Sensex - Reducing fear of Covid?

Sensex closed today @ 51,017 points which is just 2.2% short of the all time high of 52,154 reached on 15th February, 2021.   

2021-22 has clocked till now 2% increase in sensex or 988 points.  Today market posted strong gains due to gains mainly in financial & IT stocks.  Nifty financial services index increased by 0.52% & Nifty IT index increased by 1.76% during the day to move up the index. 

Stocks are projected to be uptick in the short term due to reduction in Covid infections in India, expected better performance of Indian corporate's and rising trend in US & Europe stocks   

Black Gold Inching towards 100 - Roll it back

Per litre petrol Cost today 25.5.2021

Mumbai : Rs.99.71
Chennai : Rs.95.06

Kolkata : Rs.93.49

Delhi : Rs.93.44

Let us take Chennai for further analysis.  

Price of WTI crude on 1.1.2020 - $ 61.13 per barrel

Price of WTI crude on 25.5.2021 - $ 65.65 per barrel

Increase % = 7.4%

Price of 1 litre petrol in Chennai on 1.1.2020 - Rs.78.20

Price of 1 litre petrol in Chennai on 25.5.2021 - Rs.95.06

Increase % = 21.6%

What caused this disparity? Why so high increase in domestic petrol prices?

Is it Currency?  No only marginally

USD vs INR on 1.1.2020 = 71.36

USD vs INR on 25.5.2021 = 72.79

Increase % = 2%

Is it Taxes in India?  Yes significantly

Twice in 2020 taxes were increased on petrol (March & May) - totally Rs.13 per litre or 65% increase in tax from Rs.19.98 to Rs.32,98 per litre in 2020

Overall impact on petrol price per litre = 17%

Indirect tax collections in 2020-21

Provisional figures released by Government on 13.4.2021

Shortfall of Rs.0.5 lakh crores in GST collection was more than offset by an increase of Rs.1.46 crores in central excise collections which mainly constituted tax on petrol & diesel.  The increase of 12% in indirect tax collection is mainly because of higher tax on petrol & diesel.

What the Government should do now

With the economy projected to get back into normal mode in Q3 2021-22 there should be a push for industrial development consequently improve collections under GST.   In parallel there should be a reduction in excise duty on petrol & diesel to pre 2020 levels and reduce inflationary impact on the economy.  It would do a world of good if Petrol & diesel are brought under GST ambit rather than erstwhile excise & VAT regime

Will the Government Act on this or push for more taxes on fuel and thereby fueling inflation which is the last thing the economy wants at this moment 

Crpto Currency - Waiting for a reason

Crypto currencies had dream run with its main constituent Bitcoin in 2021 up until  April rising over 97% from $29,111 in 1st of January 2021 to $53,260 in 30th April 2021.   Then the drop started in May by 34% and now trading at $ 37,707 which still is a good growth of 30% for 2021.  

The market capitalisation of crypto currencies stood at $1.58 trillion on 24.5.21 which was $2.2 trillion on 1.5.21, in 25 days time a whooping $ 620 Billion has vanished in investors wealth.  

  

What triggered this slide in May?  Two factors are cited, one Elon Musk (Tesla).  Tesla stopped accepting Bitcoins as payment for their cars, there was also talk of Tesla selling off some of their Bitcoin holdings.  Tesla cited environmental concerns caused by crypto currency mining as its main reason for not favouring Crypto currencies this is an U-turn by Tesla from its earlier statement.  

Second reason is China announcing that it will crackdown on crypto currency mining as a part of an effort to control financial risks and also to control high electricity consumption which are gulped down by Crypto currency miners who are majorly concentrated in China 

Question : Are the above the major factors to wipe away value from crypto currencies and will these factors continue to determine value of crypto currencies in future?  To my knowledge No.  Crypto currencies were moving up mad @ 97% in the first 4 months of 2021 and it was looking for some reason to wind down when it conveniently found reason in Tesla & China and dropped 34% in one month.  Now that crypto currencies are down from their high levels they will look to consolidate in the days to come and again look for excuses to move down or move up.  Volatility is a hallmark of crypto currencies and it will always play a major part as there is no regulation from Governments and it will find some reason for moving up or down dramatically making headline news everytime.

Just a spoke in the Growth Wheel - All is well still - Will be back in track in Q2 & Q3 of 2021-22

All was going on well till mid of February when Covid made a big comeback into India and now has started to slightly taper down albeit slowly.   This surge will stunt economic growth as demand drops and people start to become cautious again and start to increase their savings rather than spending.  Jobs are once again in the spotlight with hospitality and entertainment sector ensuring many of them vanish leaving earnings to drop significantly.   Good news is that there is no full lockdown similar to last year.  Lockdowns now are only regional ones now, those too ensuring economic activities are not stunted to a large extent leading some scope for earnings to happen.  A bold step by the Government is implementing vaccination for all adults of 18+ from 1st May, this is the only way to contain the virus added with following Covid protocols by all citizens of India.  Industry which saw smart recoveries in Q3 & Q4 of 2020-21, will take a hit in Q1 of 2021-22 and look for revival in Q2 once the pandemic is contained.  Reserve Bank of India (RBI) Industrial outlook survey of the Manufacturing Sector for Q4 2020-21 was released on 7th April 2021, which was projecting quite an optimistic picture for the industry for Q1 of 2021-22.  Will that be realised?

                   Source : RBI

Q1 of 2021-22 will show a subdued growth in contrast to RBI projections due to unprecedented covid surge.  Indian corporates proved their resilience in Q3 & Q4 of 2020-21 but it will be a difficult task in Q1 & Q2 of 2021-22, recovery should start from Q3 of 2021-22.

Stock Markets

Recovery of business and hence stock market was quite upbeat in Q3 & Q4 clocking an upward swing of 20%, in contrast the months of April & May 2021 till now has seen a see-saw swing and expectations are bears will rule the market.     

                                                         Stock Market Movement 

Corporate results for Q1 2021-22 is expected to be subdued and markets will factor in the same in Q1.   Should expect a flat or depressed market for 2021-22 albeit some short term volatile movement and rallies 

Rupee Movement 

Q3 & Q4 saw Rupee strengthening or holding ground due to better corporate and stock market performance.  

Q1 2021-22 (April) saw a sudden depreciation of the Rupee due to Covid surge and domestic stock market weakness.  However uptick in stock market movement & general US Dollar weakness (Dollar Index) helped Indian Rupee to move towards appreciation mode.  My prediction is Indian Rupee will be under depreciation mode till business sentiment moves up and Covid fears subside in Q3 2021-22.  When Rupee depreciates it will be time for RBI to intervene in the markets and ease out the Rupee a bit and to ensure cost of inputs especially oil do not spiral out of control consequently sending inflation into a tail spin, which is the last thing the country wants which is already reeling under pandemic stress.  

Oil Prices

With economies opening up crude oil is back in focus.  In Q1 2021-22 there is a 2% appreciation in Crude WTI from $ 61.45 to a barrel to $ 62.78 per barrel

Projection is crude will continue to marginally raise over the next two quarters in line with economic activity pick up

Conclusion

There will be a economic slowdown in Q1 2021-22 & part of Q2 also.  Q3 & Q4 of 2021-22 will bring in recovery and all will be well soon

Marching on in April

Stock Markets

Sensex surged 4% in the last week of April with 4 days of continuous increase despite turbulent times with Covid cases increasing significantly in India.  Surge is mainly due to better Q4 results of corporate (compared to 2020 Q4)

• IT & ITES stocks - Revenue growth of TCS 4.2%, Infosys 13.08%, Wipro 3.14%, Mindtree 5.2%  
• Bank stocks - Revenue growth of HDFC 13%, ICICI 17%, Axis Bank 10.98%  
• Automobile - Revenue growth of Maruti Suzuki 32%, TVS Motor 52.87%
• FMCG - Revenue growth of Britannia 9.68%, HUL 35%, Hatsun 23.89%  
• Manufacturing - Revenue growth of ACC 22.57%, Bajaj consumer 39.25%, Tata Steel 53.4%, ABB 7.02%, Biocon 16.3%, Carborandum 27.38%, Ambuja Cements 23.44%  

Overall corporate's are delivering better than expected results for Q4 2020-21 which keeps investors interested.   

Another major reason for the surge in sensex is that business sentiment is upbeat as can be seen by RBI survey  

        Source : RBI

Reserve Bank of India (RBI) Industrial outlook survey of the Manufacturing Sector for Q4 2020-21 was released on 7th April 2021, this shows a positive sentiment for Q4 2020-21 and Q1 2021-22.  Markets are factoring in this positive sentiment and gives a big thumbs up and consequently jump in sensex.    

As for Covid markets have already factored the same in 2020 and so more cases will not impact it unless it takes on monstrous proportion which I believe will never happen.  Though cases are on record levels good news is that till now 15 crore vaccination have been administered in India and there is a conscious push for faster vaccination in the days to come.  Government has realised vaccination is the only route out of this pandemic and stepping up all efforts which is appreciated.   

Rupee

Rupee in the last 4 days had an appreciating effect and appreciated 1.28% moving from 75.02 on 23.4.21 to 74.06 on 29.4.21, this primarily is due to a positive stock market which grew by 4% during the same time period.  Also the announcement that US Fed Reserve keeps its policy rates and assets purchases unchanged is pulling the dollar index down and it is at its one month low and currently at 90.63, this helps the Rupee to appreciate. 

US Dollar Index (DXY)

Goo

OIL

Good news is that petrol / diesel prices in India are unchanged since 15th April, which is a long record considering price movements in the last 1 year.  Primary reason for this is a slight drop in demand due to Covid & oil companies are in pause mode to see the trends in global oil market.  In the meantime there has been a sharp movement of oil and Crude WTI is trading at $64.98 per barrel  

Pre-Budget Memorandum 2021-22

Scrap TCS Provision under Income tax Act

TCS under section 206C(1H) is being levied by Government at the rate of 0.1% (0.075% due to Covid-19 till 31.3.21) on sale of goods under the pretext of collecting data for purposes of tracking transactions to ensure compliance with tax laws.   E-invoicing was also introduced from 1.10.20 under GST laws to ensure tracking of transactions to be in compliance with tax laws.  TCS & e-invoicing will track the same data one through direct tax legislation and another through indirect tax legislation.   Is the intention of the Government to collect data or effectively use the data?  If objective is it to collect data then TCS and e-invoicing can co-exist but if the objective is for effective usage of data either one of the legislation should be scrapped most preferably TCS as it is more of a subordinate legislation having limited data scope whereas e-invoicing is a more broader scope legislation.  Let us the industry be pragmatic and oppose TCS as this leads to unnecessary chaos for all practical purposes – charging an additional tax in the invoice, collection from customers, depositing in customer PAN account, reconciling with 26AS (imagine companies having huge vendor base reconciling with 26AS will be a huge nightmare).   It may not be a surprise if a provision similar to 40(a)(ia) is also implemented for failure to collect and pay TCS creating more chaos in tax computation.  Here I am reminded of the 3 “goods years” when we had the “Fringe Benefit Tax – FBT” which caused more pain than gain for both the industry and Government.    Similarly TCS will cause more pain than gain and it needs to be stopped ab-initio as it will create more work for business with little gain for them and creates one more spoke in much used phrase “ease of doing business”.

Faceless Assessment – Relief for AEO-T2 onwards

Faceless assessment is here to stay and I personally feel it is a good move by the Government albeit the difficulties faced by importers (and also officers in some cases).  These difficulties are initial blues faced and we are sure over a period of time this will be solved largely.  At the moment it takes around 10 days for cargo to be assessed if it goes for faceless assessment and this time taken is unlikely to be reduced in near future, which surely causes inconvenience to industry in its supply chain.  To avoid delays in faceless assessment and to ensure officers concentrate more on key cargo it is imperative to reduce the total population of import consignment which is used for selecting cases for faceless assessment. 

It is pertinent to note that an entity with AEO status is considered as a secure trader and a reliable trading partner globally.  Further AEO-T2 status is awarded to an importer after physical verification of premises and also after detailed study about its processes.  With the stringent methodology followed for AEO-T2 certification and also provision for audit also being present my suggestion is to have 100% self-assessment for all AEO-T2 certified importers.  This will take away approximately 15% to 20% of big importers out of faceless assessment (the % of import cargo by these AEO-T2 certified importers will be much higher around 30%+?).   This bring about a big relief both to industry and officers (Officers usually do not have much challenge with imports of big certified importers) and there will be ease of doing business and improvement in supply chain.

Tax Collected at Source (TCS) on sale of goods Section 206C(1H) vs E-invoicing

India is a unique country where there is absolutely no coordination among various arms of Government. To take a simple example State Highways department lays roads and within one month Corporation team comes in and digs up the entire road to lay drainage pipes. Both these activities are budgeted by the respective divisions, tenders called and debated in the same council hall but no coordination whatsoever. This means we remain at the starting line or start and end up in shambles pretty soon. This is exactly what is happening with Direct and Indirect tax teams with TCS and e-invoicing. No coordination.

TCS under section 206C(1H) is being proposed to be levied by Government at the rate of 0.1% (0.075% due to Covid-19 till 31.3.21) on sale of goods under the pretext of collecting data for purposes of tracking transactions to ensure compliance with tax laws.   E-invoicing is proposed under GST laws to ensure tracking of transactions to be in compliance with tax laws.  TCS & e-invoicing will track the same data one through direct tax legislation and another through indirect tax legislation.   Is the intention of the Government to collect data or effectively use the data?  If objective is it to collect data then TCS and e-invoicing can co-exist but if the objective is for effective usage of data either one of the legislations should be scrapped most preferably TCS as it is more of a subordinate legislation having limited data scope whereas e-invoicing is a more broader scope legislation. 

Let us the industry be pragmatic and oppose TCS as its implementation will lead to unnecessary chaos for all practical purposes – charging an additional tax in the invoice (still debate is on whether to add GST for calculating TCS or not), collection from customers, depositing in customer PAN account, reconciling with 26AS (imagine companies having huge vendor base reconciling with 26AS will be a huge nightmare).   It may not be a surprise if a provision similar to 40(a)(ia) is also implemented for failure to collect and pay TCS creating more chaos in tax computation. 

Here I am reminded of the 3 “goods years” when we had the “Fringe Benefit Tax – FBT” which caused more pain than gain for both the industry and Government.    Similarly TCS will cause more pain than gain and it needs to be stopped ab-initio as it will create more work for business with little gain for them and creates one more spoke in much used phrase “ease of doing business”.