Animal Spirits Back?
Reserve Bank of India (RBI) Governor Shaktikanta Das recently gave the clearest indication that India’s economy is moving into top gear. At a media banking event, Das said India’s GDP figures for the July-September 2023 quarter would spring a “surprise” on the “upside”.
So is the economy growing more rapidly than most Indian and global financial institutions project? Quite likely. Decode the numbers.
Merchandise exports, after a difficult first six months of this fiscal, grew year-on-year in October 2023. The rise was a modest 6.2 per cent but after six months of declining growth, the uptick in goods exports suggests manufacturing activity is reviving.
Services exports meanwhile remain robust. The Services Purchasing Managers Index (PMI) for October was a healthy 58.4. At $28.70 billion in October, services exports are catching up with merchandise exports ($33.57 billion in October) and helping pare the trade deficit.
While the merchandise trade deficit ballooned to $31 billion in October, the services surplus of nearly $15 billion halved the deficit for the month. With remittances remaining strong at over $10 billion a month and foreign direct investment (FDI), though constrained by geopolitical turbulence, beginning to pick up, the year’s balance of payments (BoP) could fall to near zero.
Most institutional forecasts see the Indian economy growing at 6.5 per cent in 2023-24. They could be wrong. A figure closer to 6.8-7.0 per cent is more likely. A key driver towards higher growth is government spending on infrastructure and manufacturing. Budgeted capex of Rs 10 lakh crore in FY24 is well on track. This is set to rise 25 per cent to Rs 12.5 lakh crore in the interim Union Budget to be tabled early next year ahead of the 2024 Lok Sabha election.
Higher bank credit uptake suggests private investment – a laggard for years – too is picking up, shaking off the effects of both the Covid pandemic and trade disruptions caused by the Russia-Ukraine war.
The most significant indication of a revival of animal spirits in the economy is the rise in corporate and personal tax collections. Both are running ahead of last year by over 10 per cent. This has enabled the government to step up investment in core sectors.
But even as the economy revs up after three difficult years that contained two Black Swan events, regulatory authorities are queering the pitch. Having sensibly rolled back the licensing scheme for the import of laptops and other electronic equipment, regulators are building new economic road blocks.
For example, the RBI’s recent diktat to banks to raise the risk weightage for unsecured borrowers by 25 per cent will increase the cost of capital for small loans.
*Damage limitation
Regulatory overreach can damage India’s reputation as a reliable place to invest. The ministry of finance’s quick reversal of its policy on laptops imports has belatedly limited that damage. The revised production-linked incentive (PLI) for laptops has drawn 27 companies, including Dell, Hewlett Packard and Lenova. They will now set up manufacturing facilities in India for local sales and exports. Several could outsource work to Indian contract manufacturers, strengthening India’s manufacturing ecosystem.
But what one hand gives, the other hand often takes away. You don’t have to be a gaming enthusiast to see the lack of logic of government agencies sending notices to gaming companies seeking several thousand crore rupees in retrospective taxes. Apart from killing an industry that is booming worldwide, retrospective taxation defies common sense.
The senior Supreme Court lawyer Arvind Datar explained in an article in The Indian Express why the new retrospective demands on gaming companies are bad in law: “Recently a show cause notice issued to GamesKraft Technologies for over Rs. 20,000 crore was quashed by the Karnataka High Court, although this was later stayed by the Supreme Court. It is indeed unfortunate that these staggering amounts are once again made without regard to earlier court rulings and contrary to a central law. The other reason for these high demands is the retrospective application of the law. From October 1, the GST Council decided to amend the law and treat winning on games of skill as also amounting to betting and gambling. But the claim of Rs 1.5 lakh crore from online gaming companies is for the period 2017-22, when such a law did not exist.
“In the case of gaming companies, services tax was always paid at 18 per cent on the platform fee. Thus, if 20 persons paid Rs 500 each to play a game of skill, the total amount pooled is Rs 10,000. The gaming companies typically collect 10 per cent as their service charges and the balance sum of Rs 9,000 is then to be shared among the winners. From 2017, the balance amounts have been paid to thousands of winners. These payments were perfectly legitimate in view of the central law and rulings of high courts. It is difficult to understand how a GST demand of 28 per cent can now be made on the entire amount which has been disbursed to thousands of winners over the last six years.”
*Better days for IT?
Meanwhile, with inflation moderating in the United States, US treasury bonds yields softening and the unemployment rate falling, technology spending by US companies is likely to rise after a protracted hiatus. That spells good news for India’s infotech sector. Already both large cap and mid-cap IT stocks have firmed up in anticipation of closing new AI-driven deals.
If the manufacturing and software services sectors fire at the same time, tax revenue remains strong and corporate earnings maintain their upward trajectory, spurring greater private investment across sectors, the RBI governor’s recent upbeat forecast for the economy might well appear prescient.
