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1The Exponent Group of Journals For Shares And Stock Market, Volume 4, Number 4, Sep 2016 - Nov 2016

Exponent Group of Journals - Empowering the common man In Association with Shree Aniruddha Upasana Foundation

Volume: 4 - Number 4 Sep 2016 - Nov 2016

* ThisjournalispublishedinassociationwithShree Aniruddha Upasana Foundation.* Theviewsexpressedinthisjournalarethoseoftheauthorsandtheeditormaynotnec essarilyagreewiththesame.* Copyright©2012.Allrightsreserved.Nopartofthispublicationmaybereproduced ordistributedinanyformorbyanymeanswithoutthepriorwrittenpermissionofthe publisher.* AlldisputesaresubjecttoMumbaiJurisdictiononly.* Allcorrespondencemaybeaddressedto:-

EditorsDesk,ExponentGroupofJournalsEmail:[email protected],[email protected]

The Dean & Editor-in-chief

Samir Dattopadhye

Editorial Board :

Dr. Shivanand Nichanaki

Girindra Vasudeo

Sanjay Thakkar

Sushil Mulye

Sanket Pradhan

Dharmesh Trivedi

Prashant Talpade

Assistant EditorVaibhav Karnik

Contents

WhatisBlack SanjayThakkar4Money DemonetisationGirindraVasudeo9

EffectofDemonetisationPrashantTalpade12ontheIndianStockMarket

TrumpPresidency-SanjayThakkar14HowcanitImpactIndia

InvestinginGlobalDharmeshTrivedi17MutualFunds

UnionBudget2017DharmeshTrivedi19

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for Shares And Stock Market is an

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Shares And Stock Market



Editorial

- Prashant TalpadeEmail: [email protected]

November2016wasaboutmajoreventsnotjustinIndiabutevenUSA.Ontheeveningof8thNovember,PrimeMinisterNarendraModicarriedoutasurgicalstrikeonblackmoneybyeliminatingoldRs500andRs1000currencynotesfromcirculation.WhileinUSA,RepublicanDonaldTrumpdefeatedDemocraticnomineeHillaryClintontobecomethe45thPresidentofUSA. Demonetizationwasaboldandhistoricdecisiontakenprimarilytocurbblackmoneythatwasbeingusedtofundterrorism.Theblackmarketwhichismainlycashdrivenwasbadlyaffected.Inaddition,theshortageoflowerdenominationnotesaffectedtradeacrossdifferentsectorsoftheeconomy.Inthiseditionwewillseewhatisblackmoney,itssourcesanditseffectsoneconomy.WehavealsoexplainedtheimpactofDemon-etizationonthestockmarketandvarioussectors.

DonaldTrump’sAmericafirstpolicyandchangestotheH-1BprogramcouldadverselyaffectIndianITcompa-niesandotherprofessionals.TrumpiskeenonreducingtheoutsourcingofjobsandgivingprioritytoAmeri-cans,hencethedecisionsthathetakesshallhaveaneffectonoureconomy.InthiseditionwetakealookathowTrumpspresidencycanaffectIndia.

WealsotakealookathowtheUnionBudgetispreparedandpresented.UnionBudget2017willbeuniqueasitendsthe92yearoldpracticeofseparaterailwaybudget.

Lastlywetakealookatadvantagesanddisadvantagesofinvestmentsininternationalmutualfunds.

4 The Exponent Group of Journals For Shares And Stock Market, Volume 4, Number 4, Sep 2016 - Nov 2016


What is Black Money

- Sanjay ThakkarE-mail: [email protected]

Black money is a term used in common parlancetorefer tomoneythat isnot fully legitimate in thehandsoftheowner. Thiscouldbefortwopossiblereasons.

1. Firstisthatthemoneymayhavebeengeneratedthroughillegitimateactivitiesnotpermissibleun-derthelaw,likecrime,trafficking(human,drugs,arms), terrorism, and corruption, all of whicharepunishableunderthelegalframeworkofthestate.

2. Second and perhapsmore likely reason is thatthewealthmayhavebeengeneratedandaccu-mulatedbyfailingtocomplywiththetaxrequire-ments.

AlthoughblackmoneyinIndiaisdecadesoldprob-lem, it has become real threat post liberalization.Illegalactivities suchascrimeandcorruption,non-compliance with taxation requirements, complexproceduralregulations,culturalandsocialpractices,globalizationalongwithweakinstitutional,policy,le-galandimplementationstructureshavefurtheraug-mentedtheblackmoneyeconomy.

Concept of Black Money

Blackmoneyistax-evadedincome.Itcanbeearnedboth through legal and illegalmeans. Its legitimatesourceisthattheincome-earnersdonotrevealtheirwholeincomefortaxpurposes.

Forexample,governmentdoctorsearningmoneybyprivatepracticeevenwhen they getnon-practisingallowance;teachersearningmoneythroughtuitions,examinationsandbookroyaltyandnotincludingitinincome-taxreturns;advocateschargingmuchhigherfeethanshownintheiraccountbooks,andsoforth.Itsillegitimatesourceisbribe,smuggling,black-mar-

keting,sellingcommoditiesatpriceshigherthanthecontrolledprices,takingpugreeforhouse,shop,etc.,sellinghouseatahighpremiumpricebutshowingitatmuchlowerpriceintheaccountbooks,andsoon.

Itispossibletoconvertblackmoneyintowhitemon-eyandviceversa.Forexample,whenapersonman-agestogetthereceiptfromtheshopkeeperbypay-ingsales-taxforacommoditybutdoesnotpurchaseitactually,hegeneratesblackmoneyasreimburse-mentismadetohimagainstthereceipt.

Themoneynotactuallypaid is theblackmoney inthiscase.Insuchcase,theshopkeepersellsthesamecommodity to another person without giving himanyreceiptforit.

On the other hand, if a person purchases second-handcarandpaysRs.90,000foritoutofwhitemon-eybutgetsareceiptofonlyRs.60,000,thebalanceofRs.30,000becomesblackmoneyfortheseller.Inthiscase,whitemoneybecomesblackmoney. Magnitude of Black Money

It is not easy to calculate the magnitude of blackmoneyinanysociety.TheeconomistsintheUnitedStates, the United Kingdom, Norway, Sweden andItalyadopteddifferentmeasuresbutcouldnotesti-matetheamountinvolvedinblackmoney.

NorwayandSwedenusedquestionnairemethodforeliciting answers from persons whether they hadparticipatedinillegalactivitiesasbuyersorsellers.

Italyattempted toestimate theundergroundecon-omybyfindingoutthedifferencebetweenthesizeof the labour-force officially reported and actuallyemployed.Thisenabledtheauthoritiestodetermineproductivityintheundergroundsector.



TheUnitedKingdomtriedtoassessparalleleconomybycomparingtheofficialestimatesoftheGrossNa-tional Product (GNP) made from the consumptionsidewiththosemadefromtheincomeside.

Inspiteofthevariedmethodsused,itisnotpossibletoestimatethemagnitudeofblackmoneyinasoci-ety,eventhoughitisdescribedasaworld-widephe-nomenon.

ItissaidtobeinoperationnotonlyinthedevelopingcountriesbutalsointhedevelopedcountriesliketheUnited States, the United Kingdom, Russia, Japan,Canada,France,Germany,etc.

AstudyconductedbytheIMFaboutadecadeandahalfbackshowedthatinregardtothesizeoftheun-dergroundmoney,IndiaholdsthefirstrankfollowedbytheUnitedStatesandCanadahavingthesecondandthethirdranks.

Thoughitisquitedifficulttoestimatethequantumofblackmoneywithaccuracybutmanyattemptshaveso far beenmade in India for quantifying it and inmostofthecasesthefindingsappeartobefarfromreality.

However, most of such studies undertaken in ourcountry in recent years put the quantum of blackmoneyintheneighbourhoodof40percentofgrossdomesticproduct(GDP). Accordingly, Indian Institute of Public Finance andPolicy (IIPFP) finds that out of the total amount ofblackmoney,48percentisgeneratedfromevasionofpersonal incometaxalone,28percentfromun-der-reportingofproductionand18percentfromun-der-registrationofimmovablepropertysothatthesethreemaincomponentsexhaustabout94percentillegalincomegeneration.

Guesstimates based on ‘Global Financial Integrity’claim that the amount exceeds ‘USD1.4 trillion’ intotal.

Swiss Bankers Association and the Government ofSwitzerlandthrashedthereports&saidthatthetotalamountheldinallSwissbanksbycitizensofIndiaisabout‘US$2billion’. InFebruary2012,thedirectorofIndia’sCentralBu-

reauof Investigationsaidthat IndianshaveUS$500billion of illegal funds in foreign tax havens, morethananyothercountry. InMarch2012,thegovernmentof Indiaclarifiedinits parliament that the CBI director’s statement on$500billionofillegalmoneywasanestimatebasedonastatementmadetoIndia’sSupremeCourtinJuly2011

Sources of Black Money Asdiscussedabovethesourcesofblackmoneyarebroadly of two categories- illegitimate activity andtaxevasioneveniftheactivityislegitimate.Inparticularfollowingaresomeofthemechanismsthroughwhichblackmoneyiscirculated,utilizedandtheprofitsearnedarefurtherinvestedinothersec-torstogeneratefurthermoney.

1. Realestate:Duetorisingpricesofrealestate,thetax incidence applicable on real estate transac-tionsintheformofstampdutyandcapitalgainstaxcancreateincentivesfortaxevasionthroughunder-reportingoftransactionprice.

2. Bullion and jewellery market: The purchase al-lows the buyer the option of converting blackmoney into gold and bullion,while it gives thetrader the option of keeping his unaccountedwealthintheformofstock,notdisclosedinthebooksorvaluedatlessthanmarketprice.

3. Financial markets transactions: IPO manipula-tions,riggingofmarketsuchasuseofshellcom-panies.

4. Public procurement: Public procurement hasgrownphenomenallyovertheyears–involume,scale,andvarietyaswellascomplexity.TheCom-petitionCommissionof Indiahadestimated to-talpublicprocurementfigureforIndiaataround10to11lakhcroreperyearandprovidesamplescopeof corruptiondue to riggedprocurementprocess.

5. Non-profitorganizations:Taxationlawsallowcer-tainprivilegesandincentivesforpromotingchar-itableactivitieswhicharemisusedandmanipu-lated.HighlightedbyFATFaswell.Usedtoparkfundsofcorruptpoliticiansandbusinessmen.

6. InformalSectorandCashEconomy:Cashtransac-tions, large un-banked and under-banked areascontributetothelargecasheconomyinIndia.

7. Trade-based Money Laundering (TBML): Dis-guisingtheproceedsofcrimeandmovingvalue



through the use of trade transactions in an at-temptatlegitimizingtheirillicitorigins.

8. TaxHavens:Taxhavensaretypicallysmallcoun-tries/ jurisdictions, with low or nil taxation forforeignerswhodecidetocomeandsettlethere.Strong confidentiality or secrecy regardingwealthandaccounts,very liberalregulatoryen-vironmentandallowopaqueexistence,whereanentity caneasilybe setupwithout indulging inanymeaningfulcommercialactivityandyetclaimtobeagenuinebusinessunit,merelybygettingitself incorporatedor registered in that jurisdic-tion.Thismakesthemhighlydesirablelocationsformultinationalentitieswishingtoreducetheirglobal tax liabilities. Multinational entities con-sisting of a network of several corporate andnon-corporatebodiessetupconduitcompaniesintaxhavensandartificiallytransfertheirincometosuchconduitcompaniesinviewofthelowtaxregimethere.

9. InvestmentthroughInnovativeDerivativeInstru-ments:SuchasParticipatoryNotes(P-notes).

10. Hawala: It is an informal and cheapmethod oftransferringmoneyfromoneplacewithoutusingbanksetc.Itoperatesoncodesandcontactsandnopaperworkanddisclosureisrequired.

Detrimental to economic health: Thereisadistortionininvestmentineconomy.Withblackmoneytheinvestmentismadeinhighendandluxurygoods. Hugelossoftaxesamountingtobillions.Blackmoneyleadstofurthercorruptionbycreatingaviciouscycle. Generatingblackmoneymeansthatqualityiscom-promisedinpublicsectorprojectswhereblackmon-eyisusedtomanipulatetendersandofferkickbacks. Investmentsthatmusthavebeenmadeinthecoun-trygivingthenecessaryboosttoeconomyareinvest-edelsewhere. Since,RBIcannotcontroltheblackmoneycashflowineconomy,itdilutesitspoliciestargetinginflation.Highpricesofrealestateespecially inbigcitiesareduetodeeppocketsfilledwithblackmoney. Forward trading of goods by cash rich speculatorscausefluctuationinpricesduetohoarding.

Nationalsecurityisthreatenedbecauseblackmoneyis used to finance criminal activities. Black moneygeneratedfromdrugsandsmugglingisbeingusedtooperateterrornetworks.

Steps taken by government to curb black money generation and flow:

Tax Reforms: Taxdeductionat source inwhich thetaxisdeductedfromthepaymentitselfbythepayee.

Voluntary Income Disclosure Schemes: The gov-ernment allows reporting black money generatedthroughtaxevasioninagiventimeframe.

Removing currency after certain time:Sothatunac-countedwealth is either brought into economy orbecomes useless.

Encouraging Cashless transactions:Governmenthasrecently announced tax benefits formaking onlinepayments.

Legislative Framework:

PreventionofMoneyLaunderingAct,2002(amend-edmultipletimeslatestin2012) LokpalandLokayuktaAct PreventionofCorruptionAct,1988 TheUndisclosedForeignIncomeandAssets(Imposi-tionofTax)Bill,2015 BenamiTransactionsProhibitionAct,1988amendedin 2016 TheRealEstate (RegulationandDevelopment)Act,2016

International Cooperation: Multilateral Convention on Mutual AdministrativeAssistanceinTaxMatters FinancialActionTaskForce UnitedNationsConventionagainstCorruption UnitedNationsConventionagainstTransnationalOr-



ganizedCrime InternationalConventionfortheSuppressionoftheFinancingofTerrorism United Nations Convention against Illicit Traffic inNarcoticDrugsandPsychotropicSubstances EgmontGroup for international intelligencegather-ingregardingmoneylandingandterrorismfinancing CooperationthroughG20,Bilateralagreements.

Recent Steps 1. Withtheaimofunearthingblackmoneystashed

abroad, parliament has passed theUndisclosedForeign Income and Assets (Imposition of Tax)Bill,2015, in theparliament.Salient featuresoftheBillareasfollows

• Taxonallforeignincomewillhavetobepaidat

theflatrateof30percentwithoutanyexemp-tion,deduction,andsetofforcarryforwardloss-esthattheIncomeTaxActpermits.

• Enhanced punishment of jail for 3-10 years forwillful evasion of tax on foreign income alongwithapenaltyequaltothreetimestheamountoftaxevadedor90percentoftheundisclosedincomeorthevalueoftheasset.

• One-timecomplianceopportunity:Aone-timecompliance opportunity to persons who haveany undisclosed foreign assets (for all previousassessmentyears)willbeprovidedfora limitedperiod.Suchpersonswouldbepermittedtofileadeclarationbeforeataxauthority,andpayapen-altyattherateof100%.

• Bill empowers the Centre to enter into agree-mentswithothercountries for theexchangeofinformation, recovery of tax and avoidance ofdoubletaxation.

2. Indiaisaimingtoestablisharealtimeautomat-

ic information sharing systemby 2017. It seeksto enter into Multilateral Competent AuthorityAgreement (MCAA). To implement the MCAA,governmenthasamendedtheITAct,2008.

3. Underpressure from Indiaandothercountries,Switzerlandhasmadekeychangesinitslocallawsgoverning assistance to foreign nations in theirpursuitofblackmoneyallegedlystashedinSwissbanks. These amendments, would allow India

andothercountriestomake‘grouprequests’forinformationaboutsuspectedblackmoneyhoard-ers. Switzerlandhasdisclosed certainnames toIndianauthoritiestoo.

4. Special Investigation Team (SIT) appointed by

governmentonthedirectionsofSupremeCourtonblackmoney.

5. Demonetization: Demonetization is a currencysidestep.Thatitselfwillnotfightblackincome.Themostimportantpolicyshouldbetaxadmin-istrationwhere the tax authorities canmonitorexpenditureandmatchingitwithincomeoftherespectiveindividuals.

Analysis of the Recent steps by Government In1997theamnestyschemeforblackmoneyholdersgotdeclarationsofaroundRs33,000croreandtaxescollectedamountedmorethanRs10,000crore.

At present under the Income declaration scheme,Rs65,250croreofundisclosedassetsweredeclaredinonetimecompliancewindow,yieldingRs29,362croreintaxes. Way forward

The black money menace is still untamed and lotmore needs to be done to tackle it. Some of thestrengtheningstepsthatcanbetakenare: 1. Appropriate legislative framework related to:

PublicProcurement,PreventionofBriberyoffor-eignofficials,citizensgrievanceredressal,whistleblowerprotection,UIDAdhar.

2. Settingupandstrengtheninginstitutionsdealingwithillicitmoney:DirectorateofCriminalInvesti-gationCell forExchangeof Information, IncomeTaxOverseasUnits- ITOUsatMauritiusandSin-gaporehavebeenveryuseful,StrengtheningtheForeignTAX,TaxResearchandInvestigationDivi-sionoftheCBDT.

3. Developing systems for implementation: Inte-gratedTaxpayerDataManagementSystem(ITD-MS)and360-degreeprofiling,SettingupofCyberForensicLabsandWorkStations,implementationofGoodsandServicesTaxandDirectTaxCode.

4. Impartingskillstopersonnelforeffectiveaction:Bothdomesticandinternationaltrainingpertain-ing to theconcernedarea. For instance, theFi-



nancial IntelligenceUnit-Indiamakesproactiveefforts toregularlyupgradetheskillsof itsemployeesbyprovidingthemopportunitiesfortrainingonanti-moneylaundering,terroristfinancing,andrelatedeconomic issues.

5. ElectoralReforms:Electionsareoneofthebiggestchanneltoutilizetheblackmoney.Appropriatere-formstoreducemoneypowerinelections.

Thus,aholisticandallroundattackfromwithinandoutsidethecountryistheneedofthehour.Indiashouldquicklytakeupappropriatereformsathomethatwillaidincurbingtheblackmoneygenerationandcircula-tioninthecountryalongwiththeuseofbilateralandmultilateralmechanismstodealwithroundtrippingandstashingofmoneyoutsidethecountry.



Demonetisation

- Girindra VasudeoEmail: [email protected]

Amonthplus into India’sdemonetisation initiative,long linesofpeople looking toexchangenotes stillspew out of banks, some sectors of the economycontinuestrugglingwiththelackofreadilyavailablecash,grassrootsbusinessesarestillbeingrevolution-izedwithelectronicpaymentcapabilities,andmassesofpeoplecontinuetransitioning towardsnewwaysofpayingforbasicgoodsandservices.

On8thNovember2016,86%ofIndia’scurrencywasnullifiedinagreatdemonetisationeffortthataimedtocleanouttheblackmarket’scashsupplyandcoun-terfeitnoteswhichcompletelydisruptedthesocial,politicalandeconomicspheresoftheworld’ssecondlargest emergingmarket. All 500 and 1,000 rupeenotes were instantaneously voided and a 50-dayperiodensuedwherethepopulationcould(ideally)redeemtheircancelledcashfornewlydesigned500and2,000rupeenotesordepositthemintobankac-counts.

India has done this before. In 1946, all 1,000 and10,000 rupeenoteswere recalled. In1978, 1,000,5,000and10,000rupeenotesweredemonetised.

This recentboutofdemonetisationwasplanned insecretbyasmall,tight-knitgroupledbyPrimeMin-isterModi and it overtook the country like a flashflood.Thissurprisewasbydesign,asitwasfeared

thatiftheblackmarketcaughtwindofwhatthegov-ernmentwasplanning,theywouldfindwaystorap-idlyunloadtheir illicitcashandtheinitiativewouldflopononeofitsinitially-statedgoals.

It is nearing twomonths since thehighdenomina-tionnoteswereabruptlyscrappedon8thNovember2016.About85%ofcurrencyinvaluewasconvertedintoillegaltenderanditbecamemandatoryforyoutodeposit theseoldnotes intoyourbankaccountsbytheyearend.Ofcoursetheunderlyingassump-tionwasthattheoldnotespossessedbyyouwereall“tax-paid”notes.

Theplanhaslaudableaims.Itsinitialpopularitywasbasedontheideathatthegreedyrich,withtheirill-gotten“blackmoney”storedinstacksofbanknotes,willcometothesurface. Thosewhocannotjustifythesourcesof theirwealthwill facepunitivetaxes.ItalsoalignedwithMr.Modi’smanifestopledgetonormalize India’s black economy, estimated by theWorldBank in2010tobeworthaboutone-fifthofofficialGDP.TheideaisthatIndiawillbecomemoreefficientasmorepeopleandmoremoneyenterthebanking system, counterfeit currency will becomeworthless,India’swoefullylowtaxbasewillexpand,andgovernmentcofferswillenjoyawindfallofcashexpropriatedfromthecorrupt.

Assooften,theburdenofthisreformhasfallenmostheavilyonthepoor.Overfour-fifthsofIndia’swork-ersareinthe“informal”sector,paidincash.Untoldnumbershavebeenlaidoffbecausetheiremployerscannotpaythem.Tensofmillionshavequeuedforhoursatcashmachinesandbankbranchestogetridoftheuselessnotesandgetholdofsomespendingmoney.Anewbusinesshassprungupinlaunderingcashforafeeforthosewithoutthetimeorinclina-tiontoqueueorwithmorenotesthantheycanac-countfor.



Cash is used for 98% by volume of all consumertransactionsinIndia.Withfactoriesidle,smallshopsstrugglingandashortageofcashtopayfarmersfortheirproduce,theeconomyisstuttering.Therearereportsthatsalesoffarmproductshavefallenbyhalfandthoseofconsumerdurablesby70%. Apart from the noble intent of the government tocounter 1. Blackmoney2. Fakemoney3. Terroristfundingtheramificationsofthissurgicalstrikeledtothefol-lowing: • Apathyofpoor/middleclass/ruralpeople• Slowingdownoftheeconomy• Joblossesofthedailyworkers/artisansetc.

ThelongtermeffectsofIndia’sdemonetisationgam-bit remainunclear, largelybecausenoothermajoreconomyhasattemptedsuchanexperimentexceptduringacrisis.Butwithgrowthslowingandjobloss-es,theshort-termprognosisappearsgrim.

Whilstthecountry’seconomistsareperformingad-vancedmentalgymnasticstodefendthismove,theythemselves appear to be hazy in theirmind aboutthepathahead.

India’seconomywith its intrinsicresiliencewillcer-tainly recover in the long run but it has certainlyimpaired itsprogress intheshorttomediumterm.Theoptimists,on theotherhand,have said that itwilleventually rootoutcorruption,simplify the taxstructureandlaythefoundationforagrowingrobusteconomy.Thereisalsoaviewthatdemonetisationwillinvigoratethesluggishbankingsectorwithcheapfunds.Weneedtopraywithfoldedhandsthattheshorttermpaininjectedbywithdrawingtheoldnotesis really“short term”andwill leadus toadawnofuncorruptandgrowingeconomy.Astepinthisdirec-tionisthatthegovernmentmitigatesthewoesofthepeoplebyfindingwaysofprintingnewmoneymorequickly.

Themost interestingthingregardingthedemoneti-sation is that people have devised various uniquemethods for transforming their black money intowhiteone.Someofthesemethodsareasfollows:

• Depositingmoney intheaccountsof theirpoor

relativesandfriends.• Enticing the people with some percentage of

moneyforexchange.• Askingtheiremployeestostand in longqueues

infrontofbanksandATMsforgettingmoneyex-changed.

• HiringpeopleforasumrangingfromRs.500/-toRs.700/- for being apart of the longqueues infrontofbanks/ATMs.

• Convertingblackmoneyintogold.• Payingafewmonths’salariesinadvance.• Payingbackloansforcibly.• Usingtheirinfluence/linkswithbankemployees,

and so on.

Weshallseeagreatimpactofthismoveofthegov-ernmenton Indian society andeconomy. Thefirstimpact will be that people will have lower spend-ingpower,whichwouldmeanthattheywouldonlyspendonnecessitiesandavoidexpenditureonluxu-rygoods.

There will also be no ostentatious expenditure onweddingsandotherceremonies. Thiswill result insocietygrowinglessmaterialisticandmoreprudent.With counterfeit currency destroyed, the Indianeconomywill experienceanupward swing. At thesametime,thereisapossibilitythattherealestatesectormaysufferadownwardspiralandcrash.

Hopefully,alldailynecessitiesoflifewillgetcheaperandthe Indiancurrencywillearnrespect in the in-ternational market. Terror-related funding will becurbedandthereforesowillterroristactivities.Cor-ruptionwillalsobecontainedaspeoplewillstopac-cumulating“blackmoney”andusingitforunethicalmeans.

Asmajorityoftheoldnoteshavecomebacktothebank,itisimperativetoinvestigateandensurethatnoportionofthesenoteshasbeenusedtolaunderblack money into banking channels. Those foundguiltyshouldcomeunderthestrictestpunitivemea-suresofthegovernment.

Finally,weneedtoappreciatethatonly25%ofthecurrencyprior todemonetisation isback incircula-tion. This isnotallowing theeconomy to functionproperly. People are hoardingwhatever new cashthey have and this could result in “demand slow-



down”aspeoplewouldpostponepurchases.Itwilltakesometimeforthecurrencyincirculationtoimproveenoughfortheeconomytogetbackontrack.

Thereisverylittledoubtthatthegovernmentwillexpeditetheexerciseofremonetisationbyinjectingnewnotesinthesystemtoextricatetheeconomyfromgoingintoanegativespiral. MayourIndianeconomycomebackontrackattheearliestandsparkleontheglobalcanvasslikeashiningstar.



On 8thNov, 2016, PM Narendra Modi announcedthe cancellation of Rs 500 and Rs 1000 notes (akademonetization) which resulted in 86% of the cir-culated money being removed from the economyovernight.Thiswasprimarilydonetocurbtheblackmoney,makeallthecounterfeitcurrencyworthlessandattackterrorismatitsroots.

Tounderstandtheimpactonthestockmarket,let’sfirstunderstandhowsignificantamovethisis.Inthepast many countries have attempted demonetiza-tion,somesuccessfullyandsomeunsuccessfully,butallof themweredonewhentheireconomieswerehaving major problems like hyper-inflation in Ger-manyinthe1920s.This isthefirsttimethataper-fectlyhealthyeconomyhasattempteditandthattooto targetblackmoney.Because this isafirst, therearevariedopinionsamongsteconomistsonwhattheimpactwillbeinthefuture. Theimmediateimpactofremovingsomuchmoneyfromcirculationisofcoursetheimpactitcanhaveonseveralsectorsthataredrivenbytheblackeconomylikerealestate,constructionetc,butmoresoalsothesectorsthataremoredrivenbycash,becausetheyarethefirstthatareaffectedwhensomuchmoneyissuddenlyremovedfromcirculation.

Hereishowthevarioussectorshavebeenimpactedafter the demonetizationmove andwhatwe thinkcouldhappeninthefuture:

Real Estate

SinceRealEstateisdrivenbytheblackeconomy,thiswasthesectorthatwasprobablytheworsthitofallthesectors.TheNiftyRealtyindexgappeddownafterthedayof thedemonetizationmoveandcorrected-25%(asindicatedinthechartbelow,theNIFTYRE-ALTYbouncedoftheAuto-SRverystrongsupportof

152.5onaweeklychart)beforerecoveringabit.Itisstilldownalmost-16%from8thNov.

Sincemany real estate properties have a big blackmoneycomponent,theyareexpectedtogothroughatleasta20-30%correction,andhenceforthefore-seeable2quartersatleast,chancesarethatthissec-torwillprobablygolowerbeforeitstartstoimprove.

Consumer Durables

Thissectorisprimarilydrivenbycashandhencehasalsobeenhithard.Itisdownbyalmost11.7%sincethedemonetizationannouncement.

Banking

TheBankingsectortookanimmediatehitthedayaf-ter theannouncementbut recoveredonNov10th.But,ithasbeensubsequentlycorrectingasitisstillgrappling with trying to replenish the cash in theeconomy. However, this is one sector which is ex-pectedtobenefit inthe longtermbecausea lotoftheblackmoneywillbedepositedinbankaccountsandtheexcessfundsinthebankingsystemwillalsohelpaddressthenon-performingassets(NPA)prob-lem thatmany of the banks are facing due to badloans.Due to theseNPAproblems, a lot of the in-frastructurefundingetchasalsobeenaffectedandhopefully, that should also be addressedwhen thecurrentcashcrunchisreducedandeconomyclawsbacktonormalcy.

Infrastructure

Theinfrastructuresectorisdrivenbymassiveinvest-mentsfromgovernmentaswellasloansfrombanks.One of the healthy effects of demonetization is toincreasethe liquidity in thebankingsystemaswellas increase the funds that the government has for

Effect of Demonetisation on Indian Stock Market

- Prashant TalpadeEmail: [email protected]



spendingonitemslikeinfrastructure,welfareetc,sothe Infrastructure isanobviousbeneficiaryof that.ThefactthattheNIFTYINFRAindexhasnotbeenaf-fectedmuch(asisconfirmedbythefactthatitisupmarginallysinceNov8thinthechartbelow):

Information Technology

TheITsectorhasbeenlargelyunaffectedbythede-monetizationasitisexportorientedandhencerela-tivelybetterpositioned tohandle shocks in the In-dian economy.Moreover it is probably also largelyacashlesssectorandhencealsonotaffectedduetothecashbeing takenoutof theeconomy.TheNIF-TYITchartbelowshowsthattheITsectorisactuallydoingbetterthanfromwhatitwasonNov8th.

Inconclusion,wecanprobablysummarizetheeffectofdemonetizationontheoveralleconomyasfollows: 1. Intheshortterm,GDPwillbedownforatleasta

1-2quartersbeforerecovering.

2. AlotofblackmoneywillbeconvertedtowhiteandbedepositedintothebankswhichwillinturnhelpintheNPAproblemthatbanksarefacing.

3. In the longer term, reducing of black moneyeconomyinthefutureshouldbringmorepeoplein the taxnetandhence lower taxesaswellasinterestrateswhichwillbodewellfortheoveralleconomy.

Althoughthiswaswhatiscalledasurgicalstrikeonblackmoneyandwillhaveimmediateimpactontheexistingblackmoney,mosteconomistsagreethough,thatthismoveisnotsufficientandseveralotherre-formsliketaxreforms,realestatereformsetcneedtobeundertaken to curb theblackmoneygenera-tioninthefuture.



Trump Presidency - How Can It Impact India

- Sanjay ThakkarEmail: [email protected]

AsRepublicanpresidentialcandidateDonaldTrumphas frequently targeted India through his rheto-ric, recently accusing India andChinaof takingun-fair “advantageof theUnitedStates”andhasusedwidely televised debates and pep rallies to pilloryoutsourcing. Indianbusiness leadersareconcernedthataTrumppresidencycouldnegativelyimpactthecountry.

India’sChiefEconomicAdviserArvindSubramaniantold the Advancing Asia Conference hosted by theIMF: “My concern is that Trump inhis last debate,said–‘H-1B,whateveritis,IuseitbutIdon’tlikeit.IwanttoscrapallH-1Bvisas.’That’sveryworryingforIndia’sexport-ledgrowthgoingforward.”

India’s software services accounted for $82 billion-worthofexportsinthefinancialyearendinginMarch2015,accordingtotheReserveBankofIndia;60%ofthatfigurecamefromNorthAmerica.

IndianoutsourcinggiantsTataConsultancyServices,InfosysandWiproareheavyusersoftheH-1Bvisas.TheIT industryhasgenuineconcernsasTrumphasshifted his position several times on theH-1B pro-gram.Earlyinhiscampaign,Trumpproposedrestrict-

ingtheprogramandcriticiseditforgivingawaycov-etedentry-levelITjobstoworkersflownincheaperfromcountrieslikeIndia.

Then, during the thirdRepublicandebate, he com-plained that a paucity of H-1B visas was makingAmericalosetalentedpeople.“TheygotoHarvard.They go to Yale. They go to Princeton. They comefromanothercountry,andthey’reimmediatelysentout.Iamallinfavourofkeepingthesetalentedpeo-pleheresotheycangotoworkinSiliconValley,”saidTrump.

TheRepublicanfront-runnerthenreversedhisclaimafterthedebate.Inastatementreleasedonhiscam-paignwebsite, Trump saidhedoesn’t actually sup-porttheH-1Bvisas.Instead,hesaidhewould“endforever”usingH-1Bworkersforcheaperlabour,andstucktohisinitialproposalofarecruitmentrequire-mentforemployers.

Inhis2011bookTimeToGetTough,Trumpalsoad-vocated a 15% tax on companies for outsourcingjobstoplaceslikeIndia,anda20%taxforimportinggoodsandservices.

“OutsourcingisasoldasAdamSmith.Youcan’tturneconomics on its head. Services will move wheretheyarecheaper.USconsumershavebenefitedfromahigherqualityofservicesfromIndiaatacheaperprice,”saidRajivKhanna,presidentofthepowerfulIndia-AmericaChamberofCommerce.

“Trumphasoverruledhimself severaltimeson theH-1Bvisaprogram,whichisgood.Itshowsheisflex-ible. If Trump imposes a 15% duty then those ser-vicescomingtoUScompanieswilljustbe15%moreexpensive.ItisnotasifthereiscapacityintheUStoperformthoseservices,”saidKhanna.“Iwouldn’tbeasupsetastheIndiancompaniesareasthisiselec-

Trump Presidency - How Can It Impact India

- Sanjay ThakkarEmail: [email protected]



tionrhetoric.”

Obama and Indian IT

In2008,then-candidateBarackObamahadpromisedvoters thathewouldwork to slowtheoutsourcingofAmericanjobstoothercountries,proposingtore-vampafederaltaxcodethatencouragescompaniestomaintainoverseasoperations.Ayearlater,Obamaaspresidentcameoutwithaplantorevamptaxrulesandendthetaxdeferralsystem.Underthisplan,out-sourcerswithbigIndianoperationscouldhavebeenhitwithahigher35%taxbillifdeferralswereelimi-nated.Intheend,however,Obama’splansgotaca-gey response from theUSCongress. Thebroad taxchangeshavenothappened.Still, that’s not to say everything has been smoothsailing for India’s IT industry duringObama’s presi-dency.Trump’santi-outsourcingtalkcomesatatimewhenthe Indian IT industry isalreadyfeeling likeapunchingbagforUSprotectionism.InDecember,theUSCongress passed a bill named the “9/11Healthand Compensation Act” to fund continued health-careforfirst-responders.Tokeepthedollarsflowing,theBilldoubledthefeeforH-1Bvisasforeverynewapplicantto$4,000andto$4,500foreveryL-1visa,whichisneededforintra-companytransfers.

Thesechangeswillbeinforceforthenext10yearsandarelikelytocosttheIndianITindustry$400mil-lionayear,accordingtoNASSCOM.

Trump’s globophobia

Trumpsaysthat,ifelected,he’dgetAppletobuilditscomputersintheUSratherthaninothercountries.He has promised to slap a 35% duty on Ford carsmadeinMexicoandotherforeigncountries.Trump’sprotectionistwildtalkisdisconcertingfortherapidlygrowingUScarmanufacturingindustryinIndia.UScargiantFordhasmanufacturingplantsinChen-nai,Puneandanewfactory—whichcost$1billiontobuild —inSanand,Gujarat.Fordsays itplanstousetheGujaratfactorytotriplethenumberofcarsitexportsoutofIndia.

“TogetherwearedeliveringPrimeMinister(Naren-dra)Modi’s vision for India,”Mark Fields, chief ex-ecutiveofFord,saidattheFordfactoryopeningonThursdayMarch242016.“Wearehappytobemak-inginIndiaforIndiaandfortheworld.”

Ford’smoveshowssupportforModi’s“Makein In-dia”campaigntogetmoreUScompaniestomanu-factureinandexportfromIndia.

But ifTrumphashisway, thingswillbeverydiffer-ent.Trump,whohasbeensellinghimselfasasmartbusinessman, proposes to slapmassive tariff taxesonAmerica’slargesttradepartners.

“IwouldtaxChinaoritsproductscomingin,”TrumptoldTheNewYorkTimesearlierthisyear.AsforMex-ico,hehassaid:“everycarandeverytruckandeverypartmanufactured in theirplants thatcomeacrosstheirborder,we’regoingtochargeyoua35%tax.” If Trump has hisway, highUS tariff barrierswouldextend to car and auto partsmade in India,whichalready exports more passenger cars than China.ForeigncarmakersinIndia,suchasHyundai,SuzukiMotor,Nissan,GeneralMotors,FordandVolkswagenAG,haveseentheirpassenger-carexportsjumpover60%inthelastfiveyears,to620,000passengervehi-clesin2014.Chinatrailedbehindwith533,000autoexportslastyear. AnanonymousseniorexecutiveatUSbeveragegiantPepsiCo, said, “Trump’s anti-free trade crusade ap-pealstounionmembersandleft-winglaborbosses.

Trump wants voters to believe Mexicans, ChineseandIndiansare‘rippingusoff.’Butitisn’tazerosumgame.” Timmons Roberts, a professor of environment andsocietyatBrownUniversity,saysTrumphashitasen-sitiveAmericannerveon fearsofwhat isderisivelycalled “globophobia”. Sadly, what muscle-flexingTrumpdoesn’ttellvoters isthattheAmericanpeo-plewillfinallyenduppayingthesetaxes,which,aswithanylevies,willbeembeddedinthepriceoftheproduct.

It’s unusual for foreign diplomats to express con-cernaboutcandidates in themiddleofapresiden-tialcampaign.ButTrump’santi-freetradecampaignandrantsagainstminoritieshasspurredforeigndip-lomats,includingfromIndia,tocomplaintotheU.Sstatedepartment.“Asthe[Trump]rhetorichascontinued,andinsomecases ampedup, so, too, have concerns by certainleadersaroundtheworld,”onestatedepartmentof-ficialwasquotedassaying,citingIndia,SouthKorea,



JapanandMexicoamongcountrieswhosediplomatshadraisedthematter.

Trump vs. Clinton on foreign policy

TheWashingtonPostreportedthatinameetingwithitseditorialboard,Trumplaidouthis“unabashedlynoninterventionistapproachtoworldaffairs,”includ-ingaplanto“significantlydiminish”USinvolvementinNATO, and he questioned “the value ofmassivemilitaryinvestmentsinAsia”.HearguedthatthebestwaytohaltChina’smilitaryairfieldsonreclaimedis-landsintheSouthChinaSeawastothreatenitsac-cesstoAmericanmarkets.

“This is a man who knows nothing about foreignpolicy.Trumpwants towithdrawAmerica fromtheworld.Hisforeignpolicyisincoherentandbereftofmeaningfulideas,”saidSouthAsiaexpertSumitGan-guly,whoholdstheRabindranathTagoreChairinIn-dianCulturesandCivilizationsatIndianaUniversity,Bloomington. Ganguly added, “On the other hand, Hillary Clin-ton is a seasoned foreign policy professional. Thisissomeonewho isknowledgeableabout theworldandwhocanreason,incontrasttoTrump,whoisademagogue.Clintonwouldmean,fortheworld,anemphasisonfreetrade.ShewouldprobablymeananinterventionistUSforeignpolicy,anactivistAmericanforeignpolicy.”

Astheformersecretaryofstate,Clinton’ssignatureinitiativebecameknownas theObamaadministra-tion’s“pivottoAsia.”WhiletheUSwasboggeddownin Iraq and Afghanistan, China had the headroomtoexpand its influence intheregionwithallies likeNorthKorea,Pakistan,MyanmarandSriLanka.Ris-ing China spurred Clinton to consolidate America’stieswithregionalpowerslikeIndia,Japan,Australia,Indonesia and the Philippines in a policy pivot to-

wardsAsia.

ThereweremanyreasonsClintonwasmissedbyIn-diaasJohnKerryreplacedherassecretaryofstateforObama’ssecondtermaspresident,nottheleastbecauseshematurelyacceptedthatIndiaandthe.Swillnotseeeye-to-eyeonallissues,norwilltheirin-terestsalwaysconcur.YetshewasagoodfriendtoIndiaandensuredtherelationshipwasnotcantan-kerous.

According to Indian diplomats, Clinton understoodthe glue that bound India and Iran, which otherWashington elites found so hard to fathom. Shetampeddownconcern inWashingtonabout India’soiltradewithIran.HereffortsensuredthatIndiawasexemptedfromfinancialsanctionsin2012alongwithsixothercountries.InsteadofbeinganalarmistshesawIndia’straditionaltieswithIranaspartofIndia’ssmarteco-diplomacy.

“ItwouldbeinterestingtoseehowClintonhandlesPakistan.IhavebeendisappointedwiththeObamaadministration’s willingness to coddle Pakistan de-spiteitscontinuedutilisationofterroriststoaccom-plishitssecurityandforeignpolicygoals,”saidGan-guly.

WhenClintonwasAmerica’stopdiplomat,shecon-sistently prodded Pakistan on terrorist havens andstucktodeliveringatoughmessage.

WithClintonasthepragmaticalternative,Indiacanonly hope that Trump’s presidential bid eventuallyflamesout.



Investing in Global Mutual Funds

- Dharmesh TrivediEmail: [email protected]

Background Till2006,mutualfundswereonlypermittedtoinvestonlyininternationalcompanieswhohavea10%stakeincompanylistedontheIndianbourses.Inthefinancebillof2006,thecurbsonthetypeofsecuritiesanMutualfundscaninvestwasremoved.FurtherthegovernmentincreasedtheoverseasinvestmentfromUSD1bntoUSD2bn

Benefits of investments in International Mutual funds

• Itwillgivecapitalappreciationwithlowervolatility• Diversificationintheinvestments• Itcanensureasteadyflowofdividendsbyinvestingindividendstocks.• Itensuresspreadingtherisk.• Takebenefitoftheboominthegrowingeconomies.• ProfessionalManagementandbettertransparency.

Disadvantage • Foreignexchangefluctuations• Repatriationofthecapitalduetoexchangecontrolsregulations.• NAVcouldfluctuateduetothechangesintheinterestratesorchangeinthecreditpolicies.

Lookingattheadvantagesandthedisadvantages,onecaneasilyconcludethattheadvantagesoutweighthedisadvantagesandinthepresentscenariowhenthereislotofuncertaintyitisworthexploring.

Tax on the Investment in International Mutual fund

ItissimilartoDebtmutualfund • Longtermwithoutindexation–10%• Longtermwithindexation–20% BestInternationalMutualfunds

Asondatethebestinternationalfundstoinvestareasunder



Name of the Mutual Fund

AUM (In Crs)

Returns1 month

Returns 1 Year

Returns 3 Years

MotilalOswalMOSTshares Nasdaq100–ETFfund

64 3% 19% 15%

ICICIPruUSBluechipEquity

166 2% 20% 9%

DSPBRworldGoldfund

317 24% 65% 7%

ICICIpruGlobalstableEquity

97 2% 14% 9%

ICICIUSEquityFund 166 2% 20% 10%TataGrowingEcoInfra-B

53 .7% 49% 16%

HSBCBrazilFund 1 -3% 44% 9%DSPBRUSFlexibleEq-uityfund

68 3% 22% 10%

KotakUSEquityfund .83 2% 18% 11%

Conclusion:

Normallywealwayssay“Be Indian Buy Indian”,butintheinvestmentphilosophyweneedtochangethestrategytomaximizethereturnsanddiversifytheriskandhenceoneshouldtrytobe“Be Indian Buy Global”.

Reference: • www.moneycontrol.com



Union Budget 2017: How is the Budget prepared by the Finance Ministry of India?

- Dharmesh TrivediEmail: [email protected]

Themost significant budget by theNarendraModigovernmentwillbepresentedonFebruary1,2017.TheUnionBudget2017willmarktheendoftheco-lonial practice of presenting the Railway Budget inadvance and will play a significant role in definingtheroadmapahead.Budget2017,whichwillbepre-sentedbyFinanceMinisterArunJaitley,playsamoreimportantroleinthebackdropofcurrencydemone-tisation,whichcausedvariousdisruptionsintheeco-nomicgrowth.Thisbudgetwillalsopartwaysfromthe traditional method of presenting the plan andnon-planexpenditureclassificationandwill insteadprovide a clear line between the recurrent spend-ingandtheproductivespending.While thebudgetwillbesubmittedforthepeopleofthecountry,itisimportanttoknowhowtheUnionBudget ismade.Therearevarioussteps involved in thepreparationandpresentationoftheUnionBudget.

1. The initial process

ThebudgetthatispresentedinFebruaryeveryyear

requiresalotofresearch.ThepreparationofUnionBudgetbeginsinAugustorSeptemberwhenallthestakeholders are informed, and the notification ofthebudgetisissued.ThisiswhytheannouncementofcombiningtheRailwayBudgetwiththeFiscalBud-getwasannouncedinSeptember2016.

2. Gathering Information

OncethetimelineissetwithaproperoutlineoftheBudget, the Finance Ministry begins asking otherministers for their receipts and their financial re-quirements for the upcoming fiscal year. A broadoverall goal for thedifferent sectorsof thegovern-mentisdecidedbythedifferentdepartmentsoftheFinance Ministry. In the period where the futureneeds arepredicted, the chief economic adviser intheFinanceMinistryreviewsthefinancialyeargoneby and presents an economic survey, which is re-leasedonedaybeforethepresentationofbudgetinParliament.Viewandadviseofleadingstakeholdersincludingindustry,representativesofworkers,farm-ersetc.andothereconomistsissolicitedanddeliber-ationsareheldinthisstageofinformationgathering.UnionBudget2017onFebruary1:Top3significanttaxchangesexpectedfromArunJaitleyinthisBudget

3. Preparation of the Union Budget

Thepreparationofunionbudgetrequiresacloseas-sociationoftheFinanceMinistrywiththePrimeMin-ister’s Office. Once the information received fromvarioussurveysandstudiesinthepreviousstepsareanalysed,thepolicyforthebudgetismade.Thispro-cessishighlyconfidentialandtheFinanceMinistryismadeoutofboundsforjournalistswhenthisprocessisbeingexecuted.TheprocessusuallybeginsinDe-cemberwhentheareaaroundtheofficeofFinanceMinistry isputunderclosesurveillanceandtheof-



ficialsareplacedinquarantineaweekinadvance.

4. Printing of the Budget

VariousstoriesaresurroundingtheprintingoftheBudgetpapers.Theprintingoftheunionbudgetbeginsfifteendaysbeforetheofficialpresentation.Aritual‘halwaceremony’isconductedtomarkthebeginningoftheprintingprocesswherein‘halwa’ispreparedinabig‘kadhai’(largefryingpot)andservedtotheentirestaffintheministry.The‘halwaceremony’wasconductedonJanuary19,2017,astheprintingofthebudgetpapersbegan.Variousstaffoftheministryhastostaybackattheministryafterthehalwaceremony,markingcompleteisolationfromtheirfriendsandfamilyuntilthepresentationofbudgetbytheFinanceMinisterinLokSabha. 6. Presenting the Union Budget 2017

TheunionbudgetispresentedbythefinanceministerandhisteamintheLokSabhaeveryyear.Themem-bersoftheparliamentaregivenagistofthebudgetthatistobepresented.Thisisfollowedbytheactualpresentationwherethefinanceministerannouncesthevariousallocations.ThisrevelationismadeintheLokSabha,whichisthehouseofthepeople,insteadoftheRajyaSabhaasthebudgetisalsoconsideredasamoneybill.MoneybillscannotbepassedorstalledbytheRajyaSabhaandthehouseifstaterepresentativescanmerelymakeamendmentstothebills.

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