BofA Securities said it expects GDP growth at 9 per cent in 2021-22 if the vaccine distribution is done in the first half of the new fiscal year but may be just at 6 per cent if the distribution is deferred to the second half (October-March).
For the current financial year, it expects GDP to contract by 6.7 per cent as against the government’s estimate of 7.7 per cent contraction. It can be noted that a slew of policy measures have been taken in the recent past including deep rate cuts, which had to be halted because of a surge in inflation to beyond the upper end of the range set for RBI.
Speaking to reporters a day after official data suggested a sharp cool-down in the consumer price inflation to 4.6 per cent in December after being consistently above 6 per cent, its India economist Indranil Sen Gupta said BofA expects the RBI to cut rates by 50 basis points by June before it starts hiking them again.
He said the pressure on the inflation has been driven more because of supply-side issues and expected the same to ease going forward, explaining that over 1.60 per cent impact on the price rise number is only because of such constraints.
The gap between the headline inflation and wholesale price inflation or the core consumer inflation points to the supply side constraints affecting the overall situation at present, he said.
From a growth perspective, the brokerage said India will be the third biggest economy in the world in the next decade.
Growth will be driven by a demographic dividend which will be driving investment, rising financial maturity and emergence of mass markets, it said.
Gupta pitched for a fiscal stimulus in the budget to address the demand side concerns, and keeping the fiscal deficit at 5 per cent of the GDP for FY22.
Specific measures can include a cut in excise duty on oil products, he said, adding that even though there has been a rally in oil prices lately, the commodity will stabilize eventually.
Other measures which the budget can look at will be a recapitalization of the state-owned banks who can in turn use the capital for lending to productive purposes in the economy and also issuance of Rs 1 lakh crore of PSU infrastructure bonds, he said.
Gupta said from an external perspective, India is at its most comfortable level for over a decade because of the accretion of forex reserves which can now last for over ten months of imports.
The rupee will not depreciate as much as it did during three episodes in the last decade, forcing policymakers to throw everything they can to arrest the fall, he said, adding that the currency manipulator tag will also go off once the volatilities in rupee are taken care of.
India's economy shows signs of recovery as coronavirus cases decline
The needle on a dial measuring overall economic activity was unchanged at 5 last month, indicating the economy was coasting along in the fast lane.
Although seven of the eight high-frequency indicators tracked by Bloomberg News held steady and one deteriorated, the gauge uses the three-month weighted average to smooth out volatility in the single-month readings.
With new infections dipping sharply over the last few months and a nationwide vaccine roll-out put in place this month, consumer confidence and demand look set to grow further. The recovery might get a boost from fresh stimulus in the upcoming budget, which Finance Minister Nirmala Sitharaman will present Feb. 1, one of the most high-profile and highly anticipated events on the government’s calendar.
Activity in India’s dominant services sector expanded for a third straight month in December, although at a slower pace. The Markit India Services Purchasing Managers’ Index came in at 52.3 in December from 53.7 a month earlier, with a reading above 50 indicating expansion. Hiring activity, however, suffered due to liquidity concerns and labor shortages, among other issues.
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Manufacturing activity continued to strengthen in December, with businesses stepping up production amid efforts to rebuild inventories. The seasonally adjusted manufacturing Purchasing Managers’ Index was at 56.4, a tick higher than November’s 56.3.
Input price pressures were witnessed broadly across both sectors, a factor that is likely to prevent headline inflation from easing sharply in the coming months.
Exports regained some ground last month backed by healthy performance of sectors such as iron ore, electronic goods, drugs and pharmaceuticals.
“While intermittent hiccups may persist, we are hopeful that the performance of exports will strengthen in the coming months, as the Covid-19 vaccine roll-out gathers speed in the major trading partners,” said Aditi Nayar, principal economist at ICRA Ltd, in New Delhi.
With activity in the economy normalizing, imports also picked up last month and the trade gap expanded.
Passenger vehicle sales, a key indicator of demand, rose nearly 14% in December from a year ago, with two-wheeler sales witnessing robust growth. The Reserve Bank of India said in its latest monthly bulletin that the employment situation would brighten in the coming months and that could give a boost to consumer confidence, setting the economy up for a V-shaped recovery.
Demand for loans picked up from lows seen in October. Central bank data showed credit grew at more than 6% as of end-December from a year earlier — higher than the 5.1% growth seen in the second half of October. Liquidity conditions were tighter amid advance tax outflows last month.
Industrial production shrank 1.9% in November from a year earlier. Production of capital goods declined 7.1%, although infrastructure and construction goods showed a slight expansion of 0.7% from a year ago.
Output at infrastructure industries contracted 2.6% in November from a year ago. The sector, which makes up 40% of the industrial production index, had contracted by a record 37.9% in April. Both data are published with a one-month lag.
Budget 2021: Why finance minister should not bring in any new tax
Say, introduce a temporary Covid-19 cess at the highest income-tax slab, or maybe reintroduce the wealth tax? Or, should she focus on maintaining tax stability while stepping up expenditure for economic revival?
To understand how both scenarios could play out, let’s first look at what impact moderate tax rates have on the tax-GDP ratio and how this compares with a high-tax regime.
Union Budget 2021-22: Complete coverage
EY’s analysis of the historical tax rates in India shows that we have come a long way in achieving the objective of a rational and moderate tax rate regime. For instance, in 1971, the personal tax system had as many as 12 tax brackets, with tax rates ranging from zero to 85%. With surcharge, the highest tax rate worked out to a staggering 93.5%.
The effective burden of personal taxes was reduced in successive years as governments recognised that moderate rates, a wider base and higher compliance made for a better tax policy as opposed to high rates. In 1992-93, the tax rates were considerably simplified: only four tax brackets, with the peak rate at 40%. The 1997-98 ‘Dream Budget’ — presented by P Chidamabaram — cut the peak personal income-tax rate from 40% to 30% and the corporate income-tax rates from 40% to 35% for domestic firms. This announcement set the new peak tax rate for personal income-tax which continues until today, although with additional surcharges the highest tax burden is now 42.7%.
The immediate impact of the Dream Budget was a sharp fall in the tax-GDP ratio. But, soon after, moderate rates led to better compliance. The government also took measures to broaden the tax base. So, eventually, the tax-GDP ratio got much better.
Consider the numbers. After the 1997-98 Budget, personal tax collections fell by 6%. However, in the next five years (FY1999 to FY2003), the average personal tax-GDP ratio jumped to 1.4% as against 1.2% in the previous five years (FY1993 to FY1997). A similar effect was observed in the corporate tax collections too, where the average CIT-GDP ratio increased from 1.4% in the previous five years (FY1993 to FY1997) to 1.6% in the next five years (FY1999 to FY2003). This sustained increase in the tax-GDP ratio was achieved despite India facing global economic headwinds and a three-year growth slowdown between FY2000 and FY2002.
The data suggests that stability and a gradual moderation of tax rates resulted in a positive behavioural response with better compliance, leading to an increase in the direct taxes-to-GDP ratio in the long run.
Compared to other developing countries, India’s peak individual effective tax rate is still on the higher side:
India’s peak effective tax rate (after including surcharge and cess) hovered between 30% and 35.9% till last year. The hike in surcharge rate by the Finance Act, 2020 catapulted the peak rate to the present level.
The Prime Minister has launched the initiative of ‘Honouring the Honest’. In keeping with this spirit, in times of crisis, the focus may need to be on stability, encouraging compliance, broadening the tax base and boosting consumption to improve tax collections. To this effect, certain measures have already been announced and it is expected that Budget 2021 will be constructed around these themes. In the circumstances, any additional burden on existing taxpayers or any new taxes like wealth tax/estate duty, which were discontinued earlier for reasons of high administrative costs and low revenue yield, may not be in sync. The mantra for the FM in Budget 2021 should be ‘No New Tax’.
– By Anish Thacker & Shalini Mathur
(Thacker is tax partner, and Mathur, director, tax & economic policy, EY India. The views expressed are personal)
Our unity is driving growth, says Infosys CEO Salil Parekh
You took over three years ago during a turbulent phase at Infosys. Today Infosys is the fastest growing among the large IT services companies. How did you accomplish this turnaround?
It’s multiple things. Our focus on clients, employee reskilling, the One Infosys concept. Large enterprises globally are strongly driving digital and cloud transformations. And we have built tremendous capability in that area over the last few years. That’s giving us a nice runway for growth. For employees, we put in place a huge reskilling programme some years ago. So many have now been reskilled to support this digital and cloud approach. We have also put in place a comprehensive change of every element within Infosys.
Everything that employees touch and feel, every way that we interact, our internal architecture, infrastructure, is based on digital. So anyone who interacts with us, sees a digital Infosys. And then there are some things that are a little softer. A colleague of mine was sharing this with me last week that Infosys is working as one team. All of us are united in focusing on clients, in focusing on employees. And the power of that is phenomenal. Finally, there’s tremendous support coming from our chairman Nandan (Nilekani), and the entire board. That makes a huge difference.
You’ve revved up the large deals’ portfolio. Mohit Joshi (president) was instrumental in the Vanguard deal, Jasmeet Singh (EVP and global head of manufacturing) in Daimler. Did you structurally change things that enabled you to win these bigger deals, become more aggressive?
These building blocks I just described have come together. What tends to happen is, when a large global enterprise is going through a transformation, someone like a Daimler or Vanguard, we are working with them, giving them ideas and bringing together the teams. Our intense focus on clients and capability-building to ensure that clients don’t just see it as words, but it’s backed up by action, whether it’s the work we have done or with the employees and their skills, that is what is allowing this to happen. The One Infosys approach where when a client transformation idea or opportunity is identified, everyone in the company is rallying to support how to make that possible given our skill sets and capabilities. In that sense, the structure of the company is the same. We haven’t had a reorganisation. It’s really the focus on people working together, that’s one of the main drivers.
Nandan Nilekani and you are seen to be working together as a great team, going after large deals, building a disciplined strategy around it. Nilekani is said to be meeting chairmen of the boards of prospective customers.
Nandan’s vision as to how the industry works or shapes the technology ideas are remarkable. Being a cofounder with a great value both within the company and to the outside world, that support and guidance makes a huge difference.
Do you think (US president Joe) Biden will give you some breathing space?
The approach we have taken is to drive localisation, where we build digital skill sets and recruit in the US, Europe and Australia. That has helped us build a business model which is more resilient for the future. And of course, with the new administration, whichever policy and direction they take, we will support them.
What’s the trend in client IT budgets, are they growing?
There’s a huge focus on automation and cost efficiency. It was happening pre-Covid, it got a little accelerated during Covid. The second trend is investing in digital and cloud transformation. This latter is not just for process improvement or cost saving, but for them to increase their connect with the end customer, with their own employees, and improve their supply chains with their partners. So IT has become a business driver, not just a cost budget. This is part of the reason why our digital business grew 30%, and digital is now 50% of our business. So imagine, half our company is growing by 30% because of this investment approach that clients are taking.
Infosys is said to have an internal blueprint with a 25/25 goal – to achieve $25 billion in revenue by 2025.
I have no such number to share with you. Genuinely, our focus is much more on things that are relevant to our clients, helping them navigate the next. The numbers will follow. As we have seen in the past three years, our focus was doing what’s relevant to the clients and fortunately the growth has come and margins have, and the company is doing well.
How do you see margins going forward? In large deals, you seem to have taken a forward call on margins – accepting lower margins initially, but hoping to improve it later through efficiencies.
In the last few quarters, we have had very strong margin performance. In the last quarter, it was 25.4% and in the results discussion, we have shared that some travel and some spending which had been cutback will start to come back over the next few quarters. We have also had a salary increase that came into effect on January 1. Equally, there are several strategic levers we had identified – such as reducing the usage of subcontractors – that would help us be more efficient. Our ambition for margins continue to remain high.
The digital disruption has accelerated the collective ability to create the next new normal. What will the next unfold?
For Infosys, my objective is to continue to remain relevant to our clients and be their journey of digital and cloud transformation. That area has a huge opportunity for the future. What we are seeing in cloud and data analytics and cybersecurity is, there is a huge amount of work that our clients are looking for. What that will translate to if you remain true to that focus will be good growth, good careers for employees and a good future for Infosys.
What is the contribution of Infosys’s subsidiaries? While BPM has done well, the products business hasn’t taken off as expected. Will you take a hard call on some of the businesses that aren’t performing well?
Many of those businesses are doing very well. BPM has done well and it’s the leading BPM business in the industry today in the way it has driven growth and also the way it has integrated with all of the work we do on technology. If you look at the other businesses, Finacle is a leading player in terms of core banking solutions, and it has seen phenomenal growth and a very good profile in terms of its margins. And we are transforming Finacle to be cloud-first and digital, and we are working with digital-only banks. Like these, many of the businesses working within the Infosys family are transforming themselves to be ready for the new world and they are at different stages in their transformation journey.
How are you benefitting from the growth of hyperscalers?
There the focus has been Infosys Cobalt, which is really all the work that we do in the cloud. It has about 200 industry templates and has 14,000 cloud assets that any client who is leveraging the cloud can use to grow faster and to reduce their risks on how they leverage the cloud. We have built capabilities in the private cloud and that’s become a value to others where they build a hybrid solution between a public cloud and private cloud.
You said Infosys internally is now a lot more digital. Can you give some examples of what you have done?
Everything within the company is agile. We have a variety of apps for services that employees use. The way we do sharing across the entire company is in a new distributed infrastructure that we have built. We are reimagining everything that works internally.
How will the delivery structure evolve with UB Pravin Rao retiring this year?
It’s still one year away. One of the core strengths of Infosys is delivery. This is something that Infosys has built over so many years that the large enterprises have a tremendous trust in Infosys. Delivery is core to Infosys and it starts from the training and paying attention to everyone involved in the loop. It’s also got to do with a stable structure that is not changing every day. There is a tremendous amount of capability in experiential knowledge, tools, templates and methodologies that exist within the company. We are the best in the industry in delivery and that’s very difficult for anyone to replicate.
Is the hybrid work model the new reality?
Our clients have appreciated our ability to deliver exceptionally while working remotely. That’s a paradigm shift in the way we think about how work will be delivered and that gives us the confidence for a hybrid model. What we are very clear about is there is a need to build social capital and do some work which is more joined up – in-person and being in a colocation environment. We feel social capital is going to be important as we come out of Covid. When all of this is behind us, we have to rebuild social capital and come to a natural balance and then we will find what the true percentage is.
Apple has linked executive bonus to ESG (environmental, social and governance) goals. Infosys has turned carbon neutral. Do you think you will tweak bonus payouts to link it to ESG goals?
We have rolled out a comprehensive ESG approach for 2030. We are extremely delighted that we have become carbon neutral last year which is several years ahead of global guidelines. ESG is one part of what senior executives will look at among many other things and it will certainly be one part of how we look at the future of the company.