My Thoughts

I suppose that even dodos have figured out that what we are told in the mainstream press and often on social media is what some or other person or entity wants us to know so that hopefully we are influenced in a way that benefits them. And wealthymatters readers are far from idiots.

The editorial below has appeared in today’s ET. Following are my thoughts:

How Modi Stole Manmohan Singh’s Thunder

MC GOVARDHANA RANGAN

Jaitley should borrow Chidambaram’s withdrawal tax

P Chidambaram as Finance Minister in the UPA government had many path-breaking initiatives, and one such was his proposal to tax cash withdrawals from banks. The unfortunate part was that it never got the backing of his own government, so abandoned.If only Prime Minister Manmohan Singh was half as powerful as Prime Minister Narendra Modi is, the proposal would have seen the light of the day and Singh, Chidambaram & Co would have stolen the black money thunder on which Modi is gloating now.

More than a decade ago, Chidambaram had this to say in his Budget speech in February 2005: “The NCMP (National Common Minimum Programme) requires the government to introduce special schemes to unearth black money and assets. I am obliged to carry out the mandate, but without giving undeserved relief or an amnesty . I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. These cash withdrawals leave no trail, and presumably become part of the black economy .Therefore, I propose to introduce two anti-tax evasion measures: First, I propose to levy a tax on withdrawal of cash on a single day of over Rs10,000 or more from banks at the rate of 0.1%.Thus, a person withdrawing Rs10,000 in cash would have to pay ” a small sum of ” Rs 10. Secondly ,I propose to require banks to report to the government all deposits which are exempt from TDS on interest. I intend to observe the results of these steps before I propose any further measures.” As usual, the idea behind the tax was drowned in noise of the experts. Every talking head on television and columnist got into fundamental rights of men: Why should I pay tax on the money that I have already paid tax on? Few had the ability , or desire to understand the extraordinary principle behind it. If only it had gone through, the nearly Rs. 10 lakh crore of suspected black money may not be in circulation in the first place for Modi to attack. Because all the black money was not under the mattress, but was in the banking system, and Chidambaram knew that better than anyone else.

Criticism abound for Modi’s demonetisation of Rs500 and Rs1,000 notes too, ranging from  much of it is being converted into gold, or other real assets.The suffering is only for the poor who are made to wait in queues endlessly and how people are starving without food. They are true, but often exaggerated.

One thing is certain. A portion of the Rs15 lakh crore high denomination notes won’t come back to the Reserve Bank of India’s kitty . With a conservative estimate of about Rs 6 lakh crore not coming back for exchange, the central bank’s liabilities fall, leading to a rise in its reserves. It is a gain of Rs 6 lakh crores for RBI.Unlike in the past when former Governor Raghuram Rajan opposed the transfer to government saying it is prudent to keep excess reserves earned out of its activities, this gain is due to government policy . The RBI could hardly justify keeping it. It may transfer to the government in the form of dividend, transfer, gift, anything. Money by any other name smells as sweet. Obviously , when 85% of the currency in circulation go out, the purchasing power falls. In some cases it gets postponed, and wherever the transactions were to be with unaccounted money , it is abandoned.

The flip side of this is what does the government do with the windfall of a likely Rs6 lakh crore? India’s state-run banks get recapitalised at one fell swoop as they can get more than projected Rs 2 lakh crore in the next few years. No one is disputing that real estate will be the worst hit. But in the greatest transfer of wealth, the ill-gotten money could be used to build houses for poor, Modi’s pet project. If these happen, Modi and Jaitley would have achieved the impossible.

A favourite line of the critics is, you have caught the culprits, but how do you prevent black money from being generated again. Don’t worry , we have Chidambaram to borrow from. This government has shown the courage to adopt the orphaned project like Aadhaar of the previous government and made a success of it. Jaitley should borrow from his on and off friend and foe Chidambaram’s 2005 withdrawal tax.

It need not be the same 0.1%, but lesser and on bigger withdrawals like Rs 1 lakh, or more than Rs5 lakh a week, or even Rs10 lakh a month.

That’s where the doctors, lawyers, government servants and educational institution owners generate black money . Pardon the one who withdraws and catch the beneficiary . That should put a near end to black money generation though not put a full stop to it.

A song penned by poet Pattukottai Kalyanasundaram for MG Ramachandran in the 60s captures the reality: Tittam pottu tirudara koottam tirudikkondae irukkudu; adai sattam pottu tadukkara koottam taduttukkondae irukkudu; tirudanai paartu tirunda vittal tiruttai ozhikka mudiyadu (those determined to rob continue to do so; and those who want to prevent robbery keep enacting laws; unless the robbers decide to stop there is no way to prevent robbery).

1.Either by way of withdrawal tax, or by way of suppression of interest rates in a way that forces us to keep deposits at rates that don’t adequately compensate us for the risk of keeping money in the banks as deposits, those of us with money in banks are probably going to lose some of the value of our money. In case all the government’s desperate measures to prop up banks with bad loans doesn’t work, deposit holders are now at greater risk of suffering a Cyprus-style hair-cut to their net worth. Link. Its now law in the EU: Link.

2.Most probably the 6 lakh crores  will be added to the government books. A new pliable RBI governor has been brought in for the purpose. Government is most likely to borrow foreign money on this basis to fund its pipe-dream infra-projects. Its in the realms of speculation whether foreign lenders will be able to control India via these loans or if India will end up forcing a write-off from these countries and organizations. Hard to say who or what will be the casualty in these negotiations.  Many of these infra projects are so much in the realm of early inventions that its hard to predict whether they will be taken to by the public and be economically viable enough to pay loans off loans and become worthy of being termed as assets by any but accountants.

3.I’m not at all sure that old currency not returned to the banks will become worthless. What’s to stop them from becoming one of the currencies of the parallel economy in the country? Money is ultimately what money does and there may be at least enough honour among thieves to make it work. And merely making transactions using old notes illegal is not going to stop those anyways doing illegal things. These notes are additionally not detectable by a metal detector and traceable via serial numbers.

4. Houses are a huge aspirational item in India and at prevailing prices a luxury that even the salaried middle class struggles to purchase. Never mind the poor. Mr Modi will extract full political mileage from the cheap/free house idea. However, I’m not sure that retail prices will fall or even at the developer’s end. What’s to prevent land bankers to continue transacting via barter and the now discontinued notes etc? The only pause might come via land ceiling, seizure, nationalization etc. But that’s bound to come accompanied by much bloodshed and social strife. Political funding comes from real estate dealings. What’s the chance that politicians of all hues won’t come to an understanding to protect their own privileges? At best the middle classes may get cheaper loans when the system badly needs mortgages to give a boost to the economy.

5.Even as deflation impoverishes many in our unorganized sector due to the lack of an adequate number of smaller denomination notes, the new 2K and the rumoured 5K notes along with all the new credit creation by banks and the government on the basis of their newly refurbished balance sheets will surely lead to more inflation. Add to that the inflation due to old notes that continue to remain outside the banking system. Gold and real-estate will continue to attract people as stores of value. India’s well to do will continue to diversify their holdings across the world.