Will the Black Money Law Work?

If the generation of black money is not curbed, the new law will be just another amnesty scheme and tool for tax terrorism. The Narendra Modi government swept into power on the promise that it would provide minimum government, maximum governance and helps bring back the vast hoards of India’s wealth that is ostensibly stashed around the world. For almost a year, the government did very little. The prime minister has had to face barbs and offer an explanation to parliament. Soon after, the government introduced The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill in Lok Sabha. There is a strong feeling that no political party would want to appear to be against the return of black money stashed abroad. So, the law may come into force quickly.

 But, will it succeed in getting people to bring back unaccounted overseas money when all other efforts have failed in the past? To give the government its due, it certainly seems more serious about intent and implementation. The proposed legislation seems simple and comprehensive and has adopted a carrot-and-stick approach. It provides a limited, one-time compliance opportunity to come clean on payment of a gross tax of 30% and an equal penalty. Moreover, those who have omitted to disclose foreign accounts with ‘minor’ balances of up to Rs5 lakh will be exempted from penalty and prosecution. Failure to disclose and being discovered later will not only attract tax of 30% but also three times the tax as penalty. Willful tax evasion on foreign income or assets will attract prosecution and is punishable with rigorous imprisonment from three to 10 years. The law covers benami ownership and also those who induce or abet another person (probably employees) to file false returns. This covers banks and financial institutions which are notorious for helping people open overseas accounts and to hide the trail through a chain of investment companies and false documents. International private bankers openly canvass such business in India and help conceal income by setting up a chain of numbered accounts and dummy companies. HSBC was caught helping Americans of Indian origin to evade US taxes by opening bank accounts in India; its Geneva branch has a number of Indian accounts which are being investigated. HSBC is certainly not the only one; it is just the one that got caught. Even the Securities& Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) have hit upon on several trails of unaccounted overseas accounts but allowed them to be buried through consent orders or compounding.

Many wealthy Indians, as well as their key money-managers and cohorts, have become citizens of tax haven countries such as Macedonia, Bulgaria, Montenegro and Romania by investing anywhere between 400,000 to a million Euros. They continue to be employed or do business here like Indian citizens often without disclosing that they are foreigners. The family of Subrata Roy (of the Sahara group) is among those who are Macedonian citizens with known wealth and businesses there. Will the new legislation, with its stringent provisions, induce all these people to bring back their undisclosed foreign wealth? It depends on two factors. The government’s seriousness about the Bill will be established only if the generation of new black money is stopped. A large amount of black money is generated for political funding and to route money to political parties/politicians. Unless that ends, businessmen will always be confident that any attempt to unearth their concealed stash can be stymied.

The on-going purge after the 2G scam and the cancellation of coal blocks certainly indicates that big-ticket corruption of the UPA2 variety has ended. But this is mainly because of Supreme Court-directed actions, following public interest litigation based on the Comptroller & Auditor General’s reports. All of them pertain to actions and decisions of the UPA period. But there is no sign of change in the real estate sector, which is the other large block of monumental corruption, or even in the bribes and speed money that ordinary Indians are forced to pay to net a sand babus for routine work or to avoid harassment. On the other hand, we have worrying examples of whistleblowers (vigilance officer of All Indian Institute of Medical Sciences) and diligent officials like Dr Ashok Khemka being transferred for doing their job right. Such actions do not in still public confidence.

Then there is the ‘one-time tax compliance on payment of a penalty’ offered by the black money Bill. Former union secretary, EAS Sarma, has written to the government to say, “I will not hesitate to seek judicial intervention in this matter if the government decides to go ahead with such a dubious amnesty clause (this was before the Bill was introduced in the Lok Sabha).” On the other hand, countries like Australia and the US have successfully used such amnesties to force their citizens to disclose substantial sums of money stashed in international tax havens. It worked in those countries for two reasons. The threat of criminal prosecution and penalties for non-disclosure was serious and one-time compliance was made easy and workable. Like the Indian Bill, the US too offered only a ‘partial amnesty’, meaning that tax had to be paid with interest and penalty. The Indian law has only proposed flat tax of 30% with an equal penalty. But the key here is whether the amnesty will offer quick closure, or whether there will be a permanent threat that accounts can be opened going back decades. A leading tax lawyer says that, although the black money Bill provides for due process, issue of notices and appeals, none of it really works in practice and people are at the mercy of assessment officers and their capricious orders, justified on the grounds of meeting ‘tax targets’ set out by the finance ministry. The Income-Tax Act already allowed assessment of those with overseas income to be opened going back 16 years; the black money Bill prescribes no such limit; this means that tax officials can take their scrutiny back for decades. This could be a huge deterrent to disclosure; in fact, some lawyers say that requests for help to become non-resident Indians have resumed for, the first time, after the BJP came to power in May2014.

Unfortunately, there has been very little pubic discussion on the black money Bill, although tax lawyers have been quietly flagging their concerns to the government. These discussions and debates ought to happen in the public domain and all concerns should be answered and clarified explicitly. The key would be the operation of the ‘one-time compliance’ facility and whether it will lead to effective closure after a process of disclosure, hearing and declaration and payment. For companies, there are some niggling issues—like the definition of what is ‘normally resident in India’— and what constitutes ‘place of effective management’ and its interpretation. If tax officials are allowed to decide this at their discretion, it could have serious implications for foreign companies with significant Indian operations. They would not only be taxed as per Indian laws, but would unintentionally find themselves falling foul of provisions of tax deduction at source (TDS) or minimum alternative tax, etc. All these have draconian implications and penalties. I believe that the government has to do a lot more to create public confidence that it is serious about eliminating corruption and black money. Otherwise, the black money Bill will only be a tool of tax terrorism, which is selectively used to fix political rivals or dissent. @moneylife.in

The New Statistical Measurement of GDP

Rejigging statistics

The comprehensive overhaul of India’s national income statistics, which places India among the fastest growing economies in the world, confounds economists, policymakers and the government. By V.

SRIDHAR

GOOD tidings, even if only of the statistical kind, can be bewildering. Just as Union Finance Minister Arun Jaitley started preparing for his first full-fledged Budget, news came that the Indian economy was chugging along merrily at a world-beating rate of 7.4 per cent in the current year. But the problem for the Finance Minister is in reconciling this apparent acceleration in the pace of growth with other evidence on the ground.

For instance, how can an economy that is growing at its fastest in recent years also experience its lowest levels of inflation in about a decade? Or, how come the booming economy is not experiencing a growing demand for credit from the banking sector? These ought to perplex a Finance Minister in normal times, but for now the political captains of the Indian economy seem to be savouring the glad tidings ushered in by a statistical adjustment, instead of worrying about how they square with reality.

   The latest revision to the national accounts, including fundamental changes in the methodology of calculating national income, has confounded not only economists and policymakers but also the government. While the changes in the methodology have been justified because they now adhere to international best practices as defined by the United Nations’ System of National Accounts, the problem for practitioners is their backward compatibility.

    This is not a trivial issue. Any statistical set that is incompatible with past estimates makes it difficult to compare magnitudes of the past, which is the analytical basis for statisticians, policymakers, the government and citizens at large. This is precisely the problem posed by the revised numbers, especially of the gross domestic product (GDP). When the revised GDP numbers (with the new base set at 2011-12) were released in January, they caused a stir because they conflicted with the perception that the Indian economy had slowed down significantly in the past few years. But more consternation was in store when, on February 9, the Central Statistical Office (CSO) released advance estimates of the GDP, which indicated that the Indian economy would grow by 7.4 per cent in the current year (2014-15).

   

   Soon after the release of the first set of new numbers in January, Reserve Bank of India Governor Raghuram Rajan, in a thinly veiled expression of surprise at the numbers, said: “We need to spend more time understanding the GDP numbers.” He added: “It is premature to take a strong view based on [the new] GDP numbers.” In particular, Rajan expressed surprise over the revised growth numbers for 2013-14, which was by common concurrence a bad year for the Indian economy. “Most of the data we have seen in 2013-2014, except inflation which was very strong, give us a sense that there was a slack in the economy,” he observed. The quizzical reaction of the Governor of the central bank warranted a briefing by the CSO Director General, Ashish Kumar. “Now they [RBI] have no doubts about it,” Kumar said after the meeting with the RBI Governor on February 18.

  The new data, using a brand new methodology, showed that the Indian economy grew at 6.9 per cent in 2013-14, not at 4.7 per cent as estimated earlier using the old series (2004-05 base year). The growth rate for 2012-13 was also revised upwards to 5.1 per cent, instead of the 4.5 per cent estimated earlier. However, within the same data set there lurked several other surprises, notable among them being the rate of capital formation. One would normally expect asset formation to gather pace during an economic upswing; however, the new data show that capital formation declined from 37 per cent to 33 per cent between 2012-13 and 2013-14. How could a smartly growing economy simultaneously experience a deceleration in asset formation? This was the obvious question raised by sceptics.

New method

     The CSO, in its note to the new statistical series, has identified three major changes in the way it computes national income and output. The first relates to how national GDP as a measure of what in economic parlance is referred to as incomes accruing to various “factors” of production—land, labour and capital and rewards to entrepreneurs —is calculated. The second pertains to the usage of market prices to compute GDP; the justification for this emanates from the logic that these are the prices at which economic agents actually transact in. The third major change has been the introduction of a new concept of “basic prices” in order to compute the extent of gross value added (GVA) in the new methodology. The concept of basic prices involves the netting out of taxes and subsidies in order to arrive at the level of GVA in the economy. Analysts have pointed out that the singling out of the government as a separate entity (and an economic agent) in order to compute GVA is not justified by any system of national accounts. Their logic stems from their understanding in economic theory that the government cannot be counted as a factor of production in its own right.

  But by far the most significant change—which appears to have contributed significantly to the apparent inflation in levels of national income —has been the inclusion of new data sources. Foremost among them is the usage of data filed by companies to the Ministry of Company Affairs, instead of relying on the sample surveys conducted by the RBI and the Annual Survey of Industries, which is released by the Union Ministry of Statistics and Programme Implementation. The reliance on the new data source, which gathers data from over five lakh companies, has been justified as being more comprehensive and superior in sweep when compared with both the RBI’s sample and the relatively small coverage (about 2,500 companies) of the Annual Survey of Industries.

   The usage of the new method and data source has resulted in dramatic changes in the rate of both savings and investment by Indian companies. Savings, as computed by the new method, were 30 per cent higher than those computed by the old method (2004-05 base) in 2011-12; for 2012-13 the new method yielded a savings rate that was 40 per cent higher! In effect, if one is to rest sound economic advice on the new data, the share of the private corporate sector in national savings has increased from about 29 per cent (according to the old series) to 40 per cent (as per the new data set).

Significantly, while the portion of GDP emanating from the manufacturing activity is set to increase by 6.7 per cent during the current year, growth estimated by another data source, the Index of Industrial Production (IIP), grew by only a little over 2 per cent in the nine months ending December 2014. Even the earnings and profits of corporates during the year have been pretty disappointing, as is evident in the response of the share markets to their announcements.

Problematic source

One possible explanation for the inflation in national income could perhaps lie in the very choice of data source, especially those emanating from the Ministry of Corporate Affairs. The data are, after all, an aggregation of data (primarily of a financial nature) that are furnished by corporate entities. This could result in the possible inflation of the data on two counts.

First, there are questions about the sanctity of the data submitted by corporates for purposes that are primarily of an accounting nature. The verification of such data could be problematic for several reasons, one among them being the competence and ability of the Ministry of Corporate Affairs to sift through this data for a purpose that it is not designed to perform. Second, there is a possibility that the data, because they are meant primarily to be for an accounting purpose, have been “financialised”, which could explain the inflation in the numbers on the level of national income.

Even if the new data set has resulted in better coverage—and, conversely, less “leakage” of statistics pertaining to economic agents—it still poses serious challenges. 

It is easy to understand the argument that the new method captures a wider picture of the economy, which explains the inflated numbers pertaining to the national income. But this is about the level of national income generated during a year. How does one explain the relative performance of the economy over time, as measured by the growth rate of the economy over time, especially when they are irreconcilable with other numbers pouring in from other sources of data? In many ways, it is difficult to escape the conundrums that the new data pose. While industry has welcomed the pace of growth, its complaints of the government not doing enough to “ease” the process of doing business would ring hollow. For the monetary authority (the RBI), a cut in interest rates (a continuing clamour from industry) would be incompatible with the new numbers on growth. As for Arun Jaitley, reconciling the substantial slack in economic capacity (of men as well as material) with the rosy numbers will be a tough task indeed.

In the name of Nehru- Rethinking India’s Economic Independence

ECONOMIC VISION

In the name of Nehru- Rethinking India’s Economic Independence

The Congress, which is using the Nehruvian tradition to win political legitimacy, has rejected the essentials of the Nehruvian economic trajectory which was premised on the idea of winning economic independence from foreign capital. By C.P. CHANDRASEKHAR

Jawaharlal Nehru’s 125th birth anniversary must not divert attention from one important fact. There has been for around three decades now an explicit or implicit rejection of and a conscious or unconscious deviation from the Nehruvian economic vision across a broad spectrum of India’s political and intellectual elite. This is true not only of those aligned with the BJP, its predecessor formations and organisations related to it such as the Rashtriya Swayamsewak Sangh, or to followers of Ram Manohar Lohia, but of much of the Congress as well.

This broadening of the set of those who have distanced themselves from the economic policy thinking associated with Nehru has been supported with the argument that the Nehruvian strategy for India was a failure. It may be useful, therefore, to revisit the Nehru era and re-examine this assessment, which has facilitated a shift away from what is described variously as a form of populism branded as socialism or as just a misplaced attempt at state intervention that created a “licence-permit raj” pervaded by cronyism and corruption. It must be noted that in terms of the conventionally used indicators of creditable economic performance—a combination of reasonably high gross domestic product (GDP) growth and moderate inflation—the Nehru era can hardly be considered a failure. In fact, the first decade and a half after Independence (especially the years after 1956, which marked that era), were among the best in post- Independence history when assessed in these terms. This was all the more creditable, considering that at Independence the new Indian government had inherited an economy that had witnessed near retrogression for a long period of time, with agricultural

stagnation and de-industrialisation, which together had generated a vast and poverty-stricken reserve of unemployed and

underemployed labour.

Central planning

Moreover, Nehru and his economic advisers did deliver on a number of objectives defined by their desire to take a few lessons on economic management from the theory and practice of Central planning. These included ensuring some degree of investment coordination, deciding the level and allocation of investment on the basis of a prior plan, and creating a large public sector to fill the gaps in infrastructure and capital-intensive industry that existed and were unlikely to disappear if investment decision-making was left largely to the private sector. Much effort and money were also invested in creating an indigenous scientific and technological cadre and an intellectual elite that can manage the administration and the technological requirements of a huge and diverse country.

    Overall, the Nehru era was one in which India launched on a globally unprecedented economic and political experiment. Despite its geographical size, its large population, its social diversity and its extremely low level of per capita income, the post-Independence government under Nehru’s leadership chose to pursue development based on a mixed economy within the framework of a parliamentary democracy. Given the circumstances of the time, this was a strategy that erred in the direction of economic and political balance, rather than towards excessive state intervention or laissez-faire. There was no willingness to give the market mechanism an overwhelming role, because the experience during the colonial years had made clear that the “market” was by no means benign, but a weapon of domination that had benefited in particular the British state and British capital. Neither was there any thought of nationalising all wealth and establishing a command economy in which a centralised state agency coordinated investment and influenced distribution. The best economic minds from across the world, driven by the post-War obsession with reconstruction and development as means to an enduring peace, came to India to study and participate in this remarkable experiment. Elements of failure

The elements of failure in the Nehru era lay elsewhere. First, there is the fact that the growth trajectory on which the Nehruvian strategy had placed India could not be sustained. No sooner had Nehru left the scene than India experienced the two consecutive bad harvests of the mid-1960s, ran into a balance of payments problem, had to devalue the rupee, and look to the Bretton Woods institutions for balance of payments support. That crisis precipitated a long period of close to 15 years when Indian industry went into a phase of secular stagnation. Compared with other developing countries such as South Korea, India seemed caught in a low-growth trap.

     As a result, even after six and a half decades, the promise of successful industrial development has remained unrealised. The most obvious indicators of that are the inadequate diversification of India’s production structure away from agriculture to industry and the rather premature and rapid diversification into services that has occurred in recent decades. By 1985, industry contributed 45 per cent of the GDP in Brazil, 43 per cent in China, 26 per cent in India, 36 per cent in Indonesia, 39 per cent in South Korea, 39 per cent in Malaysia, and 32 per cent in Thailand. Diversification of production towards industry was much more successful in other similarly placed developing countries than in India.

The second indicator of failure was the evidence that the effort of the interventionist regime to address asset inequality and curb industrial monopoly clearly failed. This was recognised in a range of official reports such as the P.C. Mahalanobis Committee Report on the Distribution of Income and Levels of Living (1964), the Monopolies Inquiry (K.C. Dasgupta) Commission Report (1965), the Hazari Committee Report on Industrial Planning and Licensing Policy (1967) and the Industrial Licensing Policy Inquiry Committee (Dutt Committee) Report (1969).

      The third was the failure of the strategy to resolve India’s external vulnerability, resulting in the erosion of the huge sterling reserves that India had accumulated with the Bank of England during the Second World War (as payment for India’s contribution to the War effort) and was transferred to India after Independence. Those reserves were exhausted by the mid-1950s, resulting in balance of payments stringency which then exploded in the form of the mid-1960s balance of payments crisis. Finally, there was evidence at the end of two decades after Independence that the battle against deprivation was more lost than won.

     Even today, for example, a quarter of the world’s hungry live in this country, it hosts about two-fifths or more of children less than the age of five who are malnourished, and it has an infant mortality rate which is double that of Indonesia’s and equal to that of Haiti’s. The reasons for this failure did not really lie in the nature of the strategy. Rather, it was because a number of prerequisites needed to ensure the success of the strategy, clearly recognised in the policy documents of the time, were not actually put in place. Two mutually reinforcing and interrelated contradictions, in particular, structurally limited the developmental potential of the system. To start with, despite talk of land reforms, of providing “land to the tiller”, little was done to attack and redress asset and income inequality in rural India. As a result, the large mass of peasantry had neither the means nor the incentive to invest, since they were faced with insecure conditions of tenure and could retain only a small share of the output they produced. The prospect of increasing productivity and incomes in rural India, which was home to the majority of its population, was therefore limited. The absence of any radical land redistribution also meant that India remained food insecure and the domestic market, especially for industrial goods, remained socially narrowly based, even though the Nehruvian strategy had emphasised growth based on the domestic market. Under these circumstances, the growth of the market came to depend on state action. The state provided domestic capitalists with a large once-for-all market for manufactures by widening and intensifying protection and displacing imported goods from the domestic

market. It also sought to expand that market through its current and capital expenditures and it supported investment by the domestic capitalist class through the creation of a number of development banks.

    As noted, this strategy did pay dividends during the decade and a half immediately following Independence. By the mid-1960s, however, not only was the once-for-all stimulus offered by import substitution exhausted, but the ability of the state to continue to provide the stimulus to growth was also undermined by the second of the contradictions characterising the process of development.

While the state within this regime had to maintain rising expenditures in order to keep the domestic market expanding, it was unwilling, for fear of alienating the powerful, to mobilise through taxation the resources needed to finance those expenditures. This contradiction manifested itself in a fiscal crunch, under which expanded public spending financed with borrowing resulted either in inflation or in an external deficit or in a combination of the two. Forced to avoid that after the crises of the mid-1960s, the government had to limit and withdraw from its proactive role. As a result, the regime was engulfed in a deepening crisis that precluded economic dynamism.

    Given this crisis, what was needed was to go back to the drawing board and seek out new measures to implement a strategy that in itself was remarkable. There was one difficulty, however. Central to any effort at economic renewal had to be an effort to redress asset and income inequality: attack land monopoly through land reforms and reverse the control over resources in industry and finance that

were worsening asset and income inequality. Doing that would have not only helped expand the domestic market, mobilise additional resources for public spending and revive growth, but also win the Congress the political legitimacy it had gained from its leadership of the freedom movement but which it was losing because of its failure to deliver on the promises it made at Independence.

       The Congress under Indira Gandhi did recognise this imperative but its effort at making the structural changes for revival, though significant, were far from adequate. Among the noteworthy measures that the then government adopted were the effort at trying to curb the power of domestic and foreign capital through the passage of the Monopolies and Restrictive Trade Practices Act in 1969 and the Foreign Exchange Regulation Act in 1973, and, more importantly, by the nationalisation of 14 major banks in 1969, which when in private hands were the means by which a large part of the nation’s savings were appropriated for their use by the big business groups.

But this effort did not go far enough. This was partly because the economic and political power of India’s rich had increased considerably since Independence. But it was also because the Congress had lost its vision as a party, was riven with contradictions, and had lost its links with the masses it had mobilised during the freedom movement, which could have given it the social sanction and political backing to confront the powerful.

        Unable and unwilling to do the needful to revive the Nehruvian agenda, the Congress, too, was looking for softer options that could signal renewed economic governance. Like in many other developing countries, the option chosen was one of relying on and leveraging foreign capital to drive growth based on foreign markets rather than the domestic market. The Nehruvian trajectory, informed by India’s experience under colonialism, was premised on winning economic independence from foreign capital. The option that was chosen by the Congress, especially since the 1980s, amounted to turning its back on that legacy.

This decision of the Congress encouraged an elite attack, supported by interests aligned with international capital, on what came to be called Nehruvian economics. That attack gained strength from a changed international economic environment, with substantially enhanced cross-border flows of foreign capital seeking new avenues for investment in the so-called “emerging markets”. The

“opportunity” ostensibly offered by those potential flows provided the basis for a shift towards liberalisation of trade and foreign investment policies and a greater reliance on foreign debt.

Interestingly, the balance of payments crisis that the turn to such policies during the 1980s precipitated in 1991 resulted not in a halt to this reversal of the Nehruvian agenda, but in an intensification of liberalisation. The private sector was given free rein. The state was downgraded from leader and regulator to facilitator of private sector growth. Foreign capital, once viewed with a sceptical eye, was now embraced. And India, too, began a tempestuous affair with foreign finance capital. The result has been a huge increase in inequality and growing economic vulnerability, and only a brief honeymoon with growth.

What is important to note is that all this was initiated and pursued largely under the Congress, which still “owns” that strategy. So much so that even when the much more right-wing NDA governments opted for new measures of liberalisation and took credit for “reform”, the Congress was quick to claim that this was merely the implementation of an agenda it had laid out. The difference in economic policy between the BJP and the Congress is largely that while the former (with much help from the RSS) uses a communal platform to garner voter support, the Congress still has to rely primarily on welfare measures (such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, or NREGS, or the Food Security Bill), which, too, it pursues hesitantly.

    How then does one read the eagerness of the Congress to celebrate its Nehruvian tradition? It is partly to use that tradition and its leadership of the freedom movement to win political legitimacy, even if it has rejected the essentials of a Nehruvian economic trajectory that remain unimplemented. It also has to do with giving legitimacy to its own leadership, which remains at the top not because it has mobilised mass support through activism but because of its Nehruvian lineage.

(Published in Frontline.in)