Markets Retreat as Tariff Fears Reign Once Again
The markets beat what looked like a hasty retreat on Wednesday
On Episode 541 of The Core Report, financial journalist Govindraj Ethiraj talks to Dr. Suresh Itapu, Chairman of the Soy Food Promotion and Welfare Association (SFPWA) as well as Himanshu Parekh, Partner and Head of Tax (West) at KPMG Assurance & Consulting Services LLP.
SHOW NOTES
(00:00) The Take
(04:41) Markets retreat as tariff fears reign once again. FII buying at $2 billion in four days.
(07:44) The Rupee continues to rise towards the year end
(10:34) Why India’s soy makers would welcome America’s reciprocal tariffs on soybean and thus lower import duties in India
(18:45) A 6% equalisation levy or Google tax is set to go, what does it mean
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 feedback@thecore.in.
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Good morning, it's Thursday, the 27th of March, and this is Govindraj Ethiraj Broadcasting and streaming from Mumbai, India's financial capital.
The Take: Air India Needs To Lose Its Legacy Problems To Make A Real Comeback
News that Air India had to announce that its top management would travel in economy class from April 1st, more than three years after acquiring the airline, comes as a bit of a shock because it took them three years to implement something that should have been pretty much first order of business when they took over from the government of India in January 2022.
Now, the wording of that public statement is actually quite revealing in its candour and perhaps even lack of tact. The airline said all staff, including top management, would travel in economy to free up seats for paying customers. An Air India spokesperson said, and I quote, with this, we want to ensure that our premium seats for which we are seeing huge demand are available for booking to our customers first, demonstrating a culture of customer centricity in the new Air India.
The use of the phrase culture of customer centricity in Air India is somewhat intriguing. Does that mean that there was no customer centricity in the previous years and everything happened just because it did? And what is new now after three years in the new Air India?
Anyway, note that this is only for domestic flights, which in any case do not last more than two to three hours or so, save a few routes. Staff would, of course, continue to be upgraded to premium economy and business class seats, but only if these remained unsold 50 minutes prior to departure. When it comes to international non-fair paying Air India, employees will have as much right as you do, which of course goes back to where the problem started.
To conclude, it's not like staff cannot and should not travel in the front of the cabin at all. It's just that in a sudden brainwave, the airline remembered that they have hard cash paying passengers who they should be thinking of first. And with that start date of April 1st, hopefully they will not be playing April fool.
Now, Air India employees and government functionaries used to treat the airline like their private chariot, something you could sense with the extra care that some passengers would get on long haul Air India flights, not because they paid more, but because they worked there or knew someone or were someone. If you paid more, it's quite likely you would get a broken seat with an in-flight entertainment system that struggled to function. If it functioned, you would be treated to maybe one movie in its library over a 14-hour flight.
And that I'm speaking from experience. Airline employees are obviously entitled to comforts, including on long haul flights, but all airlines have standard operating procedures for this, including awarding seats based on load when not travelling on duty. In 2021, the year before Air India was sold to Tata's, it had accumulated losses of 78,000 crore rupees and debt of 70,000 crore rupees.
These staggering numbers alone are a reflection of what goes wrong when you put employees before customers. Air India is right to project the fact that its brass is slumming it out with the rest of us being customers, even though in doing so it risks getting some egg in the face. Now, whether that alone will save it from the flak it's been getting for poor service off late is highly doubtful, but it's definitely a good step or more appropriately, a wrong that has been made right.
Now, the larger question in some ways is who comes first in a business, customers or employees? Approaches differ. Richard Branson, owner of Virgin Airlines, in an interview to Inc magazine a few years ago said his philosophy had always been, if you can put staff first, your customers second and shareholders third, effectively in the end, shareholders do well, customers do better, and you yourself are happy.
That article also refers to the famous Southwest Airlines, among other businesses and airlines who put employees first. But most companies put customers first with the logic that a happy customer will send up happiness and business and profits to employees and shareholders, obviously, because there is more business and patronage to start with. It's also about timing.
Sometimes you follow a certain philosophy, but when things don't work, you have to change tack. Air India should have changed tack several decades ago, that it took them three more years after a change of management to do so in a key customer facing perception driven area shows that turning around the legacy enterprise is much tougher than it sounds. It will also take some sacrifices by management, including giving up that first class seat before enjoying the fruits of success.
And that brings us to the top stories and themes of the day.
Stock markets retrieve as tariff fears reign again. FII buying is at $2 billion in four days.
The rupee continues to rise towards the end of the financial year.
Why India's soy makers would welcome America's reciprocal tariffs on soya bean and thus lower import duties in India.
A 6% equalisation levy or Google tax is set to go away. What did it mean?
The Markets Fall Back
The markets beat what looked like a hasty retreat on Wednesday after confidence gathered in the previous seven sessions waned, which in some ways was expected to after the struggle on Tuesday's trading session. The focus is back to tariffs only because Donald Trump has been alluding to them again in recent interviews. Perhaps the one that matters for trade today is the one where he said that tariffs will likely be more lenient than reciprocal as the April 2nd tariff deadline looms.
I will probably be more lenient and reciprocal because if I was reciprocal, that would be very tough for people. Donald Trump said on Tuesday in an interview with a channel called Newsmax in the United States reported by CNBC. I know there are some exceptions and it's an ongoing discussion, but not too many exceptions, the president said.
The other input or data point to note this morning is FII buying. Overseas investors have bought more than $2 billion worth of Indian shares in the last four days, while months-to-date inflows into bonds or debts stood a little over $3 billion according to Reuters. We'll be back with the United States markets in a moment.
Back home, the indices ended their seventh winning streak day. The 30-share Senzix was down 728 points to close at 77,288. The NSE Nifty 50 was down 181 points to close at 23,486.
Amongst the broader markets, the Nifty Mid-Cap 100 and Nifty Small Cap 100 were down between 0.6 and 1% respectively. Most sector indices except for auto were in the red. Now back on Wall Street and in the U.S., consumer confidence fell further in March as views of future conditions fell to the lowest level in more than a decade according to CNBC quoting the conference board. The board's monthly confidence index of current conditions slipped to 92.9 which is a 7.2% decline and the fourth consecutive monthly contraction. Economists surveyed by Dow Jones had been looking for a reading of 93.5 and this was 92.9. CNBC reports that the measure for future expectations told an even darker story with the index falling 9.6 points to 65.2 which is basically the lowest reading in 12 years and well below the 80 level that is considered a signal for a recession ahead. The survey comes amidst worries about America's plans for tariff on U.S. imports which has also coincided with a volatile stock market. Elsewhere with tariff threats back on the table, gold was stronger. They edged higher on Wednesday to hover near all-time highs once again thanks to those concerns over fresh tariffs and their impact. Meanwhile, with tariff threats back on the table, gold was stronger and prices were higher on Wednesday to near all-time highs once again over concerns over the Trump administration's fresh tariffs that were on the horizon that's April 2nd.
Reuters said that spot gold was up at about $3,027 while gold futures rose to $3,034. Gold prices have risen more than 15% this year and hit an all-time peak of $3,057 on 20th of March that's last week.
The Rupee Is Strong
The Indian rupee closed marginally higher on Wednesday at the end of a session which saw a fair amount of swings. The session was influenced by maturity of positions in the non-deliverable forwards market, exporter activity and mild dollar sales from foreign banks according to Reuters. The rupee ended at Rs.85.70 against the U.S. dollar higher from its previous close of Rs.85.75. Asian currencies were mixed while the dollar index was not changed as such at 104.2.
Understanding The Impact Of Sanctions On Venezuelan Crude
Now before we go to that, crude oil prices are now closer to $74 at around $73.70 and thus holding higher than in past weeks. All of this is per barrel. Meanwhile, Bloomberg is reporting that Reliance Industries has paused further purchases of Venezuelan crude after U.S. President Trump authorised a 25% tariff on countries buying crude from Venezuela. Reliance is India's largest private refinery and was expected to take delivery of a cargo of Mere crude that's currently en route from Venezuela but additional buying has been put on hold according to Bloomberg. Reliance had secured waivers from the United States last year to resume importing crude from Venezuela. Trump's executive order on Monday will target any nation taking Venezuelan oil with secondary tariffs with effect from April 2.
Bloomberg describes this as a new economic statecraft tactic by Donald Trump wherein he threatened what he dubbed secondary tariffs on countries that buy oil from Venezuela to choke off its oil trade with other nations. The targets of his secondary tariffs could vary widely given that oil goes to the U.S., Spain, India and the black market, said Bloomberg. The first three countries are covered by licences to Chevron, Repsol, Essay and Reliance Industries.
The black market is apparently dominated by China, which takes 40% of Venezuela's exports. Analysts told Bloomberg that China is the main actor this is directed at because it's essentially the black market for Venezuelan oil. They would not have had to do secondary tariffs if it was not for China.
The Latest on India Tariffs
India on Tuesday said there would be import duties on several goods used to manufacture electric vehicle batteries and mobile phones as part of a series of steps to cut broader tariffs, which will help local producers withstand the potential impact of reciprocal U.S. tariffs. The finance minister said that India aims to boost domestic production and enhance export competitiveness by reducing duties on raw materials. India will thus exempt from import duty 35 items used to make EV batteries and 28 items used in mobile phone manufacturing.
The Soyabean Story
With reciprocal tariffs coming closer, it would be useful to pick an area where tariff resistance could be the highest. A former and senior government official told me that there was no way India could reduce tariffs on dairy products and agriculture products except for one or two small exceptions. Soybean is one example that's worth going a little deeper into.
The United States is the world's second leading soybean producer and exporter. Soybeans comprise about 90% of U.S. oilseed production. A U.S. Department of Agriculture note says oilseed, particularly soybean exports, represent a significant source of demand for U.S. producers and also make a large net contribution to the U.S. agricultural trade balance. Amongst all U.S. agricultural produce, only grains and feeds outrank the oilseed sector in terms of total export value and volume. To get a sense on how it's grown, in the early 2000s, the value of U.S. oilseed and product exports was about $9 billion, which was nearly half the farm value of production. By 2021, the value had crossed more than $26 billion.
The main export destinations for U.S. oilseeds, oilseed meal and vegetable oil include China, the European Union, Japan, Mexico, and Taiwan. Other markets include Indonesia, South Korea, and Thailand. Canada, Mexico, Philippines, and several Latin American countries also import significant quantities of U.S. oilseed meals. Now, India imposes a 45% duty on import of soybean, which adds up to about 50% finally, with all the other cesses thrown in. The current minimum support price for soybean, or the price at which the government picks up the crop, is Rs. 4,890 per quintal or 100 kilograms, which is higher than the market price of about Rs.
4,000. There could be another complication. India does not allow the import of genetically modified crops, and most soybean crops in the United States are genetically modified, according to my understanding.
Be that as it may, I reached out to Dr. Suresh Itapu, the Hyderabad-based chairman of the Soy Food Promotion and Welfare Association, representing soybean users and crushers. Dr. Itapu holds advanced degrees in food science and technology, and has worked in several places, including at Purdue University in the United States. So, I began by asking him, what would happen if tariffs were brought down in the deals that could kick in on the 2nd of April?
INTERVIEW TRANSCRIPT
Dr. Suresh Itapu: If you look at the Indian soybean scenario, we are currently producing about 11 to 12 million metric tonnes of soybeans. The MSP is usually lower than the market price. Actually, that really doesn't make any impact.
But if you look at the soybean crushing, if you are looking at the crushing of soybeans, we have almost 20-21 million metric tonnes capacity to crush the soybeans. Unfortunately, we are not able to provide raw material for the crushing industry. That is actually making it very much difficult for the industry, because they are hardly working for half of the year or so.
Those who are in a capacity to store the beans and then crush it, they are able to do that. But most of the crushers are not able to meet that, because we have less than almost half of the raw materials available as per the production or crushing capacity is concerned. We export soybean meal, which has actually gone down significantly.
Earlier, we were the importer of soybean oil. We are not allowing soybean imports. What is happening is, we have a huge demand for soybean oil.
If we actually allow the import of soybeans into India, the crushing industry can work better. And the soybean oil, which is actually imported, so we can actually meet from the imported soybeans crushed here, and we can always export the additional soybean meal into the international markets. That is what is happening for two years.
We are not actually exporting the meal, but that means the domestic demand is there. It is increasing. So that is the reason sometimes the meal prices have gone up so much.
And India had actually allowed importation of the soybean meal. So in that situation, if we actually import the beans, that will be very beneficial for the industry. And it is not going to impact the soybean farmers at all, because we have a definite demand for those soybeans in the country.
And if you come to my area of interest, I represent Soy Food Processors and Soy Food Manufacturers Association. Here, we have almost, if you look at the soy milk tofu manufacturers, we have about 3,000 soy milk and tofu manufacturers. There are some other people who are into the soy food business.
But these people, if they want to access the good quality soybeans, we are not able to do that. So in fact, we are actually requesting, in the process of requesting the government of India to allow a certain tariff reduction quota on food grade soybeans, not only whole soybeans, food grade soybeans. Food grade soybeans are beans which are specially used for different food applications like making for soy milk or making for tofu or soy nuts like that.
So that is something which is not in India. Fortunately, our Soy Food Research Institute, which is in Indore, has developed some varieties, but unfortunately, they are still not commercially available. So the problem that the milk manufacturers are facing is, they are not able to get the good quality raw material.
So we are getting a lot of enquiries for soy foods manufactured in India to be exported. But unfortunately, due to lack of quality raw materials, we are not able to export.
Govindraj Ethiraj: If we were to import from the United States, how much would we import if the tariffs were to come down? And what should those tariffs ideally be so as not to destabilise farmers as well as make it lucrative for the crushers?
Dr. Suresh Itapu: As far as food is concerned, food grade soybeans, we are not actually looking at a very high quantity. The total requirement may be if you meet about 100,000 tonnes, 1 lakh tonnes under a reduced tariff, that will actually help the soybean industry, soy processors industry, to get raw material at a reasonable cost. Another thing that I am looking at is, okay, we can allow food grade soybeans into the country at a reduced tariff.
The industry uses it. Simultaneously, we can sensitise the soybean farmers to produce these kinds of beans, which are already developed in India, but unfortunately, they are not available in the market. When they see the premium for the food grade soybeans, which we are meeting from the imports, if you meet that, that will also encourage the soybean farmers to grow those specialty soybeans, which are good for tofu, which are good for soy milk.
So this is another advantage. Here, we are not causing any harm to the farmers. At the same time, we are allowing the farmers to actually improve their bean production to get a better premium on these products.
That is what we look at, and that's why we are asking the Government of India to allow some reduced tariff on these food grade soybeans. And what's the tariff that you've been asking for? We are asking for 10% duty.
So it has to be, like now it is 45%, and then there is 10% social welfare, some IGST is there. So it is all coming to about 52%. So that makes it very unviable for the soy milk manufacturer, soy food manufacturers.
So if you have about a 10% duty on these specialty soybeans or food grade soybeans, then the industry can also get soybean raw material at a reasonable price. And definitely that is going to help the consumers, of course, because we can get good quality products and we can look at the export of the products and also encourage soybean farmers to grow or produce these kinds of soybeans.
Govindraj Ethiraj: And what's stopping the farmers from doing that now?
Dr. Suresh Itapu: Because there is not much organised production there. IASR, Indian Institute of Soybean Research or the Soybean Research Institute in Indore has already developed, but unfortunately it has not been commercialised. And the farmers are also not sure that whether they grow these kinds of varieties and then how they market it, and if a market is created, definitely that will help them in accessing that market for specialty food grade beans.
Govindraj Ethiraj: Dr. Itapu, we've run out of time. Thank you so much for joining me.
Dr. Suresh Itapu: Thank you.
A Google Tax Goes
India is set to remove the 6% equalisation levy, commonly referred to as the Google tax on online advertising services provided by foreign tech companies like Google and Meta. This will be from April 1st. This decision is part of amendments to the finance bill 2025 and is obviously aimed at improving trade relations and helping in the negotiations between India and the United States, according to Reuters.
The levy introduced in 2016 tax payments made by Indian businesses to foreign companies for digital advertising. The elimination of that tax comes as part of India's efforts to mitigate trade tensions with the United States, which we just referred to, which had, by the way, previously criticised that levy and threatened retaliatory tariffs on Indian exports. The removal is expected to benefit tech giants, reducing advertising costs and improving their profit margins.
At one level, the gesture is obviously seen as an attempt to prevent further trade disputes. But on another level, the money collected from this tax may not have been that much. There could, of course, be other taxes to balance this out.
I reached out to Himanshu Parikh, partner and head of tax west at KPMG Assurance and Consulting, and I began by asking him the impact of this move.
INTERVIEW TRANSCRIPT
Himanshu Parekh: Let me give you a little background and context to this Google tax as we call it, right? So historically, you know, if we see the law in India when it comes to taxation of foreign companies, what the law says is that in a case where a foreign company either has a taxable presence in India or typically if it earns income by way of royalty or fee for technical services, then it becomes liable to tax in India. Now what we had witnessed over a period of time is that owing to the digitisation of the world, we had several new foreign companies starting to earn revenues from online sale of goods or online provision of services without them having to set up a taxable presence in the market jurisdiction.
What we mean by market jurisdiction is a country from which they earn revenues. So you have a foreign company setting up an e-commerce platform through which it sells goods or provides services and earns revenues through that. So take the case of Amazon, Google, Facebook, you name it.
And all these foreign companies were able to earn revenues from the market jurisdictions without setting up a taxable presence in the form of a branch or an office or a factory etc. in the source country or the market jurisdiction. And hence, as per the global international tax norms, they were not liable to pay any income tax in the jurisdictions from where they earn revenues.
And therefore, this became a global issue. At one point in time, you had several large US MNCs not only earning such revenues from India, but from several other jurisdictions, particularly in Europe. And this became a big issue at a global level as to how should countries tax this income being earned by these US MNCs.
And while discussions were on globally as to what is the solution to this issue, in the meanwhile, what India did was, India introduced a new tax, a new form of digital services tax, what we call as equalisation limit. The tax got introduced for the first time in the year 2016, whereby we said we will impose a 6% tax on any revenues being earned by a foreign company from online placement of advertisements. Thereafter, in the year 2020, we significantly expanded the scope of equalisation level so as to cover within its purview any other category of transaction undertaken online, resulting in an online sale of goods or online provision of services.
That happened in the year 2020. But the rate of tax which was fixed for that category of transactions was 2%. So we had a 6% equalisation levy for revenues from online placement of advertisements.
And we had a 2% levy for all other categories of online transactions. Apart from India, we saw the proliferation of this digital services tax being levied by several other countries, primarily European countries. And when this started happening, there was a significant pushback which came from USA to the global fraternity to say that we need to find a global solution to this issue.
As US MNCs, we are not going to have US MNCs suffer and pay this huge amount of tax in every country. And therefore, an exercise was undertaken to find a global solution on the subject matter. That exercise is still underway.
As things stand today, that global solution has not yet been found or not yet been at least implemented. In the meanwhile, what happened is India sort of came to the conclusion that it wants to be a party to this global solution as and when it is derived or evolved. And therefore, in its wisdom, India decided to withdraw the 2% equalisation levy in the last budget, the budget of 2024.
And what we've now seen is the 6% equalisation levy which is applicable on online placement of advertisements that has been withdrawn in the current budget. So India wanted to send out a strong signal to USA to say that whatever global solution is found on the issue, we will be a party to that global solution. In the meanwhile, we are withdrawing this unilateral tax, what we call as equalisation.
So that's the entire background of this issue.
Govindraj Ethiraj: What's the quantum like in your understanding or estimation that could be hit by this?
Himanshu Parekh: While the revenues are not in public domain basis, whatever news reports we've seen in the past, what India was managing to collect by way of equalisation levy was short of 5000 crores annually. So not a significant amount when you look at the overall tax revenue collection for the country as a whole and we have a budget of you know whatever 20 lakh plus crores only on income tax. 5000 crores out of 20 lakh odd crores is a pretty insignificant amount and therefore in the interest of bilateral trade relations with various countries especially with USA, I think it made better sense for India to withdraw this.
Govindraj Ethiraj: So just to come back to you know someone who may not understand, now Google or Meta or Amazon, they also have India entities who are doing business in India who pay taxes. How is that different and why is that not the main business entity as opposed to what you're saying on advertising or online advertising which is earning revenue internationally?
Himanshu Parekh: So very good question and typically the way it works is that wherever these US multinationals have set up entities in India, they act as their distributors of the services or they act as their marketing arms and they the Indian entities are therefore compensated in a basis whatever functions they perform in India which is merely a distribution activity or the marketing activity. For which the compensation being paid to them is a pretty insignificant portion of the overall revenue which is earned by the overseas MNC. So let's say it earns 100, it may just pay a small compensation of maybe 4, 5, 6, 10 whatever it is depending on the functions carried out in India.
But the bulk of the revenue that goes untaxed.
Govindraj Ethiraj: If I were to now look at the 2025 finance bill which is now gone, is there anything else that has happened apart from this removal of the 6% equalisation levy?
Himanshu Parekh: There are a few other amendments going but they are all very small and minor amendments. Something ancillary in nature, nothing very substantive. Some clarificatory amendments in the context of international financial services centre, IFSC, in the context of foreign funds, what could be the rules and regulations applicable to them.
Some very very minor things and I would not say there are any substantive changes in the bill.
Govindraj Ethiraj: Another way of asking the question is any surprises that we did not know about or we should know about?
Himanshu Parekh: Not really. The withdrawal of equalisation levy, the 6% equalisation levy was a big surprise and that's a very welcome surprise I would say. It was a big one.
Govindraj Ethiraj: Right. Himanshu, thank you so much for joining me.
Himanshu Parekh: Thank you Govind.
