To answer this question I have to touch upon the forbidden subject” The role of Black Money in creating demand” Economists will not touch this subject for known reason. Everyone knows drinking is injurious to health but good for economy as it pays huge tax revenue to government. But none can promote wine openly.
The irony is that government can not promote drinking even though it earns a huge revenue from wine business. Rather government impose ban on drinking because of its social image inspite of knowing the economic impact.Similarly Black money is injurious to formal economy as government doesn't get income tax and other tax revenue also it increases inflation but it has a huge impact in creating demand and increasing consumption.
SBI wrote-off loans worth Rs 1 lakh crore in past two years. Country's 21 state-owned banks wrote-off Rs 3.16 lakh crore of loans in four years of the BJP government. In a span of just four years the CommercialBanks got pauper by more than 3 Lakh crores. As per RBI provisional data on global operations, as on 31.3.2019, the aggregate amount of gross NPAs of PSBs and Scheduled Commercial Banks (SCBs) were Rs. 8,06,412 crore and Rs. 9,49,279 crore respectively.
India’s current account deficit (CAD) widened to a four-year high of 2.9% of gross domestic product (GDP) in the July-September period, up from 2.4%
Profession tax haul falls first time in Maharashtra in 5 years = Times of IndiaMUMBAI Apr 26, 2018 : The collection of profession tax—an indicator of formal sector job. was Rs 652 crore short of the annual target for Maharashtra in 2017-18, official figures show. Significantly, the collections actually fell when compared to the previous year by Rs 179 crore. This clearly shows loss of employment
Oct 17, 2018 - Foreign institutional investors (FIIs) have given Indian capital markets a big thumbs-down this year, withdrawing Rs 90,746 crore so far
Jul 24, 2019 - FIIs have sold a net of $1.2 billion of Indian equity shares so far in July. Foreign institutional investors have been selling Indian shares all through this month, hurt by the income-tax surcharge on the super-rich, which will hurt foreign investors that are not registered as corporates. And the pain is likely to continue.
The move spooked investors, as the surcharge will impact 40 per cent of FPIs, as per various industry estimates. Union Finance Minister Nirmala Sitharaman ruled out the possibility of a rollback of the tax surcharge last week, adding to the woes.
.India's trade deficit widened to USD 15.36 billion in May 2019 from USD 14.62 billion in the same month last year.
The IMF on Tuesday projected a slower growth rate for India in 2019 and 2020, revising its growth estimates downward by 0.3 per cent for both the years, saying India’s GDP will now grow at 7 and 7.2 per cent, respectively, reflecting a weaker-than-expected outlook for domestic demand.
One can see that Indian economy has gone into slump immediately after the demonitisation. Even though the entire currency has come back to circulation rather there has been an increase of 19% in currency note supply, the demand for goods and services has not come back to the market at pre demonitisation period. Why??
No economist has been able give any explanation of the reason. Now just think of the situation when a deep addicted stop drinking suddenly what happens ? We see the withdrawal syndrome. The person would rather die for not drinking rather than drinking.Well the above example explain the situation in a symbolic manner. However there is strong resemblance in reality for Indian economy. One can say Indian economy is going through the withdrawal syndrome.Like drinking controls a addicted person, Indian economy is also hugely controlled by black money. And we are currently suffering from the withdrawal syndrome.
In India the size of the parallel economy is much larger than the formal/government economy. How ? Well lets consider a simple example - if we consider that only 10% of GDP ( Note I am not talking of GDP growth ) which is not reported for formal accounting ( converted to black money or parallel economy ) and multiply that by 70 ( 70 years of independence ), a whopping 700% of our formal economy. This is considering only 10% conversion into black money, whereas actual conversion would be much higher.
If we consider our economy size at US $2.5 Trillion, the size of parallel economy in India could be roughly US $18 Trillion. This is purely a hypothetical figure, however the actual size of the parallel economy could be much bigger - one can use his or her imagination .
Now it is a known fact that black money ( portion which is maintained in currency form) rotates the fastest considering it can not to be deposited in bank. The more the rotation, more the money multiplication, more purchasing power and ultimately more demand. As against this white money rotates much slower ( legitimate money kept in bank, FD, Indurance etc) create much less demand. Black money is being used in a big way to purchase consumer goods. With demonetisation entire black money maintained in currency form has been brought back to system. As per government estimate there was around 3-4 Lacs crore back money ( in currency form ) before demonetisation.
This entire black money has been legitimized during the “Note Brandi” Which has now become idle money, not helping to create any demand. Whereas if we consider 4 Lakh crores rotating minimum 10 times a year would have created a corpus demand of 40 Lakhs crore per year. Even if we consider half of that 20 Lacs crores on a very conservative side taking 5 turn, Indian economy has lost domestic demand creation worth that volume.
That is the major reason for slump of Indian economy after demonetization. It is to be noted that though the black money doesn’t pay income tax, it indirectly pays tax like GST etc. while purchasing goods ( particularly white goods ) and give huge boost to Government revenue. As well black money plays big role in increasing industrial output by creating more demand ( for, car, appliances, cement, steel, mobile, other construction materials etc) as well demand for apparel, jewellery, furniture etc. Plus it has a direct role in providing input for manufacturing industry.
NO - I am no way supporting the cause of black money in line with “Alcohol is injurious to health” But one can not deny the impact of black money in Indian economy. The recovery path is going to be lengthy and painful. Black money converted to real state gold, silver, share, foreign equity and transferred to foreign bank is altogether a different subject to deal with. I am not dealing on the same in this article. I have not considered the cascading affect of GST implementation since the affect has been marginalised to a large extent by now.
This is so far domestic trade is concerned. If we look into our international trade a number of factors has gone against us. Mostly the global slow down, tariff war etc are affecting our export growth. International slow down along with stricter visa regime has affected our tertiary sector earning.
As off now we are battling grim situation both on domestic as well international trade.
What is the recovery path - Increase liquidity, even if Government has to loosen up the regulation a little. Strict measures always push peoples away, leads to tax evasion. Government needs to create congenial environment for investment, demand creation. Government needs to Create an atmosphere of trust. Too much of punitive actions and extensive use of enforcement agencies would create a panic in the economy. Higher Compliance can not be achieved only by use of strict enforcement.
Post demonetization number of entities and organisations have cut down their business activities to align with record maintained as per books so as to avoid any glare from enforcement agencies.
Government has to take call whatever suits it best. The point to be noted here that when economy gain momentum governments tax revenue collection will go up automatically. Otherwise if economy goes down no amount of increase in taxation can boost revenue earning. Whatever Government does, it has to take the action very quickly, already it has wasted almost three years after demonetization. Yes it has to take some big action as the size of the problem is also big. And it has to be a POSITIVE action
I know I have touched upon a very sensitive subject. I would sincerely solicit comments / criticism
Edit:
I have written this article quite sometime back, the telling effect on economy is now much more visible. Its time we need to go much deep and understand the impact of demonetization and beyond if Indian economy has to bounce back.
But honestly speaking I am a bit disheartened, I haven’t seen any deep study or analysis of the subject. Economist are just beating around the bush, they seem clearly clueless about the remedy. This is very sorry state of affair. I said long back demonetization is one of the major reason for economic slowdown. But then I was only partially right. Demonetization in itself or in isolation could not have done such chilling affect on the economy, there has to be more than that. Here in this section we would discuss the same.
Meanwhile the government resorted massive increase in public borrowing to increase budget outlay and maintaining GDP growth rate. One need to understand that GDP growth can not be sustained by borrowing. Whoever has been advising government on this looks to be grossly mistaken. Government also changed the GDP calculation method going for income-expenditure method.
The Congress on Tuesday claimed that the country's debt increased by over 71 per cent in the last 5.5 years whereas the per capita GDP rose by only 30 per cent
"In the last 5.5 years, the country's debt has shown an increasing trend in terms of absolute amount. In March 2014, the total debt was Rs 53.11 lakh crore, whereas in September 2019 the same has increased to Rs 91.01 lakh crore. An increase of 37.9 lakh crore (71.36 per cent) in absolute terms,"
India’s external debt has reached an all time high of 557.51 USD Billion in the third quarter of 2019 from 557.05 USD Billion in the second quarter of 2019
India’s national debt has almost double over last 6 years to USD 2.2 Trillion
Fiscal deficit hits 132 per cent of Budget Estimate till December 2019. In actual terms, the fiscal deficit or gap between expenditure and revenue was Rs 9,31,725 crore, the data released by the Controller General of Accounts (CGA).
Each one us think demonetization is responsible for economic slowdown, yes of course. But the process actually started from the beginning of BJP rule in 2014. I will put some thought for further deliberation.
BJP came to power as people wanted some change. BJP wanted to make India a Congress free country. But how do you do it? Congress is a grand old party and having a massive organisation structure. If you want to eradicate Congress you have to attack it mainly from four angles
- Attack or counter its value proposition - which BJP did it very successfully putting up the Hindutva Philosophy.
- Attack the credibility of the Congress leaders - Which BJP did quite successfully - building up “Pappu” image of Rahul Gnadhi, putting some of their leader behind the bar etc
- Expand the member base - (eat up existing support base of Congress) - Here also BJP did well expanding its member base.
- The Fourth and the most Important one - The Finance - Means attack or choke Congress’s source of fund and add/increase BJP’s fund source. Once it is successful to tap off Congress fund flow, BJP assumed that Congress its going to die a natural death, and rightly so.
Data shows BJP bagged 92% of corporate donations to political parties. In 2017-18, corporates contributed as much as 12 times more money to the coffers of the Bharatiya Janata Party (BJP) than to those of the other six national parties combined. This could have two interpretation. 1. The corporate houses would like to contribute to the parties who is in power either because they want to be good books of the government or they are afraid to antagonize the government. 2. The government has been able to impress upon the corporate houses to support BJP or move away from supporting other parties.
A staggering Rs 55,000-60,000 crore was spent in the Lok Sabha elections, 2019, according to a study by the Centre for Media Studies (CMS), a not-for-profit multi-disciplinary development research think-tank. The figure is almost twice the amount estimated by the CMS for the last general polls in 2014 at Rs 30,000.
Today's election and organisation is totally fund dependent. Without money muscle it would be next to impossible to reorganize and bounce back. Demonetization was one of those actions to limit or to seal the fund source of Congress and other parties. But it was not limited to Demonetization alone, which is what has been a much bigger blow the the economy. Let me explain.
Congress has been in power for almost 50 years after independence, a great number of industrialist or business-houses have been Congress loyalist or sympathizer ( willfully or by compulsion). And unless these loyalty or the alliance change you can not cut off the fund flow for Congress. I assume, I repeat I assume ( though there are circumstantial inputs in support of my analogy) that BJP started working, either the business houses shift their loyalties or they are put to inconvenience where they are no longer in a position support Congress with fund. For these Central Government has few very potent weapons- a. Policies, b. CBI, c. ED d. SEBI, IT department and finally Demonetization. So large section of business houses started withering out, run out of business, leading to huge NPA, cut in employment,
Over 14,000 prosecutions withdrawn under Companies Act. As part of de-criminalisation of technical and procedural violations under companies law and reducing the burden on criminal courts as well as the National Company Law Tribunal (NCLT), the government has shifted 16 offences sections to monetary penalty regime.
I would like to refer the Law Committee Report 18th November 2019. One would understand that to what extent the provisions of Companies ACT were used or misused to traumatize the wealth creators that the Law Committee had to suggest for categorization of 23 offences out of 66 penal prevision for subjecting to penalty instead of criminal proceeding.
Government has come up with new regulation
- CSR violations not to be treated as criminal offence, it will be considered as civil offence.
- Issue of income tax orders, summons notices from 1 October, will be issued through centralised computer system. This will help to restore confidence of tax payers.
- All old notices to be decided by 1 October. If some of them are decided to be issued, these will be uploaded so it will be a transparent system.
The notion is being disproved that this government is inclined to go through prosecution; we are more in favour of penalty than prosecution where possible; we have withdrawn 14,000 prosecutions under Companies Act: Nirmala Sitharaman. 76 steps taken to ensure wealth creators treated with respect, says Sitharaman -"We have taken 76 steps to remove 65 sections of criminalities in companies act.
Modi government fires 15 more senior income tax officers -“Some black sheep in the tax administration may have misused their powers and harassed taxpayers, either by targeting honest assesses or by taking excessive action for minor or procedural violations,” Prime Minister Modi had said from the Red Fort in his independence day speech this year. He is practically saying that the tax payers or the wealth creators were harassed.
My point is that Indian corporate houses and the wealth creators were operating with the same old Companies act, there was no complaint. Why then the need for changes come ? The problem was not with the provision, the problem was with the way or intention it was exercised.
If the wealth creators are harassed, the economy can not progress. The government has taken some action. But that is not enough, it has to implement the same in letter & spirit. I have already said that the enforcement agencies have to be put in background if the government sincerely wants to bring the economy back on track.
For bringing back the economy in the growth path, I would suggest the Following other measures. in view of Corona pandemic and current lockdown these measures would be further more important.
The government has to think of action hitherto it never though of, to bring back the demand.
- The government should withdraw all kind of restriction on cash purchase with immediate effect. People should be encouraged to spend, convert asset to liquid cash.
- Capital gain tax on disposal of land and residential property should be abolished or waived off at-least for a year.
- For limited period of 6 months or one year the government could consider quantum deduction of stamp duty and GST applicable on transfer of property coupled with lower interest rate. All these action will help to increase liquidity and boost the reality sector as well push the overall demand in the market for products and services .
- The road tax and GST & surcharge on automobiles also to be reduced with immediate effect to give boost to the automobile sector.
- GST on building materials also should be cut down drastically so as to push for new construction activity. GST on appliance could also be reduced to push demand.
- Capital gain tax applicable on share market should also be waived off or abolished atleast temporarily to encourage trading activity. Rebuilding confidence on share market will be very important to encourage industrial sector, for industries to draw finance from market as well to reduce Bank NPA
- Agriculture is still the backbone of our economy. The farmers have to be supported in a big way - it could be in terms of postponement of loan repayment, interest subsidy and other support like availability of fertilizer and seeds. Farmers have to be supported with transportation & marketing of agricultural produce which got disrupted because of this lockdown. Farmers producing perishable commodity are suffering the maximum.
- The hospitality and aviation sector which are also worst affected, have to be given breathing ground for at least next six months.
- Indian Pharmaceutical industry has to quickly put up manufacturing facility for the essential ingredients for which they are currently dependent on China all most to the extent of 70%. This dependency has to be killed at the earliest.
- Tariff on all non essential import should be increased drastically to cut down import cost and pressure on rupee. Restoring export to pre corona level would take some time, weaker Rupee has to be defended till then. Anti dumping measures could be imposed on import of non essential items. This is the golden opportunity to push Make in India initiative, restrict non essential import , take advantage of anti China sentiment and capture part of European & US market.
The government has to think of all possible means to increase business volume first even it means reducing tax. The government need not worry about revenue loss. Higher business volume can always make up the revenue loss, larger business volume will compensate more than enough. All these will help to generate employment, restore demand in the market
Reference:
- Bank NPA
- Foreign investors make historic run from India! Over Rs 90,000 crore withdrawn from markets in 2018
- FIIs simply dumping Indian stocks; pull out $1b so far this July
- http://www.mca.gov.in/Ministry/pdf/CLCReport_18112019.pdf
- At Rs 1,450 cr, BJP got 61% funding via Electoral Bonds before LS polls
- At an Estimated Rs 60,000 Crore, Lok Sabha Elections Costliest Ever; BJP Spent 45% of it, Shows Study
- Data shows BJP bagged 92% of corporate donations to political parties
- Over 14,000 prosecutions withdrawn under Companies Act
- Waging war on corruption: Modi government fires 15 more senior income tax officers.
- 76 steps taken to ensure wealth creators treated with respect, says Sitharaman
- Debt increased by 71% in 5.5 years, address it in Budget, Congress tells government - Times of India
- India's exports decline for fifth straight month in December, trade deficit narrows
- Fiscal deficit hits 132 per cent of Budget Estimate till December
- https://blog.thomascook.in/1-usd-to-inr-from-1947-to-2020
- Total government liabilities rise to Rs 84.6 lakh crore in Q1: Finance Ministry report
- India - national debt 2014-2024 | Statista
- India’s debt under Modi govt surges 50% to Rs 82 lakh crore
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