Markets Fall Again, on Hawkish US Interest Rate Stance
The stock markets did fall on Thursday on the fact that the US Federal Reserve has indicated it will cut interest rates only twice next year
On Episode 463 of The Core Report, financial journalist Govindraj Ethiraj talks to Krishan Arora, Indirect Tax National Leader and Partner at Grant Thornton Bharat.
(00:00) Stories of the Day
(01:00) Markets fall again, on hawkish US interest rate stance
(03:20) Rupee crosses Rs 85 per USD now
(04:23) Time to brace, consumer product companies are hiking prices sharply
(07:32) An important GST meeting coming up might see some rates being reduced, so what will go up?
(20:04) The US is considering banning router maker TP-Link which also commands a significant share of Indian market
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 regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Friday, the 20th of December and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The top stories and themes
Markets fall again, on hawkish US interest rate stance
Rupee crosses Rs 85 per USD now.
Time to brace, consumer product companies are hiking prices sharply.
The US is considering banning router maker TP-Link which also commands a significant share of the Indian market.
An important GST meeting coming up might see some rates being reduced, so what will go up?
A Bad Week for The Markets
The stock markets did fall on Thursday on the fact that the US Federal Reserve has indicated it will cut interest rates only twice next year as opposed to the four times expected by the markets and thus taking a hawkish stance in anticipation of an inflationary environment there.
This obviously means that capital finds it easier to stay on in the United States including in bonds and the like rather than go half way around the world into emerging markets like India. Or at least not as much as could have happened otherwise.
All this of course might change in the new year as investors revisit the prospects of returns and where they might find them or rather in which markets. India is unlikely to have the blowout 2024 again but it should definitely be better than investing in Treasuries. Or at least that's how it appears.
The bigger story in some ways is the fact that Indian markets are swinging so wildly and mostly down in the last week thanks to the US Federal Reserve moves or, earlier, the anticipation of them.
Which would suggest that domestic factors, including the strong flows are not at this point, able to counterbalance the outflows.
This could change into the new year but not so far at least.
The benchmark equity indices BSE Sensex and NSE Nifty50 were down sharply, tracking the decline on Wall Street following US Fed Chairman Jerome Powell's hawkish commentary.
If you had not noticed, the Dow Jones Industrial average crashed by 1,100 points to its 10th straight loss on Wednesday though futures had bounced back on Thursday morning.
The 30-share Sensex fell 964.15 points to end Thursday's trading session at 79,218.05 while the NSE Nifty50 ended down by 247.15 points to settle at 23,951.70.
The broader markets also mirrored the benchmarks, with Nifty Midcap100 and Nifty Smallcap100 indices ending lower by 0.28 per cent and 0.51 per cent, respectively.
Indian benchmarks have lost over 3% each this week and foreign investors sold stocks worth a net 80.06 billion rupees ($941.2 million) up to Wednesday, Reuters reported.
Financials and IT stocks were the sectoral decliners, falling 1.2% and 1.3%, respectively.
Indian IT firms are particularly sensitive to U.S. interest rates, as they earn a significant chunk of their revenue from the region.
Rupee
The Indian rupee sailed past 85 per dollar on Thursday, hitting a fresh all-time low as the Federal Reserve's scaling back of its rate cut projections for 2025 hit currencies across the board, particularly in Asia.
Central banks across emerging market countries were scrambling to defend their already weak currencies.
The Korean won dropped to its weakest level in 15 years, while the Indonesian rupiah hit a four-month low, Reuters said.
Back home, the rupee hit a low of 85.0850 against the U.S. dollar before closing at 85.07, down 0.1% on the day, Reuters said.
Apparently, the Reserve Bank of India's (RBI) dollar-selling intervention helped the rupee do better than most of its Asian peers, which declined by as much as 1.2%., Reuters said.
The dollar index has dipped below the 108 handle in Asia trading after rising to an over two-year high earlier in the day.
U.S. bond yields extended gains, with the 10-year Treasury yield touching a peak of 4.54%, the highest since May.
FMCG Companies To Hike Prices
Inflation is finally catching up and companies particularly consumer facing are unable to hold on to higher costs anymore.
And the time to start passing it on will start shortly.
How consumers will respond will of course be the story of the next quarter.
Fast-moving consumer goods (FMCG) companies such as Hindustan Unilever, Godrej Consumer, Dabur, Tata Consumer, Parle Products, Wipro Consumer, Marico, Nestle and Adani Wilmar are rolling out price hikes to offset higher commodity costs and increased customs duty, the Economic Times reported quoting executives at companies and FMCG distributors.
From tea and edible oil to soap and skin cream-will be 5-20% more expensive, marking the biggest price hike in 12 months, the ET said.
One driving factor is edible oil whose price rise we have discussed on The Core Report after import duties were raised.
Low edible oil prices were also keeping food inflation down by the way, at least relatively.
Companies' production costs have swelled due to 22% increase in import duty on edible oil this September, and up to 40% in calendar year 2024. In 2023 too, the cost of key commodities such as sugar, wheat flour and coffee had surged, the ET said also quoting a Parle Products spokesperson saying they are increasing prices across our brands as we speak," said Mayank Shah
According to him, Parle Products, which makes Hide & Seek and Fab biscuits is seeing such a price increase happening after one year; but was hopeful it won't impact demand, which is already under pressure."
Parle is set to introduce packs reflecting the revised prices across its entire portfolio.
Adani Power and Bangladesh
Bangladesh's interim government has accused energy supplier Adani Power of breaching a multi-billion-dollar agreement by withholding tax benefits that a power plant central to the deal received from New Delhi, according to documents seen by Reuters.
In 2017, the Indian company controlled by billionaire Gautam Adani signed an agreement with Bangladesh to provide power from its coal-fired plant in eastern India. Dhaka has said it hopes to renegotiate the deal, which was awarded by then-Prime Minister Sheikh Hasina without a tender process and costs Bangladesh far more than its other coal power deals, according to Bangladesh power agency documents and letters between the two parties reviewed by Reuters, as well as interviews with six Bangladesh officials.
Dhaka has been behind on payments to Adani Power since supply started in July 2023. It owes several hundred million dollars for energy that has already been supplied, though the two sides dispute the exact size of the bill.
Meanwhile, the Adani Group announced a new version of its 'Hum Karke Dikhate Hai' advertising campaign as it tries to revive its image which took a beating from a damning indictment in November by US authorities in an alleged bribery case.
"Building on the success of its previous edition, this multi-media, multi-platform campaign moves beyond the conventional corporate strategy of emphasizing statistics and figures to focus on inspiring human-interest stories. These narratives showcase the profound, positive impact of Adani's infrastructure projects on the lives of millions of Indians," the group said in a statement.
The charges relate to allegations of securities fraud, wire fraud and violation of the SEC guidelines.
GST Moves
Reduction of goods and services tax (GST) on health and life insurance policies will be part of the GST Council’s scheduled meeting on December 21, it has been widely reported.
The group of ministers (GoM) on GST, which is headed by Bihar deputy chief minister Samrat Chaudhary, has submitted its report to the GST Council which will meet in its 55th meeting.
The question of course is what will go up, rumored to include everything from sin goods like cigarettes to apparel leading in turn to protests from the respective industries, in this case the Clothing Manufacturing Association of India, which has warned of massive job losses if goods and service tax was increased to 18% upto Rs 15,000 and 28% beyond that.
There are other fallouts as well.
To get a sense on how the year so far has been for GST collections and how we were poised and positioned ahead of the meeting tomorrow, I reached out to Krishan Arora, Indirect Tax National Leader and Partner at tax consulting firm Grant Thornton Bharat and began by asking him to give us an overview of GST so far.
INTERVIEW TRANSCRIPT
Krishan Arora: So if we just talk about the collection trends right from 2017 when it all started and government had clearly identified GST to be one of the key revenue drivers as it taxes all consumption of goods and services, right? So alongside economic growth and India's vision to become Atma Nirbhar, you know, a 7 trillion USD economy by 2030 and exit Bharat by 2047 which is a 30 trillion economy, I think the growth of GST was inevitable. We started from about 7.2 lakh crores in 2017-18. It's almost up by 300% if you look at the current FY23-24 data is about 20.18 lakh crores. I think the last couple of months and what we saw in April 24, I think it was a bumper time because it was a closer of financial year, closer of commitments in terms of booking and, you know, putting all the expenses etc. So 2.10 lakh crore was the highest we saw which was almost a 12.4 crore jump of year-on-year growth. But if you look at the growth and the collection from then to now, I think April 24 to October 24 is about 12.75 trillion which is almost 10%, 9.5% increasing year-on-year. This has been consistently growing so I think what we really see is a 20.14 lakh crore growth is almost an 11% increase in what is expected out of this and that's what has been the trend. And if you look at states also across many states like Kerala, Maharashtra, Karnataka, Gujarat, Tamil Nadu, Haryana, there are dozens of states have got, you know, a very high growth which is above 20%, around 17%.
Some of the states were at 15% but there are states which are not grown because the consumption patterns are obviously different across states. So states like JNK, Sikkim were very low on growth and some of the other states were even lower. So I think from the perspective of growth, the economy is obviously steady.
There is headline improvement obviously in domestic transactions. There is significant variation which will continue to happen across states but as we see it, I think on a year-on-year, I think the growth is going to be this. Plus what you really see from here, I think, is economic resilience and despite economic challenges, global challenges, domestic variations, disparity, the consistent growth in collection is actually indicator of resilience in the economy.
Govindraj Ethiraj: Krishan, what's changing within that? So, you know, one of the things is that if let's say if this was a race of sorts, though it's not a race in that sense, let's say a few states have charged ahead because they were always traditionally ahead in terms of collections. So they've stayed ahead, Maharashtra, Gujarat, Andhra, Karnataka and so on.
So has anything changed within in the last few years as even as this economy has got formalised and obviously GST reflects that?
Krishan Arora: So I think typically if you look at the way states are actually poised to look at investment, even from a perspective of attracting investment, states are competing with each other. I think one of the factors of opening up states and building that infrastructure from tier 1 to tier 2 to tier 3, I think everybody's catching up and wherever the game of investment is growing and those are the states which will ultimately tend to gain from that perspective of building the right infrastructure, I would say. The second part is obviously the tier 2 and tier 3 cities are now growing in terms of revenues also because of the consumption patterns.
Consumers have also realised post-Covid that this is the time when we will want to make the maximum out of it. I think people are actually realising that opportunities of job and employment are also increasing in tier 2 cities with growth of GCCs and we always keep hearing news of central excellences opening, the back office services opening in India. I think with the kind of growth which is happening in terms of the way it has been looked at, it is inevitable that each of these states will have its own pattern but it will still steadily grow.
Some of the states will still lack it because of the infrastructure. They will probably have some of the indicators in terms of the climatic conditions that have ever come in where the consumption patterns will always be lesser in terms of the growth pattern. But other than that, with the economic growth, I think every state will catch up.
Govindraj Ethiraj: Okay, I'll come back to states in a second. So one of the things that we are obviously talking about right now is the prospect or we are discussing the prospect of increasing GST rates. So there has been discussion about 35% syntax, discussion of increasing GST on apparel to 18% up to 15,000 rupees and then 28% beyond that.
So what does all of that reflect and what is the likelihood that we will see higher rates and I guess to that I can peg the question of how are you seeing 2025?
Krishan Arora: Sure, I think I'll talk about the rate reject first and that's been on the agenda. I think the upcoming GST council meeting which is poised on 21st December in Jaisalmer is going to be action-packed. There's lots to address.
The top of the agenda is actually GST rate rationalisation. You're aware that the group of ministers was interested with the responsibility to kind of look at the rate structure. If was it a possibility that we go down in terms of the number of rates because not only causes the, you know, multi-stability causes variation in compliances but also the position which people take in terms of which bucket they fall under etc.
I think that is what was looked at. So the multi-gain rate structure was always something which was planned that will become smaller as the GST stabilises in India. That's what happened and I think almost initially a 150 item list was actually proposed by the GOM which was to be discussed in the council but they have obviously identified hiking some of the rates while others there's also reduction.
So the specific ones which you just mentioned, I think I'll pick up some of them. The rational between on the health and life insurance I think is on exemption and reduction. So there is obviously a case for that because the senior citizens are the ones who are actually the most largest beneficiary of it.
So reducing a rate on individual health policies on the cards and that's likely to happen to 5% from the 18% rate. Also exempting the life insurance for senior citizens is done something which is higher on the cards. On luxury goods, see whenever there's a reduction of GST on something there has to be a cross revenue projection also which the government looks at.
So they always look at the luxury segment of the same segment to compensate for it and that's the reason why they identified some of the affordability items which are in the upper market or the luxury market for that matter and that's why the premium segment was done that they will not have bit of that kind of pinch which a normal consumer would feel. That's why that slab of 15,000 plus in shoes, the 25,000 plus MRP of wristwatches where the rate of tax was looked at from 18% to 28%. I think that was one thing.
Other products also were covered. There was a reduction which was looked at ready-made garments bringing something from rates to from 12% to 5%. This also again MRP based and the more affordable garments which will lower the rate from that perspective.
Similar to that is packaged drinking water and exercise notebooks where existing rate is 18% and bringing it down to 12% and 5% respectively. Sin goods, I think has always been the criteria that sin goods are not the kind of goods where the focus of the economy or the market should be. It is something which always is adverse to encouraging consumption.
That's why tobacco and aerated products are always part of that and that's the reason why pan masala, aerated drinks, tobacco items are which are currently at 28% is where you know actually the initial proposition was 40% jump which is the maximum rate which can be imposed on GST which can be proposed at the law today which is where the 35% rate is actually being looked at. But it's not a far-reaching consequence also from that perspective because this is going to be an impact not only on the sector also the ecosystem. Looking at the overall consumption pattern, what will happen?
The working capital requirement will change. The technology intervention will have to change. A lot of things will have to change for this to get accepted but if the government is going from that perspective of looking at sin goods differently, I think nothing will come in the way of that.
Govindraj Ethiraj: So give me an example when you were referring to let's say a 35% rate and that in turn affecting let's say cash flows because obviously you deposit GST. So what is the industry that could or what are the industries that could get affected the most with a sudden jump in rates?
Krishan Arora: Any industry like tobacco basically the market sin goods market driven by tobacco aerated beverages is gonna get you know overly aerated beverages means some of the FFGC companies are going to get impacted. So these companies ultimately today have planned an outflow of tax which is at 28%. There is obviously you know input tax credit whichever wherever it is available is available but many of these products are outside GST also because they attract other taxes also.
The local taxes and leak size as well. So when they look at the overall tax structure, not only the margin will get hit if they don't pass it to the end customer and whenever it passes to the end customer it's always a pinch right. There could be a change in the consumption demand etc which will happen but because they are sin goods possibility of it getting stabilising you know sometime from now might happen but that's something which has to be still looked at.
But if you look at the way the working capital will change is obviously the GST has to be paid upfront right. Monthly GST has to be paid. So your money paid to the recovery of that money from the distributors and the chain is going to take time.
So there has to be additional working capital impact because of that also because you have to fund your outflow of GST. So those are the things which will have to be kept in mind for these sectors and that's why they have to be given time to prepare for this is something which also is the industry ask.
Govindraj Ethiraj: Right last question. So as you look at 2025 so what are the areas you are hoping for let's say more structural reform. One is rates.
Rates of course is always a critical part of it but in any other areas that you're looking at where you feel there could be more structural reform intervention.
Krishan Arora: I think there are a couple of things on the collection. See if you have to boost the GST collections and what is being said is that getting to that 2 lakh crore average number monthly number in the next fiscal. If you have to do that then I think there'll be more focus on enhancing the compliance, digitalisation, tax administration from audits and assessment because there are a lot of notices that there are a lot of you know demands being raised where ultimately the money gets stuck either for the taxpayer or for the government department.
So also you know getting that administration on the tax dispute resolution with GST applicable have not been set up till now soon to set up. So one moment these machinery starts functioning I think there are a couple of things which are on the agenda to kind of look at and you know faster remediation on one side and better compliance and tax administration on the other side is something which the government is definitely focussing on. Other than that I think amnesty schemes also are the ones which help in boosting revenues and also reduce the you know longevity of litigations which are going on.
So something on that front is also something which is the deadline is 30th June 2025. Hopefully government gains a lot out of that as well as the taxpayers. So standardisation of processes administrative compliances and digitisation plus you know better administration in terms of giving the judicial system a push is something which is on the cards.
Other than that I would say you know including more sectors into GST like petroleum products etc will also help in you know making the economy more and more inclusive and GST rates will get stabilised across the board and that's when the rate rationalisation can come in. When you actually start including more sectors is where the GST revenues start to increase at one side and sectors also tend to gain because the impact on the burden of GST on the revenue neutral rate becomes you know standard for everyone. That's the whole idea of GST becoming a one nation one tax and one GST rate which is a dream.
Govindraj Ethiraj: Okay on that note Krishan thank you so much for joining me.
Krishan Arora: Thank you so much. Pleasure.
TP-Link Ban
U.S. authorities are investigating whether a Chinese company whose popular home-internet routers have been linked to cyberattacks poses a national-security risk and are considering banning the devices, the WSJ is reporting.
The router-manufacturer TP-Link, established in China, has roughly 65% of the U.S. market for routers for homes and small businesses. It is also the top choice on Amazon.com, and powers internet communications for the Defense Department and other federal government agencies.
I don’t have the India number but TP-Link is quite popular in India as well and sells all kinds of routers, large and small.
One report I came across said TP-Link has a 24% share of India’s wireless local area network market or WLAN which should reflect the enterprise or business side of the market and surely large in value. Cisco is close in router share and has been ahead in the past.
Investigators at the Commerce, Defense and Justice departments have opened their own probes into the company, and authorities could ban the sale of TP-Link routers in the U.S. next year, according to people familiar with the matter.
An office of the Commerce Department has subpoenaed TP-Link, some of the people said.
An analysis from Microsoft published in October found that a Chinese hacking entity maintains a large network of compromised network devices mostly comprising thousands of TP-Link routers.
The network has been used by numerous Chinese actors to launch cyberattacks. These actors have gone after Western targets including think tanks, government organizations, nongovernment organizations and Defense Department suppliers.
TP-Link routers are routinely shipped to customers with security flaws, which the company often fails to address, according to people familiar with the matter.
While routers often have bugs, regardless of their manufacturer, TP-Link doesn’t engage with security researchers concerned about them, the people said.
TP-Link has also joined with more than 300 internet providers in the U.S. to be the router that is mailed to new homes that sign up for their services.
