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Mumbai, Dec 2 Both the Sensex and Nifty on Monday opened slightly higher led by heavyweight like Reliance Industries (RIL), Bharti Airtel following tariff-hike announcement of up to 40 per cent on Sunday by the telecom companies.

The biggest index contributor RIL, jumped over 3 per cent on the Nifty and Bharti Airtel as much as 8 per cent, but overall 34 scrips Nifty50 stocks traded in the red while only 16 advanced during the early trade.

The benchmark Sensex opened nearly 280 points higher. At 9.17 a.m., it was trading 85.23 points higher at 40,879.04. The Nifty50 was also up 30.30 trading at 12,086.35.

Deepak Jasani of HDFC Securities told IANS that the GDP growth figures were more-or-less on expected lines.

National Statistical Office (NSO) data, released last week, showed that India’s GDP growth slipped to a six year low of 4.5 per cent owing to sharp decline in manufacturing activity, which contracted by one per cent.

R. Nagaraj of Indira Gandhi Institute of Development Research Mumbai, on the markets scaling new highs despite slowing growth in the economy, said: “The stock market is largely driven by short term capital flows. Hence stock price movements are mostly a sideshow, not a barometer of the real economy.”

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Column: Helping Indian SMEs to achieve scale – Behind Infra Lines

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As the Indian economy deals with the economic impact of the Corona induced slowdown, an opportunity to make constructive changes to the economic policies has arisen.

India needs a long hard look at ways to deregulate the economy and businesses. Deregulation pertains to not just the legal frameworks at play but the overarching tax, law and business frameworks that drive business decisions and policies. Changes that can help reduce the regulatory burdens and hindrances to business will help businesses in India achieve the elixir of “creating scale” to help them take advantage of economies of scale.

In a recent article, Paula Mariwala refers to the fact that if Adam Smith or Napoleon who referred to England as “a nation of shopkeepers” were to stereotype India, they would arguably refer to us as “a nation of entrepreneurs”. The article further goes on to state that 80 per cent of Indians find livelihoods in the informal sector. The two biggest takeaways from the article are both the importance of small businesses to the Indian economy and the need to help support small businesses.

While a lot is written and said about helping SMEs and MSMEs, the critical point that needs attention is how to assist businesses in India to scale to a larger size. Taking advantage of the concept of ‘economies of scale’ is probably the most significant need for companies across the spectrum in India. While lack of access to credit has been a large contributing factor to the hindrances faced by small businesses in India, a more effective and less complicated regulatory regime is equally important, if not more.

A closer look at the issue will show that a lack of access to credit and complex regulatory ecosystem that hampers the growth of small businesses are closely interlinked. As has been oft-repeated, Indian businesses suffer from the vicious cycle of not being able to formalise due to the complexity of the regulatory regime and, therefore, lacking access to credit and thereby remaining small are unable to achieve economies of scale.

Essentially, the inability to achieve scale today inhibits the ability to achieve scale in the future. Therefore, the critical question is how does the government turn this vicious cycle to a virtuous one in which small businesses are incentivised to formalise, access credit more easily, achieve scale and generate returns and get the ever-important tax revenue that is needed? Essentially, when making policy changes, one question that policymakers must keep in mind is whether the policy change will assist small businesses to achieve scale. While achieving ‘economies of scale’ cannot be the only determinant of policy decisions, it must surely be a major one.

For instance, for smaller businesses the concept of ‘job work’ whereby a larger business outsources some of its work to a smaller unit or a small unit outsources parts of the product creation to another small unit sounds routine but is of prime importance. Job work allows for economies of scale through specialisation. As India moves ahead, especially intending to boost manufacturing, the ability of small businesses to achieve scale will be driven through their ability to specialise that will allow them to scale and add technology. In this case, compliances around concepts such as ‘job work’ must get more attention in terms of ease and compliance burdens on businesses.

While the concept of jobwork and related regulation at the surface seems standard, a searching look on how Indian small businesses will grow will reveal the importance of rules around concepts such as jobwork. As mentioned earlier, scale is needed for businesses to thrive as the classic economic theory dictates. It is only after a threshold of scale is achieved that businesses can start enjoying the fruits of lower costs, greater profits, formalisation and access to credit, thereby further boosting growth. Indian SMEs have historically struggled for scale and the concomitant advantages that scale brings.

Therefore, as India emerges from the economic slowdown, significant attention must be paid towards the need of businesses to achieve scale. Capital flows, job creation and demand creation are all factors that revolve around the success and scalability of millions of businesses in India. Policy creation and changes that keep a close eye on assisting Indian businesses to scale amongst other factors will have a significant contribution to putting the wheels back on India’s growth story.

(The author heads Development Tracks, an advisory firm. You can contact him at [email protected] The views expressed in this article are personal and that of the author)

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‘Economic disruption to deter RBI from quantifying FY21 growth forecast’

The RBI’s MPC (Monetary Policy Committee) is expected to release its resolution on the monetary policy after their meet on September 29 to October 1, 2020.

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New Delhi, Sep 27 : The dynamic economic upheaval unleashed by Covid-19 pandemic might hinder the Reserve Bank of India (RBI) from giving a pin-pointed growth as well as inflation forecast in the upcoming monetary policy report, experts opined.

The existing legislations mandate the RBI to come out with a growth and inflation forecast twice in an interval of six-months in the monetary policy report.

Expectedly, the report is slated to be issued with the upcoming policy review on October 1. The report was last issued in February.

“Given the continuing uncertainty on the economic revival, it is difficult to say whether RBI will come out with clear forecasts on the GDP print for FY21,” said Suman Chowdhury Chief Analytical Officer at Acuite Ratings and Research.

“It has, however already highlighted the risks of a material contraction in economic output in the previous MPC report. As regards inflation, it is likely to reiterate its expectation of a moderation in the CPI inflation over the next few months due to lesser supply constraints, higher crop output in kharif season and also the favourable base effect kicking in.”

According to Brickwork Ratings said: “With uncertainty regarding the pandemic looming large, the RBI may not provide a GDP forecast for FY21 in the upcoming MPC meeting. As in the previous statements, the RBI may continue to talk about economic contraction without quantifying the magnitude.”

“Given the continued surge in Covid-19 cases in the country’s major hubs, which is hindering the recovery process, we expect the Q2FY21 GDP to shrink by 13.5 per cent.”

In April, the RBI’s Monetary Policy Report said that the global economy may slump into recession in 2020.

The report noted that the the coronavirus pandemic, lockdown and the expected contraction in global output will weigh heavily on the growth outlook. The actual outturn would depend upon the speed with which the outbreak is contained and economic activity returns to normalcy, said the Monetary Policy Report for April 2020.

As per the report, due to the highly fluid circumstances in which incoming data produce shifts in the outlook for growth on a daily basis, forecasts for real GDP growth in India are not provided in the Monetary Policy Report, awaiting a clear fix on the intensity, spread and duration of Covid-19.

It is widely expected that persistently high inflation fanned in part due to supply side disruptions along with seasonal factors will deter the Reserve Bank to administer a dose of lending rate cut during the upcoming monetary policy review.

Notably, the expected move will come at a time when industrial output is at historic low due to the Covid-19 pandemic.

The RBI’s MPC (Monetary Policy Committee) is expected to release its resolution on the monetary policy after their meet on September 29 to October 1, 2020.

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Temporary retention, not diversion: FinMin on CAG audit of GST cess

Time taken in reconciliation of compensation receipts can’t be termed as diversion of GST cess fund when the dues to states were fully released by the central government, they said

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Nirmala Sitharaman

Finance ministry sources have countered CAG audit finding of central government wrongly retaining Rs 47,272 crore of GST compensation cess meant for states, saying temporary retention cannot be termed as diversion.

Days after the Comptroller and Auditor General (CAG) flagged that the Centre in first two years of the GST implementation wrongly retained GST compensation cess that was meant to be used specifically to compensate states for loss of revenue, ministry sources said compensation due for the year 2017-18 and 2018-19 was fully paid to states.

Time taken in reconciliation of compensation receipts can’t be termed as diversion of GST cess fund when the dues to states were fully released by the central government, they said.

Sources said that in 2017-18, Rs 62,611 crore was collected, out of which the government released full compensation dues of Rs 41,146 crore to the states and union territories (UTs).

In 2018-19, an amount of Rs 95,081 crore was collected, out of which Rs 69,275 crore was paid as full compensation dues to states and UTs.

They said an amount of Rs 47,271 crore collected in the 2017-18 and 2018-19 had remained unutilised for reconciliation post full payment of GST compensation dues.

For the year 2019-20, the central government released Rs 1,65,302 crore as GST compensation against a cess collection of Rs 95,444 crore which it could do so with the unutilised cess of Rs 47,271 crore.

The GST (Compensation to States) Act guarantees all states an annual growth rate of 14 per cent in their GST revenue in the first five years of implementation of GST beginning July 2017. It was introduced as a relief for states for the loss of revenues arising from the implementation of GST.

If a state’s revenue grows slower than 14 per cent, it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess. To provide these grants, a GST compensation cess is levied on certain luxury and sin goods.

The collected compensation cess flows into the consolidated fund of India (CFI), and is then transferred to the Public Account of India, where a GST compensation cess account has been created. States are compensated bi-monthly from the accumulated funds in this account.

However, instead of transferring the entire GST cess amount to the GST compensation fund during 2017-18 and 2018-19, the CAG found that the Centre retained these funds in the CFI and used it for other purposes.

The finance ministry sources said the compensation receipt in the CFI was subject to reconciliation in the coming months, as usual, in the forthcoming financial year.

If for that reason the amount remained in the CFI, how can that be treated as diversion, they asked adding even the CAG in its report has not said so.

The amount collected under compensation cess fund has been regularly and fully distributed to states as per their dues and budgetary provisions and by the end of July 2020, everything has been accounted for and released, source added.

The CAG in its report tabled in Parliament earlier this week said out of the Rs 62,612 crore GST Compensation Cess collected in 2017-18, Rs 56,146 crore was transferred to the non-lapsable fund.

In the following year (2018-19), Rs 54,275 crore out of Rs 95,081 crore collected was transferred to the fund.

The short transfer in 2017-18 was Rs 6,466 crore and in 2018-19 it was Rs 40,806 crore, the CAG said adding the Centre used this money for “other purposes” which “led to an overstatement of revenue receipts and understatement of fiscal deficit for the year”.

Sources explained that all amounts including taxes and cess that are collected by the Centre should, under the Article 266 of the Constitution, get credited first to the CFI and then only it could be transferred to any other fund through a budget head in Union Budget.

The government makes all efforts to transfer all amounts collected by the end of every financial year into the fund by making necessary budget provisions, they said.

In case of compensation cess, since the final accounts of amounts collected are known only after the end of financial year, any amount collected over and above the estimate will remain in the CFI temporarily, they said adding after reconciliation, the amount is transferred to Compensation Fund and from that fund to states as per their compensation formula.

Therefore, such temporary retention of GST cess in CFI pending reconciliation cannot be treated as diversion by any stretch of imagination, sources said.

Since the cess collected by the Government has been used for full payment of due compensation, then it cannot be alleged that unutilizedcess amount has been diverted for other purposes, they insisted.

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