GST - Domestic manufacturing (Countervailing duty as input cost)

Q. Have a question about countervailing duties on imports in India. I read in the eco survey that input taxes on domestic manufacturing will continue even after gst will be introduced... So the countervailing duty won't give an advantage to the domestic mfgs. Didn't understand how input taxes will be levied even after gst comes. Isn't gst an all composing tax?

We need to know what is 'input tax'?

When gst is introduced, it says the countervailing duties will become equivalent to any other type of input tax

Whether a tax is input tax or output tax is based on whether the taxed goods are further consumed in manufacturing or sold as such

Gst can be both depending on what goods we are talking about

So that will offset the disadvantage to the domestic manufacturers?

No

It says that whatever advantage the countervailing duties give to the domestic manufacturer may not materialize in gst scenario.

Sir in the case of manufacturing goods?

Let's say the goods is a car engine - is it input or output?

It is input for the car manufacturer

If a company is just selling car engines, it is output

In gst scenario, let's say a car manufacturer buys car engine

With countervailing duties in place, domestic car engine will be cheaper than or competitive with foreign car engine

However when working out gst for the car, the countervailing duty will be regarded as an input tax and will be credited to the car manufacturer making it to favour the foreign car engine.

Gst is also a value added tax

Is the countervailing duty imposed on the import or is it given as a subsidy to the domestic mfg?

It is imposed on the import

The countervailing duty will be credited to the car mfg...so in the end, the foreign engine ends up being cheaper! N the domestic mfg suffers?

Yes, So do the exemptions.

It differs in what you are importing and which price you want to bring down.

Inflation

In the economic survey, they say ""in addition to oil prices, India’s inflation will be shaped by pressures from agriculture, foreign and domestic""

How does foreign agricultural pressure shape India's inflation, since we are mostly self-sufficient in food production?

What you think about inflation?

Inflation - increase of prices , when there is more demand

In general terms, its fine.. but any other inputs..??

Persistent increase in prices more than the growth

a general increase in prices and fall in the purchasing value of money

in general terms Increase in the prices and reduce in purchasing power of people.. also increase in demands..

inflation usually is based on WPI and occurs when there is mismatch between demand and supply

Good. Let us look at this... Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service.

In our country this is measured using two parameters i.e., WPI and CPI..

(WPI) Earlier, the concept of wholesale price covered the general idea of capturing all transactions carried out in the domestic market. The weights of the WPI did not correspond to contribution of the goods concerned either to value - added or final use.

Precisely, the WPI is worked out taking out, as far as possible, all transactions at first point of bulk sale in the domestic market.

The major criticism for this WPI started and gave ris to a thought that 'the general public does not buy at the wholesale level'. Hence WPI does not give the actual feeling of the amount of pressure borne by the common man. However, the increase in wholesale prices does affect the retail prices and as such give some feel of the consumer prices. This led to something we refer as the second index.. CPI..

This CPI measures price change from the perspective of the common man/ retail buyer in our eco terms. It is the real index for the common people. It reflects the actual inflation that is borne by the individual. CPI is designed to measure changes over time in the level of retail prices of selected goods and services on which consumers of a defined group spend their incomes.

There were four parameters taken as a key parameters to work out the CPI. they are: Industrial workers, Agricultural labourer, Rural Labourer and Urban Employees etc.. So when we are working out these indices, we have to take the domestic market and the international market as well since we will be importing the goods and services as well.

Quoting few lines from the economic survey

""The most dramatic structural change relates to wage pressures. As shown in Figure 1.7, wage growth has declined to about 3.6 percent from over 20 percent. If these trends continue, rural wage growth can continue to decelerate, further moderating inflationary pressures.""

How does rural wage growth affect the inflation?"

Sir, I did not get how the rural wages would effect inflation, since the wages are very small in number

When we are talking about CPI, we have to consider a distinct difference between the RURAL and URBAN population and its impact.. a overlap...

There was a strong feeling that there is a need for compiling CPI for entire urban and rural population of the country to measure the inflation in Indian economy based on CPI. Thus, now Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling a new series of CPI for the

i) CPI for the entire urban population viz CPI (Urban);

ii) CPI for the entire rural population viz CPI (Rural)

iii) Consolidated CPI for Urban + Rural will also be compiled based on above two CPIs

These would reflect the changes in the price level of various goods and services consumed bythe Urban and rural population. These new indices are now compiled at State / UT and all India levels.

When we understand the parameters which are used to measure the inflation, we shall be able to correlate the graphs with them clearly.

Sir in fiscal drag inflation occurs to cause adjustments in tax brackets? Do they have direct relation or it happens because of rise in income?

We can state that there is a direct relation. Fiscal drag is essentially a drag or damper on the economy caused by lack of spending or excessive taxation. As increased taxation slows the demand for goods and services, fiscal drag results. Fiscal drag is a natural economic stabilizer, however, since it tends to keep demand stable and the economy from overheating.

Because it is an economic stabilizer, fiscal drag can influence economic equality among citizens of the same region.

"One cause of fiscal drag is the consequence of expanding economies with progressive taxation. In general, individuals are forced into higher tax brackets as their income rises. The greater tax burden can lead to less consumer spending. For the individuals pushed into a higher tax bracket, the proportion of income as tax has increased, resulting in fiscal drag"

Fiscal drag can influence economic equality among citizens of the same region. Is this in positive terms or negative?

Both.. for those who are earning more, they are taxed more and thus are left with less money to spend... those who are earning less are taxed less leaving more money to spend.. (in % terms as well.)

As far as i understand, for the man who earns more, it may sound negative. but for the man who is under the lesser tax bracket, it may sound positive...

About WPI, i just got some information that may be of use to you (for a fast reading..) This (WPI) index is the most widely used inflation indicator in India. This is published by the Office of Economic Adviser, Ministry of Commerce and Industry. WPI captures price movements in a most comprehensive way. It is widely used by Government, banks, industry and business circles. Important monetary and fiscal policy changes are linked to WPI movements. It is in use since 1939 and is being published since 1947 regularly. We are well aware that with the changing times, the economies too undergo structural changes. Thus, there is a need for revisiting such indices from time to time and new set of articles / commodities are required to be included based on current economic scenarios. Thus, since 1939, the base year of WPI has been revised on number of occasions. The current series of Wholesale Price Index has 2004-05 as the base year. Latest revision of WPI has been done by shifting base year from 1993-94 to 2004-05 on the recommendations of the Working Group set upwith Prof Abhijit Sen,, Member, Planning Commission as Chairman for revision of WPI series. This new series with base year 2004-05 has been launched on 14th September, 2010.

I just enjoyed these links, may be you can browse through them.. (the abstract / executive summary)..

http://www.investopedia.com/terms/f/fiscal-drag.asp

http://www.bostonfed.org/economic/wp/wp2013/wp1325.pdf

how to recoganise if a graph or flow chart is relevant from exam point of view?

While reading economic survey, i came across many graphs. Should the relevant ones be included in our notes? If so, how, since while using them in exam one may not remember their scale, also it will be difficult to draw on scale.

In addition, please guide as how to recoganise if a graph or flow chart etc. is relevant from exam point of view.

The graphs are the easiest representation of data. So taking the topic and picking the relevant ones will help.

Including the graphs are always better - for a clear understanding. While using them in exam, the scale doesn’t matter. But the concept - whether you have understood the subject, concept or not is what that matters. So no problem. You shall pick the graph and use them.