India Passes Landmark Tax Reform in Modi's Biggest Win Yet
Comment of the Day

August 03 2016

Commentary by Eoin Treacy

India Passes Landmark Tax Reform in Modi's Biggest Win Yet

This article by Vrishti Beniwal and Abhijit Roy Chowdhury for Bloomberg may be of interest to subscribers. Here is a section:

Today is indeed a historic day," Finance Minister Arun Jaitley told reporters after the vote, noting it was significant that the vote passed unanimously. In a series of tweets, Modi congratulated lawmakers on a “path-breaking decision" and said “together we will take India to new heights of progress."

For answers to all your questions about GST, click here

The tax stands to benefit companies in the world’s fastest-growing major economy, where internal barriers to trade increase logistics and compliance costs. Indian equities climbed last week near the highest level since August 2015 as optimism increased that the measure would finally pass.
“GST is the poster child of the Modi government’s reform agenda,” said Nilang Mehta, senior investment analyst at HSBC Global Asset Management, which oversees assets of about $429 billion. “Pushing this through will provide a major boost to the credibility of the reform process in India.”

Plaudits rained in from India Inc. as it became apparent that the measure would pass on Wednesday evening. The country’s main business group hailed it as “one of the most awaited reform measures by the industry." PwC India called it “a momentous occasion." Microsoft India said it was a “positive development." Wal-Mart India praised it as an “extremely progressive step."

Eoin Treacy's view

The Modi government has been criticised for the modest pace of reform since winning a landslide in the 2014 election. However, as he said at the time, there are a large number of small changes that can be made which can have a big impact and he has been delivering on as many of these small successes as was possible. Successfully rationalising the myriad sets of, often competing tax rates, within the economy by imposing a general sales tax is a major accomplishment and further emphasises that despite the heretofore slow pace governance is improving in India. 

That perception of improving governance will be important to how investors view prospects for the Rupee not least as a new central bank chief is due to take office when Rajan steps down in September. The Dollar bounced from the region of its trend mean today and a sustained move below it will be required to question potential for continued higher to lateral ranging not least as the RBI continues in its reserve accumulation policy. 

The Nifty Index has rallied impressively from this year’s low and is now somewhat overextended relative to the trend mean. Some consolidation of recent gains is looking likely but a sustained move below 8000 would be required to question the medium-term upward bias. 

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