The Chinese Conundrums: What and Why?

The Chinese Conundrum

The Chinese Currency Yuan has been devalued twice in last one week and there are a lot of concerns around the world including the anxiety about the imminent collapse of Chinese economy triggering a downward spiral  in the growth rate pushing the world economic environment in depression.

On the face of it, the move looks as a step to boost the country’s exports by making them more attractive for foreign buyers, thus providing an impetus to the economic growth that china has been struggling to maintain in the recent years, the same step would make the exports from other countries into china unattractive and countries like US, UK , Australia which have china as a major trading partner could see this as a warning signal leading to fall in the stock prices in these markets.

China is the second largest economy in the world after USA and any adverse movement in the economic parameters have far reaching impact across the world.  If we go deeper in the phenomenon, the devaluation could be a move towards the natural progression towards the free float system where the value of the currency is determined by the market forces and not managed by the government which is the case with Chinese currency which is pegged against a fixed basket of currencies, china may be looking at moving towards the free float system which is followed by most of the developed countries in the world. This could also be seen as a step towards getting yuan included in the basket of Special Drawing Rights (SDR) of IMF in which it grants loans to member countries.

This devaluation looks more natural than in the years around 2008 where the country was accused of keeping its currency cheaper for making exports attractive, the kind of growth trajectory that china has followed over last two decades is very difficult to sustain unless there is continuous economic activity. China has been deriving its growth from the exports where the numbers of economic parameters might not have been reported that correctly which puts a question mark on the rosy picture painted by close to the double digit growth over a decade. The next spurt of Chinese growth will come from the widespread domestic consumer spending and the measure that the government takes might be the stepping stones in this direction.

Another reason for currency devaluation could be to keep the Chinese currency competitive in such a market where major competitive currencies were losing more value and as a result Chinese export were losing competitiveness.

The move has seen knee jerk reaction from stock markets across the world with Indian bourses registering historic falls before recovering a bit, In terms of resilience Indian markets are fundamentally strong and these falls may best be considered as temporary in nature.

If we look at the movement of rupee, devaluation of Yuan has an adverse impact on the price of rupee and it has moved down, but it is still to be seen that whether it is a long term phenomenon or a one off event , in terms of export Indian exports have been declining for months, but as a result of global slowdown imports have also been declining keeping the balance of payment stable , but if the rupee movement goes out of hand RBI may have to intervene with policy measures like rate cuts to keep the fluctuation of currency in comfortable limits. Volatility in rupee may make imports costlier stoking inflation due to which RBI might have to stick to high rate regime.

While the fall in value of Rupee should help exports, it may not necessarily be true because of global economic slowdown and the fact that India and China compete for many item exports like textile, gems and jewelry etc.

What Indian Corporate sector is wary about is the possy of dumping of Chinese goods in India as a result of cheaper yuan

As for the stock markets in US , some believe it to be overvalued for a long time  so the correction is taking place for some time which has been compounded by the signals of crisis in China. Overall all now Fed is in much better position to intervene and make amends than it was in 2008 global financial crisis, the over dependence on china for trade and exports is causing some jitters in the US stock market which should even out with time.

In regards to India, the fundamentals of the economy look strong enough , Rupee with the intervention of central bank should weather the storm set up by Yuan devaluation and the possibility of currency war look like a distant possibility. With the Chinese dragon weakening in its flight, the time is ripe for Indian Elephant to move fast and attract FDI in addition to FII to strengthen the fundamentals of economy to move into decade of sustained double digit GDP growth.

Union Budget 2015-16:-- Neither Drastic nor Fantastic

The Union budget is on the expected lines where  the finance minister did not touch the tax rates and slabs maintaining the status quo for the most part. While this was widely expected as we had mentioned in article on the expectations from the budget, it can be termed at most insipid from the point of view of a salaried individual.

There are some unexpected good moves like the phased reduction of the rate of corporate tax to 25% over a period of 4 years and diverting 62% of the tax receipts to the state. With this move the finance minister has increased the responsibility of states in terms of public spending.

While nothing much has been done on the front of individual taxation and the limit of investment under section 80 C has been kept at 150000, the limit for deduction from taxable income of   premium paid on health insurance has been increased to 25000 for individuals and 30000 for senior citizens under section 80 D. Tax free transport allowance which has been hovering at Rs 800 has been thankfully increased to 1600 per month. No other exemption or deduction has been tampered with as the time lag between the last budget and this budget has been barely 9 months and many limits had been increased by the finance minister last time around.

The replacement of Wealth tax with the 2% surcharge on the Super rich (Taxable income > 1 Cr) would yield additional revenues of 8000 cr to the government and would save the hassle of valuation and measurement of wealth every year.

For a resident individual while the relief in tax  is not visible there  is an additional burden in the form of increased service tax from 12.36% to a lump sum rate of 14%, this would certainly  have an impact on the  wallet of the common man as there are hardly any services which do not come under the net of Service tax and we  only can  hope that when the GST will come into play in 2016, this additional burden would be rationalized.

There has been intent on the part of the government to counter the menace of black money by putting in place stricter legislations including the scope for rigorous imprisonment for stashing money abroad.

There has been a focus on job creation and encouragement to the entrepreneurship with initiatives like SETU ( Self Employment and Talent utilization) and more could be expected in future.  Quoting JAM ( Jan Dhan yojana, Aadhar and Mobile) in economic survey as a means of Financial Inclusion could have far reaching effects

Thus while this budget  falls short on instant gratification for the common man, One hopes that the measure initiated are in the right earnest and fulfill the objective of sustainable and inclusive growth and development in the targeted time frame.

Budget 2015 -16: What to  Expect

So the rituals begin and we are in the budget week when every tax payer ( Aam Aadmi) looks at the finance minister with a lot of hope and this year the expectations are even more owing to the following factors.

1.     This is the first full fledged budget of the  New incumbent (  NDA Government) which stormed into the corridors of power riding on the slogan Sabka sath   Sabka Vikas,  now is time for them to walk the talk and induce the  much needed confidence in the  industry as well as general public.
2.     The budget comes on a close heels of a severe defeat in the Delhi Elections for the ruling party, the first since the general elections in may 2014 and the government needs to send a strong message through this budget  that it is still strong  on the policy front and does not lack political will to carry out the strong measures required  for the growth  and development.

While these are the factors which we believe will be the major forces determining the direction of the budget, it should also contain the measures which will give fillip to the economic growth leading inclusion of all the sections of the society.

On the front of personal finance, there are expectations on many fronts as mentioned below

1.      To  raise the basic exemption limit to Rs  300000/- , while this would be a populist measure , this will pressurize the exchequer more than other measures

2.      Another expectation could be raising the limit for 80 C investment to Rs. 200000, although it was  increased to 150000 last year only, there are little chances, it will be done again so soon

3.      Deduction from Taxable Income on interest payment of housing loan  (u/s 24) was increased to 200000 in the last year’s budget , and it would be a bit too Optimistic to expect it to increase this time also.

4.      While 80 D which provides Deduction on the premium paid for the self and Senior citizen parents  till the limit of 15000 and 20000 respectively , these limits can be expected to be revised as they have been for some time

5.      Some of the Allowances and reimbursement need to be looked into , like the tax free transport allowance is Rs 800 per month would make for taxi ride for a single day in some cases, similarly the tax free Medical Reimbursement of Rs 1250 per month seem very little looking at the cost of medicines and the cost of medicine consultancy charges, Tax Free Child Education Allowance of Rs 100 per child per month looks inadequate .

6.      Short term Capital Gain Tax on Sale of Equity Shares: While there have been voices on changing the definition of the short term for this purpose, we do not foresee this coming in the near future, while reducing the short term capital gain tax rate to 10 % would be a welcome move for the equity markets.

7.      Securities Transaction Tax:  There  has been demand to abolish this tax which is charged at a rate of 0.1% of the transaction value in the equity market. It is expected that this move might encourage retail participation in the market

In addition the finance minister will have to show intent by moving forward in the matters of GST, Direct Tax Code and other such forward looking measures which could not see the light of the day in the tenure of UPA government.

Another measure which government should set as target would be the ease of doing business in India, Entrepreneurs are an integral part of any developing and vibrant economy and the success which they achieve depends on the economic and regulatory environment in which they operate in their home country.

Targets like containing fiscal deficit to an acceptable limit needs to be achieved, while the government has the cushion of falling crude prices to ensure the same, the same should not be done at the cost of general public.

Thus our expectations are simple, friendly and simplified tax regime, more jobs for the youth , more opportunities of entrepreneurs, more amenities for the public and more growth for the country and the first Step in the direction of “ Sabka Sath Sabka Vikas”