Tax buoyancy and fiscal challenges

High economic growth rates have resulted in tax buoyancy, giving Finance Minister P. Chidambaram additional leeway in preparing the Union budget for 2007-08. Government finances have been improving with each quarter this year, the second and third quarters ending with a gross fiscal surplus. The upshot has been a dramatic reduction in the rate of increase of the widely watched gross fiscal deficit. On a cumulative basis, at the end of the first nine months, the gross fiscal deficit at Rs.94,584 crore has been 12.44 per cent lower than last year. That is a remarkable turnround, considering that in the first two months the Government had incurred nearly 50 per cent of the gross fiscal deficit it had budgeted for the whole year. The budgetary goal of containing fiscal deficit within 3.8 per cent of the GDP seems achievable. As a proportion of a larger GDP the deficit is bound to come down. An improved tax collection machinery has reinforced the positive trends.

During the first nine months, tax collections increased by 37 per cent to Rs.232,171 crore. Almost 71 per cent of the budgeted net tax revenue has been realised during the period. Gross corporate tax collections rose by a robust 55.2 per cent, fully corroborating the impressive performance of the corporate sector. Income tax collections have gone up by 27 per cent. Not only is there better compliance but rising incomes have brought more people into the tax net. Customs duties have risen by nearly 33 per cent. That was primarily attributable to the higher global oil prices during the early part of this year. While service tax collections have gone up by 64 per cent, it is the meagre growth in excise duty collections — just 7 per cent during the first nine months — that is surprising. Recent economic growth has been underpinned by a strong manufacturing sector, whose output should have boosted excise collections. Aggregate government expenditure has grown at a slower pace of 15.4 per cent but quite disturbingly non-plan expenditure has been racing ahead of targets. The Government would seem to have kept only plan expenditure on a leash. Ominously, ministries such as agriculture and those dealing with infrastructure projects have fallen short of their expenditure targets. Among the major challenges before the Government is not only to earmark, in the budget, large sums for the thrust areas but also to ensure that they are really spent, and purposefully so. The reasonably healthy state of government finances might give the Finance Minister sufficient room to embark on major tax reform such as rationalising the numerous exemptions and taking the first steps towards a uniform goods and services tax combining elements of excise and sales taxes.

Limiting climate change

Climate change as a result of human activity is no longer in question. The summary report released by the Intergovernmental Panel on Climate Change made it unequivocally clear that the vast quantities of carbon dioxide and other greenhouse gases being released into the atmosphere by vehicles and industrial smokestacks were trapping the earth’s heat. Rising global temperatures would, in turn, lead to more frequent heat waves, droughts, and powerful storms as well as a dangerous rise in sea-level and acute water scarcity. The challenge now is how to go about limiting global warming. In a report prepared for the British Government, Sir Nicholas Stern, its adviser on the economics of climate change and development, pointed out that it would be far cheaper to take strong measures now to cut emissions and stabilise greenhouse gas concentrations at acceptable levels than to face the economic consequences of catastrophic climate change. But meaningful cuts in emissions will require industrialised as well as rapidly industrialising countries to act in unison. After a recent meeting in Washington D.C., legislators from G-8 countries along with those from China, India, Brazil, Mexico, and South Africa issued a landmark statement asking their governments to sign up to a “a measurable long-term goal to stabilise greenhouse gas concentrations in the atmosphere.” The `G8 + 5′ account for two-thirds of global greenhouse gas emissions.

Since greenhouse gas emissions are closely related to industrial activity, the Kyoto Protocol required industrialised countries to meet targets for cutting their emissions. The United States has refused to be governed by the Protocol, which came into force in 2005. However, even if the United States comes on board, the developed countries are not going to be able to achieve the necessary emission reductions on their own. China is second only to the United States in its emission of greenhouse gases; and India is a rising contributor to global warming. The G8 + 5 legislators have sensibly urged global negotiations towards “a binding U.N. framework signed up to by all the major economies” that would take effect when the Kyoto Protocol draws to a close in 2012. Establishing a post-Kyoto framework to govern greenhouse gas emissions is not going to be easy. China, India, and other developing countries are likely to refuse to limit their emissions if it denies them economic growth. A number of thorny issues will need to be settled through lengthy and complex bargaining. For that very reason, negotiation towards a post-Kyoto framework must be given top priority.

Strategic Oil Reserves & Other Options

 Policies to hedge against the exposure to disruptions in supplies and sustained high prices should be complemented by financial strategies.
              In 2005-06, Indian oil imports were $43 billion or 30 per cent of total imports. In 2006-07, the oil import bill is expected to be around $50billion, or about 6 per cent of GDP. At current levels of oil imports, a one-dollar change in the price of oil changes the annual import bill by $800 million. This article discusses strategies to reduce the risk of disruptions in oil supplies and exposure to consistently high oil prices caused by war or other unanticipated politically driven events.

Although opinions vary widely, the Iraq war, which started in March 2003, and the continuing tension in West Asia are estimated to have raised the price of oil by about $10 per barrel. Iraq’s peak oil production before the war was 3.5 million barrels per day (bpd) and now it is about 1.5 million bpd (1 million bpd of production is approximately equivalent to 50 million tonnes annually). OPEC increased production as prices went over $70 per barrel and let us assume that the “extra” production halved the so-called war premium from $10 to $5 per barrel. That is, with all other factors held constant, oil importers paid $5 more per barrel and India’s oil import bill in 2005-06 was higher by $4 billion due to the war.

It is difficult to estimate this war premium with any precision since some of the causal factors are political and cannot be modelled. Exporters are paying a part of it through increased production since it is in their longer-term interest to prevent substitute products from developing. Irrespective of who is bearing what proportion of the enhanced cost, petroleum exporters/processors are receiving a part of the war premium. This can be demonstrated by drilling (pun unintended) down from the country to the corporate level. The net income after taxes and the earnings per share of three global oil companies for the last 10years are shown in the table above.

It can be seen from the table that net income has risen sharply for the three firms from 2003 onwards. Earnings per share have tripled for Exxon between 2000-01 and 2006 and doubled for British Petroleum and Shell. It appears that the tension in West Asia has helped major international oil companies in the near term and probably would not hurt them in the medium to long term. This is not to suggest any conspiracy but to highlight that while war in Iraq hurts oil-importing countries it boosts net income for oil companies. End-results that are so sharply divergent make it that much more difficult to arrive at internationally cooperative solutions.

Some argue that the principal reason for the sharp increase in oil prices in the last few years is the rising demand for oil in India and China rather than the tension in West Asia. In 2005-06, the United States consumed about 1,050 million tonnes of oil, which was 25 per cent of global oil production. In comparison, China consumed 360 million tonnes and India about 140 million tonnes in the last one year. While the growth rates of oil consumption in these two Asian countries are relatively high, their combined consumption is still less than half that of the US. Except perhaps at the margin, India and China remain price takers and not price-makers as far as international oil prices are concerned.

In January 2006, the CabinØÿÿÿvk

Success is about direction more than distance ..

Many managers spend a lot of their working time, thinking about how to accelerate their promotions, how to impress the boss more than their colleagues, and how to earn money faster. The management world is indeed very competitive. So you feel that time must be spent thinking through such matters and taking appropriate actions–quite correct, but only in part.

The question to ask is whether it is the aim of a career to go far or in the right direction. Ideally, of course, you should achieve both, but that is not easy.

If you watch club level golfers, you will see the point. Some stand on the tee box with the longest club, and whack the ball with the might of an ox. They are the ones who want to see the ball soar away with an accelerating speed. A few seconds later, when they observe where the ball has landed, they curse and crib. The ball has perhaps been lost or has landed in a difficult spot from which it would be difficult to play the next shot. Other golfers take a measured approach of landing the ball on the fairway at a spot where they want to land. For them, the next stroke is as important as this first tee shot. Both are valid ways to play the game. If you are very talented, you may learn to do both i.e. go far as well as land where you want. Many club level golfers never achieve this.

The purpose of a career is to utilize your potential fully because that alone can give you satisfaction and a sense of self-esteem. This is so whether you are a chairman or an assistant. It becomes possible to achieve such satisfaction when you are surrounded by friendship and trust, which are essential for accomplishment in managerial tasks. Nobody can do a management job all by himself, this is a well accepted fact. It is the web of relationships and friendship that enables a manager to navigate the choppy waters that the ship of his career will constantly encounter.

There was a fine movie made by Frank Capra which I recall seeing when I was young. It starred James Stewart and Donna Reed and was named It’s a wonderful life. The story is about a man, who thinks he is a failure. So he prepares to commit suicide.

An angel is sent to prevent his act and to rescue him. The angel finds that the man lacks self esteem and hence he thinks that his friends and relations do not much care for him. The angel takes him in an invisible form to overhear what his friends and relations think of him in reality. He is surprised that he seemed to be loved by them all and that he mattered to them. His own perception of his failures in his career and his business activities bothered them little, and their love for him was overwhelming. He feels blessed.

The moral of the film is that no man is a failure who has friends.

Well, it is the same with your career. You take your own successes too seriously, and your failures in the same way. Other people do not think about either with the same intensity, they have better things to do!

Philosophers say that a good question to ponder about is when you die, who will come to your funeral? When a loved man dies, lots of people come for his funeral out of choice. When a rich or powerful man dies, lots of people may come, but for the reason that they want to be seen to have been there.

If you aim in the right direction, the best possible distance will come automatically. That is a simple truth.