Seasonal Changes in Indian Economy
Seasonal Changes in Indian Economy
Seasonal Changes in Indian Economy
SEASONAL CHANGES:
Importance of monsoon in Indian Economy
India is primarily an agrarian economy— agriculture contributes 15% of India’s gross domestic
product (GDP). Past data has indicated positive correlation between actual rainfall and the
growth rate of agriculture GDP. Normal rains will help the economy, which is showing signs
of recovery after slowing last year due to demonetization and the lingering impact of GST
imposition. It will not only boost agricultural production but increase consumer demand, which
will help keep inflation in check.
The monsoon delivers about 70% of India's annual rainfall and determines the yield of rice,
wheat, sugarcane and oilseeds, such as soybeans. Farming makes up about 15% of India's $2.5
trillion economy but employs more than half of its 1.3 billion people. Rising farm output from
a decent monsoon boosts demand for consumer goods in rural regions. A stronger economic
outlook tends to lift the stock prices of companies focused on selling products in rural areas.
India is self-sufficient in rice and wheat, but a drought would increase imports of pulses and
edible oils, such as palm oil, soy oil and sunflower oil. Monsoon rains replenish reservoirs and
groundwater, allowing better irrigation and more hydropower output. Higher rainfall can trim
demand for subsidised diesel, which is used to pump wells for irrigation.
Monsoon importance for agriculture growth, addressing farm distress
The south-west monsoon irrigates over half of India’s crop land. Its arrival marks the beginning
of the cultivation of rain-fed kharif crops which are heavily dependent on the monsoon—the
quantity of rainfall determines agricultural production. Early showers will help farmers start
planting of major crops such as rice, soybeans, cotton and pulses. With farmers reeling under
stress due to low crop prices, normal rainfall is expected to help revive the sector and alleviate
rural distress.
Around 50% of India’s total food output comes in the form of summer crops. A delayed
monsoon can lead to supply issues and even accelerate food inflation. Below normal monsoon
can also lead to drought, which India witnessed during the first two years of Narendra
Modi government’s rule. Just 15% of the $2 trillion Indian economy is accounted for by the
farm sector but it employs over half of the total population of India, as per estimates.
Effect on demand
In a good monsoon season, farm output goes up, boosting demand for consumer goods as well
as income of rural people. All of this leads to a stronger economic outlook that in turn help lift
equities, especially of companies selling goods in rural areas.
However, a poor monsoon season weakens demand for FMCG products, tractors, two-
wheelers, rural housing. Also, it forces the government to spend on the import of food as well
as take measures like farm loan waivers.
The Monsoon rains in India also replenish reservoirs and groundwater that helps in improving
irrigation and also boosts hydropower production. Moreover, a good Monsoon season can
reduce demand for subsidized diesel used for pumping water from wells, ground, ponds or
rivers for irrigation.
Monsoon effect on inflation, RBI policy
A good Monsoon season leads to bumper farm output that keeps food prices under control.
This is so because food accounts for 50% of the country’s consumer price index, which is
closely monitored by RBI. During droughts, the government has to support farmers through
incentives, subsidies. These widen fiscal deficit. Good monsoon season, hence, also checks
government spending. A poor monsoon season can have a rippling effect on India’s economy
and growth. A strong correlation between rainfall and agriculture GDP has been established by
data analysis in past.
The repo rate is the rate at which the RBI lends other financial institutions. A repo rate
reduction means banks have easier access to funds and more scope to reduce their individual
rates on their home-loan products. Under the marginal cost of funds-based lending rate
(MCLR) regime, the interest rate that banks charge on their loan products, is linked to their
cost of raising funds. So, when banks pass on the benefits of a reduced repo rate, buyers pay
lower interest rates on their home loans. Hence, the monsoon would decide whether or not
homebuyers can see better days in terms of lower interest rates.
FMCG
When a normal monsoon is forecast, this sector will see a rise in demand for their products and
services. This will reduce input costs; improve financial performance such as rise in margins
and net sales. If this is the case, then stocks will also see positive performance in their valuation.
Automobiles
A better monsoon spurs demand for two wheelers and low cost four wheelers as well. Even
tractors are in good position during this season. This in return increases companies’ sales and
margin which results in good stock performances. If this is the case, then automobile sector
gets a booster. However, BSE Auto has recorded negative 7.8% performance till date in 2018.
Companies like Apollo Tyres, Atul Auto, Bajaj Auto, Bharat Forge, Eicher Motors, Exide
Industries, Mahindra CIE, Maruti Suzuki, Minda Corp, Minda Industries, Motherson Sumi,
Schaeffler India Ltd, SKF India and Tata Motors are best pick, as per Antique stock broking.
Fertilizer companies
This sector also highly depends upon rains as their margin and revenue will see rise as demand
would increase. Companies that are engaged in fertilizers are Chambal Fertilizers & Chemicals
Limited, Gujarat Narmada Valley Fertilizers & Chemicals Limited (GNFC), Gujarat State
Fertilizers & Chemicals Limited (GSFC) and Mangalore Chemicals & Fertilizers.
Power
Generally, when there are good monsoon water levels in India rise, which results in greater
generation and usage of electricity for irrigation purposes. Firms that are involved highly in
power sector are NTPC Limited, Tata Power Company Limited, Reliance Power Limited and
Adani Power.
Agrochemical
Pesticides comprise a large group of chemicals that are used in agriculture to control plants and
animals’ infestation. Pesticides, being the last input in agricultural operation, are used for
preventing the destruction of crops from pests like insects, weeds, etc, thereby increasing the
agricultural production.
A STUDY ON MOON PROJECTIONS DONE BY IMD AND SKY MET FOR THE
LAST 10 YEARS
• Normal monsoon - rainfall between 96 per cent and 104 per cent of LPA
• Above normal - rainfall between 104 per cent and 110 per cent of LPA
• Excess monsoon - rainfall more than 110 per cent of LPA
YEARS IMD SKYMET WHETHER ACTUAL
2011 98 - 102
2012 99 95 93
2013 98 103 106
2014 88 102 88
2015 106 102 86
2016 106 105 97
2017 96 95 95
2018 97 100 91
2019 96 93 110
2020 100 - 109
2021 98 103 -
100
80
60
40
20
0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
India is likely to have a normal monsoon this year (assessed at 98 per cent of long-period
average LPA), which is on a trend that aligns with two consecutive years of above normal
monsoon in 2019 and 2020, according to the monsoon long-range forecast issued by India
Meteorological Department (IMD) on Friday.
The five-category probability forecasts for the monsoon rainfall over the country as a whole
suggests maximum probability for monsoon seasonal rainfall to be normal (96-104 per cent of
LPA)
Category Rainfall range Forecast Climatological
(% of LPA) probability (%) probability (%)
Deficient <90 14 16
Below normal 90-96 25 17
Normal 96-104 40 33
Above normal 104-110 16 16
Excess >110 5 17
The India Meteorological Department predicted rains at 96 per cent of the long period
average. Markets have seldom moved in line with rainfall, shows an analysis of past years'
data. For example, above normal rainfall in 2011 (98 per cent of long-period average predicted,
actual was 102 per cent) coincided with a 24.6 per cent calendar year decline in the S&P BSE
Sensex. A shortfall in rains in 2014 (95 per cent predicted, actual was 88 per cent) coincided
with a 29.9 per cent gain in the index.
The correlation between the India Meteorological Department’s April predictions and calendar
year returns on market barometer S&P BSE Sensex is -0.34, suggesting that monsoons have
had limited effect on market returns for a given year. A value of one would indicate perfect
positive correlation, which would mean that the two values move perfectly in sync. A value of
-1 would indicate perfect negative correlation. This would mean that one value increases
whenever the other decreases. A value of zero suggests that the two don’t move together at all.
Private weather forecaster Skymet Weather Services said on April 3 that rains are expected to
be below normal, at 93 per cent of the long period average. The spatial distribution of the
rainfall matters more than the actual amount of rainfall received, according to Abhimanyu
Sofat, Head of Research, IIFL Securities. Too much rain in one part of the country and too little
elsewhere, can be a negative. That said, work on irrigation projects over the last decade have
left the country in a better place to deal with such issues than before, and there is sufficient
buffer stock of essential grains to tide over any issues that may arise, according to him. “India
has adequate amount of food reserves to take care of any challenges that may arise over the
next few months,” he said. While food may not be a problem, there are fears over rainfall’s
impact on economic activity. Much of India is still engaged in agriculture, especially in rural
areas. Sachin Shah, Fund Manager at Emkay Global Financial Services said that quite a few
states are already facing water issues which can have an impact on consumption going forward.
“If monsoons are not good, then it can have a decent amount of impact on rural demand and
on aggregate demand in the economy,” he said. Business Standard examined data over the last
15 years. The India Meteorological Department’s predictions have an error margin of five per
cent. They had predicted that rainfall would be within 97 per cent of the long-term average in
April 2018. The actual rainfall came in at 91 per cent. The S&P BSE Sensex gave returns of
5.91 per cent during the calendar year.
Equally-distributed rain usually gives a fillip to demand for products from rural areas, and
results in an increase in rural citizens' purchasing power. The Indian economy is heavily
dependent on monsoon rain, and a normal and well-distributed monsoon usually results in an
uptick in farmers' income, which leads to an increase in the demand for consumer and
automotive products in the rural market. A good monsoon creates positive reading about the
economy among the investors, including foreign institutional investors and a stronger
economic outlook would lift the sentiments of the investors, mainly companies selling products
in rural areas from the sectors such as FMCG, consumer goods, automobile.
Escorts
Escort will be a direct beneficiary owing to the government’s focused approach to encourage
farm mechanisation and growth in infrastructure segment. The total allocation for Rural,
Agriculture and Allied sectors was Rs 2 lakh core which is 10 percent higher than the previous
budget. Agricultural credit has also increased by 10 percent and fixed at a record level of 11
lakh crore, which is expected to drive demand for tractors. We expect revenue and net profit to
grow at 16 percent and 34 percent CAGR over FY18-20E led by 15 percent volume growth in
tractor segment and new product launches.
Bata India
Bata with its new focus on opening stores in Tier II & III cities is expected to benefit from the
normal monsoon. To accelerate growth, BIL is adding 300-350 stores via franchise route in
next three years and has already identified 435 small cities. We expect revenue to grow at 11
percent CAGR over FY18-20E aided by demand improvement driven by good monsoon along
with store additions, increasing premium mix, and higher advertisement spending. Further,
improving efficiencies & premiumisation will continue to support margins and we estimate 17
percent CAGR in the net profit over FY18-20E. BIL is currently trading at its 3-year Avg of I-
Yr Fwd P/E of 36x.
MONETARY POLICY
Monetary policy refers to the policy of the central bank i.e.; Reserve Bank of India in matters
of interest rates, money supply and availability of credit. It is through the monetary policy, RBI
controls inflation in the country. RBI uses various monetary instruments like REPO rate,
Reverse RERO rate, SLR, CRR etc. to achieve its purpose.
• In short, Monetary policy refers to the use of monetary instruments under the control
of the central bank to regulate magnitudes such as interest rates, money supply and
availability of credit with a view to achieving the ultimate objective of economic policy.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting
monetary policy. This responsibility is explicitly mandated under the Reserve Bank of
India Act, 1934.
• Recently there were many changes in the way Monetary Policy of India is formed –
with the introduction of Monetary Policy Framework (MPF), Monetary Policy
Committee (MPC), and Monetary Policy Process (MPP).
• The primary objective of monetary policy is to maintain price stability while keeping
in mind the objective of growth. Price stability is a necessary precondition for
sustainable growth. To maintain price stability, inflation needs to be controlled. The
government of India sets an inflation target for every five years. RBI has an important
role in the consultation process regarding inflation targeting. The current inflation-
targeting framework in India is flexible in nature.
• Now in India, the policy interest rate required to achieve the inflation target is decided
by the Monetary Policy Committee (MPC). MPC is a six-member committee
constituted by the Central Government (Section 45ZB of the amended RBI Act, 1934).
The MPC is required to meet at least four times a year. The quorum for the meeting of
the MPC is four members. Each member of the MPC has one vote, and in the event of
an equality of votes, the Governor has a second or casting vote. The resolution adopted
by the MPC is published after the conclusion of every meeting of the MPC. Once in
every six months, the Reserve Bank is required to publish a document called
the Monetary Policy Report to explain: (1) the sources of inflation and (2) the forecast
of inflation for 6-18 months ahead.
TYPES OF MONETARY POLICY
Monetary policy
It is the monetary policy which seeks to increase aggregate demand and economic growth in
the economy. It involves increasing the money supply and lowering the interest rates. The
lower interest rate encourages the borrowers to buy more which increases the economic
activity. The increased economic activity leads to more employment opportunities thus
decreasing unemployment. It also increases the inflation as more money is available to buy
goods and services. It is also known as Easy Money Policy or Lose Money Policy as central
banks seeks to increase the money supply by lowering the interest rates.
Contraction monetary policy is the monetary policy which is used to fight the inflation in
economy. It involves decreasing the money supply and increasing the interest rates. As
reduction in money supply increases the interest rates, the borrowers will be reluctant to borrow
the money due to higher borrowing cost which ultimately reduces the economic activity. It
leads to decrease in inflation, increase in unemployment and slowdown in economy. It is also
known as tight money policy as central banks seeks to reduce the money supply by restricting
credit by increasing interest rates.
Unconventional monetary policy is pursued by central banks when their traditional instruments
of monetary policy cease to achieve their goals. The one such unconventional monetary policy
was employed us United States after the financial crisis of 2007 in the form Quantitative Easing
(QE).
The Reserve Bank of India employs various instruments of monetary policy in India to achieve
the objectives of price stability and higher economic growth. Some of the important instrument
or tools of monetary policy in India are:
It is the process of buying and selling of government securities, bond or Treasury Bills (T-
Bills) to regulate the money supply in economy. If government wants to reduce money supply,
it issues these bonds. The money is consumed to buy these bonds thus it reduced the monetary
base of the economy. Similarly, to increase the money supply, the government sells these bonds
thereby increasing the monetary base of the economy. In India, the open market operations are
conducted by Reserve Bank of India through its core banking solution e-Kuber.
It refers to the cash which banks have to maintain with the Reserve Bank of India as percentage
of Net Demand and Time Liabilities (NDTL). An increase in CRR makes it mandatory for
banks to hold large portion of their deposits with the RBI. Therefore, it reduces their deposit
available for credit and they lend less which affect their profitability and also reduces the
money supply in economy.
Apart from CRR, the banks in India are required to maintain liquid assets in the form of gold,
cash and approved securities. The increase/decrease in SLR affects the availability of money
for credit with banks.
Under Liquidity Adjustment Facility (LAF) the banks purchase money from RBI on repurchase
agreements.
• Repo Rate: It is the interest rate at which the Reserve Bank provides overnight liquidity
to banks against the collateral of government and other approved securities under the
liquidity adjustment facility (LAF).
• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs
liquidity, on an overnight basis, from banks against the collateral of eligible government
securities under the LAF.
Under SF, the scheduled commercial banks can borrow additional amount of overnight money
from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a
limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity
shocks to the banking system.
UNEMPLOYEMENT
The unemployment rate in India fell to 7% in September 2020 from the record high of 29%
since the country went into lockdown from March 2020, says the report of CMIE – Centre for
Monitoring Indian Economy. However, it later increased to 9.1% in December 2020. The
unemployment rate again declined to 6.5 per cent in January 2021 from 9.1 per cent in
December 2020, while the employment rate surged to 37.9 per cent as compared to 36.9 per
cent. The lockdown to contain the coronavirus outbreak has forced many industries to shut
down thus increasing unemployment across the country. Some of the factors responsible for
unemployment are:
• Backward Agriculture
• High Population Growth
• Defective Education System
• Exploitation of Resources
• Low means of Self-Employment.
• Rapid Industrialization
• Population control
• Reconstruction of Agriculture
• Encouragement of Small Enterprises
• Rural Development Schemes.
This program included agriculture, forests, fisheries, animal husbandry, cottage industries,
construction of canals, roads, and so on. To provide employment, a sum of INR 312 crores was
also spent in the Seventh plan, which benefited 182 families.
The program was launched on August 15th, 1979, and is called the National Scheme of
Training of Rural Youth for Self-Employment (TRYSEM). Its main objective is to reduce
unemployment among the youth. During the seventh plan, around 11.6 lakh youth given
training, which gave young men financial assistance from banks, which varies from INR 3000
to INR 5000 to start any work.
This started on April 28th, 1989, intending to employ one member of every rural family. The
job is provided for around 50 to 100 days per year at a workplace, which is nearby the place of
residence. 30% of the employment generated is reserved for women.
a) The first scheme provides a subsidy to urban poor so that they can set up micro-
enterprises. Under this program, in the year 1995, 1.25 lakh families were benefitted.
b) The second scheme ensures arrangements for wage-employment to laborers in the cities
with less than 10 lakh population is by the means of providing Indian Economic
Development and Elementary Static facilities.
c) The third scheme provides urban poor with employment opportunities like house
repairing, etc.
The plan, which started on 1st December, is meant for providing employment to unemployed
in urban areas. It aims at providing self or wage employment to unemployed youth of urban
areas. It works upon two plans:
75% of the expenditure is incurred by the Central Government, and the rest is upon state
governments. A sum of INR 125 crore was spent upon this during 1997-98.
This program was launched in 70 districts of 13 states, which were prone to drought. It has
proved fruitful in removing seasonal unemployment, and under the sixth plan, the program
has provided 17 crore and 70 lakh employment days.
The program has been implemented in 1995-96 and aims to provide employment to the poor
in the urban area. It aims to cover 50 lakh urban poor from 345 towns.
It is a nationwide plan for the country to provide good all-weather connectivity of roads to
unconnected villages. This was introduced in the year 2000 and aimed for the following:
➢ To provide roads to all villages with a population of 1000 people and above by
the year 2003
➢ To also provide roads in hill states, desert areas, and tribal areas with a
population of 250 and above.
The main objective is to enhance the livelihood in the rural areas by providing 100 days of
wage employment in a financial year to every household which has adult members to do
unskilled manual work. Employment has to be provided within 5 kilometres of the
applicant’s residence. The minimum wage has to be provided. If the government fails to
provide the employment, it has to pay unemployment allowances as compensation.
The Employment Assurance Scheme (EAS) was launched in the year 1994 in 1752 blocks,
which are backward in the country. Its main objective was to provide 100 days of the unskilled
manual job to the poor in rural areas.
• Among the 10.9 million jobs that were lost, 5 million were in the travel and tourism
sector alone. The worst hit job role was of travel agents and tour guides. It is estimated
that 20 million people work in the travel and tourism industry. The job roles involve
sales, marketing, planning itineraries, customer service and on-ground tour guide
services.
• Small travel agencies started to shut down by May and employees were laid off en
masse. Being a niche sector, it was also difficult for us for look for alternative options
for these workers.
• Close to 3.5 million jobs are estimated to have been lost in these two segments.
• An allied industry is the automobile/transport sector, which saw several drivers of
private transport (buses, taxis) being laid off due to schools being shut and corporate
employees working from home.
• School bus staff lost their jobs and haven’t yet received any financial relief as per the
Bus & Car Operators Confederation of India (BOCI) & School Bus Owners
Association.
• Each awarded unemployment claim can affect three years of UI tax rates. Employers
often don't realize the real cost of a claim since its spread out over a long period. The
average claim can increase an employer's state tax premium $4,000 to $7,000 over the
course of three years.
• The automobile industry has been dented the hardest by the slowdown which is a
culmination of several factors like high GST rates, farm distress, stagnant wages and
liquidity constraints.
• Majority of the students agree that entrepreneurship can help to reduce unemployment
and poverty. Entrepreneurship is our greatest weapon to counteract this issue and to
empower our youth.
• Youth by default are energized and empowered, they are willing to explore new
territories and take up new challenges and risks.
• While working as an entrepreneur, an individual gets to work on multiple things, juggle
different roles and turn them into better leaders and better individuals.
• Put aside the fact that Entrepreneurship brings big money from investors and even
foreign clients, it also has a key role to play in building a character. Entrepreneurs’ open
doors to new ventures, new business, new alliances etc.
• When an investor puts money into a start-up or a venture, the entrepreneur
automatically gets to expand its team to scale the venture and hence providing
employment to more people.
• When battling unemployment, entrepreneurship is a solution, entrepreneur’s open
doors to new ventures, new business, new alliances etc.
• When an investor puts money into a start-up or a venture, the entrepreneur
automatically gets to expand its team to scale the venture and hence providing
employment to more people.
Some of the major sectors that have been affected by the implementation of GST are:
• Export-Import sector
• Automobile sector
• Real estate
• Iron and steel
• Energy sector
• Entertainment industry
• Hotel and tourism
• Education sector
• Banking sector Textile sector
• Manufacturing sector
• Information technology sector
• Before the enforcement of the Goods and Services Tax (GST), Export and Import were
governed by the Service Tax, Value Added Tax, Excise Duty and Customs Duty.
• When Goods and Services Tax (GST) was introduced all these taxes were merged into
one. But the Basic Customs Duty (BCD) continues to work on the import bills.
• When any goods and services are imported then it is the duty of the importer to pay the
Integrated Goods and Service Tax (IGST) and Customs Duty.
• Integrated Goods and Services Tax (IGST) is substituted by all the taxes which were
governing the imports of goods and services before the GST.
• There shall be no imposition of Goods and Services Tax (GST) on the goods and
services which are exported.
• But there is the export of raw materials and input of those goods which are exempted
from the Goods and Services Tax (GST), then the person exporting the raw material
and input are liable to pay the tax.
• Before the implementation of the Goods and Services Tax (GST), there is a requirement
of Value Added Tax (VAT) registration for all the business.
• After the imposition of Goods and Services Tax (GST), there is a requirement of only
one registration and that too with Goods and Service Tax (GST) which is controlled by
the Central, same as service tax.
• It is compulsory on the part of every business to pay the Value Added Tax (VAT) if the
annual turn comes out to be more than five lakhs in some states and in some other states
it is more than 10 lakhs.
• After Goods and Services Tax (GST), businesses are not required to pay the Goods and
Services Tax (GST), this is helpful for all the small or medium businesses, having a
turnover between 5 lakhs to 10 lakhs.
• The imposition of Goods and Services Tax (GST) has some positive impact on the
property and real estate.
• 12% Goods and Services Tax (GST) charges of property value are liable on all under-
construction properties, which does not include the stamp duty and the charges on the
registration.
• Previously this provision was applied in the properties which are prepared or ready.
• Before Goods and Services Tax (GST), buyers were accountable to pay the taxes which
depends upon the property’s construction status and the state in which the property is
located. Buyers were also liable to pay the Value Added Tax (VAT), stamp duty,
service tax, and registration charges when they buy the under-construction property.
• Now the state has the power to levy the stamp duty, Value Added Tax (VAT) and
Registration Charges and all the figures of tax differ from state to state.
Impact on Iron and Steel
• There is a total of 19.5% net tax which is imposed upon the iron and steel before.
• Now utensils like pan, stainless steel cooker and many more are now charged with 12%
of Goods and Services Tax (GST). Tt is charged 7.5% less than the current tax laws.
• There are benefits for all the steel-related companies as there is a 5% low tax rate on all
the large inputs used by them under the (GST).
Rate of Goods and Services Tax (GST) differs for the hotels because of the tariffs.
1. If the tariffs range Rs 1000 and less then there will be no Goods and Services Tax
(GST).
2. If the tariff range between Rs. 1000 to Rs. 2500 then Goods and Services Tax (GST)
will be 12%.
3. If the tariff range between Rs. 2500 to Rs. 7500 then Goods and Services Tax (GST)
will be 18%.
4. If the tariff is more than Rs. 7500 then Goods and Services Tax (GST) will be 28%.
There is 5% of Goods and Services Tax (GST) on the person who operates the tour. But there
is an expectation that as the Goods and Services Tax (GST) had lower the tax rate on the
operators of the tour the price of the tour packages.
• Previously, the tax on all the services relating to the banking was 15%
• After the enforcement of Goods and Services Tax (GST), the tax rate on all the banking
service was increased to 18%.
• Before Goods and Services Tax (GST), all the employees working in the banks are
getting out of their relief mode because there was a concept of “single centralized
registration” for all the branches of banks.
• After the implementation of the Goods and Services Tax (GST), every bank is required
to obtain a separate registration for all the branches within them.
• Before the GST, it was free.
• After the implication of Goods and Services Tax (GST), the money transaction, whether
it was internally or externally, between the two different banks were done by imposing
the tax.
There is some impact on this sector after the implementation of Goods and Services Tax (GST)
which are: -
Some of the benefits which GST provided to the textile sector are: -
After the implementation of Goods and Services Tax (GST), all readymade garments which
range up to Rs. 1000 are exempted from the terms and clause of the Goods and Services Tax
(GST) and where the garments are branded ranging above Rs. 1000 then 12% of tax will be
levied upon them.
GST on mobile phones and specified parts was increased from 12% to 18%. This decision was
taken to avoid difficulties due to the inverted duty structure. All types of matches have been
rationalised to a single GST rate of 12%. Till now, the handmade ones were taxed at 5% and
the rest was taxed at 18%. GST on Maintenance, Repair and Overhaul (MRO) service in respect
to aircraft was reduced from 18% to 5% with full ITC. All these rate changes will come into
effect from 01 April 2020.
8. Other decisions
• Infosys Chairman, Mr Nandan Nilekani to present progress updates about the GST IT
systems at the next three GST Council meetings.
• The time limit for finalisation of the e-Wallet scheme for consumers is extended till
31st March 2021.
• A special GST procedure was prescribed during the CIRP period for the GST registered
corporates who are undergoing insolvency/resolution procedure under IBC Code, 2016.
• A transition plan is laid down till 31st May 2020 for the taxpayers belonging to Dadra
and Nagar Haveli & Daman and Diu, due to the merger in January 2020.
• Refund claims will now be processed in bulk for the benefit of the exporters.
• Present IGST and cess exemptions on the imports made under the AA/EPCG/EOU
schemes will continue up to 31st March 2021.
A STUDY ON TAX SLABS COMING UNDER GST AND THE GOODS THAT FALL
UNDER THESE SLABS
• GST has been structured in a way that essential services and food items are placed in
the lower tax brackets, while luxury services and products have been placed in the
higher tax bracket.
• The GST council has fitted over 1300 goods and 500 services under four tax slabs of
5%, 12%, 18% and 28% under GST. This is aside the tax on gold that is kept at 3%
and rough precious and semi-precious stones that are placed at a special rate of 0.25%
under GST.
• A total of 81% of all the goods and services fall below or in the 18% tax slab. This
means 7 % of the items come under the exempted list, 14% of the items attract a 5%
tax, 17% of the items attract a 12% tax, and 43% of the items attract an 18 % tax slab,
while only 19% of the items fall under the highest slab of 28% in the new regime.
• Below is a list of some of the products that will be a part of the respective slabs:
➢ 7% goods and services fall under this category. Which includes cream,
skimmed milk powder, branded paneer, frozen vegetables, coffee, judicial
papers, printed books, newspapers etc.
➢ 14% goods and services fall under this category. Which includes skimmed
milk powder, branded paneer, frozen vegetables, coffee, tea, fertilizers, rail
and economy class air tickets, small restaurants etc.
➢ 12% GST Rate Slab. Edibles like frozen meat products, butter, cheese, ghee,
dry fruits in packaged form, animal fat, sausages, fruit juices, namkeen,
ketchup & sauces, ayurvedic medicines, all diagnostic kits non-AC
restaurants, business class air ticket, state-run lottery, work contracts and so on
attract a 12% GST. 17% of goods and services fall under this category.
➢ 18% GST Rate Slab. Pasta, biscuits, cornflakes, pastries and cakes, preserved
vegetables, jams, soups, ice cream, mayonnaise, mixed condiments and
seasonings, mineral water. AC restaurants that serve liquor, restaurants in five-
star and luxury hotels, telecom services, IT services, branded garments and
financial services and so on attract an 18% GST.
➢ 28% GST Rate Slab. The rest of edibles like chewing gum, bidi, molasses,
chocolate not containing cocoa, waffles and wafers coated with chocolate, pan
masala, aerated water, personal care items like deodorants, shaving creams,
automobiles, motorcycles, 5-star hotel stays, race club betting, private lottery
and movie tickets above INR 100 etc.
The impact of GST on the banking sector is high and so the functioning of the banks are
affected the most:
• The GST has increased the tax to 18% on services provided by banks and NBFCs.
Earlier, only 15% service tax was levied on services of NBFCs and banks.
• Before the implementation of GST, all the banks and NBFCs maintained their service tax
compliance via a centralised process of registering.
• With GST, banks and NBFCs need to carry out tax registration separately for every
branch they have. Since GST is a destination-based regime, it has formed a multi-stage
system.
• Before GST, banks and NBFCs were able to opt 50% reversal of CENVAT (Central
Value Added Tax) credit that was acquired from input services and inputs. The credit for
CENVAT on capital goods was reversed without applying any conditions.
• The impact of GST on banks is great as they are left with 50% reduced credit on capital
goods and the cost of capital is overall raised.
• Previously, banks and NBFCs had to resort to a particular state regulator, in which that
branch was registered, for assessment of service tax.
• With GST, every branch of banks and NBFCs has to justify its chargeability position in
the respective state and provide a reason for input credit tax usage in different states.
ELECTIONS:
Previous election results and GDP growth rate fluctuations
• The Year 1999 – NDA in Power
In the 1999 election, NDA won, and as the results were within the expectation of the
market, the Sensex rallied about 7% and continued the upward trend for the next three
months. However, within the next two years, it fell around 50% due to domestic and
global factors such as the 9/11 attack. At the end of the NDA government tenure, the
annual compound return was just 3%, and the absolute performance was over 14%.
• The Year 2004 – Congress Back to Power as UPA
After the 2004 election result, the market lost 15% in 2-3 trading session as the results
were not according to the market sentiment. Congress had formed a government while
the market was hoping for an NDA government. But after the initial disappointment,
the market saw the bull rally till late 2007 accompanied by high GDP growth rate and
foreign investment flowing to India. The global financial crisis of 2008 brought an end
to the bull market, but the market started recovering in 2009 by the time India went for
polls.
• The Year 2009 – Congress Continues for a Second Term
In 2009, UPA again came to power. The market gained 17% in a single day, but as the
second tenure of UPA government was filled with scams, the market remained choppy.
For the whole economy, it was a troublesome period. The Sensex had gained 15.5%
during the first three years. However, confidence in the government was low.
• The Year 2014 – NDA Comes in with BJP in Full Majority – Modi Wave
As the NDA came into power again with a full majority in 2014, the market was
euphoric, the volatility reduced to 9.1% from 17.96% and the market rallied to a record
high. The expectation for the economic reform and stable government was the main
reason behind it. In the past four years, the Sensex has grown 40% which is being
termed as slow growth because NDA was in the majority. The global factors such as
high oil price, weakening Rupee are somewhat responsible for this.
Inference
The election impact is short term on the market. The main factors which create an effect are
economic reforms, policies, and stability.
BSE index movements before, after and during the election period
3 months before the market was down about 1.5 % and after that the market was in bull
market in fact during the election month the BSE indices were up by 10%.
The trend in technical terms of 2009 elections is similar to 2014, however we see that after the
elections the market growth (approx. ~9%) was not as substantial as before and during
(approx. 30%) the election month.
2004 Elections saw a very subdued market until the elections were over. The market was
varying of the election results down about 20% during the election month and only picked up
after a month. But there is a consistent growth after the elections and reaching close to approx.
~20% after 6 months.
The markets were booming before the elections reaching close to 40%. However, during and
after the elections the markets saw a brief growth and then falling close to 20% in 6 months’
time.
Inference
As we analyse the trends over years, we observe that the markets usually go up after the
elections.
The markets are usually up before the elections and have a very subdued growth during and
after the election month and then picks up. The ideal strategy will be to start building up the
portfolio ideally 3 months before the election and holding on to it 3 or 6 months post the
elections.
MEGHNA B RAJ
21FMCG60 B4
FINANCE DEPARTMENT