Week gone by: No exemption for MSME exporters under GST, USD/INR volatility RBI yet to act, fiscal deficit well within limits

By Abin Daya

Before we start, just wanted to update on a few activities we are doing currently.

The issues pertaining to EDPMS and the resultant caution listing of exporters have got a lot of attention recently. We are working with a number of exporters to resolve the issues that they have had with their bankers on settlement of Shipping Bills on EDPMS, and thereby successfully removing them from the caution list.

We are also privileged to work with FIEO, India's apex body of Indian Export Promotion Organisations, to deliver a series of client education workshops to explain the workings of EDPMS, and the common issues that surround settlement of export bills. These workshops have so far been done in Chennai, Madurai and Guntur, and we have had excellent response to the same. More of these workshops are in the pipeline.

Please watch this space for more news on these.

As we are getting to the end of the first quarter of the current FY, we are starting to get the final figures of a number of economic indicators for the previous FY.

With a revision in the base year taking effect, change in the weightage structure, plus the inclusion of renewable energy into the electricity production data, changes are aplenty in the new core sector index. It is also in line with the changes in the larger IIP index, of which the first set of data will be available to us from this month onwards. We discuss the core sector numbers for FY 17 and Apr 2017 this week.

We have also got data on the public finances for FY17. It is definitely a commendable job to have kept the Fiscal Deficit close to the targeted 3.5% of the GDP during the year. Particularly considering the fact that in the absence of private investment, government spending had to take up the slack to ensure that the economy did not crash and burn. This is demonstrated by more than 20% growth in GFCE as per the GDP data. We will have to see if the same can be repeated in the current year.

The GDP and GVA data for Q4 of FY17, and FY17 have also come out. I will talk about that in detail in my next week’s update.

With GST implementation getting closer, exporters’ concerns are getting more and more to the forefront. It is now almost certain that post-GST, exporters will need to provide for higher levels of working capital than they do now, and this could affect operations, if not managed well. There are discussions happening at the ministerial level to smoothen the transition for exporters, but despite that, it would be good to be aware of how your business might be affected.

We also talk about the strengthening INR and the weak interventions that RBI has had in the forex market, and also the fuel supply situation at the thermal power plants.

Read on for a detailed update. Please share your comments at [email protected]

Core Sector growth disappoints in Apr 2017

• With the revision in base year for IIP, the core sector base year has also got changed from 2004-05 to 2011-12 from Apr 2017 onwards
• Under the revised base year, the core sector weightage in IIP has also increased from 38% to 40.27%
• For FY17, core sector grew by 4.8%, higher than the growth achieved in FY16, and marginally lower than that of FY15

• Sector such as crude oil and natural gas continued to decline y-o-y, while steel sector made a smart recovery during the year
• Another sector which lost the growth momentum of the previous year was fertilisers, where sectoral growth declined from 7% in FY16 to 0.2% in FY 17
• The core sector grew at 2.5% in Apr 2017, significantly lower than 8.7% recorded in the same month last year

• The performance trends are mixed, with three industries  - coal, crude oil and cement – falling into negative growth
• The fertiliser index, which was beset with negative growth for the past 4 consecutive months, grew by 6.2%; a favourable base effect also helped

• The steel index continued to exhibit strong growth at 9.3%, though the performance declined month-on-month, against the 11% growth recorded in Mar 2017
• While the anti-dumping duties imposed by the government will create a stable space for steel producers, we are moving into a high base range from now on, and will need to wait to see the impact of the same
• Refinery products, which was the best performing segment in the same month last year at 19.1% growth, remained flat in Apr 2017, while growth in electricity sector moderated to 4.7% from 14.5% last year
• It is expected that IIP growth might ease in Apr 2017, compared to Apr 2016, tracking the lacklustre performance of the core sector

Fiscal deficit for the year at 3.51% of GDP in FY17

• Despite revenues falling short of the revised budget estimates, the government has managed to keep the fiscal deficit within the targeted limits for the year
• The budget estimates for total revenues was revised from Rs.14.44 lakh crores to Rs.14.8 lakh crores, against which achievement was at Rs.14.40 lakh crores, or 97.3%

• The total revenues translated to a growth of 14.5% over last year numbers of Rs.12.58 lakh crores
• Budget estimates of expenditure were also revised from Rs.19.78 lakh cr to Rs.20.14 lakh cr, and even here, achievement fell short of estimates at Rs.19.75 lakh cr, or 98%
• Fiscal deficit remained restricted to Rs.5.35 lakh cr, or 3.51% of the GDP, against a target of Rs.5.34 lakh cr, in FY17
• Fiscal deficit for FY17 was only marginally higher than what it was in FY16 (Rs.5.33 lakh cr), while the revenue deficit declined from FY16 levels
• Revenue deficit ended at Rs.3.08 lakh cr, or 2.02% of the GDP, against a figure of Rs.3.43 lakh cr in FY16, a decline of 10%
• While overall expenditure increased by 10% from FY16, it is heartening to note that the growth was much higher in capital expenditure (14.7%) than in revenue expenditure (9.5%)

• Direct tax collections grew 12.53% from FY16 to end at Rs.14.48 lakh cr in FY17
• This was made possible by robust growth in personal income tax, from Rs.2.80 lakh cr to Rs.3.40 lakh cr, a growth of 21.5%
• Corporate taxes grew by 7% y-o-y, from Rs.4.53 lakh cr to Rs.4.85 lakh cr
• The highest growth amongst all heads for indirect taxes came from excise duties, supported by the hikes in excise duties on fuel
• Excise duty collections grew from Rs.2.87 lakh cr to Rs.3.81 lakh cr, a growth of 32.7%, while service tax receipts grew by 20.4% y-o-y
• Overall, indirect tax collections grew by 24.75% while direct tax collections increased by 12.5% y-o-y

RBI not too concerned with USD/INR volatility

• The Reserve Bank of India seems to be comfortable with ‘flow induced volatility’ that is present in the markets at the moment
• No indications of major interventions by the central bank in the Forex markets from mid-April
• Signals RBI’s adherence to its stated objective of intervening only to curb undue volatility and not to manage a particular level
• INR has appreciated against the USD by 5.4% so far in the current calendar year, and exporters who were largely under-hedged have suffered
• While surplus liquidity in the banking system is one of the reasons for the central bank to restrict its interventions, the intention of RBI to let market forces play out is also evident
• With the FCNR (B) redemption event having passed, RBI does not expect markets to be unduly volatile in the near future
• Unless things change drastically, or markets become unreasonably volatile, it looks as if the rupee will find its own level, and not be influenced too much by the interventions of the central bank

No exemption under GST for MSME exporters

• The implementation of GST on July 1 is widely expected to increase the working capital requirements of exporters quite significantly
• Under the GST regime, only basic customs duty is included in duty drawback scheme, and the exporter has to claim the GST portion through a refund mechanism
• For Advance Authorisation, too, the exporter has relief only on the Customs duty portion, and he will have to bear IGST plus any penal duties at the time of import, to be claimed as a refund later on
• The Commerce Ministry had put forward a suggestion to exempt exporters from the MSME sector from paying GST thereby blocking their working capital
• However, the GST Council has refused to accept the same, and thus there is no exemption for MSME exporters under GST
• This could lead to possible blocking of working capital due to delays in the refund of duty paid
• The Ministry had also proposed that the duty drawback scheme under GST regime should include both basic customs duty and IGST, so that refunds happen under one window, instead of the exporter having to coordinate with multiple agencies
• Even exporters find favour with the proposal to have IGST under the duty drawback scheme which is under the control of the Centre
• Refund mechanisms with state governments may not work so smoothly, and exporters have not had very good experience generally with VAT refunds by the various States

Thermal power plants face fuel shortage, despite ready availability of coal

• Coal is currently in short supply at thermal power plants, after two years of oversupply
• As on May 22, the average coal stock at 113 power plants is down to 12 days, with 13 utilities having 7 days stock, and 6 others, just 4 days’ stock
• In contrast, during same period last year, utilities had 22 days’ coal inventory, with no single entity having less than 7 days
• Typically, power generation peaks in summer, but demand has been relatively subdued this year, particularly for thermal power
• Between Apr 01 and May 20, when the overall electricity generation was up by 4.7%, increase in thermal power generation was lower at 3.8%
• Hydel power generation was up by 25%, and the installed capacity of solar power has gone up by 80% to 12GW in FY17
• While this has led to subdued demand of power, it still does not explain the reduced inventory levels
• It looks to be a case of missed planning, as plants had only 19 days stock at the beginning of the FY, compared to 26 days during the same period last year
• By Apr 30, utilities were down to 16 days stock, despite record pit-head inventory at state run coal producer, Coal India Ltd
• Despite the increased availability, utilities did not offtake allocated quantities, with a view to maintain low inventory levels and thus reduce operating costs
• In May, due to the shortfall in hydel power generation, as demand started increasing, demand for coal also increased significantly
• Despite availability of stocks, railway logistics could not be arranged at short notice, which has led to the situation of critically low fuel stocks at many utilities
• The government’s push to reduce reliance on imported coal has also led to a 7.6% fall in thermal coal imports, thereby compounding the problem
• All said and done, the state run miner is now looking at increased sales volumes for the next few months as fuel starved power generators look to replenish stocks

Abin Daya the author of 'Basics of Trade: An India Perspective' is a FEMA expert, a career transaction banker, with close to 15 years of experience in corporate and transaction banking, in India.