Few points reg. the new Income Tax bill

 How to reduce the litigation in Income tax Assessments under IT Act.

1)As per CBDT Time series released upto FY23-24, Pre-Assessment Tax collected which include TDS, Advance Tax and Self-Assessment Tax paid show almost 88% is collected (IT dept link ).Even out of the balance 12%, a major portion comes out of Central TDS, Dividend Tax,Equalisation levy which are also collected Pre-Assessment.Only a small percentage is collected by way of Post-Assessments and if we look at how much of Post-Assessment Tax lies in Appeals at CIT(A), ITAT, High Courts and Supreme Court,then we can get a fair idea of usefulness of Assessment process and procedure.

2)Since CIT(A) is the first Appeal level and there is a huge backlog of Appeals lying before CIT(A)s, we may even consider this Quasi Judicial Authority to be assisted by AI for speedy disposal of Appeals without prejudice to any significant fall in Tax collections since most of the Direct Tax(i.e 88% approx) is collected through TDS, Advance Tax and Self Assessment Tax as per CBDT Time series data upto FY23-24.

3)Even if CIT(A) position is combined with ITAT and segregated based on the amount of Tax under litigation, it may speed up the process.

4)Since Govt is the biggest litigant, Govt may look at dropping litigation if they lose in both ITAT &CIT(A) without going upto High Court and if they lose in ITAT and High Court not to take it before Supreme Court unless the Tax amount or the underlying legal point has pan-India implication.

Thoughts on the recent Union Budget and aftermath

 My first thoughts on the Union Budget are positive:-

1)The Fiscal deficit glide path adhered to is good for the economy interms of containing inflationary pressures and also give macro economic stability in the medium terms which will reassure all the Global Ratings Agencies for a possible Sovereign Ratings upgrade.This will moderate Interest rate which is positive for Private Capex investments to pickup.

2)The medium term reduction plan of Debt to GDP bringing it down to close to 50% by 2030 shifts focus from Fiscal deficit reduction to Debt to GDP in a significant manner

3)Certainly Acche Dhin AAA(Triple A) Gaya for Indian middleclass- despite Dil Maange More , one should admit honestly that in one stroke FM Nirmala Sitaraman has both made life easy and also made filing ITR easy for them. 

Inflation itself is a form of Taxation on the poor and for the middle class for whom Marginal Utility of Money is high, even one Rupee relief by way of Tax reduction will boost their spending propensity. Simple theory which puts more money in the hands of women belonging to Middle class will mean additional disposable income for Consumption to increase.

4) Allocation for Capex for Infra is more than 3.1% of GDP even without considering Grants in Aid for Capex in the States and Capex of CPSUs;

5)Allocation for  Agriculture under The Prime Minister Dhan-Dhaanya Krishi Yojana in 100 Districts benefiting 1.7 cr farmers is an unique scheme for improving the income levels of farmers.But bringing big Farmers by taxing Agricultural Income exceeding Rs.25 lacs p.a is yet to be implemented.

Other Highlights:-

Tax reforms

• New income tax slabs to increase take-home pay for salaried individuals and pensioners 
• Rationalization of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) to simplify the tax process
• Review of the rate structure for customs duties to reduce disputes and ease trade 
• Exemption of three more cancer medicines from custom duties

Infrastructure 

• Development of geospatial infrastructure and data
• Modernization of land records, urban planning, and design of infrastructure projects
• Set up of a National Digital Repository of Indian knowledge systems

Climate Action

• Significant funds allocated for renewable energy infrastructure, including solar, wind, and green hydrogen projects
Commitment to net-zero emissions by 2070
Concrete steps laid out to reduce carbon intensity in key industries like manufacturing, transportation, and power generation

Others

Creation of a “Makhana Board" in Bihar to improve the production, processing, value addition, and marketing of Makhana 
Ten thousand fellowships for technological research in IITs and IISc 
Documentation and conservation of manuscript heritage 

Outlook for H2 FY24-25 GDP

 

Domestic Developments

Recent movements in high-frequency indicators suggest a recovery in H2:2024-25 from the slowdown experienced in H1. Supply chain pressures remained below historical average levels, despite a marginal uptick in December. Based on the economic activity index (EAI), the seasonally adjusted GDP growth nowcast for Q3:2024-25 is placed at 6.2 per cent.

Aggregate Demand

The first advance estimates (FAE) of national income released on January 7, 2025, placed real GDP growth for 2024-25 at 6.4 per cent, compared with 8.2 per cent a year ago. While private and government consumption expenditure increased, and net exports contributed positively, investment growth moderated. In fact, gross fixed capital formation (GFCF) slowed to 6.4 per cent in 2024-25 from 9.0 per cent growth in 2023-24. A decisive factor in this investment slowdown was lower capital expenditure by both the Union and State Governments. On the external front, India's exports grew by 5.9 per cent in 2024-25, primarily due to steady growth in services exports. Imports contracted by 1.3 per cent, and enabled net exports to contribute positively to GDP growth by 1.7 percentage points.

High-frequency indicators suggest that aggregate demand firmed up in Q3:2024-25. E-way bills rose on a y-o-y basis in volume terms in December, and toll collections recorded strong growth both in volume and value terms. While overall automobile sales declined in December 2024, passenger vehicle sales recorded sound growth. Domestic tractor sales showed robust growth in December. Petroleum consumption expanded by 2.1 per cent (y-o-y) in December, as petrol, aviation turbine fuel (ATF), and diesel recorded strong growth of 10.8 per cent, 8.7 per cent, and 6.0 per cent, respectively.

India's investments in renewable energy are rising faster than other countries. According to the International Energy Agency (IEA), India's annual renewable capacity additions are expected to quadruple from 15 GW in 2023 to 62 GW in 2030. In November 2024, several policy decisions were undertaken at COP29 held in Baku, Azerbaijan, to help countries deliver their climate plans more quickly and cheaply, facilitating faster progress in reducing global emissions this decade.

Inflation

Headline inflation, as measured by y-o-y changes in the all-India consumer price index (CPI), eased to a five-month low of 4.3 in Jan 2025, from 5.2 per cent in December 2024 and 5.5 per cent in November 2024. There is decline of 91 basis points in headline inflation of January, 2025 in comparison to December 2024. It is the lowest year-on-year inflation after August, 2024

Year-on-year inflation rate based on All India Consumer Food Price Index (CFPI) for the month of January 2025 over January, 2024 is 6.02% (Provisional). Corresponding inflation rate for rural and urban are 6.31% and 5.53%, respectively. All India inflation rates for CPI(General) and CFPI over the last 13 months are shown below. A sharp decline of 237 basis point is observed in food inflation in January, 2025 in comparison to December, 2024. The food inflation in January, 2025 is the lowest after August, 2024.Food inflation decelerated to 7.7 per cent in December from 8.2 per cent in November. In terms of sub-groups, a moderation in inflation was observed in respect of cereals, milk, vegetables, pulses, and sugar, whereas inflation in respect of meat and fish, eggs, oils and fats, fruits, prepared meals, and nonalcoholic beverages picked up. Deflation in prices of spices persisted.

Year-on-year Fuel & light inflation rate for the month of January, 2025 is -1.38 %. Corresponding inflation rate for the month of December, 2024 was -1.33%. It is combined inflation rate for both rural and urban sector.Fuel and light deflation narrowed to (-)1.4 per cent in December from (-)1.8 per cent in November on account of a lower rate of deflation in kerosene and LPG prices and a higher rate of inflation in electricity prices. 

In January 2025, India's core inflation rate was 3.74%, which is a decrease from 3.64% in December 2024. This is considered low. Core inflation remained steady at 3.7 per cent in December 2024, the same as in November. Among the sub-groups, inflation moderated in case of housing, transport and communication, and personal care and effects sub-groups; it remained steady in respect of clothing and footwear, household goods and services, health, and education. Inflation in respect of pan, tobacco, and intoxicants, and recreation and amusement, however, registered an increase in inflation.

In terms of regional distribution, rural inflation stood at 5.76 per cent, higher than urban inflation (4.58 per cent) in December 2024. The majority of the states faced inflation less than 6 per cent.

India's GDP growth based on 1st Advance estimate and its implications

 Here's a summary of the press release on the First Advance Estimates of Gross Domestic Product (GDP) for 2024-25 in India, including relevant graphs and tables.

Key Highlights:

• Real GDP Growth: The Indian economy is estimated to grow by 6.4% in FY 2024-25, compared to the provisional estimate of 8.2% in FY 2023-24.
• Nominal GDP Growth: Nominal GDP (GDP at current prices) shows a growth of 9.7% in FY 2024-25, up from 9.6% in FY 2023-24.
• Real GVA Growth: Real Gross Value Added (GVA) is projected to grow by 6.4% in FY 2024-25, compared to 7.2% in FY 2023-24.
• Nominal GVA Growth: Nominal GVA has a growth rate of 9.3% in FY 2024-25, up from 8.5% in FY 2023-24.
• Sectoral Performance:
  • Agriculture: Real GVA growth is estimated at 3.8%, a significant increase from 1.4% in FY 2023-24.
  • Construction: Shows strong growth of 8.6%.
  • Financial, Real Estate & Professional Services: Registered a growth of 7.3%.
• Consumption Expenditure:
• Private Final Consumption Expenditure (PFCE): Grew by 7.3% in FY 2024-25 (4.0% in FY 2023-24).
• Government Final Consumption Expenditure (GFCE): Rebounded to a 4.1% growth rate from 2.5% in the previous financial year.

Below are some of the relevant graphs to be considered for understanding the health of Indian economy:

• The 1st Advance estimate of GDP for FY25 describes a mixed picture of India's economic performance in FY25, showing deceleration in some key areas despite overall growth. Let's summarize the key points and their implications:

  Key Observations and Implications:

  • GDP Growth Slowdown: Real GDP growth has significantly slowed, and nominal GDP growth shows stagnation. This indicates a weakening overall economic expansion.
  • Per Capita Nominal GDP Increase: Despite the slowdown, per capita nominal GDP is projected to rise substantially (almost Rs 35,000 more than FY23). This suggests that even with reduced overall growth, the increase in per capita income is driven by population factors.
  • Agriculture: Positive growth in agriculture is encouraging. A 3.8% increase in FY25 versus 1.4% in FY24 signals continued strength in this vital sector.
  • Industry Slowdown: All sub-segments of the industrial sector are expected to decelerate in FY25. The sharp decline from 9.5% in FY24 to a projected 6.2% in FY25 is a major concern, suggesting potential weakness in manufacturing and mining.
  • Service Sector Slowdown: The service sector, while still growing (7.2%), is also experiencing a deceleration. Reduced growth in "Trade, hotels, transport..." and "Financial..." sectors contributes to this overall decline. Public administration remains a relatively strong performer.
  • Aggregate Demand Weakness: The overall picture points to a weakening aggregate demand. Although government consumption and exports show positive growth, the significant slowdown in gross capital formation and valuables is worrisome. The decline in capital formation is particularly concerning for long-term economic growth. The negative real growth in imports also reflects this deceleration.
  • Private Consumption: While private consumption shows strong real growth (7.3%), exceeding per capita GDP growth, this may be unsustainable. The text suggests that this could be financed by reduced savings, a potentially problematic trend.
  • Credit Market Stress: Stress in the credit market, particularly among NBFCs and in certain banking segments (small ticket advances, credit cards), is a significant concern. The sharp slowdown in credit growth (from 15.4% YTD in the previous year to 7.0% YTD in FY25) directly points toward an impending GDP slowdown. This is further supported by empirical evidence linking credit growth to GDP.

  
  

Courtesy:RBI, SBI Research

Overall Assessment:

The Indian economy in FY25 is displaying a complex scenario. While per capita nominal GDP is expected to grow, this masks a significant deceleration in real GDP growth and concerning trends in various sectors. The weakening aggregate demand, slowdown in capital formation, and stress in the credit market pose significant risks to future economic prospects. The strong performance of private consumption may not be sustainable in the long run, potentially leading to increased debt and decreased savings. Close monitoring of the credit market and investment activity is crucial. The relatively positive performance in agriculture may cushion the impact of the slowdown in other sectors, but continued weakness in industrial and service sectors will likely impact future GDP growth.

First Interest rate cut by RBI in Feb 25 Monetary policy is expected and this may provide some impetus to the industry and individuals in managing their interest costs. This is likely to give a boost to GDP in the coming quarters.

RBI Dec 2024 Monthly Bulletin reveal mixed picture for Indian Economy

 The RBI Bulletin (December 2024) states that high-frequency indicators (HFIs) for October and November 2024 show a mixed picture regarding India's economic activity:

A. October 2024:

• GDP Growth: The economic activity index shows a pick-up in momentum during October, suggesting that the slowdown in Q2 was bottoming out.
• Consumer Confidence: Consumer confidence indicators registered a sequential moderation.Amazon
• Supply Chain Pressures: Supply chain pressures remained below historical averages, showing some further easing.
• Inflation: Headline CPI inflation increased to 6.2 percent, exceeding the upper tolerance band, primarily driven by a sharp rise in food prices, although core inflation also increased.

B. November 2024:

• GDP Growth: Headline CPI inflation moderated to 5.5 percent, driven by easing food prices, suggesting continued economic recovery. Strong festival activity and a sustained upswing in rural demand fueled this recovery.
• Consumer Confidence: Consumer confidence remained above the neutral mark.
• Supply Chain Pressures: Supply chain pressures remained relatively low.
• Inflation: Headline CPI inflation decreased to 5.5 percent, driven by easing food prices and a favorable base effect. Core inflation also showed a modest increase.
• External Sector: Merchandise exports contracted, while imports grew significantly, widening the trade deficit.

I. Global Economic Context:

The global economy demonstrates resilience with moderate growth and decelerating inflation. However, this stability faces significant headwinds:

• Geopolitical Tensions: Conflicts and trade wars pose risks to global growth and price stability. The rise of protectionism could significantly disrupt trade and investment.
• Supply Chain Issues: While supply chains have shown improvement, geopolitical factors continue to introduce volatility. Commodity prices, while generally declining, show fluctuations in energy and food sectors. Food insecurity remains a major concern in low- and middle-income countries.
• Financial Markets: Markets display mixed signals. While stock markets have seen periods of growth, concerns remain regarding inflation, interest rate decisions by central banks, and the potential for recessions. The US dollar's strength impacts other currencies. The search for yield continues to drive investment choices.

II. Indian Economic Performance:

India's economic performance exhibits a mixed picture:

• Growth: GDP growth in Q2 (2024-25) was lower than anticipated, primarily due to a slowdown in private consumption and investment, and weak performance in manufacturing. However, high-frequency indicators suggest a rebound in Q3, driven by robust festive demand, a rise in rural demand and good agricultural prospects.
• Inflation: Headline CPI inflation moderated in November 2024 but remains above the upper tolerance band, primarily driven by food inflation. Core inflation also shows a modest increase. The RBI anticipates a decline in food inflation in Q4, though risks remain due to weather and international commodity prices.
• Aggregate Demand: Private consumption expenditure registered growth in Q2, driven by strong rural demand. Investment, however, remained weak. Net exports contributed positively to growth.
• External Sector: Merchandise exports contracted in November 2024, influenced by both negative momentum and an unfavourable base effect. Imports, however, registered a significant increase. The trade deficit widened substantially, driven by a surge in oil imports, although the share of oil in the total trade deficit decreased. Services exports continued to grow robustly. Foreign direct investment (FDI) inflows decelerated during the period, though they remain significant. Foreign portfolio investments (FPI) were largely negative in the earlier part of the period, though they turned positive in December.
• Financial Sector: System liquidity remained largely in surplus in the second half of November and early December. The Reserve Bank used open market operations to manage liquidity. Interest rates showed upward pressure.

III. Monetary Policy Decisions:

The MPC decided to hold the policy repo rate steady at 6.50 percent. This decision reflects a cautious approach, balancing the need to address inflation while supporting sustainable growth. The CRR reduction aims at injecting additional liquidity into the system.

IV. Other Key Developments:

• Financial Inclusion: Initiatives to enhance access to credit for MSMEs and the agricultural sector, including the expansion of pre-approved credit lines via UPI, and improvements in digital payments.
• Financial Regulation: Measures to strengthen the financial system's resilience and address emerging risks, including enhancing cybersecurity, and implementing a new approach to identifying and addressing stressed assets in the banking system.
• FinTech and AI: Initiatives to leverage the potential of FinTech and Artificial Intelligence (AI), including the development of a framework for responsible AI in the financial sector.

India's Q2 FY-25 GDP growth rate-why muted?

 India's Q2 FY25 GDP figures reveal a significant economic slowdown, falling to 5.4% year-on-year growth—a substantial drop from the projected 6.6%. This underperformance stems from a broad weakening across investment and consumption sectors. Private investment significantly lagged expectations, growing at only 5.4% compared to 7.5% in Q1, despite increased government spending. Consumer spending also weakened, declining to 6% year-on-year growth from 7.4% in Q1, primarily due to sluggish urban demand hampered by wage stagnation and elevated food prices. Export growth decelerated sharply (2.8% YoY from 8.7% in Q1), while imports contracted.

The Gross Value Added (GVA) mirrored this trend, slowing to 5.6% year-on-year. Industrial activity suffered a particularly sharp decline, with mining and manufacturing sectors experiencing contractions. However, the agricultural sector showed some positive growth. While the services sector maintained its growth momentum, high-frequency indicators pointed to persistent weakness in private consumption, especially in urban areas.

Consequently, growth forecasts have been revised downwards. The FY25 growth projection is now anticipated to be significantly lower than the initial 7.2% estimate, possibly around 6.3%, reflecting the weak first half of the fiscal year (6% YoY). While a modest improvement is expected in the second half, the FY26 forecast has also been lowered to 6.6% from the previous estimate of 6.8%. Inflation remains a key concern, with the 6.2% rate creating headwinds for potential monetary policy easing. While measures to improve liquidity may help offset tighter financial conditions, the RBI is likely to prioritize monitoring inflation trends before considering interest rate cuts.

In essence, India's economy faced a steeper-than-expected slowdown in Q2 FY25, primarily driven by weak investment of both Government and the private and the falling urban consumption. Although the agricultural sector displayed strength and government spending increased, the overall economic outlook remains cautious, highlighting the need for potential policy interventions to bolster growth and mitigate the effects of constrained liquidity.

IN the above chart we have tried to look at how GDP Annual Growth rate every quarter , Gross Fixed Capital formation and Consumer spending data have correlated.It shows high combined Consumer spending coupled with high GFC formation has always pushed up GDP growth with a lag effect of one or at the most two quarters.A weak GFC formation + Weak Consumer spending is pulling down GDP growth also with a lag effect.

So, IMHO, to push up Consumer spending, GOI should look at Fiscal push by slashing the Excise on Oil-Petrol & Diesel by atleast Rs10 since Inflation itself is a Tax and RBI should also address it through appropriate Rate and/or Liquidity decisions without any delay.Any undue delay in Rate cut can itself feed into Inflation.

"Maha" elections and its effect on India's politics!

 Maharashtra elections have come and gone.I am not going to slice and dice the election results but only look at larger picture it offers for some one looking at India's politics from a third state-Tamilnadu.

My views are personal and I do subscribe to right-wing ideology.

Ek hai tho Safe hai" is such a powerful message which I was taught in Schools by my Teachers.But if PM of the country says it becomes divisive agenda in the eyes of opposition.

Batenge to Katenge " is another slogan emphasizing that Divide and Rule policy of British Imperialism almost destroyed us and let us not repeat the history knowingly now.Those who dont learn from history are not only condemned to repeat but condemn their progeny and future generations also.

If the above two slogans mean dividing us on religious basis so be it.

When Gandhi ji said that British imposition of separate Muslim constituency would divide India was he not echoing the same sentiment of "Ek hai tho Safe hai".

When he said India should not be divided and partitioned was he not saying "Batenge tho Katenge", if not in the same words.

Rahul Gandhi said 'Bharat Jodo" , it was appreciated by the secular media but when PM Modi says "Ek hai tho Safe hai" they are reading  between the words and line! This is called the attitude of liberal media.

Women folk lured by "Ladki Bahin Yojana" have voted enmasse to Mahayuti. So some electoral pundits are saying that ladies have become the determining factor in electing the ruling parties in Indian elections-Women empowerment! Now all said and that, majority "Maha" women have identified who should rule them for the next 5 years.

People of Maha have clearly voted in favour of Stability with Growth, having understood whom to believe and trust for the next 5 years.

It is as simple as that! No right wing ideology.

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