India Equity Strategy: GST passage is the way forward
India Equity Strategy: GST passage is the way forward
The government could gain in 2016 the votes it needs to pass the GST Bill. The legislation could have far-reaching macroeconomic and earnings implications
Investor expectations regarding the passage of the GST bill, arguably India’s biggest reform in two decades, have waned due to a logjam in the Upper House: The implications of the GST reform range from creating a simplified and more compliant tax system to directly benefiting sectors such as consumer companies, logistics and home building products. Although the Bharatiya Janata Party-led government has a majority in the Parliament’s Lower House, it lacks the votes required to pass the bill in the Upper House. Parliament disruptions and opposition from the Indian National Congress (INC) and a few other parties held up the Bill’s passage in 2015.
The key to the Bill’s passage is a reduction in the number of Upper House members opposing the bill. That number currently stands at 91 and it needs to fall to 82 for the bill to pass—we forecast that to happen by July 2016 : To pass the bill, the government needs the higher of 50% vote of the Upper House (123 out of 245 votes) and two-thirds of members of the Upper House present and voting (163 votes in a full house). Thus, not more than 82 members can oppose the bill if all are present and voting. Currently against the bill are 91 upper house members, including 67 INC legislators. Between March and July, 75 members are scheduled to retire from the House—changes to Upper House membership are fixed since these changes depend on the current composition of the state assemblies and, thus, representation is changing in favour of the government. We calculate that the BJP will gain two seats, the INC will lose 7, and the BJP gain another 7 via newly nominated members in the Upper House (a prerogative vested with the government of the day). The net result of this and gains by BJP allies increases the number of those supporting the bill, from 97 to 110, and decreases those opposing to 81.
Time to buy GST winners. Can the bill pass before these changes happen? Yes, if the government and the Congress settle their disagreements, which revolve around two main issues—capping the GST rate and including the rate in the bill. It is also possible that they agree to disagree, in which case the Congress abstains from voting, allowing the bill to pass in the Upper House. Indeed these scenarios currently have low probability but with the passage of time, as the Congress loses strength in the House, their probability rises. From a stock market perspective we think it means investors should start including GST winners in their portfolios, as we have in our Focus List.
The key risk is that political parties change their views: Persistent parliamentary gridlock could also spoil matters.
Support for GST rising in the Rajya Sabha
The BJP-led government has been in power for almost two years, but it has been unable to pass the GST bill in Parliament. This government doesn’t face a challenge in the Lower House, where it has a healthy majority. It is the Upper House where it has a minority position. The GST is a Constitution Amendment Bill and the following conditions need to be met for its passage:
(i) the bill requires a special majority in Parliament for its passage (which is the higher of 50% of total membership and two-thirds of those present and voting), and (ii) the bill requires ratification by state legislatures of not less than one-half of the states by resolutions to that effect passed by those legislatures.
The Upper House comprises 245 members. Currently, there are 242 members due to three vacant seats. The BJP and its allies have 60 seats while the INC has 67. For the GST bill to pass in the Upper House, more than 163 members (two-thirds of the total membership) need to support the bill to get a two-thirds majority. We count how upcoming retirements are likely to change the seat math in favour of the BJP.
Why we think opposition membership will fall to one-third: For the GST bill to be passed in the Upper House, not more than 82 members should oppose the bill. As per our analysis, currently 91 Upper House members do not support the passage of the GST bill. These 91 members include the Congress, Left parties, nominated members (appointed during the Congress’s term) and some regional parties. Between March and July, 75 members are scheduled to retire from the House—changes to Upper House membership are fixed since they depend on the current composition of the state assemblies and, thus, representation is changing in favour of the government.
By July 2016, the number of members opposing the bill will fall to 81 as members retire. The Congress will lose seven seats (including two nominated members). There are seven nominated members’ seats up for appointment by the end of March. These members are appointed by the President as advised by the government of the day.
These seven membership seats include two vacant seats and two seats of the Congress, as these two members joined the Congress after their appointment to the Upper House. We assume that the seven newly appointed nominated members will be supportive of the GST bill (versus none of them supporting it previously). With these changes, the number of members opposing the bill falls to 81.
Why we think the proportion of members supporting the bill will increase to two-thirds: Currently, BJP and its allies have 60 seats in the Upper House, and, along with parties supporting GST, there are 97 votes in favour of the bill. This count increases to 110 by the end of July with the upcoming retirements.
We assume the following scenarios that raise the vote in favour of the bill to two-thirds of the total members present and voting:
(i) In the first scenario, all members participate in voting. The BJP and its allies see their seat membership increase to 110 from 97 seats. There are another 44 members that are currently supporting the bill.
Supporting votes add up to 154. There are another nine who are neutral at this point and could swing either way. If the government can garner support from these members, then getting to the 163 vote mark becomes likely by July 2016. (ii) In the second scenario, the Congress (i.e., 67 current Upper House members) abstains from voting , and then the government needs 123 votes. In this situation, the bill can even pass during the second part of the Budget session, between April and May. By April, we think the BJP and parties supportive of the bill will have 107 seats in Rajya Sabha; they need another 16 seats to get the votes in the favour of the bill, which are already available to them.
(iii) In the third scenario, the BJP and the Congress agree to pass the bill as their disputes about the bill are resolved.
The second and third scenario can play out anytime from the start of the budget session last week. A persistently gridlocked parliament, or members of parliament who currently support the bill but change their mind, are risks to our views.
Once the bill clears Parliament, getting the bill passed by more than half of the states should not prove challenging, as the BJP and its allies are currently in power in 12 of 29 states, and a few beyond the 12 are supportive of the bill.
Implications of a potential GST on stocks and sectors
Our analysis suggests that six of the ten sectors we evaluated would benefit from a GST implementation: consumption (warehousing consolidation), logistics (more heavy vehicle movement), house building materials (lower duties), and industrial manufacturing would likely experience a positive impact; cigarettes (if included in the GST) and oil & gas could see a negative impact, while the remaining sectors would likely see a neutral impact.