India’s Next Big Reform Could Focus On Creamy Layer In Agriculture, Ambit Says
Further reforms will be tough for Modi with 14-15 state elections lined up ahead of 2019 polls, Ambit says.
The next big reform could be in the a tax on the creamy later in agriculture, according to Siddhartha Rastogi, director at Ambit Private Wealth.
The first step towards ending corruption in agriculture has already been set in motion with the direct benefit transfer through fertilisers, Rastogi told BloombergQuint on this week’s Thank God It’s Friday. But “it will be a tough call for Modi” with 14-15 state elections lined up between now and 2019, he added.
Here are edited excerpts from the interview.
A lot of people have said that the Moody’s upgrade should have come sooner. What did you make of it?
I somewhat agree and disagree with you. Moody’s was waiting for the after-effects of both large reform measures such as demonetisation, GST and the Benami Property Act to see how the government will tackle that. If you look at the second move from the government where they rationalised a lot of rates. This means that this is a democratic country, people are in pain and somebody is listening to them and you are rationalising rates to make sure that the livelihoods of people in the long term don’t get disrupted. You bring larger number of people to pay less taxes and that is what the government is trying to do.
Perhaps, Moody’s was waiting from the execution perspective. We have seen, in March-April, 2017 when the International Monetary Fund and World Bank came out with a heads-up, Lagarde also said that this is an encouraging and bold move from the Prime Minister but there were no upgrades. We saw, till yesterday, that government securities dropped from 6.52 number to 7.04. There were possible devolvements from the underwriters’ side. People were skeptical to get into GSecs and today you can see a 13 basis point move which is massive.
It says that there is short-term pain, which is undeniable, but are we in India, Indian equities, Indian markets, Indian growth story for 1-3 quarters or three years? If you are there for 3-4 years, there is massive money to be made. And after a long time, the Indian population has realised that. Otherwise, it is not by chance that $3 billion entered the mutual fund industry on a month-on-month basis. Clearly, these reforms resonated with people.
The boldest reform would be to tax agricultural income which nobody is talking about it. But we are waiting to hear something on agriculture?
So, if you look at what Mr. Modi’s plan is...there is a creamy layer of the agriculturists and there are poor agriculturists. It would be unfair on those poor farmers committing suicide because of lack of resources, lack of water and lack of lending facilities. If you put a standard taxation, it will be unfair. So, Modi’s plan probably is a Universal Basic Income which might come in this Budget, or if this Budget is advanced, then the early next Budget. So, my reckoning is that if Universal Basic Income comes in and if major reforms are done for lowest strata then there will be a taxation on the creamy layer too.
If you look at the first step towards ending corruption in the agriculture side, already DBT through fertilisers is a massive step. Because the bigger guys, who were not supposed to take the benefits of an agricultural subsidy, were doing so in masses. A lot of fertiliser firms were being benefitted. My reckoning is some form of taxation will get addressed. But the challenge is, it will be a tough call for Modi to take because we have 14-15 state elections between now and 2019 and the the opposition is finding ways to pull him down. So, it will be challenging, and I don’t see it happening in two years, but it will be the next step where the creamy layer will get taxed.
Do you see any specific areas where you think the government needs to do more reforms.
The two things which have not supported the growth trajectory are land acquisition and labour reforms. These are two areas which are people-centric, very sensitive and emotional and hence it will take a lot of courage and persuasion from Modi for the rural and downtrodden, saying this is for your benefit.
What does this Moody’s upgrade do for India as there are some concerns with respect to valuations in the Indian equity markets?
Foreign portfolio investors keep comparing where they will find the best returns for their investment. If you look at China, after 2016, FPIs were concerned about China’s growth. With Xi Jinping coming back full throttle at the helm of affairs and giving thrust to domestic demand, obviously FPIs believe that it’s a lucrative market for them. On the other side, Mr. Trump is doing tax reforms. He has been pro-employment. After a long time we have witnessed 3-4 years of massive rally in business-to-consumer companies in the U.S. A large number of FPIs will chase both these markets because the rupee remains a concern. We still remain a net importer. So, they need to look at their dollar returns. For them and absolute returns in the rupee don’t matter. Oil producing companies need to make the most of whatever is happening in Saudi Arabia. Most FPIs will invest in U.S. or Chinese markets because crude will keep moving up. It has moved up from $40-45 per barrel to $65 per barrel and India’s currency remains targeted or comes under pressure. Valuations are stretched, there is no doubt. So, this is a short term phenomenon which will turn around in the longer term. There will not be a significant price-wise correction because of liquidity and fundamental change in the economy. When I say price wise correction, I mean 12-13 percent correction which is meaningful. 4-5 percent is the norm. Beyond that, I see a time-wise correction because valuations are stretched, earnings are still weak, and they need to move up which will happen in next two quarters. So, you will see December numbers better and March numbers even better than the December numbers.
Watch the full interview here.
