Monday, January 21, 2008

Online GD Topic 1

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The online GDs for 2008 start from today. I shall post a GD topic once in a while (frequency two to three a week) and would like your comments on the same.

Topic for the Day: "Tax cuts, a great boost for an economy heading towards recession"

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Some of you have asked for a case study. It will take me a little while to come up with one. In the meanwhile, if you have some with you send across to catfundae@gmail.com and I will suitably modify and put it out for discussion.

Also I will be starting Key talking points in a couple of days where you get to learn new things.
Click here for the Key talking points of 2007

To make it more organized and hence more useful to everyone interested, I suggested the following broad framework last year and it worked very fine

1. Write down the way you wud start such a GD - Name the section as 'START' in capital letters. You can skip this if you think you will not be able to start.

2. Write down "Discussion points" you would make in the middle of the GD. Please be crisp, but articulate.

3. I will keep putting my comments in between and also summarise at the end.

4. I will also comment on specific comments and starts. Put your name in the comments so that I can reply with specific inputs. If you still want to stay anonymous, it is fine. Atleast use a pseudonym, so that I can reply pointedly

5. Do not spend more than 15-20 minutes on a GD topic. Though I feel only 5 minutes should be allowed, I have made some space for typing, disturbances etc

6. Please do not google search on the topic before you put in your points. If you think you want to know more on the topic, do the search after you write in. Afterall, you can get a topic in the GD that you have not prepared for. So it is good to understand how to handle those topics

7. Please participate regularly and do not skip the topics you think you have no knowledge on.

8. You can track the GD comments on the blog by joining the google groups Catfundae. You can also get RSS feed by clicking on the orange button on the right sidebar

We will put in some more to this framework as it evolves. Suggestions are welcome.

Get Cracking.

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13 Comments:

Blogger Gyan-ee said...

Still overcoming the hitch to start?
Get shooting guys. Nothing better than to start first on such a hot topic. Else others will steal many of the obvious points

8:31 PM, January 22, 2008  
Anonymous Anonymous said...

I think tax cuts will add to the burden of the govt and increase the deficit. Ofcourse the tax structure can be changed to benefit certain sections as well as to maximise the revenues.

12:06 AM, January 23, 2008  
Blogger Smriti Mehra said...

Well, there is a very relevant topic of today and no country other than US can be a live example of this. Post the dot com bubble and the housing problem, the Govt. as well the Fed are trying to take steps to control the falling GDP growth rates in US using tax concessions as well as by decreasing the interest rates.
#1 With the fears of US heading towards recession, we need to take a look at why the tax rates are cut -- my understanding here is they would increase the consumer income and subsequently the consumer spending. US govt has been cutting tax rates over the years, atleast post the dot come bubble, then why hasn't consumption and GDP risen in US ? These are the questions we need to ask before heading towards any conclusions
# Post the sub-prime crisis, skeptisms have increased in Investments in US and this is already a detterent to the GDP growth rate.Besides as already pointed out by my friend above, they decrease the income of the Govt, and thus causing budget deficit in the country.
# Even when in India, Mr. P. Chiddambram announced his dream budget in 1997 -- and announced the tax rate cut -- although it was hugely welcome by the general public , it failed to have the desired impact. The reasons, though many, but can also be attributed to the Asian crisis, the Harshad Mehta stock market scam and then the dotcom bubble.
Hence, with all these points, I would like say to that merely tax concessions are not the only solution to any economy, and particularly the one heading towards recession. A bigger combination of the macroeconomic picture along with the consumer sentiment need to be taken into account for deciding whether they will have the desired impact or not.

4:01 AM, January 23, 2008  
Anonymous alapatt said...

The lesser the tax the better is for the economy, especially for developing countries and countries like India, China, Brazil etc would be the most important benefactors.In India too the finance ministry and the economic advisory commitee to the PM have been showing signs of going in for a cut on taxes.It would fuel market growth and investment Opportunities. Tax cuts on the higher sides are suited for developed countries because they are already self sufficient and they could afford paying taxes to ensure a good quality life structure.The best examples are Norway and countries in the scandinavian belt and as a result these countries also figure in the top ranks in the World,s most suited places for buisness.Indian market were the last to get affected by the US down turn(SUB prime and the Bad debt recovery problems), it also shows that Indian markets are evolving in its own way focussing on our domestic needs,so the tax cuts would definetly help in countering our infrastructural and power related challenges, people would be persuaded to spend more.The deficits in the market can be offset by diluting stakes in the public sector fund holding if at all crunch situations arise. The stakes in the government holding can be lowered till 51% and we have seen signs of this in the case with Maruti,BACLO etc.The stocks are more integrated and the new measures by the SEBI can eliminate fraudsters.The registration of Participatory note holders and short selling concepts with rigorous and concrete checks in place are the right way forward

1:08 PM, January 23, 2008  
Blogger Gyan-ee said...

Smriti,
1. A good start.
2. Good that you are talking in points. It will give you a good chance of making more points and also the group will listen to you when you are crisp
3. Good that you were able to touch India and did not stick to just US.
4. You had to dig a little deeper in the points you made. Specially, you did not touch strong enough on recession and what happens in a recession
5. You reached the conclusion a little fast and it was generic too. Make strong points 1..2..3.. and hence the conclusion...
Good show for a first GD

Alapatt,
1. Good point was that you were able to bring in what is good for developing countries.
2. Note that you are digressing form the topic a little. Focus, and I am sure you have great many points
3. Govt stake in Maruti, not relevant to topic. The harm is that the GD group will not listen to you.
Look like you have good knowledge. Just focus and think various angles, but stay within the topic.

Guys,
I would like some people take a good dig on recession.
Hint: Think long term and short term solutions for recession. And the short/long term impacts of tax cuts

9:33 PM, January 23, 2008  
Anonymous Jason Bourne said...

Let us first look why the US economy is on the verge of recession :
1.Slump in House market-Huge Number of Unsold Houses are forcing Real estate prices to go down
2.Oil Prices-With oil price approaching $100 a barrel, it is responsible for weaking the purchasing power for other goods.
3.Credit Issues-After Subprime Crisis Investors and Lenders are bit cautious and therefore there is liquidity crunch in US economy.

Although recession has its own downsides like Unemployment,Low Profits,Slow Growth,Low Motivation among Investors but it has few upsides as well like it helps to dampen inflation,helps investors to make careful and strategic long term investments.And thus it is advtangeous for economy in long term .

Now let us look at Implications of Tax Cut:
1.Some mite argue that Tax Cuts will allow Consumers to take more money home and thereby it will increase their spendings.However in the current scenario most of the consumers are afflicted with debts of different forms and thereby most of the spendings would be to ward off the debt.
2.Unnecessary tax Cuts and Interest Cuts will lead to Inflationary pressure and therby can induce a Recession much bigger than current one.
3.Also they will reduce Money with the Government and theryby increase the deficits.

Thanks

1:53 AM, January 24, 2008  
Blogger Utsav said...

Tax Cuts are like a double edged sword. Although it increases the spending power of the people, it also increases the deficit. It seems, according to me, a quick fix solution to a reccesing economy. There are other ways to increase the spending in an economy which would help to turn it around. Decreasing the intrest rates, As done by the US Federal reserve recently, would mean that loans become cheaper and more money is available for use by the public. Also it frees up a lot of money that can be invested in other emerging markets like India and China, thus earning high returns. Another way is for the Government to increase spending. This will lead to increased consumption figures. However in this method, deficit increases. In case of Tax cuts, once the Government cuts rates, then it has to rely on the public to increase consumption. It loses control of its own money which can be harmful in the long term w.r.t. developmental projects as the Government has to contend with less spending.

10:49 PM, January 24, 2008  
Blogger Gyan-ee said...

Jason,

Great points and very well structured. You take the trophy for this GD.

A small point, clearing debt with tax savings may help warding off recessions because less people and banks are going bankrupt. credit squeeze eases a little because of less defaults.

Utsav,
Good attempt and some good points, but you need to be a little more structured.

Complete threadbare analysis of the topic will come soon

7:25 PM, January 27, 2008  
Blogger Gyan-ee said...

Hi guys,

Find below the analysis of the points that you people made. i will come up with the complete analysis tomorrow on what shud have been the points covered. Your comments on my comments are welcome :)

On the whole, the topic was a little tough, but you have to get cracking on these. earlier the better.
The group made some good points, but failed to rise beyond a point. If you look at it at the end, there is no great take away that the group has given.

Good try for the first GD though. Please find below the comments from my side. Note that my comments are soft since this is the first GD. they will get harsher the next time around. Lets get the ploughs and dig deep next time.

_________________

Anonymous said...
I think tax cuts will add to the burden of the govt and increase the deficit. Ofcourse the tax structure can be changed to benefit certain sections as well as to maximise the revenues.
--- Both sentences are right. But neither have you touched recession, nor the impact of tax cuts on it. Deficit is increased, but is that bad is the question? The key in GDs is not to make generic statements and leave them open ended.

Smriti Mehra said...
Well, there is a very relevant topic of today and no country other than US can be a live example of this. Post the dot com bubble and the housing problem, the Govt. as well the Fed are trying to take steps to control the falling GDP growth rates in US using tax concessions as well as by decreasing the interest rates.
--- Good example and strong point. This is good in the middle of the GD though. But avoid starting on a narrow lane. If you begin with US, discussion will move in that direction. If you are starting the GD, set a broad platform and direction.

#1 With the fears of US heading towards recession, we need to take a look at why the tax rates are cut -- my understanding here is they would increase the consumer income and subsequently the consumer spending. US govt has been cutting tax rates over the years, atleast post the dot come bubble, then why hasn't consumption and GDP risen in US ? These are the questions we need to ask before heading towards any conclusions
--- Very good point. A strong point in the middle of the GD, showing the group that before we reach any conclusions, we need to know how tax cuts affected last time

# Post the sub-prime crisis, skeptisms have increased in Investments in US and this is already a detterent to the GDP growth rate. Besides as already pointed out by my friend above, they decrease the income of the Govt, and thus causing budget deficit in the country.
--- Deficit budgets are considered good for growing economy. If the govt has a surplus budget, that means it does not know how to spend the money it collected. Though deficits have to be controlled, they are not bad by themselves

# Even when in India, Mr. P. Chiddambram announced his dream budget in 1997 -- and announced the tax rate cut -- although it was hugely welcome by the general public , it failed to have the desired impact. The reasons, though many, but can also be attributed to the Asian crisis, the Harshad Mehta stock market scam and then the dotcom bubble.
--- Good try to get India in picture, but I think you are diverting from the topic, since tax cuts of Chid had nothing to do with recession.

Hence, with all these points, I would like say to that merely tax concessions are not the only solution to any economy, and particularly the one heading towards recession. A bigger combination of the macroeconomic picture along with the consumer sentiment need to be taken into account for deciding whether they will have the desired impact or not.
--- Conclusion not strong enough. Also generic ending does not help. When you conclude, you have to be very specific.

alapatt said...
The lesser the tax the better is for the economy, especially for developing countries and countries like India, China, Brazil etc would be the most important benefactors.In India too the finance ministry and the economic advisory commitee to the PM have been showing signs of going in for a cut on taxes.It would fuel market growth and investment Opportunities.
--- Need to get to the point of recession a little quicker 

Tax cuts on the higher sides are suited for developed countries because they are already self sufficient and they could afford paying taxes to ensure a good quality life. The best examples are Norway and countries in the scandinavian belt and as a result these countries also figure in the top ranks in the World,s most suited places for buisness.
--- Still not got into the topic

Indian market were the last to get affected by the US down turn(SUB prime and the Bad debt recovery problems), it also shows that Indian markets are evolving in its own way focussing on our domestic needs,so the tax cuts would definetly help in countering our infrastructural and power related challenges, people would be persuaded to spend more.
--- Coming along into the grove nicely now, but note that if you don’t make your points crisp and fast, the group will start talking before you finish.

The deficits in the market can be offset by diluting stakes in the public sector fund holding if at all crunch situations arise. The stakes in the government holding can be lowered till 51% and we have seen signs of this in the case with Maruti,BACLO etc.The stocks are more integrated and the new measures by the SEBI can eliminate fraudsters.The registration of Participatory note holders and short selling concepts with rigorous and concrete checks in place are the right way forward
--- you were coming into some good points above and you moved away completely into a different world altogether here. I am sure you have lot of comments to make on the tax cuts, why are you getting completely diverted?


Jason Bourne said...
Let us first look why the US economy is on the verge of recession :
1.Slump in House market-Huge Number of Unsold Houses are forcing Real estate prices to go down
2.Oil Prices-With oil price approaching $100 a barrel, it is responsible for weaking the purchasing power for other goods.
3.Credit Issues-After Subprime Crisis Investors and Lenders are bit cautious and therefore there is liquidity crunch in US economy.
---- Nailed the points clean. Though for a start, US economy is a little narrow.


Although recession has its own downsides like Unemployment,Low Profits,Slow Growth,Low Motivation among Investors but it has few upsides as well like it helps to dampen inflation,helps investors to make careful and strategic long term investments.And thus it is advtangeous for economy in long term
--- Great point. You steal the thunder when you bring in insights like this. The group should note that it is important to analyze the key words in the topic and look at it from all angles

Now let us look at Implications of Tax Cut:
1.Some mite argue that Tax Cuts will allow Consumers to take more money home and thereby it will increase their spendings.However in the current scenario most of the consumers are afflicted with debts of different forms and thereby most of the spendings would be to ward off the debt.
--- Correct. But clearing debts help the health of the economy

2.Unnecessary tax Cuts and Interest Cuts will lead to Inflationary pressure and therby can induce a Recession much bigger than current one.
--- Correct and good point. Only that you should have not used the word unnecessary 

3.Also they will reduce Money with the Government and theryby increase the deficits.
--- good point again

Utsav said...
Tax Cuts are like a double edged sword. Although it increases the spending power of the people, it also increases the deficit. It seems, according to me, a quick fix solution to a reccesing economy.
---- if it is indeed a quick fix solution, then why not 

There are other ways to increase the spending in an economy which would help to turn it around. Decreasing the intrest rates, As done by the US Federal reserve recently, would mean that loans become cheaper and more money is available for use by the public.
--- good point

Also it frees up a lot of money that can be invested in other emerging markets like India and China, thus earning high returns.
--- questionable, but good thought.

Another way is for the Government to increase spending. This will lead to increased consumption figures. However in this method, deficit increases.
--- why does everyone hate deficit

In case of Tax cuts, once the Government cuts rates, then it has to rely on the public to increase consumption. It loses control of its own money which can be harmful in the long term w.r.t. developmental projects as the Government has to contend with less spending.
--- good point

8:06 PM, January 27, 2008  
Anonymous rahul said...

well cut in interst rates is one to make public spend more , it allows banks to lend at lower rates, also reducing inflations which can happen with too much liquidity in the market but at the same time money required for development which requires both domestic and outside investments..hence it cant be too low as it will fail to aatract investments..so its a fine act of balance which is done by respective govt and need to be reviewd continously to adjust according to demands.

11:29 PM, January 28, 2008  
OpenID halfrebel said...

To Rahul [the guy who commented above me]: I guess you were making a point related to GD topic. The topic nowhere mentioned interest rates, and your whole point was related to interest rates. There is a difference b/w interest rates and tax cuts. Also, a cut in interest rates would lead to more credit flowing into economy which should result in higher inflation rather than lower inflation which you suggested.

To Gyanee:

Since topic is closed now, I wouldn't add more to points.. Will only ask one or two questions here to clarify my understanding.

1) Leaving aside the technical definition of recession, what are the general indicators of an economy in decline? Will you say Japan was in recession in 1990s?

Again, taking Japan as example which went into recession due to a credit bubble burst, It is clear that tax cuts wouldn't have helped, as even a zero percent interest rates weren't able to lift the economy for a long long time. Then why this tactic of tax cuts by Bush administration in US?(I guess it is in proposal stages only right now.. still the question remains relevant)

2) For an economy going into recession, what all central authorities of a country try to do is to promote consumption. Tax cuts(assuming direct as well as indirect tax cuts here) ideally help everybody from the rich to the poor, but help the poor more as they are hurt the most during a recession. Why do some people oppose it?

I understand that it deflates governments' assets and income but anyways, if the economy goes into recession, they'll become bust anyhow.

3) Interest rates can be increased as well as decreased by central banks without much political interference, but Tax increases(done by central governments) are very much politically unpalatable. Hence, most bureaucrats are averse to them.

But then, corporates and individuals always keep fretting(rightly so, in case of India) over high taxes. Though we no longer have 97% tax rate on businessmen now as during India Gandhi's regime, I suspect we still have quite high tax rates in India.

How do effects of Tax cuts and interest rates reduction differ in the long term and short term? Which one has a more chance of generating a credit bubble and a case of moral hazard in financial markets[I suspect it is the interest rates]. What is your solution to the question put by you?

-- Himanshu

12:26 PM, January 29, 2008  
Blogger Gyan-ee said...

Hey guys,

Sincere apologies for delay in the analysis. I am struck in the other part of world in sub-zero freezing cold with so much work to do that I am feeling like Atlas shrugged.

But I promise that I will shrug all the work by weekend and come here and give you some meaty analysis.

I promise you it will be worth the wait. I am also planning putting some other good chewing material for interviews, let me see what my frozen brain can muster.

7:54 PM, January 30, 2008  
Blogger Gyan-ee said...

Himanshu,

My points in main page may help.

1) What tools work depends on the depth of the recession. It also depends on what the current rate of taxes are and how tax cuts is marketed :)
In that sense, macro economic topics are tricky... So it is good to take a direction and make good points. The side of direction many times doesnt matter much :)

Bush tax cuts are already in. He wants to make it permanent. It has got nothing to do with recession, it is much more of a republican philosophy of running a tight govt and also encouraging the big companies


2) Many oppose it because it is difficult to reverse it. And if it results in savings because of fears of recession, govt has hit itself in the foot. They cud have used the money to spend it themselves and boost the economy from another direction

3) Again, though I have taken a facourable position on tax cuts, there is no correct answer. I am broadly in favour of lower Govt investment and interference. They should just steer and not run the engine.

Interest rates certainly has more moral hazard and has more contribution in credit bubbles.

I will also write a seperate note on recession itself next week. That will be a surprise stand and against the rule book of an MBA :)

8:49 PM, February 03, 2008  

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