FINANCIAL NEWS

Income tax changes proposed in the budget to become effective from 1^st September

1. 2% tax deduction at source (TDS) on cash withdrawals of over Rs 1 crore. The Central Board of Direct Taxes (CBDT) said that if a person has already withdrawn Rs 1 crore or more in cash up to August 31, 2019, in the current fiscal, the 2% TDS shall apply on all subsequent cash withdrawals. Hence, if a person has already withdrawn Rs 1 crore or more in cash up to August 31, 2019 from one or more accounts maintained with a banking company or a cooperative bank or a post office, the 2% TDS would apply on all subsequent cash withdrawals. 

2. For insurance policies where the life cover is less than 10 times the annual premium amount and as a result of which, the policy does not offer tax deduction benefits will see a 5% TDS on the gains. Previously, a 1% TDS was applied on the entire maturity amount.

3. Individuals and HUFs making a payment to contractors and professionals exceeding Rs 50 lakh in aggregate per annum will be required to deduct TDS at the rate of 5%. This would mean that a payment made by an individual beyond 50 lakhs in a financial year under a contract with any individual or a service professional would require deduction of tax at the time of making the payment. A new section 194N has been inserted in the Income Tax.

4. The government can ask financial institutions to report even small transactions as it has removed the minimum floor of Rs 50,000, above which financial transactions were required to be reported.

The government has decided to merge several public sector banks (PSBs) to create four large banks.

1. Oriental Bank of Commerce (OBC) and United Bank of India (UBI) will be merged with Punjab National Bank (PNB) to create the second largest bank in India.

2. Canara Bank and Syndicate Bank will become fourth largest lender

3. Union Bank of India, Andhra Bank and Corporation Bank will be merged to create fifth largest PSB in India.

4. Allahabad Bank will be merged with Indian Bank to create seventh largest bank in India. Following the government decision, the United Forum of Bank Unions (UFBU), the umbrella body of nine banking sector trade unions, has called for demonstrations across the country to protest against the mega bank merger plan.

The finance ministry has removed the requirement of 'Debenture Redemption Reserve' (DRR) for listed companies, non-banking financial companies (NBFCs) and housing finance companies (HFCs) under which the company has to maintain a DRR of 25% of the value of outstanding debentures. The amendment also aims to reduce DRR for unlisted companies from the present level of 25% to 10% of the outstanding debentures.

The Finance Minister Nirmala Sitharaman announced rollback of enhanced surcharge on foreign portfolio investors (FPI) levied in the Budget. Following the rollback of the increase in surcharge, the effective income tax rate for FPI’s with a taxable income of ? 2-5 crore will come back to 35.88% from 39% and for those above ? 5 crore to 35.88% from 42.7%

In a major success for the government in its fight against corruption, starting from September it will start getting details of bank accounts held by its citizens in Switzerland. The tax department said that India will receive information of the calendar year 2018 in respect of all financial accounts held by Indian residents in Switzerland.

recession

The National Bureau of Economic Research in US makes the official determination of a recession in US while the IMF makes the offical call on a global recession. Both of them do not use the dictionary definition of a recession to call a recession. As per the definition of a recession, it is called after a period when economic output contracts for two straight quarters. As per Bloomberg, The NBER’s Business Cycle Dating Committee considers such additional factors as employment, industrial production and income and typically takes about a year to make the call. On the other hand, The IMF looks for a decline in inflation-adjusted per-capita GDP on an annual basis that’s backed up by weakness in industrial production, trade, capital flows, oil consumption and unemployment.

A US recession leads to Global Resession, not necessary

The U.S. has experienced 11 recessions since the end of World War II, according to the National Bureau of Economic Research. As per the International Monetary Fund, there has been only four global recessions since 1960.

How severe is a Recession?

Severity of a recession has a direct link to the duration of a recession. The 2007-2009 recession lasted 18 months, making it the longest since the Great Depression of 1929 which lasted for 3 years and 7 months. Both these recessions were triggered with severe collapse in the financial system. The recession of 1980, by contrast, lasted just six months. Other measures of a recession’s severity are how much the economy contracts and how bad the unemployment gets. During the great depression, there was 26.3% decline in the US GDP and 25% peak unemployment while the recession of 2007-09 saw 4.3% dip in GDP and 9.5% peak unemployment rate.

How can the recession be restrained?

A recession results in increasing unemployment, decreasing consumption spend and a fall in asset prices. Controlling recession means controlling the results of the recession. Current recessions have seen job losses to be of structural nature and that means the unemployed have to upgrade their skilsl or move to other sectors to resume employment. Getting the unemployed employed will take time. Therefore, countries use monetary and fiscal stimulus options to revive the other two variables, namely, consumption spending and restricting asset price falls.

How close is the US to a recession?

Contrary to the general belief, the US is in a better position than others and is fairly insulated because of its domestic market. The onset of a recession would severely impact the chances of President Trump getting reelected.

The unemployment rate in July is at 3.7%, levels not reached this low for the last 50 years or more. Consumer spending, which is a biggest part of the economy, expanded at an annual rate of 4.3% in the second quarter while inflation was at 1.4%, much below the Central Bank’s target of 2% thus providing enough room for further rate cuts. Unlike 2007, American households are carrying less debt and an increase in mortgage refinancing has resulted in release of cash for consumption.

On a negative note, The University of Michigan’s consumer sentiment index which measures the consumer confidence (a strength of the domestic market) fell in August to a seven-month low.

What factors can lead to a global recession?

While US and China are involved in trade and technology war, both of them have the ability to manage their debt problems in the face of a recession. China’s debt is predominantly domestic and is financed by state-owned banks while the US has a high trade deficit that can be financed by foreign money which is denominated in USD thus not creating much downside for the Dollar. Other countries may have their own structural problems to deal like delayed monsoon, disruption, credit restriction, non transmission of easier cost of credit happening in India. The ongoing trade and technology war between US and China can lead to potential harm to other countries. A US election in a year’s time indicates that the dispute may not intensify but if continued beyond the current levels can lead to a global slowdown/downturn and eventually a global recession where the other countries may suffer more than the US and China.

To counter a declining global trade and reducing domestic consumption demand, over 30 central banks around the world have cut interest rates this year. Germany after having already seen a quarter of reducing GDP is indicating a support to give monetary incentives to encourage home improvements, short-term hiring and social-welfare programs. In the US, its Central Bank stopped raising rates after nine hikes of 25 basis points each and introduced a rate cut in July. The market anticipates two to three rate cuts in the remaining months of this year. Unlike most of the industrialized world’s central banks, the Federal Reserve still has plenty of room to cut rates before getting down to zero. India, Thailand and New Zealand have lowered rates by more than expected and Mexico reduced its key lending rate for the first time since 2014.

Preparing for the possibility of a recession

As per the Americal Institute for Economic Research in its research study on “The changing nature of Recessions, the individual needs to create a business plan for their careers, “learn how to learn”, provide for emergency expenses, manage current debt. We add a few more from the investment perspective like 1. Diversification with liquidity, 2. Direct mutual funds, 3. No lumpsum investments, 4. No closed ended fund investments and 5. No lock in structured products 6. Recessions are temporary and eventually, some of the best investments decisions come true when made in times of a recession.

DOMESTIC ECONOMY

India’s GDP and GVA (Gross Value Added) growth in Q1 FY20 recorded a surprisingly sharp slowdown to 5% and 4.9%, respectively, from 5.8% and 5.7%, respectively in Q4 FY19.

1. The low growth was mainly due to the manufacturing sector, which saw a collapse in Y/Y growth to 0.6% in Q1 FY20 from the low 3.1% in Q4 FY19. Excluding Manufacturing, the GVA recorded a 5.9% from 6.3%, respectively.

2. The services sector grew at just below 7%.

3. Private spending grew at 3.1%, one of the slowest rates since the new national accounts series began in 2012.

4. Investments (gross fixed capital formation) grew at 4%, reflecting poor sentiment among investors and big companies.

5. The private final consumption expenditure (PFCE), which reflects demand in the economy, grew 3.14% in the first quarter (Q1) of 2019-20 (FY20) — a 17-quarter low. In the previous quarter, Q4 of FY19, it grew by 7.2% while in Q1 FY19, the growth was 7.31%. The PFCE’s share in GDP declined to a seven-quarter low of 57.7% in Q1FY20 from 59.3% in Q4FY19 and 58.7% in Q1FY19. Sector wise, key employment providers like Agriculture and Construction grew at 2% each in Q1 FY20. The economy grew at 8% in nominal terms due to a 3% average inflation, a low rate last seen only in the third quarter of 2002-03. It will be difficult for the country to match the Union Budget assumption of an 11% nominal growth rate, and a tax revenue growth rate of more than 15%. The fiscal balance of the Union and state governments could see trouble because poor nominal growth adversely affects tax collection.

As per a CRISIL report, lower production of paddy, which accounts for 30% of the kharif crop acreage could likely result in a 3-5% decline in kharif crop output but adds that farm profits could still rise 10-12% this season on the back of an expected rise in prices of agricultural commodities. The monsoon's delayed arrival contributed to a 6.4% decline in paddy sowing as on August 22. The expectation of rise in farm profits is due to other factors like higher cotton and soy exports, and increased domestic demand for soybean, maize and jute.

State Bank of India became the first bank to offer a home loan product linked to RBI's repo rate. The home loan rate is linked to the bank's repo rate lending rate (RLLR), which in turn is linked to RBI's repo rate. SBI’s RLLR is 225 bps over repo rate. As and when there is a change in RBI's repo rate, SBI's RLLR changes automatically and the home loan rate will change immediately from the next month. SBI's repo rate lending rate was 8.00% as on 1 July 2019. From September 1, after the RBI reduced the repo rate by 35 bps cut on 6th August, SBI's RLLR will fall to 7.65%. On the RLLR a spread, depending on the borrower's credit score is added between 40 to 50 bps for home loans up to ?75 lakh (95 to 110 bps for above ?75 Lakhs). The RLLR linked loan gets the rates adjusted by the next month itself after the repo rate change while the MCLR linked loan which is linked to the bank deposit rate will not change till 1 year is finished after the previous reset.

COMPANY NEWS

US tech giant Apple Inc is considering an investment of around Rs 1,000 crore in India soon. The iPhone maker has informed the government that it plans to establish an online selling platform as well as open three Apple retail stores across major cities in India over the next two to three years.

Maruti Suzuki India reported a 32.7% decline in sales at 1,06,413 units in August. The company had sold 1,58,189 units in August last year while domestic sales declined by 34.3% at 97,061 units last month as against 1,47,700 units in August 2018.

Korean consumer electronics major LG Electronics said there is no slowdown in institutional sales in India and the stalled government projects due to the elections have revived boosting prospects for its business-to-business (B2B) sales in the country.

Lenders to Dewan Housing Finance Ltd (DHFL) are considering transfer out of a major chunk of the mortgage firm’s wholesale builder loans to special purpose vehicles (SPV). The lenders plan to transfer ~?30000 to 32000 Crores of its ?42000 Crores outstanding under wholesale lending. 

central bank stimulus and The government rollback

The Bimal Jalan Committee specifically set up to look at whether the Reserve Bank of India (RBI) was holding on to too much of its reserves has recommended RBI to provide the government with ?176000 Crores ($24.62 billion) as a dividend in the bank’s fiscal year FY19 that ended on June 30. About ?28000 Crores of the now recommended ?176000 Crores has been transferred to the government in February, 148000 Crores will be transferred to the Government in the current fiscal year.

A dedicated cell will be set up at CBDT to address the tax problems of startups. Startups can approach the cell for quick resolution of any tax issue.

BS-IV vehicles purchased up to March 31, 2020 will continue to remain operational for their entire period of registration and the revision of one-time registration fee has been deferred till June 2020. To boost demand for cars, the ban on purchase of new vehicles by govt department has been lifted to replace old vehicles and the Government is considering measures to introduce a scrappage policy.

The Union Cabinet announced measures to relax foreign direct investment (FDI) norms for several sectors. One of the measures announced was to allow single brand retailers to have online-only models. Previously a retailer was not allowed to have a digital store unless they had a brick-and-mortar presence. The Cabinet also relaxed the clause regarding mandatory sourcing from the domestic market. Earlier, companies with more than 51% FDI had to source at least 30% of their goods from domestic market. But now single brand retail companies are allowed to limit their sourcing in India to just 10% provided they export 20% of their products to other countries.