GST: ‘Results of plumbing work done by Centre in 2-3 years’

The effects of the ‘plumbing’ work done by the Centre in terms of fixing the GST and other pending reforms as well as ramping up infrastructure spends will be seen in the next two to three years, K Shankar, CEO, Feedback Business Consulting Services, has said. Shankar, however, cautioned that IT companies will face some headwinds in the short to medium term given the problems faced by Europe, the overall slowing down in spending as well as the weakening of the euro/pound vis-à-vis the dollar. He said Brexit could offer a window of opportunity for Indian companies prepared for it. Excerpts.

What is the rate that the GST Council should fix? There have been calls for it to be capped at 18%. Will it be a negative if it is fixed above that?

In my view, fixing the GST rate is as important or critical as fixing the inflation target. We must remember that once the GST is in place, the government will have no other route to collect taxes indirectly. The expenditure budget should not suffer. Since fiscal consolidation is paramount, it will be acceptable if GST is fixed at a percentage higher that what is required when it gets implemented. In my assessment, 20-21% would be a fair number to start with. It can be reduced as catchment of taxpayers grows.

Services sector will start on a negative even if the revenue neutral rate (RNR) is fixed at 18 per cent. There will be a host of sectors that will not mind a slightly higher rate in the short term.

Corporates may not to pass on any GST-related benefits directly to consumers in the first six months to a year. To be fair to them, they will take time to get a full assessment of the GST impact. This may result in some short-term inflationary conditions. Once the Bnd its impact is understood in full, free market economics will prevail and the rates could come down.

The GST regime is supposed to replace a cumbersome regime, which obviously supported a number of vested interests in the past. What happens to them? How will they let the new system work without posing impediments or sabotaging it in some manner?

The prolonged negotiations and discussions between parties in a way indicates that all stakeholders in the ecosystem had been considered before passing the Bill. Petroleum, alcohol and electricity have been kept out of the GST.

These account for a significant chunk of India’s GDP. That in itself indicates that all stakeholder interests have been suitablyaddressed.

What is going to be the impact of 'Brexit' on Indian companies? Are they prepared for it ? Who stands to gain and who will be affected?

The net impact of Brexit on Indian companies will be marginal. Some companies that have lots of ‘asset driven’ exposure in the UK could face larger challenges while those that trade should not see any difference. People movement would be a challenge. Most Indian companies use the UK as a gateway to business in the EU. Seamless people movement, seamless trade etc., will become a thing of the past. Brexit could also work favourably for some Indian companies that invested in the UK under the overarching EU agreements. Brexit will help these companies renege on their agreements and help faster and more beneficial decision-making.

IT services companies will be affected in the short term but given the nature of services they provide they will find other areas to balance revenues. In the short term, Brexit will also mean that financial assets around the world will converge towards the dollar or the yen. These currencies will be stronger than the GBP or euro. IT companies will follow the currency market routes.

Given the economic slowdown in the rest of the world and particularly in Europe, what kind of headwinds do you see for Indian IT companies in the immediate future?

Indian IT companies need to look ‘in country’ with as much intensity as they look at exports. India itself is expected to consume a lot of IT products and services over the next few years. The Indian IT companies are also very flexible and agile. They probably know the US markets better than their US counterparts or other global vendors. There will be some more of maintenance projects they will do. They will work with SMEs on small ticket projects and sustain themselves till such time capital flow across continents does not improve. There will be pressure on hiring and also on margins but they will sustain through this uncertain phase and grow back again.

There is a general perception that 7.5% growth in the economy doesn't feel like that – on the ground. Why is it so?

Growth in India over the last 2-3 decades has been cosmetic and superficial. India did not really invest in three areas – sound policy-making – monetary, fiscal, allocation of natural resources, spectrum, environment etc etc., India dragged its growth on jaded and ‘less than acceptable infrastructure’ and finally India did not invest on creating a framework to recognise the importance of manufacturing and creating jobs in that sustainable sector. All these areas are what I would call the ‘basic plumbing’ of a good economy . The present administration is getting that into shape. There is traction on all fronts. The investments we are making in these areas will start benefiting the nation in 2-3 years’ time and that is when it will be felt by people on the street. 7.5 % will have a good 1-1.5 % upside with the present reforms. There are more reforms that can be undertaken but India needs them coming at an acceptable pace.

Are business and government leaders looking beyond the immediate future and planning for the long term?

Leaders everywhere are looking beyond balance sheets and performance reports. They are looking at one or two major achievements which will propel them as legends in history books. With that kind of vision they will set a framework or a roadmap for the future.

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