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2015: A series of unfortunate events

Saturday , 09 January 2016

We review the year that was

After an unexpected political windfall in form of a stable government, 2015 began with renewed optimism, as the year that would ‘Redefine India’. There was all round hope that Modi will manage to wave his magic wand and make all the miseries disappear. But instead of a fairy tale, India witnessed a series of unfortunate events.

It started with the budget session, then it was a wasted monsoon session and finally, it closed on the sour note of a washed-out winter session. In between, there was a healthy dose of negative global and Indian events, including the Chinese shock, commodity prices plummeting, terrorism activities on the rise, debates on intolerance and poor corporate results. That said, not all was bad on the monetary policy front, as RBI carried out a series of rate cuts to boost the economy, the Government announced ‘Make in India’ initiative and started its work in earnest, on fixing the ‘nuts and bolts’ of the economy.

Let us take a look at some of the key developments in greater details.

Budget 2015

The budget tried to put the economy on a higher growth path, without falling prey to the pressures of enlarging populist schemes. In addition, the government also took the motto of, “minimum government, maximum governance” seriously and unveiled a series of reforms to reduce regulatory bottlenecks, introduce single window clearance schemes, allay fears of retrospective taxes and encourage more foreign investors to the market. All in all, the budget, though, did not make any big-bang announcement, was still meaningful in trying to kick-start Indian economy. Here are some of the key highlights of the 2015-2016 budget.

• It stressed on growth, investment and passing the benefit to the common man.  However, no big bang announcement was made.

• GDP growth of 8.0 – 8.5 per cent for FY16 was targeted.

• A 35 per cent increase in capital expenditure was provided, to boost growth. Plan expenditure was expected to remain flat.

• GST was estimated to be implemented from 01 April 2016.

• Corporate taxation was planned to be reduced to 25 per cent, over four years.

• Additional deductions were allowed while computing personal taxes. As a result, income up to Rs 445,000 was tax free.

• Surcharge on Income Tax was increased by 2 per cent for domestic companies and non-corporate tax payers, with income greater than Rs 1 crore per annum. The surcharge was increased from 10 to 12 per cent for corporates, earning more than Rs 10 crore and from 5 to 7 per cent for those corporates, earning between Rs 1 crore and Rs 10 crore.

• Service tax was increased from 12.36 to 14.0 per cent, with additional services like theme parks, water parks, rides, toll manufacturers of liquor, etc.

• Creation of Bankruptcy protection law was also included.

While a number of reform-oriented measures were promised, key measures like the GST, and Bankruptcy bills were not passed due to a political logjam, lack of government majority in the upper house in case of the GST bill and reference of the Bankruptcy Code back to a parliamentary panel, for further review. As a result, much of the industry remained a disappointed lot. In fact, a CII initiated petition to pass GST bill got over 50,000 signatures within 3 days of its creation, while 3 in 4 Indians surveyed, believed that the opposition was wrong in not allowing the Parliament function smoothly. Hopefully, the tide will change soon.

RBI’s bid

Despite RBI’s stand that monetary and fiscal policy needed to go hand-in-hand, RBI tried its level best to prop-up the economy by cutting rates aggressively. Unfortunately, though, the rate transmission was much lower, at about 70-80 basis points, since banks were keen to protect their margins against the backdrop of rising non performing loans.

Global concerns

As if India related issues were not enough, global shocks were experienced in abundance. Chinese markets closed up by 18% YoY, but that ride was not smooth. Like a bubble, it went up rapidly, only to drop dramatically in the third quarter. Its performance on the back of a slowing economy had global repercussions, with several commodities shedding their value by over a half.

Brazil too, had a rough ride with corruption scandals and downgrading of sovereign-credit rating to junk status, on the back of a budget deficit, political turmoil and deep recession. Russia, on its part, had skirmishes with Turkey and was deeply impacted by the global fall in oil prices.

As a result of all these global crises, FIIs pulled out money from most of the emerging markets and India, obviously, was not immune to this. The tide started turning around mid-July to early August, the same time as Chinese market volatility started, and has continued till date. Overall, FIIs have pulled out Rs 17,400+ crore vs. investment of Rs 71,000+ crore in 2014.

The impact on the markets would have been more severe, had it been not for DIIs, who purchased shares worth Rs 51000+ crore during this year.

The net impact of this tug-of-war was that the Indian equity markets surged ahead initially, only to be pulled back. However, the fall was not as severe as DIIs stepped in, to fill the void. Sensex closed at 25,838.71 (December 24th), down 6.1% for the year. It hit a yearly high of 29,681 on January 29th and, a yearly low of 24,894 on September 7th, 2015.

Indian Rupee faced collateral damage as a result of these upheavals, thus, a new normal exchange rate was established, in the range of 65-70 Rupees to the Dollar. Rupee closed down at 66.025 on December 25th, with an overall annual range of 61.358 and 67.148, down 4.2% for the year.

All in all, 2015 was a year of plumbing, wherein the government tried its best to fix the nuts and bolts of the economy, but was hit by a multitude of unfortunate events, globally and locally.

With the government taking an aggressive posture, along with greater support from the common Indians flowing in and stability over global rate-cut scenario, markets are likely to generate average to above average returns. That said, further fillip will be provided, only after some of the key bills and reforms are passed in the Parliament. So let’s hope, like the book titled, ‘The Series of Unfortunate Events’ that ended in 13 chapters, the negative events in India, will also end by the thirteenth month.