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New tax change to hit NRIs

Income tax will now be levied on worldwide earnings as well as earnings in India. In many cases, this will mean double taxation whammy, says Dr Bhaskar Dasgupta.

india Updated: Sep 13, 2003, 15:10 IST
Dr Bhaskar Dasgupta
Dr Bhaskar Dasgupta

The India Babble
The Sensex moved up smartly over 100 points this week before dropping back slightly to close at 3921. Industrial production has improved (up) by 5.7 per cent in June and 5.3 per cent in the second quarter. Car sales zoomed up with a 38 per cent rise in sales. The foreign exchange reserves situation is still high and international loans to the order of $1.5 billion are going to be paid off.

Bimal Jalan, the RBI governor admitted to what most already know - that the rupee is convertible for all practical purposes - but rightly, the short term commercial borrowings are still controlled. India cannot afford to handle foreign exchange shocks at all.

An interesting news item crossed my inbox. Televisions and refrigerators manufactured in India are cheaper than those manufactured in China, partially due to the strengthening of the rupee against the dollar, in case of a TV, the difference on a 21" set is $8. Mind you, China produced 20 million TV’s last year compared to just 6 million in India, but this just shows what a major difference the foreign exchange rate makes to our industrial base. 

Corporate earnings are expected to jump, as the economy is forecast to expand from  6.0 to 6.5 per cent this fiscal, up from last year's 4.3 per cent, the bond prices took a breather, while the rupee paused as the US Fed held its interest rates. NASDAQ’s rise helped the domestic IT sector rise, while cement, aluminium and steel makers perked up on anticipated increase in demand after the good monsoon.

A little noticed tax change crept into the tax books and that is going to hit almost all the Indians living abroad, as well as the foreigners living and working in India. The income tax will now be levied on worldwide earnings as well as earnings in India. In many cases, this will mean  double taxation whammy, although India does have some double taxation treaties with some countries. One immediate impact of this will be the reduction of foreign talent, who may otherwise come and work in India. Too soon to tell but based on the fact that Indian tax authorities will have to liaise closely with the foreign tax authorities and the Indian tax authority's skills (or lack thereof), the impact looks a bit further off and little less than originally expected.

The Babble in the Ivory Towers
Now for a different perspective on finance. Behavioural Finance is a relatively new branch of financial market studies, which is based more on cognitive psychology and limits to arbitrage. Every MBA or Finance student worth his/her salt has been brought up on a strict diet of efficient financial markets, utility theory and arbitrage. If I turn around on the trading floor and say, hey, the markets are not rational, chances are more than even that I will be laughed out of the floor. Rationality is the fundamental principle of the markets and return is commensurate with risk.

Well, this is ok for the most part, but specially in times of stress, crisis, extreme bull and bear markets, rationality seems to take a dive and more normal behavioural patterns emerge. These are characterised as less than rational, risk averse people go into risk taker mode, adopt rules of thumb, over-confidence or panic, underweighting of long term averages, slower to react, etc. If one uses this framework to analyse the markets, then the chances of understanding the markets during times of stress is much higher than relying solely on the efficient markets paradigm.

Jay R. Ritter of University of Florida has written an excellent review paper on Behavioural Finance. Besides mentioning the above points, he talks about how Behavioural Finance  is getting more and more accepted within the mainstream financial markets field. This "correction" has been long overdue.

Over the past 20 odd years, we have seen a steady increase in computing power and extraordinarily complex models. Besides the general systemic model risk that this generates, slowly the explanatory power of models is tapering off. A similar debate is also going on within the field of economics, where there is a far greater pushback to the generically accepted mathematical economics framework. Think about it, quite a lot of trading in places like China and India is done on the advice of astrologers. Without commenting on the pro's and con's of getting planetary and divine help in trading, that factor will never be able to be captured within mainstream economics and financial economics, but behavioural finance does offer many ways to address this all too human factor.

Details of this paper and past columns are available on

The World Babble
A snappy week, with a bit of a high swing seen on Monday. The DOW ended up at 9321 and the NASDAQ at 1702 (more than 3 per cent). US industrial production moved up 0.5 per cent over July, but the blackout on Friday made trading volumes very thin. The dollar held steady with the backdrop of good economic fundamentals and the clarification by the Fed, that the rates are going to be on hold and may well be low for the foreseeable future.

US retail sales showed an unexpectedly strong growth in July, giving a nice little fillip to the market. This caused the bond market to slide even more, since the economic numbers are looking better and better (no word on the labour market yet, the single most important and worrying factor left).

Japan is doing well, economic numbers up, strong GDP numbers reported on Tuesday. So there is a fair bit of excitement in Tokyo right now.

General Motors has pumped more than $3 billion into the employee health fund. This is where the chickens are coming home to roost. Almost all American companies are struggling with rapidly rising healthcare and pension deficits. With no major rise in sales nor on the market, funding these deficits will be extremely expensive and will tie up cash flow for a long
time to come.

Thanks to overgenerous labour agreements and a rather strange health system (at least to people like me in the UK), the costs fall disproportionately on the corporate sector, while leaving significant chunks of the population under-insured or not insured at all. Because of the sheer
scale of the problem, no politician worth his or her salt wants to touch it and it may well have to collapse before getting fixed.

Gold is still hitting highs at $363 per ounce and same with Oil, with NYMEX September Crude trading at $31 per barrel. The oil market is slowly getting spooked by the inability of the Brits and Americans to control Iraq and fears of more disruption in supply is ever increasing. I would not be surprised if the oil price inches higher.

Europe did well this week with the FT Eurotop index closing the week at 892, in fact it did go up to 897, a 7 month high. The Footsie 100 ended at 4247 mostly driven by the good US news. Mind you, the much loved and lamented online (day or otherwise) traders seem to have made a comeback, at least in the UK. Online stockbrokers are reporting a 42 per cent increase in trades in Q2,
while the number of clients has jumped to almost 400,000. Most of the action seems to be coming from the rally in the equity markets, and that too from people who had originally closed off their accounts during the dismal years.

The traders are not only dealing with standard equity trading, but also with the contracts for difference, covered warrants and spread betting. A good vote of confidence, but a word of warning, this is an extremely slippery market, it slips away as fast as it comes back.

The pension fund at the UK arm of KPMG was found to be £65 million short and that's creating a ruckus at the firm. Watch this space, as the pension fund crisis in the UK shows no signs of slowing down or disappearing at all!

We reported on the state bail-out of Alstom and as expected, the bailout will not really help much. The firm is reporting that it may halve its workforce in the next 2 years, just shows how bloated and ill-managed it was. In the normal course of events, it would have restructured by itself and slimmed down its spread or depth, but now it will keep on staggering on, consuming vast sums of public money and rotting the image of Europe from inside. Just  to confirm this, Germany officially fell into recession in the 2nd quarter with zero growth for the year if not negative.

The Japanese finance minister, Masajuro Shiokawa, told China to revalue its currency last weekend. In a display of spectacular ability to keep a straight face, he said that foreign exchange rates should reflect fundamentals and market principles and that it is not good for countries to artificially maintain levels. All this coming from the  country which is the biggest intervener in the foreign exchange markets. Do as I say and not as I do? Japan grew faster than expected in Q2 of this year and the market seems to attribute it to the increase in capital investments and the growth in export orders. Obviously, the Japanese don't want to choke off this performance by Chinese Yuan under valuation and that gives the idea of the double talk.

Incidentally, the hiccup in the bond markets would have hurt the investors, specially the Asian central banks, who have been trying to keep their currencies down against the dollar and since this means selling their currencies and buying dollars, they park the dollars into the US treasuries. The price free-fall would have hurt the valuation rather badly.

On the trade front, the USA has appealed against a WTO panel's finding that the steel imports  which USA imposed in March 2002 violated trading rules. Well, the first impact of this appeal is that the tariffs and duties can stay on for another 9 months at least!, It also postpones an estimated $2.2 billion of EU sanctions on US imports. Nice one! USA and the EU came up with a proposal to reduce farm subsidies and import duties.

Looking at the proposal, I am not impressed at all. September is just next month and if this is going to be where the negotiations are going to start, then I very much doubt that the Cancun meet is going to be successful.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.) 

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