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India to become world's fastest growing economy by 2013-15: Morgan Stanley

NEW DELHI: The two hands to produce count for more than that one mouth to feed, after all. Driven by a sterling demographic dividend, continuing structural reform and globalisation, India is poised to accelerate its growth rate to 9-9.5% over 2013-15, even as China will cool down to a more sedate 9% by 2012 and to 8% by 2015. So finds a new report by Morgan Stanley, authored by Chetan Ahya (managing director for Asia and India economist, who writes a monthly column for ET) and Tanvee Gupta.

India has one of the lowest median ages among the major economies. When an economy prospers, first its death rate and then, its birth rate falls. As this trend proceeds, there is a big bulge in the working age population while the non-working population (the young and the old) shrink as a share of the population. The lowering of the dependent (non-working) population to working age population ratio has twin effects.

One, it allows people to save a large proportion of their income, raising the country’s rate of savings; two, it boosts the number of people who work and contribute to growth. Thanks to structural reform, the additional hands available for work find work. Even with stagnant per capita output, the sheer increase in the number of workers would raise GDP growth. With reform pushing up productivity per worker, GDP would rise even faster.

Globalisation gives additional job opportunities, additional capital to augment rising domestic savings and additional know-how. With this happy combination, the report expects India to become the world’s fastest-growing economy. The government’s chief economic advisor Kaushik Basu has been forecasting such a development as well.

“Real GDP growth in China has averaged 10% annually over the past 30 years, compared with 6.2% in India. During this period, China’s GDP grew 16 times to $5 trillion whereas India’s rose seven times to $1.2 trillion. China’s exports (including services) surged 65 times over this period to $1,330 billion while India’s exports increased 22 times to $250 billion” says the report.

China has overtaken Japan to become the world’s second-largest economy. China’s demographic transition pushed up its savings rate above 30% in 1985, while India’s savings rate crossed that level only in 2005. India’s consumption level will now come down, even as China’s will rise.

Underlying the Morgan Stanley forecast is the assumption that India will significantly jack up its expenditure on infrastructure and in plant and machinery. Infrastructure expenditure has gone up from 5.4% of GDP in 2005 to 7.5% in 2009 and is poised to go up to 8% of GDP in 2010. Over 2012-17, the forecast is that India’s infrastructure spend would be $1 trillion as compared with $530 million over the previous five-year period.

Another assumption is on the quantity and quality of the young people coming into the workforce. While India will be the largest contributor to the world’s workforce — all of 136 million people — over the next 10 years (fully a quarter of the entire world’s additional workforce), China will add just 23 million.

source: www.economictimes.com

Non-compete fees taxable, rules ITAT

MUMBAI: Non-compete fees are capital expenditure and therefore liable to tax, according to a recent ruling by the Income-tax Appellate Tribunal, Delhi.

The special bench of ITAT, Delhi gave this ruling on July 30, 2010, on an appeal filed by Tecumseh India, the Indian arm of the US-based Tecumseh. The transaction in question was the acquisition of Whirlpool assets at Faridabad and Ballabgarh and the non-compete fees it paid to Whirlpool. The assets were purchased on July 2, 1997 but the agreement for non-compete fees of Rs 2.65 crore was signed on July 10, 1997.

Since the non-compete fee was claimed by Tecumaseh as revenue expenditure, it accordingly deducted the amount from computation of taxable income. The I-T department did not agree with the taxpayer’s contention and held that the payment of non-compete fee was capital expenditure and therefore tax has to be paid. The assessing officer, therefore added the expenditure back into the income computed for purpose of levying tax.

The company had cited the Delhi High Court decision in the case of Eicher to support its case. In the case of Eicher, the Delhi High Court had held that the non-compete fees are mainly for protecting the profitability and business interest of the company.

Further, since no profit-making apparatus was created through the payment of non-compete fees, such expenditures could be classified as revenue expenditure, and therefore tax was not payable on this count. The tax payer company had also argued that the acquisition of Whirlpool assets and the agreement for the non-compete fee were made on different dates and therefore the latter could not be construed as part of the acquisition.

The I-T department contented that though MoU and the agreement for paying non-compete fees, are signed on separate dates, they are part of the same transaction that could be classified as capital expenditure.

The I-T department cited section 6 of the Indian Evidence Act which stipulates that courts should take note of facts which formed part of the same transaction though they may have occurred at different places and time. It said the non-compete clause was part of the same transaction.