Tax to GDP ratio, redux

Suncapital: In a recent column in this newspaper (“India is an outlier in its tax policy”, 23 February), my IDFC Institute colleague, Praveen Chakravarty, and I peered into the Pandora’s box of public finance in India, arguing that India’s tax to gross domestic product ratio (GDP) is low by any relevant empirical benchmark. That particular trunk was prised open by French economist Thomas Piketty on a recent whirlwind tour of India. Readers will recall that it is he who has argued both that taxes are too low as a share of GDP, and that this contributes to a worsening inequality problem in India.

Now, the Economic Survey 2015-16 has a chapter devoted largely to tax to GDP ratio—for the first time so far as I am aware. Arvind Subramanian, chief economic adviser and architect of the survey, deserves enormous credit for turning what to many might have been an arcane technical issue into a live public policy debate.

The headline finding in chapter 7 of the survey is that, when controlling for GDP per capita, India is not, in fact, a negative outlier, as Chakravarty and I had claimed. Who is right?

Start with a simple statistical argument: an outlier is always relative to a given data set. So while, as we ourselves documented, the data clearly show that India’s tax to GDP ratio is low compared not just to the Organisation for Economic Co-operation and Development but also emerging economies—see table 1 in chapter 7—the report then goes on to argue that this vanishes when controlling for the level of per capita GDP, as presented in figure 2.

However, the report itself then establishes—see figure 3 and table 2—that when democracy is added as an additional control, India re-emerges as a negative outlier in total tax to GDP ratio, as also total government expenditure and especially health and education expenditure as shares of GDP.

Further, I would conjecture that, were an additional control added for resource-rich economies whose public finance is markedly different from other major economies, the survey’s finding would be enhanced further, and India would be even more of a negative outlier in its tax to GDP ratio. Preliminary results by Chakravarty reinforce this conjecture.

One other claim in the chapter needs to be probed further. In section 7.13, it is asserted: “India’s tax to GDP ratio has increased by about 10 percentage points over the past six decades from about 6% in 1950-51 to 16.6% in 2013-14.”

While this is true, it is incomplete and perhaps misleading. As Chakravarty and I documented, this increase occurred almost entirely in the first three decades, whereas the tax to GDP ratio has remained largely flat in the 16-17% range since 1991, the year that launched economic reforms. Further, our analysis demonstrated that there is, in statistical jargon, a structural break in 1991, as even eyeballing the data suggests.

This poses an enormous public policy puzzle, and indeed it contradicts the survey’s claim that tax to GDP ratio tends to rise with per capita income. For, in India’s case, tax to GDP ratio rose during a period when growth of GDP per capita was fitful and slow, whereas, when GDP per capita took off after 1991, tax to GDP ratio did not keep pace!

The bottom line of the empirical research is that, depending on how you slice and dice the data, you can find that India’s tax to GDP ratio is a negative outlier, as Chakravarty and I argue, or that it is not, as the Economic Survey argues. This invites the question, is there any theoretical basis to assert that tax to GDP ratio should rise with per capita income?

As it happens, the survey chapter does not provide a persuasive theoretical counterpart to its empirical findings. There is some suggestion that the state’s legitimacy and taxing capacity may rise with per capita GDP, thereby allowing tax to GDP ratio to increase. But this argument is not rigorously articulated. Nor does it allow for the possibility of reverse causation, such that a rising tax (and government spending) to GDP ratio allows GDP per capita to rise more rapidly, which could confound any causal claims based on the survey’s empirical results.

My own hunch is that, as a baseline, the tax to GDP ratio is likely to remain approximately constant as GDP per capita rises, at least for mature economies, however one defines these. (For the wonkish: this would follow if the income elasticity of government spending is approximately unity, and if government spending is financed, on average, only by current taxes, so that, on average, the government is running a balanced budget.) What this implies is that, once society has decided how much it wants to spend—which fixes the ratio of government spending to GDP—the tax to GDP ratio will be pinned down, and thereafter tax and government spending will rise roughly in proportion to GDP, so that the ratios will remain approximately constant.

In simpler language, in the long run, Indian governments will choose to tax more, if they wish to spend more. That appetite seems lacking at present. There’s the rub.

By Suncapital.co.in

Budget 2016: Startups not excited, expected more from government

Suncapital: The startup world reacted with muted enthusiasm to the budget, showering mild praise on proposals, which were anyway anticipated, and urging the government to do more to remove burdensome tax rules. 

Finance minister Arun Jaitley kept the prime minister's word on tax breaks on profits made by startups, and followed through on another promise by proposing to amend the Companies Law to make it easier to start a business. 

These moves, however, were anticipated and most movers and shakers in the startup community were not overly excited by what they saw.

"PM Modi set very high expectations for startups in his January speech," said Ravi Gururaj, the chairman of software industry group Nasscom's product council, referring to Modi's address at the Startup India event organised by the government in New Delhi. "The budget today is lukewarm at best for startups." 

In addition to allowing 100% profit deductions in three out of the first five years for startups set up between April 1, 2016 and March 2019, Jaitley said investors in unlisted companies will be eligible for longterm capital gains treatment in two years instead of three.

Venture capital investors were asking to be treated on par with the public market investors for whom the time limit is one year. 

Vijay Shekhar Sharma, the founder of mobile marketplace Paytm, said that while reducing the time-frame for capital gains to two years is positive, it would not have any major impact because few investors exit in two years.
Moreover, since startups normally don't make profits in the first few years, tax breaks on profits are not very useful, either.

"Startups will still be liable for MAT (Minimum Alternate Tax), so the effective benefit is not likely to be very significant," he said. 

The NDA government — and particularly Prime Minister Modi —has been eager to project a startup-friendly image, engaging closely with founders and even coming up with its 'Startup India Stand Up India' programme to promote entrepreneurship. The government's initiatives have been generally wellreceived, but this budget seems to have fallen somewhat short of high expectations. 

On Monday, Jaitley also announced that the cabinet has approved the 'Stand Up India' scheme and allocated Rs 500 crore for Dalit and women entrepreneurs. 

iSPIRT said that the proposals to make it easier to start up, capital gains relaxation and the plan to tax income from patents at 10% were all good moves.

But confusion between "goods" and "services" for online downloads has not been cleared and foreign entities continue to sell to consumers without paying any tax here.
"The budget is semi-sweet with specific sops in continuation of earlier policy announcements made by PM," it said. 

Bhavish Aggarwal, the cofounder of Ola, said he is pleased with what he sees in the budget.

"Creating inroads for entrepreneurship in the public transportation space and amendments in the Motor Vehicles Act to allow innovations will provide a strong impetus towards enabling mobility for citizens," he said. (With inputs from Biswarup Gooptu and Madhav Chanchani)

Sun Capital Advisory Service

How Startups Reacted to the Union Budget 2016

Suncapital: The much awaited Union Budget 2016-17 has finally been unveiled today. In his presentation, Finance Minister Arun Jaitley announced a 100% tax deduction programme for 3 years over a period of five years for startups approved before FY2019 under the Startup India scheme.

Moreover, to ensure that only deserving enterprises get to reap the benefits of the “Start Up Action Plan”, the government has strictly defined the term ‘Startup’ as “a company which would have equity funding of at least 20% by incubation, angel or private equity fund, an accelerator or angel network registered with SEBI endorsing the innovative nature of the business.”

Jaitley in his presentation, expatiated on a series of policy initiatives and schemes that aim at eliminating the common challenges startups come across, and ensure that MSMEs in the country get a fillip. Few of the key highlights are:

1. No tax on income from Startups. 100% deduction on profits for startups for 3 out of first 5 years; MAT to apply.

2. Shortening of the holding period of from three to two years to get benefits of long term Capital Gain regime in case of unlisted companies.

3.Registration of a company will take no longer than just a day under the Government’s 1 Day Incorporation Policy.

4.The corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding Rs. 5 crore (in the financial year ending March 2015) is proposed to be lowered to 29 % plus surcharge and cess. The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

Here’s how the Ecosystem Reacted to the Announcements:

NASSCOM welcomed the Union Budget 2016, while terming it as a mixed bag for the sector. The budget reiterates the 7.6% GDP growth rate for the country and provides a slew of incentives for the rural, agricultural sector to enable inclusive growth. Mohan Reddy, Chairman, NASSCOM said, “Our wish list for Budget 2016 included three key priorities – policy bottlenecks including ease of business; nurturing start-ups, products and eCommerce sector; and clarifications on transfer pricing to enable inward investments in India. Budget 2016 only partially covers these priorities. Extension of Section 10AA for SEZ units till 2020 is a positive outcome though the imposition of MAT on startups will not allow the full impact of the benefits to be realized.”

Expressing his happiness on Aadhar and IndiaStack, Vijay Shekhar Sharma, Founder and CEO, Paytmmaintained, “Finally, the government has provided legislative backing that will unleash the full potential of such an incredible platform. With the focus on digital payments and incentives to startups, the Finance Minister has boosted our Prime Minister’s Digital India and Startup India plans. Overall, the budget creates a strong foundation for sustainable growth in rural & urban India. Steps to further improve Ease Of Doing Business will drive entrepreneurship which is essential for job creation.”

Putting forth his opinion on the matter, Ajay Jalan, Founder & Managing Partner, Next Orbit Ventures said, “We welcome the initiatives taken by The Finance Minister Mr. Arun Jaitley, however we were looking forward for government support in creating a positive environment pertaining to venture capital (VC) and private equity (PE) funds in India, and bringing it at par with the global standards. We were expecting regulators should help unlock domestic capital pools by encouraging institutions regulated by them to invest in VC/PE asset classes. Pensions & provident funds should have been encouraged and investment limits for banks & insurance companies in VC/PE Funds could have been increased from 10% to 25%.

Here’s what Siddhartha Roy, CEO of Hungama.com opines- “The Union Budget 2016 has stepped in the direction to pave the way for rural digitization with a focus on digital literacy. The aim to connect 6 crore households will provide a stronger reach and deeper penetration for digital and technology driven services in rural India thus allowing residents a plethora of services. The digital literacy scheme announced by Mr. Arun Jaitley in rural India will not only give rise to increased manpower but also boost employment generation. The budget is an indication of the government’s resolve towards the Digital India scheme.”

Similarly, Manish Dashputre , Co-Founder, Medidaili, maintained, “We welcome the 100% tax deduction for start ups for 3 years as announced by the government today. However, tax exemption alone will not help spurt the government’s ambition of boosting the start up environment in India on a large scale. Exemption from indirect taxes including MAT would have greatly reduced the compliance burden. Even though the budget has announced several favourable measures, a clear framework to translate policy actions needs to be put in place to foster the start up ecosystem.”

Talking on the same line, Sumit Chhazed, Co-Founder, CredR  stated, “The Union Budget 2016 did not have much to look out for the start-up community, as we were hopeful to see some on-ground initiatives from the government to further ease regulatory clearances policies. Prime Minister’s declaration of 100% tax deductions for new startups for first 3 years is definitely an optimistic move towards nurturing entrepreneurship and facilitating ease of doing business. Government’s effort to provide skill development and training to youth along with implementation of digital literacy will help further providing a boost to the start-up ecosystem. We are hopeful to see more immediate action from the government in fostering a conducive environment for the entrepreneur community.”

Likewise, Pramod Saxena, Chairman and MD, Oxygen Services is of the opinion that  the general direction of the budget as it lays emphasis on development of the rural sector, digitization and reforms in banking is right.  He said, “The digital literacy mission that has been announced which will target 6 crore households with financial literacy, with this the digital connect and payments connect will play an important role. Also, statutory status to Aadhaar will play a very big role in promoting digital payments, social benefit transfers and allowing several services beyond banking & insurance to be also be brought into its fold, whether it is government subsidies or government payments it will open a way for more government payments and subsidies to flow into the financial inclusion program.”

Last but not the least, expressing his thoughts on the subject, Manish Kumar, Co-founder & CEO GREX said, “We believe the Union Budget 2016-17 is well aligned with Prime Minister’s ‘Make in India’ and ‘Startup India’ campaign. The budget focuses clearly on growth, development, job creation and creating a better environment for doing business in India. Besides a particular focus on startups by giving them exemption on their profits for the first three years is a welcome move. The relaxation in capital gain tax for investment in Funds of Funds and reducing the time frame to two years from three for availing long term capital gain tax benefit in the unlisted space will further boost the investment in startups.” Adding further, he stated, “Keeping the ‘Digital India’ momentum rolling during the budget, introduction of electronic auction platform for the private placement market in corporate bonds is a welcome move.”

The Union Budget 2016 has been well accepted by the ecosystem, overall.  However, there is a certain uneasiness that the industry has expressed on the imposition indirect taxes including MAT. Moreover, the effective implementation of the policies that have been announced by the government, is also something that needs to be waited and watched. Nevertheless, the startup community in general, looks quite happy with the government’s emphasis on narrowing down the digital gulf in the country; a move that would definitely help budding enterprises grow faster and expand their footprint across geographies.

Sun Capital Advisory Services

Budget 2016: Jaitley walks a tightrope to fund infrastructure

Suncapital: Budget 2016: Jaitley walks a tightrope to fund infrastructure.

Finance minister Arun Jaitley’s third Union budget had a theme—Transform India. And while reading out the budget speech, Jaitley termed infrastructure and investment as the fifth support pillar of the theme championed by the National Democratic Alliance (NDA) government.

Given that infrastructure forms the backbone of the government’s flagship programmes such as Make in India, the budget announced a higher public spending to support infrastructure development.

The total outlay for infrastructure announced in the budget for 2016-17 is Rs2.21 trillion compared with Rs1.80 trillion in revised estimates for 2015-16. With NDAs focus on improving the country's transportation architecture, Rs2.18 trillion has been earmarked for roads and railways for the financial year 2016-17.

With tepid private investment due to a slowdown in emerging and developed markets coupled with weak domestic earnings by companies, public spending was required to keep the momentum going. However, the dilemma faced by the government was how to balance the spending and stick to the fiscal deficit targets of 3.5% of the gross domestic product (GDP) for 2015-16 and 3.9% for 2016-17.


The government decided to stick to the targets while creating space for infrastructure spending.

“We wish to enhance expenditure in the farm and rural sector, the social sector, the infrastructure sector and provide for recapitalization of the banks. This will address those sectors which need immediate attention,” Jaitley announced while laying the roadmap for the third year of Prime Minister Narendra Modi led government.

The Union budget proposed a capital expenditure of Rs1.21 trillion for the railways. This will support the national carrier which has mostly relied on monetising its assets and funding projects through external financing, as announced by the railway minister Suresh Prabhu on 25 February.

The government also earmarked Rs27,000 crore for Pradhan Mantri Gram Sadak Yojna and

Rs55,000 crore for roads and highways. Additionally, Rs15,000 crore is to be raised through bonds issued by National Highways Authority of India (NHAI).

“Our goal is to advance the completion target of the programme from 2021 to 2019 and connect the remaining 65,000 eligible habitations by constructing 2.23 lakh km of roads,” Jaitley said.

He also announced that contracts for constructing nearly 10,000km of national highways will be awarded in 2016-17.In addition, around 50,000km of state highways will be upgraded as national highways.

This allocation towards physical infrastructure projects comes in the backdrop of twin balance sheet problem as articulated by the Economic Survey—the stressed financial positions of staterun banks and some business houses.

Experts agree with the government’s strategy.

“Given the fiscal deficit constraint, I think the numbers for infrastructure announced today look good. There has been a hike of 20-30% in capital expenditure,” said Abhaya Agarwal, partner and public private partnership leader, EY.

Agarwal added that too much capital expenditure at one shot is not desirable given that one may end up investing in projects not worthy enough and lose market value.

An analysis of December quarter results of all staterun bank by news agency Press Trust of India shows that the cumulative gross nonperforming assets of 24 listed public sector banks, including market leader State Bank of India and its associates, stood at Rs3.93 trillion as on 31 December 2015.

As part of the comprehensive infrastructure development plan, the budget also focused on developing ports and airports.

“We are planning to develop new greenfield ports both in the eastern and western coasts of the country. The work on the National Waterways is also being expedited and Rs800 crore has been provided for these initiatives,” said Jaitley, while adding that the Airport Authority of India will revive the unutilised and underutilised airstrips across the country in partnership with state governments.

To provide further impetus to mobilise funds for infrastructure spending, a total of Rs31,300 crore will be allowed to be raised through bonds issued by NHAI, Power Finance Corp. Ltd, Rural Electrification Corp. Ltd and Inland Water Authority, among others.

Making public private partnership (PPP) as its pivot to attract private sector investment, the budget announced the government’s intent is to introduce a Public Utility (Resolution of Disputes) Bill and also guidelines for renegotiation of PPP concession contracts.

“A new credit rating system for infrastructure projects which gives emphasis to various inbuilt

credit enhancement structures will be developed, instead of relying upon a standard perception of risk which often results in mispriced loans,” Jaitley said.

Infrastructure development is necessary for realising a GDP growth of 7-7.5% for the next fiscal as projected by the Economic Survey released on 26 February. The Survey added that India could achieve a growth rate of 8-10% going forward.

“The government spending capacity cannot be increased overnight. So, taking into account other related announcements for ease of doing business and resolve to implement goods and services tax, the infrastructure sector is poised to gain,” said EY’s Agarwal.

Sun Capital Advisory Service

Two downgrades a day put India Inc in trouble

Suncapital: At two downgrades a day, the quality of India Inc’s debt is fast deteriorating. Thanks to160 downward revisions in the last two months alone, the tally since April 2015 has crossed 655 companies; metals, power, construction and infrastructure players lead the pack. And between January and now, rating agencies have made at least 13 revisions across seven state-owned lenders.

Jindal Steel and Power(JSPL), which owes lenders Rs 42,000 crore, is now rated below investment grade by CRISIL with the firm’s long and short-term credit rating now down by three to four notches. In mid-February, Moody’s lowered the long-term corporate family rating of Tata Steel by two notches to Ba3; soon thereafter, S&P revised downwards the grade of Vedanta Resources’ long-term foreign issuer credit rating to B, the fourth time this fiscal, citing increased pressure on liquidity as the firm attempts to refinance $1.35 billion of borrowings.

Moody’s lowered its outlook on Delhi International Airport Private Ltd’s Ba1 corporate family rating and senior secured ratings to ‘negative’, citing the impact of a new tariff order by the Airports Economic Regulatory Authority (AERA). It estimated that the new tariff guideline, applicable over 2016-2019, will lead to a decrease in annual aeronautical revenues by about R2,000 crore, or around 70%, from FY17 onwards. Among others for whom the outlook has been lowered to ‘negative’ are BHEL, DLF, Lodha Developers, Tata Tele Services and Shree Renuka Sugars.

As many as 16 sugar companies and 22 textile-linked companies have also seen rating revisions, as have several key infrastructure projects based on tariff changes or lower traffic volumes.

Given the dire situation that the steel sector is in, it’s not surprising that as many as 20 steel-producing and processing companies have been downgraded to ‘D’ or default rating in FY16 so far, according to Bloomberg data. The proportion of corporate debt owed by stressed companies, defined as those whose earnings are insufficient to cover their interest obligations, has increased to 41% in December, 2015, up from 35% in December 2014.

ICRA revised its outlook on the long-term rating of Mumbai Metro One, a special purpose vehicle (SPV) of Reliance Infrastructure, with two other entities, from stable to negative citing the shortfall in cash flow position of the project, resulting from lower than estimated actual daily passenger volume.

CRISIL Ratings identifies two clear trends in credit quality that have emerged over the past one year. The debt-weighted credit ratio, or the ratio of quantum of debt upgraded to that downgraded, is at its lowest level in nearly three years. This is because some large corporates — whose fortunes are linked to commodity and investment cycles — or those which are highly leveraged, remain stressed. What’s positive is that several mid-sized and smaller firms have seen an improvement in credit quality, with upgrades higher than downgrades, and the credit ratio touching a four-year high in the first half of fiscal 2015-16.

However, as demand slow-down and leveraged balance sheets of some Indian corporates limit their spending capacity, the cascading impact may not be ruled out even on smaller companies.

In a recent interaction , Bharat Iyer, MD & Head of Research at JP Morgan, pointed out that the de-leveraging cycle is taking longer in the absence of a revival in earnings and the inability of companies to raise equity. Which is why although the NPL cycle looks like it’s closer to the bottom, it could be some time away from turning. “Apart from sectors such as real estate, infrastructure and resources, there is also stress in the SMEs linked to these sectors,” Iyer added.

CRISIL had downgraded debt worth R2.4 lakh crore in the six months to September with the the debt-weighted credit ratio for a set of 1,441 companies — for which ratings were altered — falling to 0.27 times. For FY15, this ratio stood at 0.62 times. For FY16, a further deterioration in the gauge cannot be ruled out as companies struggle to make ends meet.

The metals and mining was clearly the worst affected space given that almost a quarter of default ratings belonged to such entities.

Ratings plunge

* Ratings for 655 firms downgraded since April 2015

* JSPL rated below investment grade, owes lenders R42,000 crore

* Tata Steel downgraded two notches to Ba3 by Moody’s

* Vedanta Resources downgraded by S&P to B

* Dial’s outlook lowered to ‘negative’ by Moody’s

* Outlook for BHEL, DLF, Lodha, TTSL, Shree Renuka Sugars lowered to ‘negative’

* 13 revisions for seven PSBs since January

Sun Capital Advisory Services

Arvind Subramanian’s checklist for the Union budget

Suncapital: Governments have usually ignored the advice of their economic advisers. Rumour has it that the finance ministry is haunted by the ghosts of past economic advisers brandishing copies of neglected economic surveys and wailing loudly.

Be that as it may, over the years, thanks to insistent repetition, governments have incorporated some of the reforms championed by the authors of economic surveys.

As John Maynard Keynes put it, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Let’s hope chief economic adviser Arvind Subramanian’s voice, too, is heard by those in authority, in spite of him being neither a “defunct economist” nor an “academic scribbler”.

We shouldn’t look to the Economic Survey to provide hints about likely announcements in the budget. What the survey does is mark the road ahead for the government. It provides a laundry list of things that need to be done for making India a modern and vibrant economy. It is a master plan for building the economy.

The Economic Survey, therefore, also serves as a yardstick with which to evaluate the Union budget. The question is: how far does the budget travel in the direction laid out by the survey? That is the basis on which we should indulge in the traditional practice of giving marks out of 10 to the budget.

What then are some of the key measures outlined in the survey? Listed below are a few of them:

1) Unlike last year, this year’s Economic Survey is rather pessimistic about growth, saying real gross domestic product (GDP) growth will be 7-7.75%, with a downward bias. It’s also pretty certain inflation will come down further, which suggests nominal GDP growth could be even lower than in the current year. That means the assumptions in the budget about revenue growth, if they are to be realistic, must be low.

2) It presents arguments both pro and con about sticking to the fiscal consolidation road map, but there does seem to be a tilt towards relaxing it a bit, especially as public investment needs to be strengthened further. And it calls for a re-look at the medium-term fiscal consolidation targets. This is one argument the finance minister will be tempted to grab with both hands.

3) The survey talks of the twin balance sheet problem of banks and the corporate sector. It says the way out is through the 4Rs—recognition, recapitalization, resolution, reform. Last year’s survey had talked of the 4Ds for banking—deregulation, differentiation, diversification and disinterring for the banking system. We can infer two things from this: a) the prime minister’s preferred style of speech-making seems to be making a strong impression, and b) the budget must have a credible scheme for recapitalizing banks and an indication of what the government plans to do to prevent the problem from arising in future. The survey says the government must sell off its non-financial companies and the Reserve Bank of India (RBI) must also contribute to recapitalization.

4) The survey says the benefits provided on account of small savings schemes and the tax/subsidy policies on cooking gas, railways, power, aviation, turbine fuel, gold and kerosene “provide a bounty to the well-off of about Rs.1 lakh crore”. It says this “represents a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving”. Ending these subsidies will, therefore, be a pro-poor measure. The implication is also that any benefits provided to income tax payers will go to the comparatively rich 5.8% of the population who pay income tax. Will the government be able to bite this deadly political bullet? Rather surprisingly though, there’s no mention of changes in the capital gains tax.

5) The survey points to the damage to the economy caused by the lack of exit policies. The bankruptcy bill is already in Parliament; so what else can the central government do? It could a) reform wasteful fertilizer subsidies, b) allow sick central public sector units to exit, c) disinvest in banks and d) do something to stanch the losses from Air India.

6) It calls for greater government investment in health and education.

7) It calls for greater attention to agriculture, including “the need for reorienting agriculture price policies, such that MSPs (minimum support prices) are matched by public procurement efforts towards crops that better reflect the country’s natural resource scarcities”. It calls for minimum floor prices for crops and price deficiency payments to farmers.

8) On subsidies, it wants the annual cap on household cooking gas cylinders to be pared to 10 from 12 and wants the distinction between commercial and household uses to be removed. But for other subsidies, it says the direct benefits transfer scheme is not yet ready.

9) It warns against protectionism, asking “is India really pro-competition or is it just pro-business?”

10) And it sums up its approach by saying, “the legacy of the pervasive exemptions Raj and corporate subsidies highlights why favouring business (and not markets) can actually impede competition. Similarly, scepticism about the state must translate into making it leaner, without delegitimizing its essential roles and indeed by strengthening it in important areas”.

Sun capital services

Morgan Stanley slashes Flipkart’s valuation by over 25 per cent

Suncapital.co.in :

Is it sanity or is it the beginning of a bloodbath? Morgan Stanley has marked down its stake in Indian e-commerce company Flipkart to $103.97 per share, 27 per cent below the price of its last fundraising round. Last year, Morgan Stanley had valued Flipkart’s per share little over $142 per share. Importantly, the markdown comes just a week after Flipkart’s claimed that it’s valued $15.2 billion. The fall in share reduces Flipkart’s valuation to $11 billion.

Image credit: ShutterStock

Lowering valuation of Flipkart hasn’t come as a shocker to industry observers. Market observers have been anticipating correction in valuation of privately held Internet companies.  Mohandas Pai, ex-Infosys Board Member and founder of Aarin Capital, says:

These downgrades will happen in e-commerce till there is proper business model. The euphoria of fundraising at high valuations have to come to some reality and the current model of business is unviable because of the discount led model and high returns.

As per SEC filing, Morgan Stanley valued its Flipkart stake at $58.93 million in December 2015, as compared to $80.62 million in June 2015. While some see this mark down as only a modest one, analysts forecast that the implications will be bigger for other e-commerce companies as not many can digest a 25 per cent markdown (see this Twitter thread).

Interestingly, Flipkart’s rival Snapdeal witnessed a 30 per cent upward swing in its valuation when it raised $200 million recently. The Gurgaon-headquartered company is reportedlyvalued in the range of $6.5-$7 billion. The valuation of ShopClues also jumped significantly and it became the fourth Unicorn in the fledgling e-commerce market.

Satish Meena, Senior Analyst at Forrester Research, says:

Not many players in Indian eCommerce can digest a 25 per cent markdown. Flipkart’s valuation markdown will have consequences for others as everyone is riding on the same boat and valued based on the GMV number which is neither transparent nor correct but highly over stated.

Besides Flipkart, Morgan Stanley also  marked down shares of Palantir, a SaaS-based data analytic platform by 32 per cent, shares of Dropbox by 25 per cent, and those of Airbnb by 10 per cent.

Morgan Stanley reportedly uses multiple valuation methods for most of its private tech portfolio, including a 20 per cent discount for lack of marketability when using market comparable companies.

A few financial experts opine that investors in  Flipkart, Snapdeal and others would look to exit from these companies in the course of next two to three years (given their fund cycle and  obligation/commitment with limited partners).

“I believe that investors at some point are going to ask questions about e-commerce because certain funds will exit in three to five years. But the opportunity for the business in India is only going to grow,” says R Natarajan, CFO of Helion Ventures.
by Suncapital.co.in