India Amongst Hottest Bond Markets In The World

Wall Street is betting on Donald Trump returning as President as it sees him as more market friendly

28 Oct 2024 6:00 AM IST

| 28 Oct 2024 6:00 AM IST

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India Amongst Hottest Bond Markets In The World

On Episode 421 of The Core Report, financial journalist Govindraj Ethiraj talks to Pushan Sharma, Director - Research, CRISIL Market Intelligence and Analytics as well as Himanshu Parekh, Partner and Head of tax (West) at KPMG.

(00:00) The Take

(05:00) The markets continue to sell off

(06:50) India is one of the most attractive bond markets in the world now

(10:22) Revenue growth slowest in 16 quarters says Crisil

(19:53) Can Indian tax laws have explainers alongside

(29:40) Travellers want to go to less frequented destinations now

NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].

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Good morning, it's Monday, the 28th of October and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.

The Take

A garment exporter I spoke to a few weeks ago told me he wished India would sign the much delayed Free Trade Agreement with the UK because it would help companies like his.

The current UK import duty for textiles from India is 9.6% while for Turkey, it is zero, thanks to the UK-Turkey FTA.

This puts his products at a direct 10% disadvantage as compared to a Turkish manufacturer he said.

The FTA in question, for which discussions began in January 2022 has been circling the pit for some years now.

The UK wants cuts in import duties on a range of products ranging from scotch whiskey to meat, chocolates and confectionary items among other things while India wants greater access for skilled professionals like IT and healthcare and zero customs duty for some products, according to reports.

Access to skilled professionals is another way of saying easier migration which obviously in many cases would lead to immigration.

Not surprisingly, the FTA is stuck.

If you were to note some of the rhetoric in the campaign trail in the US right now, you would not be blamed for thinking the US economy is in the doldrums.

Far from it. In the last 10 years, the US economy grew at an average of less than 2%. Last year, it grew 2.9%. This year, the IMF says, it will grow at 2.8% but that figure is an upward revision of the IMF's own July forecast which was at 2.6%.

The US economy has never looked so strong in a long time.

If nothing else, the US Dollar is a good indicator, driving down currencies across the world, including India.

Strong economies and democracies also attract immigrants, including from India.

Attempts by Indians to illegally migrate to the USA are rising.

A report last week says that in the last year, some 10 Indians were arrested every hour while attempting to cross US orders.

Some 44,000 were detained at the US-Canada border, the highest recorded figure for Indian nationals at that entry point.

You have to remember that individuals who reach that point are not poor by any stretch, having marshalled a fair bit of resources including air fares and agent fees.

And they are determined.

Not surprisingly, immigration is the key issue in the US elections once again. Donald Trump, who if one were to go by Wall Street and the forex market, is poised to return as president and has clearly set the agenda on this one.

Forcing vice president and opponent Kamala Harris to also make commitments on illegal immigration.

The surround sound around immigration is high.

Tesla founder Elon Musk for instance has been repeatedly alluding to illegal immigration and has now quite openly thrown his lot behind Trump, a somewhat unusual development even in the US where some businesses can be open about their political preferences.

Unlike India of course.

Musk may have good business reasons to do so but illegal immigration is something that he has been consistently speaking out against.

As an aside, the Washington Post put out a report over the weekend saying Musk himself worked illegally in the US on a student visa when he became an entrepreneur.

Be that as it may, immigration extends beyond the workforce.

Countries like Canada, Australia and the UK are already clamping down on students, some more than the others because today’s students are tomorrow's immigrants.

The Core Report pointed out several months ago that these countries would severely tighten inflows of students because among other things, their own infrastructure including housing is being strained.

And then there is the cultural context of immigrants.

To return to trade, India is unlikely to be on a strong wicket here if exports of people is a key point on the agenda, even if they are highly skilled IT professionals, as they have been.

Trump has been hinting at tariffs ranging from 10% to 60% on products imported into the US if he returns as president next month.

That is mostly aimed at China but other countries including India could get hurt.

Trade talks that follow could see some rationalisation of expectations but access to labour markets is likely to be off the table, except in may be small measures.

India is in a somewhat tough spot here, limited in product exports as well as people exports.

But greater economic gain would lie in the ability for India’s exports to enter countries like the UK at a lower cost.

And thus keep India's factories present and future humming with activity and creating more jobs in the pipeline.

India’s Bond Story

Global Funds have invested Nearly $20 Billion Into Indian Debt and India is shaping up to be a destination for investors seeking a relative shelter from financial volatility linked to the US election, Bloomberg is reporting..

India’s divergence from global markets was evident last week when its sovereign bonds remained relatively steady despite a global selloff in US Treasuries.

While foreign investors are selling equities in India, they are buying into bonds consistently making India among the top performers in developing markets this year.

India’s appeal is driven by broadly steady macro economic numbers and a stable currency. While the rupee is at all time lows right now, it has barely moved in the last few years and thus wins out on low volatility.

The rupee has hovered between 82.8 and 84.1 per dollar this year thanks to consistent interventions by the Reserve Bank of India’s.

Data compiled by Bloomberg show that the currency has only shaved 1 percentage point off the returns on Indian bonds this year, less than half the rate of currency-related losses on emerging market local-currency bonds overall.

Indigo Reports A Loss

India’s largest airline has reported a Rs 989 crore for the last quarter in a move that has surprised many.

IndiGo has a roughly 63% market share.

The airline has blamed this on rising costs including of course fuel.

The lower profits also illustrate how vulnerable India’s airlines are to a host of factors, despite the growth potential and increases in traffic.

The airline said grounded fleet and fuel costs triggered the losses.The loss was driven by grounded fleet-related and fuel costs, according to Negi and the airline's CEO Pieter Elbers.

Indigo has 410 aircraft and problems with engines made by Pratt & Whitney had grounded more than 70 of its aircraft in November last year.

In the meanwhile, the airline extended leases on older jets and hired more new ones, reported Reuters, adding that overall expenses jumped 22% for the September quarter, outpacing a 13.6% rise in revenue.

Fuel expenses rose about 13%, while supplementary aircraft rental and maintenance costs jumped nearly 30%.

Costs from newer aircraft and engine rentals jumped nearly four-fold.

Interestingly, there was a 41 percent jump in airport fees and charges along with a near 30 percent rise in supplementary rentals and aircraft repair and maintenance fees apart from the roughly 13% rise in aircraft fuel expenses.

Oil And Oil Companies

Oil prices are projected to fall following some easing of tensions in the middle east after Israel’s attack on Iran did not hit key oil or nuclear targets.

Oil was at $76 overnight but expected to ease off into Monday

Meanwhile, refiner Bharat Petroleum Corp (BPCL) reported a 72% fall in second quarter profits thanks to lower marketing margins.

The country's third-largest oil refiner by capacity said the average gross refining margin for April-September fell to $6.12 per barrel from $15.42 per barrel a year earlier.

This is of course an indicator of rising oil prices including from Russia, which was earlier available to India at a steep discount.

Quite likely, other refiners will also face similar pressures.

Revenue Growth Slows

India Inc’s revenue continues to grow but at a slower rate of 5-7% on-year for the three months ended September, marking the slowest pace in the past 16 quarters, Crisil Market Intelligence has said.

This is because of stagnant performance in the construction vertical.

If you didn’t know this already, construction accounts for a fifth of India Inc's revenue.

Also, a decline in the industrial commodities vertical and subdued growth in investment-linked sectors.

Crisil analysed 435 companies that account for almost half of the listed market capitalisation.

These companies posted 8.3% growth in the April-June quarter.

Crisil adds that revenue of industrial commodities, investment and construction-linked sectors—collectively accounting for ~38% of our sample set—grew only 1%, weighing down overall performance.

The industrial commodities sector, such as coal, saw a 6-7% revenue decline due to lower coal offtake, coal-based power generation and e-auction premiums.

Power which contributes 70% to revenue grew just 1% thanks to lower power consumption thanks to above normal monsoons.

On the other hand, profitability has improved, says Crisil, with overall earnings before interest, tax, depreciation, and amortisation (Ebitda) for ~435 companies growing ~10% year-on-year.

I spoke with Pushan Sharma, Director- Research, CRISIL Market Intelligence and Analytics and asked him to walk us through the numbers and also why the numbers were saying what they were.

INTERVIEW TRANSCRIPT

Pushan Sharma: Now, if you look at the performance of corporate India, what we see, it's a mixed bag right now. If you look at the construction linked sectors and some of the commodity sectors, we're seeing weakness there. Some of these sectors, you know, together account for about one third of corporate India market cap.

And we're seeing like sectors, specifically if we talk about, say, steel sector, all right, it's a significant 11% of the market cap of the companies that we've analysed. And they are down about 2% in revenue. If we talk about cement here, again, you know, they're flat too on the negative side.

Even some of the other sectors like ceramic, you know, so there is a broad-based construction sector, we're seeing that there is a lot of weakness that we're observing. And some of this is linked to lower spends by the government post-election. Some of it is linked to lower prices.

For example, in case of steel, we're facing cheap Chinese imports, and that's leading to lower prices and thereby lower revenue. Now, if we shift our focus to some of the export linked sectors, we see that the pharmaceutical sector is doing well. They're growing in double digit, whereas the IT sector, which accounts for about 16% of the revenue bucket, there we're seeing growth only about 3% to 4% because a lot of the US and European clients of these IT companies, they are not going ahead with non-essential spends.

Coming to the discretionary services, this is a segment that we can say that is doing much better than the rest of the pack. Here we're seeing double digit growth, early double digit growth, whether it is airline or telecom services, the performance is much better. But on the other hand, the consumer discretionary products, we're seeing that it is getting weighed down by the automobile segment, which is not showing a lot of strength.

There's a lot of weakness specifically in passenger cars, commercial vehicle, as well as the tractor side. So that's the broader story that we're looking at. Some weakness on the construction and commodity sectors, some strength in export link sectors, and better performance in consumer discretionary service.

Govindraj Ethiraj: How much of this looks like it is following on? Or is it all happened in the last quarter?

Pushan Sharma: So we've seen that there has been like over the last few quarters, there has been a slowdown that we've been observing. If one looks at the quarterly results of the listed ecosystem in India, we see that till Q4 of fiscal 23, we were seeing double digit revenue growth. And from Q1 of FY 24, we're seeing that there is a slowdown.

So this is the sixth quarter, where we're seeing single digit growth. And this has been the lowest in the last 16 quarters, as our report suggests.

Govindraj Ethiraj: How much of this is something that is or rather seeming cyclical or I know you've given me the breakdown of why it's happening for each of these sectors. But if you want to take a step back, why is this happening?

Pushan Sharma: Oh, what we see is that, you know, there has been, you know, the K shape recovery that we keep talking about, that continues to play in India, we're seeing better performance on the premium side of each of the sectors. So if we talk about cars, we see that small cars are growing by 13%. Utility vehicles are growing, you know, in double digit by 12%.

If we talk about two wheelers, we see the entry level, two wheelers are degrowing by 5%. The mid size and the premium vehicles are doing much better. So in each of the, you know, sectors, we see that the premium categories are doing better.

What one can attribute that to is that inflation is clearly hitting the middle class more than it would the other segments, the top segments of the society. And that is one of the reasons why we're seeing some level of slowdown, the interest rates, you know, they are slightly on the elevated side. And that's also contributing to this to some extent.

Govindraj Ethiraj: And if you were to give an outlook of sorts, I mean, what could change things? I mean, one is, of course, prices come down, you talked about steel, for example, or commodity prices, what else could be a trigger on the demand side?

Pushan Sharma: So what we're seeing this year is that monsoon has been good. Last year, we were at about, you know, 6% lower than normal. This year, we are at about 8% higher than normal.

So the reservoir levels for the upcoming season are going to be good, which should be good news for rural India, which accounts for a large part of India. So that should remain good. There could be some recovery on the rural side if the prices for the crops are supportive.

If there are rate cuts across the globe, as well as in India, that could also support demand. But on the profitability side, because some of the commodities are down, the profitability scenario is much better for India, I think.

Govindraj Ethiraj: Right. So that's the other broader question. So overall, despite everything else, profitability, according to your charts, has improved by about 70 to 90 basis points.

Now, you're also saying that it's led by export linked sectors. So if profitability is good, and that means companies are doing well, in relative terms, at least, so why should one be too concerned?

Pushan Sharma: Well, profitability is good, because, you know, in case of, say, the IT sector, the attrition rates are lower, the utilization of the resources is better. In case of pharmaceutical sector, which is seeing a sharp increase in margins, about 300 basis points, there the raw material prices have been supportive. But for structural growth in revenue, as well as finally, profitability, demand sentiment needs to be strong.

And that's where we see slight struggle at this stage. And that's where most support is required. There needs to be more population of the demand to, you know, the middle class and the lower income groups in India, which is something that is lacking at this stage.

Govindraj Ethiraj: Right, Pushan, thank you so much for joining me.

Pushan Sharma: Thanks a lot.

Trade Wars

We spoke of trade wars earlier, including India’s own bargaining stance with countries like the UK and of course the US if Trump were to return as President next month.

Meanwhile, several countries are already firing their first anticipatory shots.

German Finance Minister Christian Lindner on Friday warned that if the U.S. kicked off a trade war with the European Union, there could be retaliation.

“Trade controversy sees never winners, only losers,” Lindner told CNBC’s Karen Tso on the sidelines of the International Monetary Fund’s annual meeting in Washington, D.C.

It’s not in the best interest of the U.S. to have a trade conflict with [the] European Union. We would have to consider retaliation,” he said

. Lindner belongs to the pro-business Free Democratic Party which is currently in coalition with Chancellor Olaf Scholz’s Social Democratic Party.

The U.S.′ problem with trading lies with China rather than the EU, Lindner said, adding that the EU “should not become a negative side effect” of controversy between the U.S. and China.

If a 20% tariff were implemented by the U.S as Trump has been suggesting., the EU’s and Germany’s gross domestic product would fall in the coming years, Reuters reported Thursday citing a study by German economic institute IW.

Trade is one of the main pillars of the German economy, suggesting heightened tensions, uncertainty and tariffs would hit the country harder than others.

Trade tensions between the U.S. and China, and the EU and China, have been rising throughout the year. Both the U.S. and EU have implemented higher tariffs and on some goods imported from China, citing unfair trade practices.

China in turn has also announced higher temporary tariffs on some imports from the EU. Several probes and investigations into one another’s competition, subsidy, and other practices are also ongoing as the tit-for-tat measures continue.

CNBC also reported that Earlier in the week, Gita Gopinath, deputy managing director of the IMF, told CNBC that an escalation of trade and tariffs tensions between the U.S. and China would be “costly for everybody.”

India’s New Tax Code. The Core Report Weighs In

The Government has invited suggestions on the Income Tax Act, 1961, from the private sector and tax experts beginning October, as part of an exercise to simplify the direct tax law, the Business Standard reported last week.

The objective is to simplify the language and reduce litigation.

Finance Minister Nirmala Sitharaman in the 2024-25 Budget presented in July had proposed that the I-T law review would be completed in six months.

Considering that the six-month timeline ends in January, it is widely expected that the amended I-T Act could be brought in the Budget session of Parliament.

The Core Report is doing its bit to contribute to the discussion on India’s direct tax code by asking tax experts across the country for the three things they would like to see or not see in the new tax code.

In the third instalment of this series, I reached out to Himanshu Parekh, Partner and head of tax west for KPMG, and began by asking him to list out his three tasks.

INTERVIEW TRANSCRIPT

Himanshu Parekh: In terms of the overall objective of this exercise, as was clarified by the finance minister, the objective is to simplify the income tax law. The objective is to make it more concise, lucid, and easy to understand. The objective is to provide tax certainty to taxpayers and reduce litigation going forward.

So these are the overall objectives behind this exercise.

Govindraj Ethiraj: Got it. And what are you looking at? So if I were to ask you for three wish lists or three points that you feel this tax needs to focus on, even as it makes it simpler and more accessible, what would they be?

Himanshu Parekh: So number one, I would say there are some provisions in the income tax law which are quite complex to understand. The government needs to simplify the drafting of those provisions. They need to simplify it for the layman to understand what exactly is being emphasized in the provision.

And what they could equally do in this regard is that it may be good for the government to issue some kind of a commentary to the income tax law, explaining the government's point of view on each provision, what exactly is the interpretation of that provision. And if that explanation can be given with the help of some illustrations, it becomes much easier both for the taxpayer and for the tax administration to understand the law and implement the law. So that's point number one.

Point number two, there are quite a few complex provisions in the income tax law where we have contrary tribunal decisions, contrary high court decisions. And you know, tax litigation in India can take anywhere from between 10 years to 20 years to come to an end. And rather than waiting for every issue to go to Supreme Court and then be resolved by the Supreme Court over the next 10, 15 or 20 years, the moment any controversy arises, it may be good for the government to step in and amend the law and specifically amend the law so as to bring out its point of view on the subject matter and kill the litigation at that stage itself so that litigation does not perpetuate going forward. So that's point number two. Point number three, if you see in India, we have immense tax litigation which is being faced by taxpayers.

There are lakhs of appeals which are pending before the appellate authorities and courts today. And it may be a good idea for the government to think of introducing some kind of a mediation scheme whereby, you know, the taxpayer and the tax administration may be permitted to settle the dispute in an informal setup rather than getting into a long-run litigation. So these would be three of my major asks to simplify the tax landscape for taxpayers in India.

Govindraj Ethiraj: Okay, let me start with first one. You talked about the drafting and whether the provisions can be simplified. And you also talked about commentary or illustration that runs alongside the Act or sections within the Act.

Can you give me examples of both where one is in the case of drafting, like for example, which is a section that comes up frequently where maybe if there was simplification, things would be easier. And the second is, again, what is the Act you feel where a commentary running alongside or rather a section that a commentary running alongside would really help?

Himanshu Parekh: Oh, you know, when it comes to drafting, I would say, for example, provisions dealing with taxation of charitable trusts. I think they're very, very complex to understand. Some of the provisions dealing with search and seizure.

Again, complex to understand and follow and implement. Provisions dealing with reassessment of income. Again, a little complex to understand and implement.

When you talk about deemed dividend, you know, the concept of deemed dividend, wherever a company gives a loan to a shareholder or an advance to the shareholder, that loan or advance is deemed to be a dividend. In such cases, how should the taxation happen, especially if the loan or advance is not given to the shareholder, but to some concern in which the shareholder holds shares. Would the deemed dividend taxability apply to the concern to whom the loan is given or to the shareholder is again a moot point.

It's an open point. So some of these controversial aspects, I think, will be good if they can be clarified by the government.

Govindraj Ethiraj: And when you talk about commentary and you say that there should be the government's point of view running alongside, again, what's the example that comes to mind first?

Himanshu Parekh: That the example which immediately comes to my mind is when you look at the law dealing with international tax. When it comes to double tax avoidance agreements, there's a commentary which has been issued by the OECD. OECD is the forum which sort of, you know, takes care of international tax at a global level.

So there is a similar to the Income Tax Act, when it comes to double tax avoidance agreements, we have articles of double tax avoidance agreements. And there's a detailed commentary on each article clarifying what exactly does that article envisage, how should one interpret that article. And that gives a lot of certainty both to the taxpayers and tax administration as to how is that article of the DTAA to be interpreted.

So something similar we can try and do in India. Similarly, when you look at the US law, there's detailed explanation which is provided in the US tax law for each and every provision of the law, which makes life easier for everybody. So something similar we can try and, you know, incorporate in India as well.

Govindraj Ethiraj: Got it. And you talked about amending the law for cases which are dragging and that in turn you say or you feel will kill litigation. Now, is there precedence to this?

I mean, and you know, because I guess that would be the first question that would come up.

Himanshu Parekh: There are lots of precedence to this. What we've seen historically is that when a controversy arises, the controversy drags on for a few years until the matter reaches the High Court or in some cases the Supreme Court. And if the verdict of the High Court or Supreme Court may not be as intended by the government when the provision was inserted, then thereafter we see an amendment being made to the law.

My simple point here is that one does not need to wait for 10 or 15 years, you know, for the verdict of the High Court or Supreme Court and then find out as to whether it is in accordance with the intention of the law or not. The moment the controversy arises, the moment it reaches the first appellate stage itself, why not quickly or immediately amend the law so as to clarify what was intended in that provision.

Govindraj Ethiraj: Mediation, which is in some ways a step that precedes this, is a process where, let's say, as you say, the tax authority and the taxpayer could come together and work out, let's say, a sum or a settlement of some sort. Isn't a tribunal or a way of doing that, or you're saying that this should be taken into an informal context?

Himanshu Parekh: Really, because what happens in tribunals or courts, so for example, let me just, you know, explain this with the help of an illustration. So let's say a taxpayer has claimed an expenditure with the taxpayer is of the view that this is a revenue expenditure and is liable in the area in which the expenditure is incurred. Let's say the tax officer takes a view that this is a capital expenditure which is eligible for depreciation over a period of years.

Now, such controversies, when they come up before the tribunals or courts, the tribunal or court will hold either in favor of the taxpayer or in favor of the revenue. There's no via media out there and what I'm talking about here is a via media. Forget whether it's revenue or capital, can both the taxpayer and tax department agree that this expenditure over what time frame should it be allowed?

And let's say both of them agree that if rather than alarming it is a revenue expenditure in year one, let it be allowed over a time period of three years and if both are agreeable, then there's no controversy at all. The matter gets closed then in that itself.

Govindraj Ethiraj: So there is a way, for example, that you could get an opinion on the treatment of tax beforehand that the current system allows. But is there space in the current system to do what you're saying?

Himanshu Parekh: Right now, it's not and that's why this recommendation and we've seen this happen in especially in advanced countries. We've seen this actually being enforced out there. It's been a big success story overseas because when you look at countries other than India, you hardly find any tax litigation in those countries and the prime reason for that is most of the disputes get settled between the tax authorities and the taxpayer right at the beginning.

Govindraj Ethiraj: Right Himanshu, thank you so much for joining me.

Himanshu Parekh: Thank you Govind. Always a pleasure talking to you. Bye.

Travel Trends

The biggest travel trend of 2022 was to go big, spend big — with people eagerly booking bucket list-style trips to places like Bali, Rome, London and Paris.

But two new reports show travellers are now in a very different headspace.

Trend reports from Expedia and Booking.com show vacationers are forgoing splashy trips to global hot spots in favour of quieter trips to places that are lesser-known — and far less crowded, CNBC is reporting.

Some 63% of travellers said they are likely to visit an off-the-beaten-track destination on their next trip, according to Expedia’s “Unpack ’25,” a travel trend report which surveyed 25,000 respondents from 19 countries.

Flight searches from Expedia from Sept. 1, 2023, to Aug. 31, 2024, showed rising interest in Reims France, Brescia Italy, Waikato New Zealand, Abu Dhabi, Cozumel Mexico among others:

One reason, says Expedia, is that many destinations are becoming quite overcrowded and a lot of the travellers want something different.

The other is of course cost because the oft targeted destinations have become expensive.

Not surprisingly, airlines are responding.

CNBC says United Airlines announced this month it’s expanding international services to Senegal, Greenland and Mongolia next year in a bid to capture travel interest to the next “it” destination.

Meanwhile, Booking.com’s own study has also concluded that travellers share a desire to explore less visited locales.

“There will be an increased desire for authentic, off-the-beaten-path experiences,” states the opening line of Booking.com’s “2025 Travel Predictions.”

Some 67% of adult travellers said they want to visit less crowded destinations, according to a Booking.com survey of more than 27,700 respondents from 33 countries and territories.

Booking’s list includes Sanya China, Joao Pessoa, Brazil, Okinawa Japan, San Pedro de Atacama in Chile and Okinawa in Japan apart from Houstain, US.

Booking also says that more travellers are embracing JOMO, or the “joy of missing out.”

Marshall said 62% of surveyed travellers say that “JOMO travel” reduces stress and anxiety, and nearly half say it allows them to better reconnect with loved ones.

Author: Govindraj Ethiraj

Wall Street is betting on Donald Trump returning as President as it sees him as more market friendly

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