Knowledge Services

A couple of days back, the Department of Industrial Policy and Promotion (DIPP) announced on behalf of Ministry of Commerce & Industry - Government of India (GOI) that it plans to bring out the Service Price Indices (SPIs) for service sectors like telecom, transport, banking,  insurance, ports and aviation. These indices will be used to come up with the final Services Price Index. The GOI hopes that by having knowledge about the inflation in the services sector using the Services Price Index, it will be able to put a tab on the inflation in India.

 The first index to be released will be from the banking sector. The weights of the indices will be decided by an expert committee, headed by C.P. Chandrashekhar of the Centre for Economic Studies and Planning, Jawaharlal Nehru University. The committee has already decided that the indices will be released on a quarterly basis.

Historically in India, inflation is calculated using two indices namely, Consumer Price Index (CPI) and Wholesale Price Index (WPI). Since a couple of years the rate of inflation, measured using CPI and WPI, has been persistently high. However, the problem of inflation was not felt a lot till now because of the high rate of economic growth and the rise in real income of the population.  

World over, India is perceived as a services based country as majority of its exports coming from services. Additionally, services account for 57% of India's Gross Domestic Product (GDP). Inspite of so much dependence of the Indian economy on services, there were no indices to track and understand their price movements.

With the consistently high inflation rate, it becomes important to know about inflation in Services sector, which currently forms more than half of the Indian economy. Having said that, just by forming the SPIs and tracking inflation in services sector will not solve the problems of millions of poor in the country who are not part of the current growth story. In order to save the people at the bottom of the pyramid from volatility in the prices of daily goods, it becomes important to find an answer to the volatile agricultural output which is due to poor infrastructure, bad supply chains, poor storage facilities, and the like.  

The solution to problem of high inflation and inflation related volatility is not just to bring out the SPIs but also to work on broad macroeconomic issues like volatility in agricultural output. However, formation of the SPIs is a step in the right direction.

Sources:

§  Govt. plans new index to track price variations - Mint newspaper, April 19, 2011

§  Service sector to have own price index - Business Standard, April 27, 2007

§  India inflation rate - Tradingeconomics.com

§  Bringing tears to India's eyes - The Economist, Jan 21, 2011

 

Posted by Rahul Handa at 7:44 AM | Permalink | Comments (0) | TrackBacks (0)

There has been a lot of discussion about high fiscal deficit that India is experiencing right now especially with respect to the current debt crises in Europe and America. Here are my thoughts:

Composition of Public Debt:
Currently India's Central Government debt is 54.35% of GDP which looks relatively high especially given India's high fiscal deficit.
Central Government's public debt is largely internal. Out of the total public debt, only about 8.5% is external debt (about $250 Billion). Out of the total external debt, only about 20% represents short term debt. (See Source: 1 below) 
Keeping external debt at manageable levels has been a conscious policy of the GOI, especially after the 1991 crises.

However, India is in a different league all together.
India's tax regime will go through a paradigm shift in next few years. There are other factors, apart from GDP growth that'll lead to a sustained northward movement of tax to GDP ratio.
Here's how:

GST and Direct Tax Code:

Implementation of GST and direct tax code, by all indications should happen from April  2011.
Direct tax code will simplify the indirect tax regime and procedure. This is expected to bring in more direct tax due to increase in compliance. Ditto with GST. GST will simplify the indirect tax structure and India will truly become a single market.

Inflation:

India's WPI inflation for past decade has averaged 5.2%. (See Source: 2 below)  There is no reason to believe that the there will be any substantial downward movement in the trend in medium term. This high inflation will also lead to higher tax collection in nominal terms, everything else being equal.

UID Project:

Enrolling for Unique ID Project (UID) will start in FY12. This initiative will go a long way in ushering in transparency. This initiative will also simplify governance and bring in capabilities to the government that they have only dreamed of. Transparency will (hopefully) reduce the black market activities, tax leakage and should lead to tax buoyancy apart from the benefit of sharply targeted subsidies.

Demographic Dividend:

India starts getting demographic dividend now. Demographic dividend causes economic boom as the proportion of working population to total population peaks.

The combined effect of all the above, over a period of time is substantial movement of TAX-GDP ratio northwards.

Source 1. Govt. of India
Source 2. Reserve Bank of India

Posted by Tushar Anand Jiwane at 3:26 PM | Permalink | Comments (0) | TrackBacks (0)

It is surprising that this topic has not come up for discussion as yet! Around 4 years back, when I joined this industry, there was a lot of hype around the sheer size that this industry would grow to. A tag of USD 17 billion worldwide and India’s share of 72% i.e. USD 12 billion by year 2010, was the most quoted figure. However, the reality looks much lesser than the magical number, maybe one tenth!

Continue reading "KPO – hype, Reality and Future" »

Posted by Rahul Shah at 3:40 AM | Permalink | Comments (3) | TrackBacks (0)