Labour-Intensive Industries Are Now Panicking
While the stock markets may be resilient, jobs in some of India’s most labour intensive sectors like apparel, leather and gems and jewellery are at risk
On Episode 651 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Rotti, Founder and CEO of Tax Compaas. We also feature an excerpt from an upcoming interview from our show, How India’s Economy Works, where economic journalist and author Puja Mehra speaks to economist Rajiv Kumar about his latest book.
SHOW NOTES
(00:00) The Take
(05:48) Labour-intensive industries are now panicking though the markets may be fine.
(09:23) Trade tensions take the rupee and oil prices down.
(10:28) A revised Income Tax Bill is coming, why was it revised and what could it contain?
(20:53) A fresh approach to Chinese investment in India.
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Monday the 11th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital, and this is a holiday shortened week.
The Take - A Bottom-Up Approach To Reform
Last week, Mumbai police registered cases against five individuals for allegedly flying drones without permission during the Mahaganpati Aagman procession in Mumbai's Lal Bagh in central Mumbai.
The five youths were evidently trying aerial visuals of the welcoming of idols of Lord Ganesh to various pandals in dense central Mumbai for the annual Ganpati festival which is at the end of the month. Mumbai police officials told the Free Press Journal that the five accused claimed they were recording the event but drone activity was strictly prohibited. A case has been registered and further investigation is underway.
In May, two more young men were picked up north and south of Mumbai for flying drones for what clearly appears to be recreational purposes but on the effective ground of committing a crime. Now, the last week has seen much fulmination by leading economic and other lights about what India should do as a response to the economic embargo that the United States is set to impose on India were it not to stop buying Russian oil by the 27th of August. Now, that is when tariff rates of 50% would take effect as opposed to the already debilitating 25% in force as of last week.
Now, several voices have highlighted once again the importance of the genuine ease of doing business for local businesses and becoming more competitive. Others have pointed out how India should focus on attracting more foreign tourists, numbers of which are at a dismal low right now. This would mean a different kind of job creation because it's not clear to me whether someone who was polishing diamonds in Surat or stitching apparel in Tirupur could be managing the front office of a hotel, small or big, or helping out in the kitchen.
Possible but not easy. Last August, the Prime Minister had showcased the Namo Drone Didi scheme where young women were trained to use drones for spraying fertilisers on their crops. The Prime Minister said that this would make them integral stakeholders of their local farming supply chains and rural prosperity.
The scheme was kicked off around January last year and involved providing 15-day training to fly drones and get a drone pilot licence and some 15,000 drones were stated for distribution to women across India at the time. In the recent India-Pakistan border conflict, drones played a key role in that cross-border warfare. Many of these drones were made by private companies in India who probably had no clue that there was ever going to be a military application for their products.
Three months ago, I spoke to Ankit Mehta, CEO at Coforge Technology, a Mumbai headquartered drone maker. When they started the company about 20 years ago, drones were thought to be used for mapping and photography and then the 2008 terrorist attack on Mumbai happened and then drones began to be used for law enforcement and surveillance. But it was the Russia-Ukraine war which showcased the use of drones as an important, effective and cost-effective way and weapon in warfare.
But drones as we know have multiple uses. They could be used for aerial photography or with considerable and sometimes sophisticated modification for bombs and such payloads as we're seeing in Ukraine. Now this perhaps explains why India's police forces are constantly cracking down on drone operators unless they've secured prior permission from them.
But you have to see what's happening on the other side. China is ambitiously promoting its low-altitude economy as it's called or airborne devices flying at least below a thousand metres. The Economist quotes China's Civil Aviation Authority saying the country's low-altitude economy will be worth 208 billion dollars by the end of this year.
Over 2.7 million packages and 200,000 meals were delivered by drones last year, double of 2023. Several flying cars which also obviously use batteries are being developed and batteries as we know are a strategic edge with China. Some 2.2 million civilian drones were operating around the country which is almost a 450 percent jump in five years, says the Economist adding drones are now performing a variety of tasks from transporting blood to spraying fertilisers.
Some of this is happening in India too but the scale is not close. More importantly as the Economist points out most of China's airspace is actually deserved for military use or subject to strict security constraints which makes it more striking that China is promoting the use of low-altitude aircraft and revising rules accordingly. Six cities including Shenzhen and Hefei have been given a degree of autonomy in opening airspace below 600 metres for commercial activity which brings us back to our enthusiastic young drone cameraman trying to capture an aerial view of the famed Lalbagh Charaja as he makes his way past joyous crowds on Mumbai's packed roads.
Much innovation has happened in India's drone industry too but not as much as China and surely it's been tougher. Imagine a young engineer who builds a small drone to do something imaginative only to get caught and hauled off to a police station. Just like the cameraman who wants to get some cool aerial pictures but forgot to go through the bureaucratic maze of filling up forms and securing permissions.
India has many battles ahead including on tariffs and geopolitics and none of those problems can be solved in days or even months however much we may expend our energy on social media desiring so. Freeing up the use of drones would be one example and instance of how we can unclog the innovation pipelines bottom up
And that brings us to the top stories and themes of the day.
Labour intensive industries are now panicking though the markets may be fine.
A revised income tax bill is coming. Why was it revised and what could it contain?
Trade tensions take the rupee and oil prices down and a fresh look at Chinese investment in India.
The Markets Could Hold Out
Garment maker Pearl Global whose US client list includes Gap and Kohl's has been receiving midnight panic calls with an ultimatum. Share the tariff hit or move production out of India according to Reuters. Pearl Global is now offering its customers to shift production to its 17 factories in Bangladesh, Indonesia, Vietnam and Guatemala to bypass the steep US tariffs on Indian imports according to that report.
Elsewhere in Switzerland, Bloomberg is reporting that aircraft maker Pilatus has stopped deliveries to the US one day after the 39% tariff on Switzerland went into effect. The company said that massive additional costs and the resulting competitive disadvantages with US and European competitors are causing increasing uncertainty amongst customers and that has led the company to temporarily interrupt its US business. So the shock waves are now beginning to spread and while the stock markets may be resilient to this both internationally and in India, jobs in some of India's most labour-intensive sectors like apparel, leather and gems and jewellery are at risk and more so if the 50% tariff rate kicks in from the end of this month.
Whichever way India negotiates, we have to keep these jobs in mind and while many companies including in Switzerland, just to quote that example above, are being impacted, the hit will be significant on lower income workers in India. The stock markets are wary but not reflecting any panic right now. The major indices fell on Friday.
They posted their 6th straight weekly loss as tariffs driven by both trade uncertainty as well as soft earnings took hold. Now this would have been the longest losing streak since April 2020. The Nifty 50 and the BSE Sensex both dropped about 0.9%. The Nifty was down to 24,363 and the Sensex was down to 79,857.
For the week they were down about 0.8 and Now a lot of textile exporting stocks like Gukaldas exports and Badman textiles fell between 4 and 12% after the US hiked those duties but in contrast, as Reuters points out, Hero Motor Corp was up close to 7% for the week topping the Nifty 50 thanks to a surprise earnings beat in turn helped by stronger exports. Something that we've pointed out was the case even with two-wheeler maker Bajaj Auto. But this does suggest that stocks are still being driven by fundamentals and earnings and there is no market-wide fall because of trade tensions.
Meanwhile, a Bloomberg report says India's equity market now trails onshore China's by $6.3 trillion which is the widest cap since March. The MSCI India index is lagging its Chinese counterpart by 10 percentage points this quarter and is on pace for its biggest annual underperformance since 2017. Last month, foreign portfolio investors pulled out about $3 billion from Indian stocks which is the most since February.
Goldman Sachs has said which we reported earlier that Indian stocks will continue to underperform emerging market peers and has maintained a market weight view on India but it confirmed its overweight stance on Chinese stocks and upgraded its 12-month target for the MSCI China index. Bloomberg also points out how a few years ago China was called uninvestable due to regulatory crackdowns and geopolitical risks prompting a shift to India as a safer alternative. Now, of course, India is facing rising trade tensions, softening corporate earnings and steep valuations, says the Bloomberg report.
Elsewhere, a PTI report sums up foreign portfolio investor outflows and says it's crossed 1.1 trillion rupees in 2025. With this, the total outflow by foreign portfolio investors in equities for 2025 has now crossed about 12 billion dollars. The rupee has now ended lower for the fifth straight week, its biggest consecutive weekly drop in six months.
Thanks to those continuing trade tensions, the rupee closed higher on Friday at Rs. 87.65 against the dollar from Rs. 87.70 on Thursday, says Reuters.
Oil prices are down, incidentally, even as there are tensions on whether or not India will continue to buy Russian oil. But prices have now marked their steepest weekly losses since late June because of all the tariff tensions, according to Reuters. So Brent crude futures are now at about $66.59, so that's under $67 a barrel, while US West Texas intermediate crude futures were at about $63.88.
A New Bill
The government has withdrawn the new Income Tax Bill 2025 on Friday after a parliamentary select committee suggested several changes to the legislation.
The revised new Income Tax Bill 2025 will be introduced in Parliament most likely today. The 31-member select committee had made a number of recommendations and suggestions. After comprehensive deliberations, the committee submitted about 285 recommendations which were aimed at simplifying the tax regime and making the income tax legislation more lucid, according to a report in Mint.
The committee also identified several drafting corrections based on stakeholder suggestions which they believe are essential for clarity. So how has this delay helped? And what could and should the revised bill have? And what are the key concerns that existed in contrast to the earlier or older bill? And where could it go? I reached out to Ajay Roti, founder of Bangalore-based tax advisory firm Tax Compass, and I began by asking him why the bill was being withdrawn and reintroduced in the current manner.
INTERVIEW TRANSCRIPT
Ajay Rotti: The withdrawal of the bill that's already there for the house in my view is more a procedural convenience rather than there being anything more about the bill by itself. So I'll tell you just take a two-minute explanation as to why it is so. Now you have a bill that was laid before the house by the finance minister and then the select committee has reviewed the bill, sought stakeholder comments, discussions, spoken to finance ministry and has come up with 285 changes to the bill and the finance ministry is also on record to say that they have accepted most of it.
Therefore the select parliamentary committee also included the revised bill which according to them should be considered. Now what happens in the parliamentary rules and the procedure is that if there's a bill already before the house and there are amendments to that bill then the members have to vote on each amendment. So which really means we would have had to have 285 votes to say on clause so and so there's an amendment you vote for it yes or no yes or no and it goes on.
Otherwise if it's a bill there's one discussion and vote for the bill to be passed. So it's more of a procedural ease to withdraw the bill and present it very technically even if the very same bill as recommended by the parliamentary committee is to be presented the same thing will get presented immediately after this and the members vote once. So I think it's more for that reason that the bill has been withdrawn and also you know every time that there's a new enactment like this which is so significant you interpret it based on what's been the changes the intent of the legislation and things like that therefore having one document rather than a document with 280 changes thereafter makes it easier.
You know this is exactly what they had done when they revised the entire criminal law. The BNS laws when the three bills came in went to the parliamentary committee absolutely the same thing they withdrew the earlier bills and then presented the revised bill and voted on it. So I would think it's more of a procedural convenience.
Govindraj Ethiraj: Right now 285 amendments is a lot of amendments at least it appears from outside so therefore even if it's being incorporated and pushed through a single motion then which as you're saying is procedurally simple it does mean that a lot of changes have happened and in all our conversations in the run-up to this bill also we've talked about a lot of issues bearing in mind that there is no change to income tax rates but almost everything around it. So what is it that we can expect?
Ajay Rotti: Most of the changes which have been suggested by the committee and which have been accepted by the ministry of finance are more of drafting errors, some small lining out of things which could have meant something different and based on stakeholder consultation. I've not been able to put my finger on even two or three very significant changes which alters the bill or the provisions completely. Of course all the 285 changes suggested by them are valid in a lot of the cases. It is things which could have otherwise led to litigation and things like that.
You know the only hope is now that it's back with the finance ministry and then they have to present the new bill will they consider any other changes like we have discussed in the past on making some improvements, changes, tax reforms even smaller ones because you need to remember when they started this exercise the FM was also very clear that this is a mere simplification exercise they didn't want to do any tax reform.
No TDS rates have changed, they have changed the way wordings are and so on. When we made and you know I also had the opportunity to be a witness before the select committee when we presented certain changes that were needed or that we thought were good the committee and the MRF came back to say that these are policy changes this exercise does not involve policy changes therefore we are not carrying it out. But that's more of a constraint they're drawn for themselves and to the committee to say look at simplification.
Now that the bill is back at the drawing board they may not make too many changes but if there are some very good suggestions that have come from different people during the course of the parliamentary committee thing one hopes that they could incorporate some of those things. There's been some noise about alternate minimum tax on LLPs. The MOF came back and said we are reconsidering this when we are presenting the revised bill. So there could be some changes outside what has been suggested all of which appears at this point to be positive feedback taken by them and so on.
Let's hope and see what comes out. I'm hearing it could even be presented as early as tomorrow.
Govindraj Ethiraj: That's right on Monday. So if you were to recap your own wish list of what you felt could have been included given all the other constraints that you've already referred to, what would they be?
Ajay Rotti: I think one is that the bill does not address or touch upon anything to improve the litigation situation. Tax litigation continues to be a huge pain. There's nothing in the revised bill which either puts a timeline on litigation or provides avenues for settlement of disputes and things like that.
That's something that I think they should have considered as they consider other changes in the future. But there's nothing in litigation. In fact there were some suggestions to the select committee on putting timelines for disposal of cases for example by a commissioner appeals.
The MOF has come back to say you know we can't put any timeline. So those are some changes which I believe could have been made. Similarly you know procedures for assessment there are some things which are litigated currently they could have taken a clear stand to put that out into the law on a couple of very important things.
I won't get into too much technical detail. A couple of very important points have said this is subdued; it's before the supreme court lets them come back and then we'll decide. They could have very well taken a call to clarify it one way or the other in the new law.
They have stayed away from policy changes rate changes so I think that's another thing that they could do. So three things one is what is currently being litigated second the overall litigation setup process the framework that's currently there not re-looked at and some more procedural simplification that could have been done has been restored but I'm hopeful that this will sort of be a face to what's happening this is just a start.
Govindraj Ethiraj: So with all these amendments this bill goes through, what would you say would be the significant changes between the old income tax act and the current one?
Ajay Rotti: So one significant change is we've run away with this big concept of having an assessment year and a previous year that's gone that will be gone if this new bill comes in. There's a tax year which aligns with most other countries. We were possibly the only one which had this unique concept of assessment year which was one year after the financial year was confusing for most people that completely goes away. There's some simplification on language that has happened the code has become much smaller of course that takes out a lot of the redundant sections which were anyway not being used or were applicable but there is a simplification in the language a lot of the as we technically call the provisos explanations those have all been brought into the main section they also have to notify some rules so we'll have to see what that'll be but other than this there's no other really significant change that we will see from 1st April 26 when the new code kicks in. The way you compute the tax remains the same, maybe they'll simplify the returns forms etc but that's anyway to be notified that's not something that comes in the statute other than that I really don't see anything too significant changing.
Govindraj Ethiraj: Right and last question so as we are in the current year as in the 25-26 and into the second quarter what would you say is a key tax reform issue that's broadly pending whether this bill was there or not there?
Ajay Rotti: I think I'd go back to the same point Govind which is most of things in terms of tax holidays incentives etc all vanished you got the headline rate down and then like in personal taxes for us the new regime does not have deductions but the rate itself is lower so that reform has happened that is true even for corporates today that they don't really have too many incentives but the headline rate has been brought down. The only thing that is missing is the overall tax administration there was one very recent point that the FM made reiterating that the department will not pursue litigation below 50 lakh rupees before the tribunal and a few crores before the high court and so on so there are some changes around litigation that's happening but that's one big big piece that's missing there's a lot of pending litigation how do you clean that up there's a lot pending at the commissioner appeals level which is within the department a few lakh cases which are pending for many many years the government is also not able to collect those disputed taxes there has to be some basis to clear those backlog of litigation that's been the biggest pain point which we've missed for a few years now i think that should be the next thing so overall administration how assessments happen how internally within the department which is commissioner appeals litigation that's bottled up a lot the other point FM touched upon the other day very very important which is you won the case at multiple stages or finally at the high court supreme court wherever the department has to give effect to that victory of yours the order that's in your favour what's called the og the order giving effect which is pending for months and months in a lot of cases these kind of things all of which again go back to tax administration i think the next round of reforms has to be more on the administration rather than you know simplification of the law and things like that address litigation address administration i think that should be the next step.
Govindraj Ethiraj: Ajay a pleasure speaking with you thank you so much for joining me
A Fresh China View
Dr. Rajiv Kumar, former vice chairman of Niti Aayog, has made a case for greater engagement in bringing in Chinese investment into India, which he feels would help India's trade imbalance with China and increase employment and production in India's economy. He was speaking to Pooja Mehra, host of How India's Economy Works, also on The Core, in the context of his latest book, Everything All at Once, India and the Six Simultaneous Transitions, authored along with Rajesh Joshi. In the interview with Dr. Kumar, to be released today, Pooja asked him about the geopolitical challenges in restoring relations with China and the economic way forward.
INTERVIEW TRANSCRIPT
Rajiv Kumar: About China, friendly relations, I think this will be gradual. It will be incremental.
But the effort has to be made right away, start off right away. And I'm sure I led two fairly high power delegations when I was the Vice Chairman for NITI AYOG. From what I have seen, they are open to this.
They are wanting to improve our relations. There is, of course, the fact that market access in the Chinese market has become very difficult. But we should identify three, four, five areas, a specific number where we want better access, and then go after them.
If you don't get joy, then raise a public outcry. Make it clear to everybody concerned in the public domain that that's what we're not getting. And then let's see what happens.
And then the other thing, the last thing here on the India-China thing is that maybe we should start a track two process of visualising the world in 2050. How would the two of them see the world in 2050? When the two countries will probably be among the first or the second largest economies, what do they see?
How do they see this going on? Because I think if there is a broad understanding on the bigger, broader contours of the economy, of the global economy, then we might get some convergence on how to get there. And last, it's been said before, I believe that there has to be some trust-building measures.
Because there is a huge amount of mistrust, and for very good reasons, maybe about China and so on. And again, I mean, you must see how hard our Prime Minister tried to create that level of working relationship with the presidency, and so on. I think we need to have, therefore, trust will appear if you have multidimensional engagement among the two countries, multidimensional at every level, and believe the fact that the two countries will be very low and will not like to have a hot war.
If you have that, I think this is one of the possibilities that maybe we can persuade China. And I don't know how, but there is merit in tackling some of the global public goods together, like maybe the global environment, the water issue, the trafficking issue, the drugs. If the two of us came together, then there will be, and that will be a beginning of the building up of trust.
We did this once. I think it's in the Stockholm conference of the UN, the environment conference, where we all got together and therefore forced the Americans to accept Palestine. It is possible.
And those are the ways I would think about it.
Puja Mehra: Although, Dr. Kumar, some of the economic security concerns people express with regard to China would also be important and would require redressal.
Rajiv Kumar: What is true, of course, is that there are certain areas where 99% of our imports come from China, especially for the advanced pharmaceutical ingredients and so on. I think this would be what the Chinese did to the Americas, which is to invite Chinese investment to produce these products within India and invite them here and get those investments going and encourage Chinese FDI. The other aspect of course is what I said earlier, which is that, for example, we have the PLI scheme, production linked incentive scheme, make sure that it succeeds, make sure that we get more and more made in India products and so on.
But I think that will also be helped if we are open to the idea of inviting Chinese investment, Chinese technology. I mean, I don't see any reason at all why this should not be the case, because once they do that, then our trade imbalance will decrease and our employment and investment and production in the economy will go up. So I think if the Chinese can do that with the Americans and the Japanese, against whom they have all sorts of things around the Second World War, I think we can also try to do that.
We can draw our red lines, but the point is that all of this will happen only if we have a multi-dimensional engagement with China.
