Business environment in india

BUSINESS ENVIRONMENT IN INDIA

Submitted to : Submitted by :

Dr. Samit Chowdhury Biswajit Bhattacharjee

DBA-JNSMS, AUS Student, DBA-JNSMS, AUS

Roll no. 19

14 Assam University, Silchar

Assignment on:

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DIRECT TAXES REMAIN UNCHANGED IN THE VOTE ON ACCOUNT…

The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. In a general sense, a direct tax is one imposed upon an individual person (juristic or natural) or property (i.e. real and personal property, rental profits, livestock, crops, wages, etc.) as distinct from a tax imposed upon a transaction.

When the government needs to withdraw any money from the Consolidated Fund of India to cover its expenditure (especially during the time when elections are underway and a caretaker government is in place), it has to seek approval from the Parliament.

A special provision is, therefore, made for a vote-on-account' by which the government obtains the vote of Parliament for a sum sufficient to incur expenditure on various items for a part of the year.

This sanction of Parliament for withdrawal of money from the Consolidated Fund of India to meet the government's expenses is generally known as a vote-on-account.

In direct tax burden of tax cannot be shifted. The disadvantage of direct taxation are mainly due to administrative difficulties and inefficiencies. The extent of direct taxation should depend on the economic state of the country. A rich country has greater scope for direct taxation than a poor country. However direct taxation is an important aspect of the modern financial system.

Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity. Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes.

INDIRECT TAXS REDUCE MARGINALLY IN THE VOTE ON ACCOUNT…

An indirect tax (such as sales tax, a specific tax, value added tax (VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer). The intermediary later files a tax return and forwards the tax proceeds to government with the return. In this sense, the term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed. Some commentators have argued that "a direct tax is one that cannot be shifted by the taxpayer to someone else, whereas an indirect tax can be."

An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. Examples would be fuel, liquor, and cigarette taxes. An excise duty on motor cars is paid in the first instance by the manufacturer of the cars; ultimately the manufacturer transfers the burden of this duty to the buyer of the car in form of a higher price. Thus, an indirect tax is such which can be shifted or passed on. The degree to which the burden

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of a tax is shifted determines whether a tax is primarily direct or primarily indirect. This is a function of the relative elasticity of the supply and demand of the goods or services being taxed. Under this definition, even income taxes may be indirect.

They are the only means of reaching the poor. It is a sound principle that every individual should pay something, however little, to the State. The poor are always exempted from paying direct taxes. They can be reached only through indirect taxation. They are convenient to both the tax-payer and the State. The tax-payers do not feel the burden much, partly because an indirect tax is paid in small amounts and partly because it is paid only when making purchases. But the convenience is even greater due to the fact that the tax is "price-coated". It is wrapped in price. It is like a sugar-coated quinine pill. Thus, a tobacco tax is not fell when it is included in the price of every cigarette bought. It is convenient to the State as well which can collect the tax at the ports or at the factory. A dealer collects the tax when he charges a price. He is a honorary tax collector.

Indirect taxes can be spread over a wide range. Very heavy direct taxation at just one point may produce harmful effects on social and economic life. As indirect taxes can be spread widely, they are more beneficial and suitable. They are easy to collect. Collection takes place automatically when goods are bought and sold. They cannot be evaded, as they are a part of the price. They can be evaded only when the taxed article is not consumed, and this may not always be possible.

indirect taxes makes it clear that whereas the direct taxes are generally progressive, and the nature of most indirect taxes is regressive. The scope of raising revenue through direct taxation is however limited and there is no escape from indirect taxation in spite of attendant problems.

Higher indirect taxes can cause cost-push inflation which can lead to a rise in inflation expectations.

If indirect taxes are too high – this creates an incentive to avoid taxes through “boot-legging” – e.g. the booze cruises to France where duty on alcohol and cigarettes is much lower.

Revenue from indirect taxes can be uncertain particularly when inflation is low or there is a recession causing a fall in consumer spending.

There is a potential loss of welfare from duties e.g. loss of producer & consumer surplus.

Higher indirect taxes affect households on lower incomes who are least able to save.

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IF BLACK MONEY AND FAKE CURRENCY IS IN CIRCULATION OR IN ECONOMY…

It’s election time and fake currency. During election season, crores of fake currency used to pump into the system. In August 2013 currency notes worth Rs. 970 crores, which were not printed in Indian mints, had reportedly landed in the vaults of the Reserve Bank of India (RBI). The RBI underplayed those reports and later ruled out the possibility of the extra notes being fake. But there is no question that counterfeit Indian currency is a clear and present danger, which will flood the Indian market especially during these critical elections. Despite the severity of the threat posed by counterfeits, security agencies in India don’t have a uniform estimate of the fake currency in circulation. In 2011-12, the RBI detected Rs. 25 crores, and seized an additional Rs. 19 crores of Rs. 1,000 and Rs. 500 fake notes.

Intelligence agencies estimate that at any given time 3% or Rs. 35,000 crores of the total currency in circulation in India is counterfeit. Sources say that this amount will more than double as fake currency fuses undetected with the large amounts of cash already swilling around the pre-election distribution of largesse.

Some of the ill-effects that counterfeit money has on society are a reduction in the value of real money; and increase in prices (inflation) due to more money getting circulated in the economy – an unauthorized artificial increase in the money supply; a decrease in the acceptability of paper money; and losses, when traders are not reimbursed for counterfeit money detected by banks, even if it is confiscated.

India has been working on counter measures like design changes in the currency notes, enhancing the capabilities of technical and bank personnel to detect counterfeits, strengthening legal mechanisms by making counterfeiting a terrorist act, introducing measures to withdraw pre-2005 currency notes which lacked security features, and increasing information-sharing with neighboring countries.

But we must do more. We must implement advanced forensic measures which analyse the intaglio ink, watermarking techniques, security thread, and the paper used in fake currency. This will enable India to maintain a comprehensive database of each fake note recovered, and take action against the support networks. We also need to complement the efforts of the central security agencies, by substantively informing the local law enforcement machinery and judicial authorities about the gravity of the problem. Failure to take significant action in combating counterfeiting can lead to uninsurable risk, which has a harmful effect on the reputation and functioning of a country’s central bank.

ASSUMING THAT INFLATION RATE IS 10%...

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account

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within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time.

Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string". Views on which factors determine low to moderate rates of inflation are more varied. Inflation is caused by a combination of four factors:

1. The supply of money goes up. 2. The supply of other goods goes down. 3. Demand for money goes down. 4. Demand for other goods goes up.

10% rate of inflation is bad. High inflation rates suggest that there is a general increase in prices of goods and services from previous period(s) to now. High prices means that there would be less consumption which would lead to less GDP which would lead to less investment which might eventually end up leaving the economy in a recession which would give rise to unemployment.

Monetary policy, Fixed exchange rates, Gold standard, Wage and price controls, Stimulating economic growth, Cost-of-living allowance are some of the tools generally used to control inflation.The inflation rate in India was recorded at 8.10 percent in February of 2014. Inflation Rate in India is reported by the Ministry of Commerce and Industry, India. The Wholesale Price inflation rate data is available at Producer Prices Change. Inflation Rate in India averaged 9.76 Percent from 2012 until 2014, reaching an all time high of 11.16 Percent in November of 2013 and a record low of 7.55 Percent in January of 2012. Historically, the wholesale price index (WPI) has been the main measure of inflation in India. However, in 2013, the governor of The Reserve Bank of India Raghuram Rajan had announced that the consumer price index is a better measure of inflation.

GDP OF INDIA IS GROWING AT 4.4% IN PRMARY, SECONDARY AND TERTIARY SECTOR…

Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a year, or other given period of time. GDP per capita is often considered an indicator of a country's standard of living.

GDP per capita is not a measure of personal income. Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita.

GDP (Gross Domestic Product) is the money a country generates divided by the population. (Average per person). There can be several reasons for a low GDP. High unemployment, large debt repayments, rural economy and poor balance of trade just to name a few.

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The GDP slow-down which began in 2011-12 reaching 4.4 percent in Q1 of 2013-14 from 7.5 percent in the corresponding period in 2011-12 has been controlled by numerous measures taken by the Government. Growth in the third and fourth quarter of the current year is expected to be 5.2 percent and that for the whole year has been estimated at 4.9 percent.

-The declining fiscal deficit, stable Exchange Rate and reducing Current Account Deficit, moderation in inflation, increasing exports are reflection of a more stable economy today.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

The Gross Domestic Product (GDP) in India expanded 4.70 percent in the fourth quarter of 2013 over the same quarter of the previous year. GDP Annual Growth Rate in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI). GDP Annual Growth Rate in India averaged 5.84 Percent from 1951 until 2013, reaching an all time high of 11.40 Percent in the first quarter of 2010 and a record low of -5.20 Percent in the fourth quarter of 1979. In India, the annual growth rate in GDP at factor cost measures the change in the value of the goods and services produced in India, without counting government’s involvement. Simply, the GDP value excludes indirect taxes (VAT) paid to the government and includes the original value of products without accounting for government subsidies.

OPENING UP OF NEW BANKS BY INDIAN POSTAL AUTHORITY AND RELIANCE GROUP…

India Post likely to get new bank licences. India Post and Reliance have emerged as frontrunners to receive new banking licences on the back of their strong distribution networks and credible records.

The committee led by former Reserve Bank of India governor Bimal Jalan, which submitted its report to the central bank, is of the view that these two applicants are ready to foray into banking services.

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The report contains the names of all eligible applicants wishing to set up banks. The committee began assessing applications at its first meeting on November 1.

"While the report is yet to be looked into, there is a high chance of giving licences to India Post and IDFC due to their large existing network," the source said, without divulging details.

The central bank will hold a meeting with finance minister P Chidambaram in the next 10 days to discuss the issue. The final names are likely to be announced by month-end.

India Post, being a government body, technically needs Cabinet approval to set up a bank. The interim budget unveiled by finance minister P Chidambaram recently did not earmark any funds for the postal department or mention the proposal in the budget. However, in case its name gets cleared, the formal proposal can be sent to the Cabinet for approval at a later stage or to a new government taking office after elections expected in April-May.

A full budget expected to be presented by the new government in July-August is likely to contain a detailed provision to help India Post set up a bank.

India Post has a nationwide network of 155,000 post offices and already has experience in administering a savings bank scheme, selling tax-saving instruments and accepting PPF deposits.

"I am trying that Post Office should get a banking licence to serve the common man in rural areas. I will keep by struggle on for banking licence," communications minister Kapil Sibal had said recently.

Besides India Post, IDFC & Anil Ambani's Reliance Group, IFCI, Aditya Birla Group, L&T Finance Holdings and Muthoot Finance, are also in the race to set up new banks.

The Reserve Bank of India( RBI) recently "in-principle" approvals to Mumbai-based infrastructure lender IDFC and Kolkata- based micro-finance Bandhan Financial Services for new bank licences.

The RBI will also consider the application of India Post, but the central bank said it would done separately in consultation with the government.

PROMOTION OF SAVINGS AND VIS-À-VIS INVESTMENT…

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring

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costs. In terms of personal finance, saving specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher.

Savings mobilization should not be promoted in periods of high inflation and political turmoil, and those MFIs which are already engaged in saving mobilization should have a strong management to overcome inflationary periods.

When exchange rate risk is a threat to the financial stability of the country, MFIs can protect themselves by avoiding taking credits on external financial markets and by placing their liquidities in a strong currency.

The intermediation of financial resources between regions is advantageous for the institutions and the overall economy.

MFIs that take in voluntary savings from their clients should undergo supervision and regulation, in order to protect clients’ deposits.

For the implementation of supervision and regulation of MFIs, no universal rules apply. Both the existing MFIs and the regulatory framework for banks should be analyzed first.

The processes of elaborating a regulatory framework for MFIs might be time and money consuming. Hence, the willingness and interest of both parts (authorities and MFIs) should be a pre-condition for elaborating such a framework.

If competent authorities do not have the capability and political will to establish such a framework, alternatives like self-regulation and delegated supervision are possible. They should nevertheless lead to an integrated supervision from the financial authorities in a predictable time horizon.

PUBLIC EXPENDITURE OR EXTERNAL BORROWINGS.

Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc. Public Expenditure refers to Government Expenditure. It is incurred by Central and State Governments. The Public Expenditure is incurred on various activities for the welfare of the people and also for the economic development, especially in developing countries. In other words The Expenditure incurred by Public authorities like Central, State and local governments to satisfy the collective social wants of the people is known as public expenditure.

In modern economic activities public expenditure has to play an important role. It helps to accelerate economic growth and ensure economic stability. Public Expenditure can promote economic development as follows :-1. To promote rapid economic development.

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2. To promote trade and commerce.3. To promote rural development 4. To promote balanced regional growth5. To develop agricultural and industrial sectors6. To build socio-economic overheads eg. roadways, railways, power etc. 7. To exploit and develop mineral resources like coal and oil.8. To provide collective wants and maximise social welfare.9. To promote full - employment and maintain price stability.10. To ensure an equitable distribution of income.Thus public expenditure has to create and maintain conditions conducive to economic development. It has to improve the climate for investment. It should provide incentives to save, invest and innovate.

Money borrowed by a country from foreign (usually European, North American, or Japanese) lenders. Interest on this debt must be paid in the currency in which the loan was made. Thus the borrowing country may have to export its goods to the lender's country to earn that currency. The infamous 'debt crisis' occurs when some weak economy is unable to do so, or can only do it at unacceptably high social and environmental costs.

External borrowings is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or citizens of that country. The debt includes money owed to private commercial banks, other governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.

Since the funds are raised through in foreign currency and the interest & redemption proceeds are also payable in the foreign currency, the issuing company has to hedge its foreign exchange exposure, which involves expenditure. In case the company opts to keep its foreign exchange exposure unhedged, it carries a huge risk due to fluctuation in foreign exchange rates. RBI has also acknowledged this problem and has instructed the banks to put in place a system for monitoring the unhedged foreign exchange exposure of small and medium enterprises.

REDUCING/INCREASING THE RATE OF INTEREST, CRR AND SLR FOR FACILATING INDUSTRIAL PROJECT…

Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money,or money earned by deposited funds.

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An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of money that they borrow from a lender (creditor). Specifically, the interest rate (I/m) is a percent of principal (P) paid a certain amount of times (m) per period (usually quoted per annum).

Interest-rate targets are a vital tool of monetary policy and are taken into account when dealing with variables like investment, inflation, and unemployment. The central banks of countries generally tend to reduce interest rates when they wish to increase investment and consumption in the country's economy. However, a low interest rate as a macro-economic policy can be risky and may lead to the creation of an economic bubble, in which large amounts of investments are poured into the real-estate market and stock market.

Reasons for interest rate changes

Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under normal conditions, most economists think a cut in interest rates will only give a short term gain in economic activity that will soon be offset by inflation. The quick boost can influence elections. Most economists advocate independent central banks to limit the influence of politics on interest rates.

Deferred consumption: When money is loaned the lender delays spending the money on consumption goods. Since according to time preference theory people prefer goods now to goods later, in a free market there will be a positive interest rate.

Inflationary expectations: Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.

Alternative investments: The lender has a choice between using his money in different investments. If he chooses one, he forgoes the returns from all the others. Different investments effectively compete for funds.

Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or otherwise default on the loan. This means that a lender generally charges a risk premium to ensure that, across his investments, he is compensated for those that fail.

Liquidity preference: People prefer to have their resources available in a form that can immediately be exchanged, rather than a form that takes time to realize.

Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on a higher rate to make up for this loss.

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system.

Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis.

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Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as % of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. The maximum limit of SLR is 40% and minimum limit of SLR is 23% In India.

If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate.

SLR is determined as the percentage of total demand and percentage of time liabilities. Time Liabilities are the liabilities a commercial bank liable to pay to the customers on their anytime demand.

With the SLR (Statutory Liquidity Ratio), the RBI can ensure the solvency a commercial bank. It is also helpful to control the expansion of Bank Credits. By changing the SLR rates, RBI can increase or decrease bank credit expansion. Also through SLR, RBI compels the commercial banks to invest in government securities like government bonds.

SLR to Control Inflation and propel growth - SLR is used to control inflation and propel growth. Through SLR rate tuning the money supply in the system can be controlled efficiently.

The main objectives for maintaining the SLR ratio are the following:

To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of India can increase or decrease bank credit expansion.

To ensure the solvency of commercial banks. To compel the commercial banks to invest in government securities like government

bonds.

Formula for Calculating SLR in India

SLR rate = (liquid assets / (demand + time liabilities)) × 100%

Lower SLR, means bank can give more money as loan = lower interest rates = cheap loan = more people take loan to start business or building house or buying car = boost in economy.

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This could to inflation, if people have more cash in their hands than the items available for purchase in the market.

Higher SLR = bank can give less money as loan = Higher interest rate = it becomes expensive to start a new factory, buy a new house / car/bike. This can curb inflation but may also lead to slowdown in economy, because people wait for the interest rates to go down, before taking loans.

SUBSIDY ; SHOULD GOVERNMENT GIVE MORE SUBSIDY OR SHOULD REDUCE IT?

The Indian government has, since Independence, subsidised many industries and products, from petrol to food. Loss-making state-owned enterprises are assisted by the government and farmers are given access to free electricity. Overall, a 2005 article by International Herald Tribune stated that subsidies amounted to 14% of GDP. As much as 39% of subsidised kerosene is stolen.

On the other hand, India spends relatively little on education, health, or infrastructure. Urgently needed infrastructure investment has been much lower than in China According to the UNESCO, India has the lowest public expenditure on higher education per student in the world.

India's vast subsidies have been severely criticised by the World Bank as allegedly increasing economic inefficiency.

However, this argument against subsidies in India does not consider the fact that just agricultural and fisheries subsidies form over 40% of the EU budget although in Europe only fraction of the people compared to India will be affected.

A subsidy, often viewed as the converse of a tax, is an instrument of fiscal policy. However, their beneficial potential is at its best when they are transparent, well targeted, and suitably designed for practical implementation.

Like indirect taxes, they can alter relative prices and budget constraints and thereby affect decisions concerning production, consumption and allocation of resources. Subsidies in areas such as education, health and environment at times merit justification on grounds that their benefits are spread well beyond the immediate recipients, and are shared by the population at large, present and future. For many other subsidies, however the case is not so clear-cut. Arising due to extensive governmental participation in a variety of economic activities, there are many subsidies that shelter inefficiencies or are of doubtful distributional credentials. Subsidies that are ineffective or distortionary need to be weaned out, for an undiscerning, uncontrolled and opaque growth of subsidies can be deleterious for a country's public finances.

In the context of their economic effects, subsidies have been subjected to an intense debate in India in recent years. Issues like the distortionary effects of agricultural subsidies on the cropping pattern, their impact on inter-regional disparities in development, the sub-optimal use

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of scarce inputs like water and power induced by subsidies, and whether subsidies lead to systemic inefficiencies have been examined at length. Inadequate targeting of subsidies has especially been picked up for discussion.

Effects of subsidies

Economic effects of subsidies can be broadly grouped into

1. Allocative effects: these relate to the sectoral allocation of resources. Subsidies help draw more resources towards the subsidised sector

2. Redistributive effects: these generally depend upon the elasticities of demands of the relevant groups for the subsidised good as well as the elasticity of supply of the same good and the mode of administering the subsidy.

3. Fiscal effects: subsidies have obvious fiscal effects since a large part of subsidies emanate from the budget. They directly increase fiscal deficits. Subsidies may also indirectly affect the budget adversely by drawing resources away from tax-yielding sectors towards sectors that may have a low tax-revenue potential.

4. Trade effects: a regulated price, which is substantially lower than the market clearing price, may reduce domestic supply and lead to an increase in imports. On the other hand, subsidies to domestic producers may enable them to offer internationally competitive prices, reducing imports or raising exports.

Subsidies may also lead to perverse or unintended economic effects. They would result in inefficient resource allocation if imposed on a competitive market or where market imperfections do not justify a subsidy, by diverting economic resources away from areas where their marginal productivity would be higher. Generalised subsidies waste resources; further, they may have perverse distributional effects endowing greater benefits on the better off people. For example, a price control may lead to lower production and shortages and thus generate black markets resulting in profits to operators in such markets and economic rents to privileged people who have access to the distribution of the good concerned at the controlled price.

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