Monthly Archives: MARCH 2016
Mr. Jaitley, Allow the Flow of Money and Let the Economy Bloom.
06.03.16 - preet k s bedi
Dear Mr. Jaitley
When you are in the opposition everything lofty sounds like a great objective for the government to achieve. Impossible is possible as long as someone else has to do it. But when in government, you need to deliver more than moral grandstanding.
Your inconsistencies while in opposition are now starting to pinch. You assumed that your rants of that period could be the basis of economic strategy when in government. That was a magnificent error of judgment for which the country is now paying a price.
Here’s what you forgot.
Mukesh Ambani has the money but not the looks. Anil has better looks but little money and lots of debt. Salman has money and looks but can’t find a wife. In life, nothing is perfect; there are always trade-offs.
Remember bribes used to be called speed money once. Because they were the antidote to the paralysis inherent in babudom. The thinking was that if a few crores could get a project worth hundreds of crores going and thereby provide jobs to thousands it was worth it to blink your eyes. Ethically wrong, morally borderline and yet desirable in its own way.
Black money is real money too. Just that a part of it has not been shared with the government, which may well have squandered it by the way. When invested, black money also creates jobs and feeds families. In fact, if smartly invested, it can actually pay back the government back much more in taxes than the amount evaded.
Let us take an example of an industry I am familiar with.
Much of the cost of film production can be incurred in cash and the returns, when they come, are accounted for. That’s classic money laundering for you. If the film is successful at the box office, the government may recover many times the tax it had initially lost by way of entertainment, service and income taxes. Even if the film flops, there is still satisfaction that unaccounted money did not stay stashed in a locker but was used to pay some salaries and run homes. The process is similar for many other industries as well including of course real estate which is the biggest industry by far.
Your government’s long-term strategy announced last year was great. But skills development, infrastructure building and digital, defense and general manufacture all have long gestation periods. And to make matters worse, all are dependent on myriad approvals and clearances from the central and state clearances. The benefits of those initiatives will come by the end of the current term of the government. So far so good.
The problem was for the immediate and short-term. In fact your government took over after over a year of complete paralysis and growth rates steadily dropping. The country needed short-term fixing too. Many of us were surprised to see you present a budget with no immediate stimulus.
In fact, instead of fixing the problem, you did the opposite. No matter how morally desirable it may have been, by blocking the flow of unaccounted wealth into productive use you ended up putting your foot on the brake. You chose to fight a war with at least one arm tied. What you did was not wrong but it was not enough.
Unsurprisingly a year later we can see the results.
The failure to anticipate this crisis was entirely yours. Enough people would have warned you that without an integrated approach you would reach exactly where you were headed. And you did. You cannot block money flow and still expect high growth. Your facile assumption that governments in the past were not clamping down on money-laundering for private reasons was absurd. They were smart enough to understand the dynamics of money flow.
That was not all.
Real estate, ugly and disorganized as it may be, is the bell-weather sector of any economy as inevitably it attracts by far the largest private investment of both the aam and khaas aadmi. Keep the money flowing and you see growth. Block the flow of money and you block growth. Because of your inability to scope the problem you actually made it a triple and not just a double whammy. Here’s how.
Just as you blocked flows at the supply side so also at the demand side. Considering that most property currently in the market has been bought in up to 50% (sometimes even higher) cash deals, the combination of high
Capital Gains Tax and Circle Rates made selling only a last-ditch desperate proposition. The paralysis in the market place has blocked money flow. Again affecting further investment.
No matter how much you fiddle around with this and that, unless you can start the flow of money again, you will not manage to guide the economy into the pink of health. What should you do? Reduce or completely do away with Capital Gains Tax. There is no rationale for it anyway except government pernicious greed. Let people dispose of or buy property without the government being a dalal in between.
Allow the flow of money and let the economy bloom.
My client is a small defaulter compared to Ambani's Reliance: Vijay Mallya's counsel
To support UB Group promoter Vijay Mallya, counsel Uday Holla, on Friday said that his client was a "small-time" defaulter unlike companies like Reliance who he claimed are bigger defaulters, and the banks were hounding the small defaulters and leaving big defaulters off the hook.
"Recently the RBI had said that these banks do not take action against large fries, but small fries. My client Mallya is a small defaulter compared to Ambani's Reliance. Some of the companies have defaulted to the tune of Rs 40,000 crore, and nothing happens to them," he claimed.
As reported by DNA, the Debt Recovery Tribunal here on Friday reserved its order on state-run SBI's application seeking securement of the lenders' first right on the $75 million payout from Diageo to UB Group promoter Vijay Mallya under a recent sweetheart deal.
Earlier, after filing the objections before DRT, Mallya's counsel Uday Holla submitted that $75 million cannot be attached because his client is getting the severance package after signing a non-compete agreement under which he would not enter into liquor business for next five years.
On the application seeking Mallya's arrest, Holla said such an action would tantamount to demeaning the institution of Rajya Sabha because he is a "respected member" of the Upper House.
The State Bank of India has filed three other applications including one seeking arrest of Mallya and impounding of his passport, as the bank approached DRT seeking action against him for defaulting on loans. SBI, which heads the consortium of 17 lenders to the grounded Kingfisher Airlines, had moved DRT here against the airline's chairman Mallya in its bid to recover over Rs 7,000-crore dues from him.
DRT judge Benakanahalli, on priority basis, took up the application for securing a first right on the $75 million severance package that Mallya will be getting for quitting Diageo-owned United Spirits (USL) as its Chairman last week under a sweetheart deal.
The judge said other three applications - seeking impounding of Mallya's passport, getting him arrested and getting full disclosure of his assets in the country and abroad - will be heard later.
"For now, I am taking up the application seeking to secure lenders' first right on the payout from Diageo on priority basis. I will take up other applications later," he said.
George Joseph, counsel for SBI, submitted that going by Mallya's track record, banks cannot take his statements on face value and be sure of getting money from Mallya if the $75 million are not secured.
"Going by Mallya's track record, we cannot take his statements on face value. Once the money is secured, we will be sure that it will not go anywhere, else the bank will not get anything," he said.
Holla also submitted that due to the increasing fuel prices, not only his client's airline Kingfisher Airlines, but also some of the known carriers around the world suffered losses, and to pressure Mallya, asking him to pay the debt "is not okay".
"It is not that (only) Mallya's airline was suffering losses, but other airlines around world also suffered - Swiss Air, the Indian Airlines and four US airlines, also suffered huge losses. Even as my client was paying up the loans, it is not right to hound my client for the payup," he said.
He said the airline had already paid Rs 1,500 crore and "what is it that the banks want more when he has paid the principal amount in spite of airline industry facing crisis the world over." Mallya and Kingfisher Airlines owed Rs 7,800 crore to a consortium of 17 lenders led by SBI which had an exposure of over Rs 1,600 crore to the now defunct airline.
Since January 2012, the loan was not serviced. Other lenders include Punjab National Bank, Bank of Baroda, Canara Bank, Bank of India, Central Bank of India, Federal Bank, Uco Bank and Dena Bank among others.
Last year, SBI declared Mallya as wilful defaulter. Last month, Punjab National Bank had also declared him, his group holding company United Breweries Holdings and the long-defunct Kingfisher Airlines as wilful defaulters.
As part of a deal, Diageo said it would pay $40 million immediately to Mallya with the balance being payable in equal installments over the next five years. It will also absolve Mallya of all liabilities over alleged financial lapses at the company founded by his family.
(Courtesy : dnaindia.com)
Indian Economy Was saved By 'The Black Money' : Kaushik Basu
04.03.16 - JUSTIN ROWLATT
There is no question that India has the most positive economic story on the planet.
Buoyed by increased manufacturing output, India's economy grew by 7.4% in the third quarter of 2015, the fastest growth of any major country in the world.
But there is a dark side to India's success, says one of the country's most eminent economists.
Kaushik Basu, the chief economist of the World Bank and former chief economic adviser to the Indian government, says the nation's tradition of petty corruption helped India avoid the worst of the banking crisis that has crippled most other large economies in the last few years.
It is an extraordinary claim for such an influential figure to make but, as he says in his new book, An Economist in the Real World, "economics is not a moral subject".
His argument is that the pervasive use of "black money" - illegal cash, hidden from the tax authorities - created a bulwark against a crisis in the banking sector.
Let me explain.
Back in the last years of the noughties India's economy was looking just as frothy as the rest of the world.
It had been growing at an astounding 9% a year for the three years to 2008.
What's more, India's growth had been fuelled, at least in part, by a dramatic housing boom.
Between 2002 and 2006 average property prices increased by 16% a year, way ahead of average incomes, and faster even than in the US.
The difference in India is that all this "irrational exuberance" did not end in disaster.
There was no subprime loans crisis to precipitate a wider crisis throughout the banking sector.
So the big question is why not.
There were some shrewd precautionary moves by India's central bank, concedes Mr Basu, but he says one important answer is all that dirty money.
In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent.
Not in India.
Here a significant part of almost all house purchases are made in cash.
And because the highest denomination note in India is 1,000 rupees, ($15; £10) it isn't unusual for a buyer to turn up with - literally - a suitcase full of used notes.
This is how it works.
Let's say you like the look of a house that is for sale. You judge it is worth - for argument's sake - 100 rupees.
The chances are the seller will tell you he will only take, say, 50 rupees as a formal payment and demand the rest in cash.
That cash payment is what Indians refer to as "black money".
It means the seller can avoid a hefty capital gains tax bill. Buyers benefit too because the lower the declared value of the property, the lower the property tax they will be obliged to pay.
What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.
At the peak of the property boom in the US and the UK it was common for lenders to offer mortgages worth 100% of the value of the property.
Some would even offer 110% mortgages, allowing buyers to roll in the cost of finance and furnishing their new home.
That's why when the crash came, the balance sheets of the big banks collapsed along with property prices.
In India, by contrast, mortgage loans can only be raised on the formal house price. So, says Mr Basu, a house worth 100 rupees would typically be bought with a mortgage of 50 rupees or less.
So when prices fell in India - and they did fall in 2008 and 2009 - most bank loans were still comfortably within the value of the property.
That's why India managed to avoid the subprime crisis that did so much damage elsewhere.
India did experience a slowdown, but it was collateral damage from the global recession rather than the result of any national problem. Indeed, within a year India had begun to pull out of the crisis, returning to growth of almost 8% a year between 2009 and 2011.
That is not to say that Mr Basu approves of petty corruption.
He compares it to the effect of an unpleasant disease: it may have some positive side effects - encouraging your hair to grow, for example - but you would still prefer not to have the illness.
Indeed, Mr Basu is famous for having devised a particularly clever and characteristically radical way of rooting out corruption - legalising bribery.
A few years ago, he proposed that instead of both bribe-givers and bribe-takers being held criminally responsible for their actions, only the bribe-taker should face sanctions.
It is a simple change, but radically alters the relationship between the two parties.
It means people who give bribes no longer have a shared interest in keeping their nefarious activity secret.
Freed from the risk of prosecution, bribe-givers would have a powerful incentive to reveal corruption.
Unfortunately, says Mr Basu, his innovation has still not found its way into mainstream Indian law.
(Courtesy : BBC News)
Government's 11-Point Clarification on Controversial EPF Tax
"There seems to be some amount of lack of understanding about the changes made in the General Budget 2016-17 in the tax treatment for recognised Provident Fund & NPS," the Finance Ministry said on Tuesday in a statement while issuing an 11-point clarification on the changes made in the Budget 2016-17 on tax treatment for provident fund and NPS (National Pension Scheme).
Here are the clarifications issued by the Finance Ministry:
(i) The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.
(ii) Towards this objective, the Government has announced that 40 per cent of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.
(iii) It is expected that the employees of private companies will place the remaining 60 per cent of the Corpus in Annuity, out of which they can get regular pension. When this 60 per cent of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.
(iv) The government in this Budget has also made another change which says that when the person investing in annuity dies and when the original corpus goes in the hands of his heirs, then again there will be no tax.
(v) The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.
(vi) The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.
(vii) However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60 per cent in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40 per cent.
(viii) There is no change in the existing tax treatment of Public Provident Fund (PPF).
(ix) Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12 per cent of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10 per cent of salary.
(x) Now the Finance Bill 2016 provides that there would be monetary ceiling of Rs 1.5 lakh on employer contribution considered with the ceiling of the 12 per cent rate of employer contribution, whichever is less.
(xi) We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.
Budget 2016 | Absolute majority, cheap oil but no substantial reform: P Chidambaram
Thanks to the crash in oil prices, that required hardly any effort. The government boasts that it earned more tax revenues than it had budgeted at the beginning of the year.
This is the third budget of the NDA government. The first two were forgettable. The Prime Minister had promised that he would "reform to transform". The word 'reform' is a little understood but much used word. Reform means reform of factor markets or product markets. There is little evidence of such reform in the budget. So, the NDA has followed its own brand of budget making, which is just housekeeping and accounting.
Thanks to the crash in oil prices, that required hardly any effort. The government boasts that it earned more tax revenues than it had budgeted at the beginning of the year. Did they collect more corporation tax? No. Did they collect more income tax? No. What they collected more was excise duties. It is a whopping increase of Rs 54,334 crore! That amount was due to the numerous times the government increased excise duties on petrol and diesel after the budget was presented last year.
I had predicted that the government will comfortably achieve the target of fiscal deficit in the current year. It has, and I am happy. I am also happy that the government has spurned the advice of the chief economic adviser and stuck to its own fiscal consolidation path for 2016-17. I take it as a vindication of the UPA government's policy declared after adopting the Vijay Kelkar committee's report on fiscal consolidation.
In the last two years, the government had turned its back on rural India, the agriculture sector, and the social sector programmes. The expenditure budgets have been achieved or exceeded under heads such as water supply and sanitation; welfare of SC, SCS, OBC and minorities (marginally); and relief on account of natural calamities. Three areas were crying for attention: the rural economy, private investments and exports. How has the government addressed the problems in these three areas? While in agriculture, the UPA schemes are being continued, the crucial signal on price is missing. The NDA government reneged on its promise to give cost plus 50%.
It did worse last year by giving meagre or nil increases in MSP. The budget speech makes no promise of a fair and remunerative MSP. Nor is there any major initiative to increase productivity in crucial crops.
On private investment, which is one of the four engines of economic growth, there is little to encourage or attract private investment. The government seems to be unaware of the problems of the core sectors such as power, steel, coal, mining, cement, construction, oil and gas. In these sectors, many projects are stranded and there is little new investment. Besides, there is the problem of high interest rates, which were not addressed.
There is no mention of exports. After 14 successive months of negative growth, government has given up on the export front.
The government promised a predictable tax regime. There is no major relief to the tax payer or the middle class or the small and medium businessperson. The reduction in the corporate tax rate fora very limited class from 30% to 29% is laughable. Besides there are new cesses and surcharges. Despite having an absolute majority in the Lok Sabha, government could not summon the courage to repeal the retrospective tax on capital gains (the so-called Vodafone tax) and also bring structured reforms. But I have to concede, it was a wasted opportunity.
Former Finance Minister Spoke to dna