Financial inclusion will plug leakages from economic recovery into informal savings outfits
By Mohan Sule
Even as there is a sense of optimism, if not euphoria, over the incremental steps being taken by the Narendra Modi government to put the economy back on track, Reserve Bank of India’s Raghuram Rajan has introduced a note of caution. He feels there is a danger of foreign investors, emboldened by the loose money policy being followed by their central banks to kick-start the stalled growth, pulling out of emerging economies if the recovery in the US acquires momentum. Such a development will prompt the country’s Federal Reserve to depart from its guidance of holding interest rates near bottom this year. This raises the possibility of a repeat of what happened early calendar year 2009, when the Indian stock market melted on outflow of foreign capital despite the economy projected to expand 8-8.5% in the fiscal ended March 2009. However, a run on Portugal’s biggest bank in July shows that the mature economies have a long way to go before they can be said to be in the safe zone. Also, there is a certain comfort in knowing that central banks and governments are better equipped to deal with such kind of crises. Western nations have identified banks that are too big to fail because of the likely impact on the domestic and global markets. The Portuguese government’s bailout, for instance, contained the fallout from spreading to rest of Europe. Liquidity pumping could resume to prevent another Great Depression of the 1930s, when supply of money was restricted.
Notwithstanding his bearish stance, the RBI governor deserves gratitude for building up forex reserves to defend a run on the currency in anticipation of such a scenario. The cautiousness, which keeps the rupee depreciated and widens trade deficit, is necessary till the investment climate for foreign investors improves. If not, the Indian currency could plummet even below the current 61 a US dollar, triggering the moderating inflation to flare up. Despite hiccups such as ambiquity on retro taxation and lack of clarity on General Anti Avoidance Rules, which give the taxman arbitrary powers to initiate recovery proceedings, sentiments have improved markedly since the last week of May when the National Democratic Alliance won a decisive mandate. The market has come off from its lifetime high not because of any doubts about the prime minister’s commitment to reform but due to the uncertainty created by the US decision to undertake air-strikes in Iraq and the resultant rise in crude prices. The threat of drought is receding. Hopefully, food inflation will cool down. Though big-bang reforms may have to wait, the budget initiatives to boost infrastructure have raised hopes of higher growth. One of the most important thrusts, which could be Modi’s flagship policy just as the rural employment guarantee scheme was Sonia Gandhi’s, is financial inclusion. Connecting poor villagers with the banking network could be the most ambitious economic program to be launched in India. With memories of Indira Gandhi’s loan melas and Sonia Gandhi’s farm-loan waivers, the plan as expected has met with resistance from those who prefer the present-day banking set-up, which keeps away even the urban poor. Despite a robust credit appraisal system in place, banks are struggling with bad loans. The bribery scandal at Syndicate Bank is a confirmation of the government-owned banks’ role in fostering crony capitalism.
Nothing has illustrated the failure of traditional banking more starkly than the success of Sahara, which has been told by the Supreme Court to refund Rs 20000 crore to small depositors, mainly from semi-urban areas. If the rural guarantee scheme can hand out 100 days of wages a year to qualifying recipients without any work to show, the overdraft facility proposed as an incentive can be considered seed money to bring the non-banked into the system. The benefits of the project will be immense even if half the participants imbibe good banking habits. Future loan write-offs will be nipped. The overdraft can be viewed as a fiscal stimulus to revive the economy just as linking guaranteed wages of rural folks to productivity activities. There will be a record of delinquent accounts, which will enable the government to precisely focus fiscal policies to address the dark areas of the economy. The Modi government’s refusal to cap farm subsidies, and thereby scuttling the WTO accord, too, had received lots of flak initially. Now there seems to be a consensus emerging that the position to protect Indian farmers is justifiable. Apart from providing a powerful boost to the economy, financial inclusion will prepare the poor to participate in the imminent recovery. Besides accelerating urbanisation, wages from job opportunities will not find their way to Ponzi schemes run by scamsters.
Thursday, August 21, 2014
Wednesday, August 6, 2014
At cross-purpose
Sebi’s mandate is to protect investors, while the finance minister’s objective is to maximise revenue
By Mohan Sule
The Union Budget 2014-15 proved to be disappointing for the opposition. There was not a single issue to whip the Narendra Modi government with despite it stealthily pulling the plug on Sonia Gandhi’s flagship rural employment guarantee scheme by linking wages to productive activities, which will ensure its slow death going forward. (Hint: FMCG companies are once again turning their focus on urban areas, with the looming drought being one of the factors.) The moaning on the absence of big-bang reforms could have turned into a weapon of torment had the government announced elimination of fuel and fertilizer subsidies or decided to get out of PSUs save for some minority stake. The uproar over the ensuing price rise and selling of the family jewels would have stalled parliament for the remaining budget session. No wonder neutral observers look to the stock market to gauge the impact of the exercise as equities, it is believed, discount all available information. On that count, leaving aside the temporary scare of the return of the debt crisis in the euro zone, the budget has scored spectacularly, with the benchmarks touching new highs some days later. Yet, it is not without blemishes. There are three sore points for investors, which were at odds with the finance minister’s stated intention of easing the tax regime. The first is the ambiguity on retrospective taxation. Despite assurance that his government would not backdate taxes, Arun Jaitley’s assertion that resorting to retrospection taxation remains the right of a sovereign government caused alarm. This implies that any Vodafone-like transaction, conducted to escape Indian taxes, could see a repeat of then Finance Minister Pranab Mukherjee’s amendment in Union Budget 2012-13.
The second is the lack off clarity on the implementation of the General Anti-Avoidance Rules. Mukherjee, who had introduced this provision, had suspended its execution for three years after the market slumped on withdrawal of foreign investors, who feared the discretion given to tax officers to initiate proceedings against anyone suspected of evading taxes. The third are two measures to reduce tax arbitrage by companies. The first is the application of dividend distribution tax on the gross amount and not on net basis. The second is the doubling of the long-term capital gain tax on debt mutual funds and extending the period to qualify for the income to three years from one year. Even investors who had bought the units earlier for their tax-efficiency compared with other fixed-income products will be subjected to the new rules. As such the budget gets low marks for providing tax stability and eliminating tax terrorism, which are essential to attract long-term capital into India. The silver linings are the imminent implementation of the Direct Taxes Code, which will enable assessees to take a long-term view on the tax rate as any changes will require an amendment, calling for three-fourths of the vote, and the proposed Goods and Service Tax reform merging all the Central and state levies into one. However, indirect taxes will be subject to changes annually like they are at present. This leads to the question if it is possible to have a consistent tax regime over a three- or five-year period.\
For this to happen, it will be necessary to change the way India looks at budget presentation. Shorn of hype, it should be reduced to tabling the country’s balance sheet rather than an opportunity to introduce reforms. For many years now, the government has been raising fares ahead of the Railway budget. Even customs and excise duties have been hiked or lowered mid way to dovetail with any import glut or slump in manufacturing. Nomenclatures such as countervailing duty, special additional duty or anti-dumping duty are used to tweak existing rates without disturbing the basic structure, which may be the result of multi-lateral trade agreements. Instead of being a yearly ritual, a taxation package can be presented to parliament with sunset clauses. This means specific revisions will be scrutinized in greater detail instead of passing the Finance Bill in totality or rolling back certain provisions under pressure. The finance ministry can also take a leaf from capital market watchdog Sebi, which frequently revises guidelines to weed out outdated practices. These updations factor in past experiences but are never applied retrospectively. But the objectives of the government and the regulator differ. While Sebi’s charter is protection of investors, the finance minister’s mandate is to maximize tax revenue and minimize expenditure. It will be historic if the finance ministry,too, changes its slogan to minimum taxes, maximum compliance.
By Mohan Sule
The Union Budget 2014-15 proved to be disappointing for the opposition. There was not a single issue to whip the Narendra Modi government with despite it stealthily pulling the plug on Sonia Gandhi’s flagship rural employment guarantee scheme by linking wages to productive activities, which will ensure its slow death going forward. (Hint: FMCG companies are once again turning their focus on urban areas, with the looming drought being one of the factors.) The moaning on the absence of big-bang reforms could have turned into a weapon of torment had the government announced elimination of fuel and fertilizer subsidies or decided to get out of PSUs save for some minority stake. The uproar over the ensuing price rise and selling of the family jewels would have stalled parliament for the remaining budget session. No wonder neutral observers look to the stock market to gauge the impact of the exercise as equities, it is believed, discount all available information. On that count, leaving aside the temporary scare of the return of the debt crisis in the euro zone, the budget has scored spectacularly, with the benchmarks touching new highs some days later. Yet, it is not without blemishes. There are three sore points for investors, which were at odds with the finance minister’s stated intention of easing the tax regime. The first is the ambiguity on retrospective taxation. Despite assurance that his government would not backdate taxes, Arun Jaitley’s assertion that resorting to retrospection taxation remains the right of a sovereign government caused alarm. This implies that any Vodafone-like transaction, conducted to escape Indian taxes, could see a repeat of then Finance Minister Pranab Mukherjee’s amendment in Union Budget 2012-13.
The second is the lack off clarity on the implementation of the General Anti-Avoidance Rules. Mukherjee, who had introduced this provision, had suspended its execution for three years after the market slumped on withdrawal of foreign investors, who feared the discretion given to tax officers to initiate proceedings against anyone suspected of evading taxes. The third are two measures to reduce tax arbitrage by companies. The first is the application of dividend distribution tax on the gross amount and not on net basis. The second is the doubling of the long-term capital gain tax on debt mutual funds and extending the period to qualify for the income to three years from one year. Even investors who had bought the units earlier for their tax-efficiency compared with other fixed-income products will be subjected to the new rules. As such the budget gets low marks for providing tax stability and eliminating tax terrorism, which are essential to attract long-term capital into India. The silver linings are the imminent implementation of the Direct Taxes Code, which will enable assessees to take a long-term view on the tax rate as any changes will require an amendment, calling for three-fourths of the vote, and the proposed Goods and Service Tax reform merging all the Central and state levies into one. However, indirect taxes will be subject to changes annually like they are at present. This leads to the question if it is possible to have a consistent tax regime over a three- or five-year period.\
For this to happen, it will be necessary to change the way India looks at budget presentation. Shorn of hype, it should be reduced to tabling the country’s balance sheet rather than an opportunity to introduce reforms. For many years now, the government has been raising fares ahead of the Railway budget. Even customs and excise duties have been hiked or lowered mid way to dovetail with any import glut or slump in manufacturing. Nomenclatures such as countervailing duty, special additional duty or anti-dumping duty are used to tweak existing rates without disturbing the basic structure, which may be the result of multi-lateral trade agreements. Instead of being a yearly ritual, a taxation package can be presented to parliament with sunset clauses. This means specific revisions will be scrutinized in greater detail instead of passing the Finance Bill in totality or rolling back certain provisions under pressure. The finance ministry can also take a leaf from capital market watchdog Sebi, which frequently revises guidelines to weed out outdated practices. These updations factor in past experiences but are never applied retrospectively. But the objectives of the government and the regulator differ. While Sebi’s charter is protection of investors, the finance minister’s mandate is to maximize tax revenue and minimize expenditure. It will be historic if the finance ministry,too, changes its slogan to minimum taxes, maximum compliance.
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