lacks in India.
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Yield Curve: A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.
(Source: Investopedia)
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Quote : "If you want to have a better performance than the crowd, you must do things differently from the crowd."- Sir John Templeton
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