Indian Economy - News & Discussion Oct 12 2013

[gakakkad]

@ negi..2% surcharge on 1 crore plus income to generate an additional 9100 crore this year...

[member_28352]

For the first time ever in the history of independent India we will have a rudimentary social security scheme. A new defined benefit pension scheme for ALL Indians. We may not appreciate it today but mark my words, this is revolutionary. Overall budget very good for social goals even for middle class savings goals. Should also see increase in corporate tax collections with taking away of exemptions and lesser litigation and with lower tax rate. Tax inversion in many sectors such as electronics to go away thereby giving Make In India a boost. Overall an awesome and growth oriented budget even if service tax is being increased. For those of you with bideshi employer ESPP/ESOP plans please be careful with tax related issues on this front. Infractions may be dealt with under newly proposed Black Money Act (10 years RI).

[negi]

Gold monetization and all such schemes are total hogwash , people in India who buy gold buy it in cash (as for using rupay card WTF is that ? I haven't seen it , no one uses it , I am sure 95% of BRFites here in desh don't have one) . All in all theory and practice are two different things.

If FM is serious about cashless transactions he should have declared policies like a surcharge on cash deposits in banks which he did not , he never announced use of cards to be made compulsory at all the commercial stores and good which cost more than say INR 50k or 1 lakh , the old broken record of compulsory PAN was played . Clever eh ? I will go and buy an item worth INR 1 lakh at say INR 99K using cash and then will not have to give my PAN details it is as easy as that , basically nothing has been done to control flow of black money sab hawa mein teer choda hai.

[sooraj]

any details on jail terms for blackmoney holders

[negi]

@ negi..2% surcharge on 1 crore plus income to generate an additional 9100 crore this year...

Birather last year people who declared an income of more than a crore was 104x or something like that , it is a joke .
The slabs need to be proportional unless they do that everyone will delclare an income of 99 lakh 99 thousand and 999 INR onlee and pay 30% tax as say an assistant professor who might have a taxable income of 10 lakh INR.

[member_28352]

10 years RI, offence is non compoundable. Can't approach settlement commission. Property and assets of equivalent amount as foreign black money will be confiscated. 300% fine on recovered black money. 10 years RI for holding benami property for domestic black money.

[gakakkad]

a clear direction on bankruptcy law and commercial dispute settlement is breath taking..overall I want the guidelines on foreign bank accounts ASAP... I don't want to be in trouble because I have taxable income in 2 countries...

I would have liked a double taxation avoidance treaty...but the zeitgeist is against black money will create trouble for genuine foreign account holders as well...

[gakakkad]

@ negi what do you want people with more than a crore taxed?

40% /50% /60% more?

IMHO very high tax (50-70% range like in france,denmark) for the really rich is a socialist concept ..in India's case it will have a negative impact...

[gakakkad]

>>If FM is serious about cashless transactions he should have declared policies like a surcharge on cash deposits in banks which he did not ,

that would have offset the jan dhan yojana...a farmer depositing 1000 rupees to his newly created account under pmjdy will have to pay 2 rupee surcharge by your phormoola...

onlee issue people really have is the increased service tax and no reduction in tax...but the overall impact on growth and inflation will be such that those 2 points would be moot...

[negi]

^ No , did you read what did I say only on cash deposits of INR lakh or more . In fact your argument is exactly on the lines of all those who have black money in this country they use farmers' shoulders to hide their stash. Can some bright bulb tell me which poor farmer makes regular cash deposits of 1 lakh or more in a bank ? Loans are always wire transferred , govt grants always come via cheques . If cashless txs are imposed people will be forced to stop cash dealings in bulk.

[Suraj]

Gold monetization and all such schemes are total hogwash , people in India who buy gold buy it in cash (as for using rupay card WTF is that ? I haven't seen it , no one uses it , I am sure 95% of BRFites here in desh don't have one) . All in all theory and practice are two different things.

?? That's exactly what the plan for monetization of gold is. Rather than the consumers importing gold and minting in into all kinds of jewelry, the government imports it, issues coins (like the South African Krugerrand) with fixed purity and fixed going rate, taking away some of the transactional cost from the traditional jewelers. You don't have to price shop if you want to sell the coins.

If FM is serious about cashless transactions he should have declared policies like a surcharge on cash deposits in banks which he did not , he never announced use of cards to be made compulsory at all the commercial stores and good which cost more than say INR 50k or 1 lakh , the old broken record of compulsory PAN was played . Clever eh ? I will go and buy an item worth INR 1 lakh at say INR 99K using cash and then will not have to give my PAN details it is as easy as that , basically nothing has been done to control flow of black money sab hawa mein teer choda hai.

It's been mere minutes since his speech. Far too much criticism is being directed too early. Unlike something like a tax rate change, a cashless system is an administrative action that takes time to implement. As much as we'd like it done in one shot, the government needs to first establish, do they have the means to implement it nationwide in one shot ? In this case I would say no. Announcing a plan that's comprehensive in scope, but depends on incomplete infrastructure and administrative base, is doomed to fail. I would rather they lay the groundwork first, but announce the intention beforehand. In this regard I wish they'd sort out the PAN vs Aadhaar issue first. Anything that needs the universal ID card thing to work should first have the ID card program itself fully implemented.

[negi]

@ negi what do you want people with more than a crore taxed?

40% /50% /60% more?

IMHO very high tax (50-70% range like in france,denmark) for the really rich is a socialist concept ..in India's case it will have a negative impact...

That figure can be arrived at after a more detailed study you seem to be stuck on semantics rather than the idea or concept i.e. tax slabs need to be much more granular . Fact is today the upper middle class be it in govt or private will fall into the INR 10-20 lakh band (senior scientists, professors , Babus , middle management in ITTY et al) to me it is unfair that these people also pay a tax at same rate as someone who makes say 50 lakhs or even a crore , this becomes even more bad when the 10-20 lakh band is the one who diligently pays tax it is the ones who are into business and higher pay bands who hide their income. For INR 10 lakh or less I am suggesting the rates be decreased even more.

[Suraj]

I would have liked a double taxation avoidance treaty...but the zeitgeist is against black money will create trouble for genuine foreign account holders as well...

DTAA is not within the scope of budget, but inter-governmental agreement.

[negi]

Suraj the flow of Gold in India is via Hawala channels so to prevent that you need to control cash which we are not doing , unless the gold coin issued by GOI is cheaper than say the biscuit smuggled from Dubai no one will buy it. Also you see if I smuggle in gold and then sell jewelery made from it I do not have to declare that income for no record exists , whereas if I buy gold from GOI they know how much gold I have and can then track how much business did I do as a jeweler . All in all GOI's policies are more for moral posturing than action .

[chilarai]

(as for using rupay card WTF is that ? I haven't seen it , no one uses it , I am sure 95% of BRFites here in desh don't have one) .

Rupay is intended as a desi payment scheme to replace visa/mastercard. Admitedly it has not caught on, but once it does it has the potential to make a hge difference int the outflow of cash . Everytime you pay using visa/mastercard 1-3% gets paid to visa/mastercard just for using their network. This is totally a avoidable waste for India.

[Suraj]

Gold imported by government does not incur a duty since they'd be billing themselves if they did. They have several hundreds of tons of gold that they'd happily mint and sell to the general public rather than have it sit in a bank vault in New York. The cheapest way to exchange such coins would be at a bank, where the daily price of those coins is easily known. No need to hold biscuits and custom jewelry, and incur the transactional cost of proving that they're not diluted. Also no need to shop for the price. An illiquid and illicit market will always have a higher markup over a liquid and legitimate market. That's just how a market works, and how GoI wants to tackle this matter to their own benefit. By implementing their own gold trade, they undercut the black market in the material, which necessarily has to maintain higher costs because of the overhead of hiding the business. It's a much smarter thing to take over the gold business themselves, rather than eternally being the cop running around after the black market/hawala folks and being solely the party imposing costs.

[panduranghari]

From political thread in GDF

The dollar has lost its intrinsic value anyway.
https://econographics.files.wordpress.c ... lar-vs.jpg

The only natural good left to recapitalise the global economy is gold. Gold is a Giffen Good- anything which people buy in more quantity when the price is rising.

Saar, how is the intrinsic value of dollah (or for that matter, any currency) calculated? Could you please explain this in layman's terms to an economy neophyte?

I can try. But I am not that knowledgeable about it. I will try to explain it as I understand it.

In the wake of WWI (1914-1918) there was an international movement in Europe to return to the stability of fixed exchange rates between national currencies. But all of them had been inflated so much during the war that reestablishing the peg to gold at the pre-war price would have implied an overvaluation of currencies that would have led inevitably to a run on all the gold in the banking system, monetary deflation and economic depression. At the same time, they feared that raising the gold price would raise questions about the credibility of the new post-war regime, and quite possibly cause a global scramble into gold.

This "problem" with gold was viewed at the time as a "shortage" of gold. And so one of the stated goals of the effort to solve this problem was "some means of economizing the use of gold by maintaining reserves in the form of foreign balances. So to "economize the use of gold" meant to limit or reduce the use of gold.

Meanwhile, the United States had emerged from the war as the major creditor to the world and the only post-war economy healthy enough to lend the financial assistance needed for rebuilding Europe. And so even though the U.S. wasn't directly involved in the European monetary negotiations that took place in Brussels in 1920 and Genoa in 1922, it was acknowledged that any new monetary order was likely to be a U.S. centered system.

The Genoa negotiations were led by the English including British Prime Minister Lloyd George and Bank of England Governor Montagu Norman who proposed a "two-tier" system especially designed to circumvent "the gold shortage". The British proposal described a group of "center countries" who would hold their reserves entirely in gold and a second tier group of (unnamed) countries who would hold reserves partly in gold and partly in short-term claims on the center countries.

The proposal was named the "gold-exchange standard" (not gold standard).

The gold-exchange standard that officially came into being around 1926 (and lasted only about six years in its planned form) worked like this: The U.S. dollar was backed by and redeemable in gold at any level, even down to small gold coins. The British pound was backed by gold and dollars and redeemable in both, but for gold, only in large, expensive bars (like A 400oz LBMA good delivery bar). link Other European currencies were backed by and redeemable in British pound sterling, while both dollars and pounds served as official reserves equal to gold in the international banking system.

Since only the U.S. dollar was fully redeemable in gold, you might expect that gold would have immediately flowed out of the U.S. and into Europe. At the beginning of the gold-exchange standard in 1926 the U.S. held 6000 tonnes of gold and by the beginning of Breton woods conference of 1945 they held over 20000 tonnes.

When you go to the shop and buy goods, you pay currency using say- your credit card. At some stage you settle your debt with the credit card company. In essence the credit card company is owing money to the shop where you bought goods from. The company settles its debt with the shop. The point is the balances have to be settled. Mostly in the same currency.

But because different countries use different currencies, we need another level of imbalance clearing. And that international level is cleared with what we call reserves. So, in essence, we really do have two tiers in the way we use money. We have the domestic tier where everyone uses the same currency and clearing is handled at the commercial bank level with currency. And then we have the international tier where everyone doesn't use the same currency and so trade imbalances tend to aggregate and then clear with what we call "reserves" (aka international liquidity) at the national or Central Bank level.

What are reserves? What are assets? These words are present in every balance sheet. In your own family, you will have reserves and you will have assets.

RBI has 2 reserves like every other foreign central bank (cB): 1. gold reserves and 2. foreign currency reserves.
They also have assets. Assets are claims against residents of your currency zone denominated mostly in your own currency. Reserves are either gold or claims against non-residents denominated in a foreign currency.

Reserves are the fundamental basis on which the basic money supply of a bank is borne, while assets are the balance sheet representation of the bank's extension of credit. Changes in the ratio between reserves and assets exert opposing influences on the ability of the system to expand.

The reserves are the base on which all bank money expands. CB money rests on CB reserves and commercial bank money rests on commercial bank reserves which are, in fact, CB money which is resting on CB reserves. Commercial bank like SBI hold assets which are in effect liabilities for the CB. This is because, SBI knows holding any asset of RBI is worth it because RBI backstops the system. When our public sector banks became GOI undertakings, it effectively meant- they won't default. The money you keep in that bank will be accessible when you need it. They guarantee access to money, they do not guarantee the value of that money. So you can see that the entire money system is built up from the CB reserves.

From an international perspective, if trade between the two currency zones was perfectly equal at all times, there would be an equal amount of rupees wanting to buy dollars and vice versa. But we don't live in a perfect world, so there's always more of one or the other which is why the exchange rates float. If, instead, we had fixed exchange rates, the CBs would be involved in equalizing the number of rupees and dollars being exchanged, and then the CBs would settle up amongst themselves using their reserves, which was how it was before 1971.

But even today, with floating exchange rates, the CB's still do get involved in what we call the "dirty float" to manage the price of their currency on the international market. This is essentially the same process as during fixed exchange rates except that they don't maintain an exact peg, but instead they let it float within a range that they deem acceptable. And the way they do that is essentially the same way they did it back in the fixed exchange rate system of Bretton Woods and before. They buy up foreign currency from their commercial banks with newly printed cash.

Or, if there's a excess of their own currency in foreign lands trying to get home, then they have to buy back their own currency using up their CB reserves. Which brings us to the makeup of a CB's balance sheet, most pointedly its reserves. And the take-home point here is the difference between finite and infinite from a CB's perspective.

From the perspective of a CB, its own currency is infinite while its reserves are finite. So if there's a shortage of foreign currency in its zone, it has no problem buying up as much as it wants with printed cash. In fact, theoretically, a CB could buy up foreign currency that is accumulating in its zone until the cows come home. On the other hand, if there's a excess of its own currency abroad, its buy-back power is finite and limited to the amount of reserves it stockpiled earlier.

So why do it? Why does a CB spend its precious reserves buying its own currency back from foreign lands? What happens if it doesn't? Currency collapse is what happens. If there's a glut of your currency abroad and you don't buy it back, the market will take care of it for you by devaluing your currency until it becomes impossible for you to run a trade deficit. And this is a painful process when the marketplace handles it for you because it not only collapses your trade deficit to zero, it also tends to bring your domestic economy to a standstill at the same time, a double-whammy.

And this is how the monetary system above scales up to the international level. While the commercial bank reserves (Cash) are good for clearing, redemption and credit expansion within a currency zone, only the CB reserves work in a pinch on the international level. And if the CB runs out of reserves, the currency collapses due to market forces and, therefore, the commercial bank reserve (Cash) upon which commercial bank money is expanded devalues, and so bank money, too, devalues. It is all stacked upon the CB reserves from whence the first bank money was born.

And as you can see above, the natural makeup of a CB's reserves is gold. But that changed in 1922.

Now when a Central Bank's finite reserves are ultimately exhausted in the international defense of its currency, its local commercial bank's reserves (Cash) are naturally devalued by the international market. And with the commercial bank reserves being what commercial bank deposits are redeemable in, so too is local money devalued.

But in 1922 they "solved" this "problem" with the introduction of theoretically infinite reserves. Theoretically infinite reserves can equal to infinite base money.

Of course it doesn't take a genius to figure out that infinite money expansion does not automatically translate into infinite real economic growth. And so we need to look at who, in particular, was the prime beneficiary of these newly infinite reserves.

In 1922 the Governor of the Bank of England which had around 1,000 tonnes of gold at the time (less than the Bank of France which had about 1,200 tonnes) proposed economizing the use of gold by declaring British pound sterling and U.S. dollars to be official and recognized reserves anywhere in the world. The "logic" was that dollars and pounds would be as good as gold because they would be redeemable in gold on their home turf.



The U.S. has run a trade deficit every year since 1975. Since 1971, the U.S. government has run its national debt up from $400B to $15,500B, and that foreign Central Banks buying this debt have been the primary support for both the relatively stable value of the dollar and the perpetual nature of the U.S. trade deficit.

But it wasn't always this way. Before 1971 the U.S. was running a trade surplus and the national debt level was relatively steady during both the gold-exchange standard and the Bretton Woods era. During the gold-exchange standard the national debt ranged from about $16B up to $43B. It increased a lot during WWII to about $250B, but then it remained below its $400B ceiling until 1971.

Another big difference during this timeline is the flow of gold. The U.S. experienced an uncontrolled inflow of gold from the beginning of the gold-exchange standard until 1952, and then a stunted outflow ensued until it was stopped altogether in 1971.

The real problem was and is - the monetary privilege that comes from the rest of the world voluntarily using that which comes only from US printing press as its monetary reserves. It was and is, "the outcome of an unbelievable collective mistake which, when people become aware of it, will be viewed by history as an object of astonishment and scandal."

Another angle which was apparent from the very beginning—was that of international lending. It basically worked except that the net international (trade) payment was an international loan. Remember that the U.S. was the prime creditor to the world following both wars. This may partly explain the inflow of gold payments that brought the U.S. stockpile up from 3,679 tonnes in 1920 to 20,663 tonnes in 1952. A dollar loan was the same as a gold loan and was payable in dollars or gold. But lent dollars returned to NY like lent pounds returned to London.

This is an excerpt from FOFOA
--------
Hello Victor,

The point of JR's excerpts is that the real threat to the dollar lies in the physical plane (real price inflation) rather than the monetary plane (foreign exchange market). The source of the price inflation will be from abroad and it will be reflected in the exchange rate, but the price inflation, not the FX market, is the real threat.

Imagine a toy model where the entire United States (govt. + private sector) imports $100,000 worth of stuff during a period of time (T). T repeats perpetually and, just to keep it real, let's say that t = 1 second, which is pretty close to reality. So the US imports the real stuff and exports the paper dollars. But the US also exports $79,000 worth of real stuff each second. So 79,000 of those dollars come right back into the US economy in exchange for the US stuff exports.

Now, in our toy model, let's say that the US private sector is no longer expanding its aggregate level of debt. And so let's say, just for the sake of simplicity, that $79,000 worth of international trade over time period T represents the US private sector trading our stuff for their stuff. And let's say that the other $21,000 worth of imports each second is all going to the USG consumption monster.

So the USG is borrowing $21,000 **from some entity** each second and spending it on stuff from abroad. This doesn't cover the entire per-second appetite of the USG consumption monster, only the stuff from abroad. The USG also consumes another $114,000 in domestic production each second, which is all the domestic economy can handle right now without imploding, but we aren't concerned with that part yet.

Now, if the **from some entity** is our trading partner abroad, then there is no fear of real price inflation. The USG is essentially borrowing $21,000 this second -- that our trading partner received last second -- and the USG will spend it again on more foreign stuff a second from now and then borrow it again. See? No inflation! The same dollars circulate in perpetuity, the real stuff piles up in DC, and the USG debt piles up in Beijing.

But what if that **from some entity** is mostly the Fed, and has been for two years now (and they are calling it QE only to make it sound like its purpose is to assist the US private sector)? If that's the case, then the fear of real price inflation is now a clear and present danger to "national security" (aka the USG consumption monster). Not so much for the private sector which is now trading our stuff for their stuff, but mostly for the public sector which trades only $21,000 in paper nothings, per second, for their stuff.

Under this latter situation, you now have $21,000 per second piling up outside of US borders and it's not being lent back to either the USG or the US private sector (which has stopped expanding its debt). It's either going to bid for stuff outside or inside of US boundaries.

The USG budget approved by Congress does account for this $21,000 per second borrowing, but it also assumes reasonably stable prices. If the general price level starts to rise faster than Congress approves new budgets, this creates a problem for the USG. It's not as big of a problem for the US private sector, since we are trading mostly stuff for stuff. If the cost of a banana rises to $1T, it will still only cost half an apple. But if you're relying only on paper currency to pay for your monstrous needs, real price inflation is an imminent threat!

FX volatility has more to do with the changing preferences of the financial markets. It is a monetary plane phenomenon on most normal days. But it will also show up when the price of a banana starts to rise.

When the USG cuts a check, it is drafted on a Treasury account at the Fed. Sometimes those funds are all ready to go in the account. Sometimes they are pulled (momentarily) from a commercial bank into the Fed account for clearing purposes. And sometimes the Fed simply creates them, adding a Treasury IOU to its balance sheet.

This latest Executive Order paves the way for the Fed to start stacking not only Treasury IOUs, but also Commerce Dept. IOUs, Homeland Security IOUs, State Dept., Interior, Agriculture, Labor, Transportation, Energy, Housing and Urban Development, Health and Human Services, etc… IOUs. Whatever it takes to keep the real stuff flowing in! If you think the Fed's balance sheet looks like a gay rainbow now, just wait!

But from a financial perspective, if you are stuck in dollar assets when real price inflation takes hold, you are going to want out. And the quickest way out is through the currency itself. So we could see a spike (outside of the US) in the price of Realdollars even as the dollar is collapsing against the physical plane and the USG is printing like crazy to defend its own largess! How confusing will that be to all the hot "experts" on CNBC?

The financial markets can cause dramatic volatility in the FX market, and vice versa. But that's all monetary plane nonsense. A small change in the physical plane might not even register at first in the FX market, especially if a financial panic is overpowering it in the opposite direction. But even if the dollar doubles in financial product purchasing power terms (USDX to 150+), that's not going to lower the price of a banana in the physical plane while the USG is defending its consumption status quo with the printing press.

Sincerely,
FOFOA
-------

The U.S. is now the world's premier debtor while it was the world's creditor back in the 30s. But in both cases the dollar currency is being continuously recycled while notations recording its passage pile up as reserves on which foreign bank money is expanded while the U.S. counterpart of reserves and bank money is not reduced as a consequence of the transfer.

If you print the currency that the rest of the world uses as a reserve behind its currency, that alone enables you to run a trade deficit without ever reducing your ability to run a future trade deficit. Deficit without tears it was called. For the rest of the world, running a trade deficit has the finite limitation of the amount of reserves stored previously and/or the amount of international liquidity (reserves) your trading partner is willing to lend you.

Another thing that happens is that, as the printer of the reserve, the rest of the world actually requires you to run a balance of payments deficit or else its (the rest of the world's) reserves will have to shrink, and its currency, credit and economy consequently contract. So to avoid monetary and economic contraction, the world not only puts up with, but supports your deficit without tears.

I mentioned Triffins dilemma before. It basically means national currency acting like an international currency causes problems between national and international objectives leading to severe market turmoil.

From Wikipedia

"In 1960 Robert Triffin testified before the United States Congress warning of serious flaws in the Bretton Woods system. His theory was based on observing the dollar glut, or the accumulation of the United States dollar outside of the US. Under the Bretton Woods agreement the US had pledged to convert dollars into gold, but by the early 1960s the glut had caused more dollars to be available outside the US than gold was in its Treasury. As a result the US had to run deficits on the current account of the balance of payments to supply the world with dollar reserves that kept liquidity for their increased wealth. However, running the deficit on the current account of the balance of payments in the long term would erode confidence in the dollar. He predicted the result that the system would not maintain both liquidity and confidence, a theory later to be known as the Triffin dilemma. It was largely ignored until 1971, when his hypothesis became reality, forcing US President Richard Nixon to halt convertibility of the United States dollar into gold, an event with consequences known as the Nixon Shock. It effectively ended the Bretton Woods System."



Basically he was recommending creation of SDR.

The USG was now relying on treasury to create new units of currency and Fed was buying it. To enable doing this they raised the debt ceiling, many times.



Here is the easy explanation as why - THE DOLLAH HAS LOST ITS VALUE-

The U.S. privilege which began in Genoa in 1922, and was so complicated that only one in a million could even fathom it in 1931 and 1960, became as clear as day for anyone with eyes to see after 1971. And so, to see it in real (not nominal) terms, we can very simply look at the percentage of our imports that is not paid for with exports. So simple, which might be why the government doesn't publish that number and the media doesn't talk about it. All you have to do is compare the goods and services balance (which is a negative number or a deficit every year since 1975) with the total for all goods and service imports.

That's comparing apples with apples. For example, in 1971 total imports were $60,979,000,000 and total exports were $59,677,000,000 leaving us with a trade deficit of $1,302,000,000. It doesn't matter what the price of an apple was in 1971, because whatever it was, we still imported 2.14% more stuff than we exported. 1,302 ÷ 60,979 = 2.14%.

A trade discrepancy of 2.14% in any given year would be normal under normal circumstances. You'd expect to see it alternate back and forth from deficit to surplus and back again as it actually did from 1970 through 1976. But it becomes something else entirely when you go year after year (for 36 years straight) importing more than you export. And that's the visualization of the U.S. exorbitant privilege at 1971.

Points to remember:
1. The U.S. exorbitant privilege peaked in 2005 (before the financial crisis) and is now on the decline, meaning it is no longer supported abroad.
2. The U.S. government (with the obvious assistance of the Fed) is now in defensive mode, defending that inflow of free stuff with the printing press.
3. The U.S. federal government budget deficit (DC's "needs" minus its normal revenue) **eclipses** the trade deficit by more than a 2 to 1 margin.

So what could possibly go wrong? The recession has already contracted the U.S. economy, all except the part that resides in Washington, DC. And just to maintain its own status quo (!) USG federal government needs to insure its national business of exporting empty containers at its present level.

What could go wrong? Prices! If the price of an apple doubles, what do you think happens to the price of a full container? Those of you who think we are due for some more price deflation in the stuff that the USG needs to maintain its status quo should really have your heads examined. Even Obama is winding up to pitch the whole ball of twine at the problem. He just delegated his executive power to print until the cows come home to each of his department heads. Here is the Executive Order -- National Defense Resources Preparedness:

"To ensure the supply… from high cost sources… in light of a temporary increase in transportation cost… the head of each agency… is delegated the authority… to make subsidy payment.

I hope this answers your question.

[Suraj]

Rupay is intended as a desi payment scheme to replace visa/mastercard. Admitedly it has not caught on, but once it does it has the potential to make a hge difference int the outflow of cash . Everytime you pay using visa/mastercard 1-3% gets paid to visa/mastercard just for using their network. This is totally a avoidable waste for India.

Absolutely, the Rupay system is a critical necessity for India. To understand why it's needed, just see what the west is doing to Russia. The Russians have no domestic card transaction clearance system. Every Russian issued card runs on Visa/MC/Amex/Discover network. The west cut that off, which means all those cards are dead. The Russians turned to the one alternative they have - UnionPay, which is the Chinese card clearance system, set up in 2003. RuPay is ours. It was only set up in 2012. It'll take years of diligent effort to popularize it, but please don't mock it. It's important that India have a completely independent card clearance system in place for the long term.

[negi]

(as for using rupay card WTF is that ? I haven't seen it , no one uses it , I am sure 95% of BRFites here in desh don't have one) .

Rupay is intended as a desi payment scheme to replace visa/mastercard. Admitedly it has not caught on, but once it does it has the potential to make a hge difference int the outflow of cash . Everytime you pay using visa/mastercard 1-3% gets paid to visa/mastercard just for using their network. This is totally a avoidable waste for India.

Sire I know what it is meant for but it will not catch up in India unless it is backed by PSU banks . Ask HDFC and ICICI to roll out rupay CCs and I shall happily throw my MC-Visa into trashbin but we are only using rupay as a Arjun MBT on 26th january parade . Instead of putting that additional 5k crore in that MNREGA chootiyapa Govt could have invested that in Rupay network , Brazil has their own such system (I did not see many Visa-MC there).

[Suraj]

negi: regarding RuPay, you're making the same mistake you did with the PAN/Aadhaar requirement on transactions. RuPay requires an underlying investment in a clearinghouse system to ensure it works. That means an investment in the bankend. That investment is accomplished over time by starting out in a pilot manner and ploughing in all incremental transaction charges into investing in the card transaction clearing system. Banks themselves issuing such cards requires a nationwide backend to be in place, and banks then connecting and trialing the system before it goes live nationwide with aggressive PSU-bank backed card issuance. Visa/MC already have the backend in place, and they've already made most of the sunk cost investments such that adding to their network has only a small incremental cost to them. For any new player, they have to build out everything from scratch. Even the Chinese took 20 years from conceptualization in 1993 to the creation of UnionPay in 2003 to it really starting to take hold only in the last few years. Your argument is analogous to demanding why a 3 year old cannot solve calculus problems.

[negi]

Where I never made any such remark on PAN , all I said is PAN alone is useless unless you make it cashless . I have done enough txs here in India and seen how the system is gamed, what is spoken in lok sabha has little relevance on the ground if the policies are not practical. My point about Rupay is in the same context it has little relevance to balck money or cashless txs today , maybe in future it will add value only time will tell .

The argument started with my assertion that Jet li's policies on cashless txs is a hoax because he has not done anything to prevent people from dealing in cash . Even today as we speak you cannot make a deposit more than INR 15k INR in cash without PAN but that means nothing unless you levy a fine for depositing large quantities of cash. People are gaming the system by using cash , only way is to prohibit it's use in large sums . Jewelry stores, car showrooms , real estate this is where cash is being used for txs .

[Suraj]

The government is not in a position to implement a cashless system today. They can announce their intention to do so, but it takes several steps:
* Universal bank account access. Just about accomplished with the PMJDY push, finally.
* Replace cash transaction from bank account with card transaction. Long way from getting universalized. Requires BOTH universal ID and universal debit card issuance and usage. That needs the Rupay backend to be fully built out and banks ready to issue cards using it. For ID, everyone needs to have PAN/Aadhaar. Ideally they'd combine that into one too.

"unless you levy a fine for depositing large quantities of cash" sounds great on paper. Extremely hard to implement politically, because the most effect way to do something is to first have a working alternative in place that's used well by good number of people, and THEN criminalize the large cash business. Do the second before the first, and what you get is creative forms of evasion and illicit business. History is littered with examples of it. All such initiatives came from high minded ideals, but failed in the face of human ingenuity.

Here's an example: tomorrow GoI bans all car sales above Rs.10 lakh from being in cash. It must be in cheque or other trackable form. By tomorrow evening someone will start a Rent-to-Own business. They'll buy cars using acceptable means and offer it as 'permanent rentals' to people who pay them installments... in cash. That's just one example of what someone might think up. Look, it's a fact repeatedly proven by history that you cannot ban humans from doing something unless they have an equally good alternative that is in their own best interest to use. The government is not in a position to argue that overnight, and they should not therefore attempt to randomly ban things that will only backfire on them politically.

In practical terms, GoI has an incentive to push for a cash free economy. They also have an incentive to look away at cash transactions in commercial goods transactions. Why ? Because all those transactions turn black money into white. The suitcase of cash that a MB dealership gets for an E class just joined the formal economy from the informal one. Similarly, the government has both an incentive to support a vibrant real estate sector and simultaneously clamp down on black market transactions. The latter is something they can handle simply by implementing something like a tax deduction on EMI interest, provided that the interest is paid by non-cash means.

I don't think they government is as dumb as you think they are. In fact I think they're much smarter than they're given credit for. The dumb decisions were made in the past - PC randomly applying taxes they proved very unpopular, like the Bank Cash Transaction Tax. It was a supposedly great idea towards enabling cashless transactions. It didn't last 4 years - came into effect 2005, withdrawn 2009. Why demand that GoI do more of the same ?

[negi]

^ Heh you think it is not there already, you need to go to Cochin and other parts of kerala the latest scam is to get your favourite Audi/BMW/Merc which should be older than 2(or is 5) years from Dubai to India and then show it on lease (company or otherwise) that way you can get a imported luxury car in India without having to pay 100% import duty . I know people who have done this.

PC actually to his credit made some good moves they were rolled back in late 2009 when that idiot MMS rolled them back. Check the tax slab fluctuations between 2007 and 2009.


The tax slabs in 2007-08 look much more progressive (check the link I posted a few posts back) and better than they are today . In fact look at Massa the torch bearer of capitalism they have 7 tax brackets they tax their rich and what do we have here ? A flat rate above everyone in 10 lakh bracket ?

The poor are not in a position to use cards but at the same time they are not the ones depositing lakhs in cash in a financial year , they deal in cash alright but in small quantity what I am talking about is to catch hold of big transactions and all that is implementable within existing framework , issue is intent .

[Suraj]

I don't see anything especially fantastic about the tax slabs in the late 2000s. It had the same problems that exist now - the lack of tiers and/or lack of movement of the tiers. A simple fix would be to index the tiers with inflation, so that the move up every years regardless of whether the budget announces anything. Unfortunately something like that requires a continuous level of fiscal responsibility. This government is in the process of fixing two opposing issues - fix 10 years of accumulated problems AND foster growth with what little remains. Part of that growth needs to come from public spending, combined with effective debt market and bankruptcy codes, because companies have very red coloured balance sheets lately. In that regard, the budget covers all the immediate macroeconomic bases.

As for 'catch hold of big transactions' my point is simply that what you think is implementable, really is not. In fact you just proved it with the Cochin example. The government has every intent, but seldom the means. The Cochin example exists because people can simply make use of broken import/leasing/rental models to circumvent the law. What is a 'simple' cashless transaction requirement suddenly balloons into a much larger problem of fixing import laws, leasing laws, vehicle registration law, and more. What you think is just one simple fix is really not so. It needs plugging dozens more holes, rewriting laws to block all the potential loopholes, implement cashless transaction framework etc.

Without a working alternative in place that people have already started moving en masse to, a ban does nothing but foster more underground activity. The ones with the means are also the ones most capable of evading any efforts to catch them, just as your Cochin example and my own hypothetical one. And yes, I am aware of it too, since I'm from Cochin too, and that's what I used partly as an inspiration for my own example. The very fact that the Cochin situation exists shows how well this 'catch hold of big transactions' thing works. The government simply does not have the enforcement capability not the tracking technology in place, and therefore they cannot assert a ban right now. But they're absolutely setting the groundwork. PMJDY did in 9 months what could not be done in the previous 65 years - give practically every household a bank account.

I'm not mocking your intent. It's a very valid one. I just think the government is much more cognizant of their own shortcomings at implementing what you ask, but are also showing diligence at accomplishing the task of laying the groundwork for it. My emphasis is simply that the assumption that you can simply fix a problem by banning cash transactions on certain things is quite wrong, and the thought that it's not done simply for lack of intent is just as wrong. If only things were so simple that all you needed to fix something like this was 'intent'. It's not.

[member_28108]

Rupay is intended as a desi payment scheme to replace visa/mastercard. Admitedly it has not caught on, but once it does it has the potential to make a hge difference int the outflow of cash . Everytime you pay using visa/mastercard 1-3% gets paid to visa/mastercard just for using their network. This is totally a avoidable waste for India.
Sire I know what it is meant for but it will not catch up in India unless it is backed by PSU banks . Ask HDFC and ICICI to roll out rupay CCs and I shall happily throw my MC-Visa into trashbin but we are only using rupay as a Arjun MBT on 26th january parade . Instead of putting that additional 5k crore in that MNREGA chootiyapa Govt could have invested that in Rupay network , Brazil has their own such system (I did not see many Visa-MC there).

The Indian PSU banks , ICICI and HDFC indeed have Rupay schemes.

http://www.hdfcbank.com/personal/produc ... debit-card

https://www.3dsecure.icicibank.com/ACSW ... payFAQ.jsp

[Hari Seldon]

^^ Excellent. First step would be to issue Rupay cards to all sarkari employees and pensioners at all levels.

Once there's a critical mass of customers commercial establishments too would move towards accepting Rupay and so on. Or maybe I'm being simplistic onlee.

[gakakkad]

@ suraj..excellent thought about Russia sanctioned off from master card/visa and in a soup..this must be a long term vision of the Indian planners too...

can anyone find the statistical implications of raising service tax ?

[Supratik]

Rupay is already part of PMJDY i.e. 11-15 crore accounts. Even if 50% of those are serviced it creates a market. Also penalizing cash transactions at this stage like a communist country will lead to more black money. The only way to do it is to encourage people with incentives and penalties. For millions of people cashless transactions mean little. However, you can and should restrict cash transactions over a certain limit. May be they will do it in future when we have universal banking.

[subhamoy.das]

Anything the middle class uses, has become cheaper? Last I head only leather shoe has become cheaper. I am now having serious doubts about the "ache din" slogan....

[member_28722]

Sir, since you asked, here are my view points.
My primary gripe is that the Hon FM sahab himself had created a big hue and cry on raising the slab to 5L and now he had a chance to do that and he didn't even raise it by a rupee
Also since this government has spoken so much on black money, not reducing cashless transaction limit was a major dissapointment

* GST on track for April 1 2016

The only saving grace ....

Monetize some of the gold holdings in the form of our own govt issued gold coins. Very good move, that should have occurred decades ago

Hogwash ... what negiji has already pointed out is the fact about gold trade in India

While IT exception was unchanged from Rs.2.5 lakh, many deductions have been provided for other items, totalling Rs.4.5 lakh if used. This is much better than a fixed deduction.

Negative, all this is useful only if you have an income of 10L or higher and usually people in that category don't feel the pinch that much. The main sufferers of rising prices are people of income around 5L and there is no relief for them.
Also the service tax is up by 2%, so going to restaurants, movies etc ... becomes more expensive.
Also per the rail budget freight rate is going up, so you can expect cost of grains etc ... to go up.
Also trains are primary means to transport coal, so there is a good chance of thermal based power cost to go up.
All these will give a significant pinch in 2015
This is even more bad, since effective inflation in 2014 was already 10% and there have been almost no major hikes in industry and rural incomes are reducing

Wealth tax abolished, replaced with a progressive tax surcharge for incomes over Rs.1 crore. This will generate 10x as much per year as wealth tax.

There is no replacement!! The surcharge was already in place at 10, this is now up to 12%. The figure being quoted is how much will be collected by 12%(theoretically). Can we see how much 10% was actually collecting? This will give an idea of how much realistic collection will be. If this is less than wealth tax, then essentially our FM has made life better for the rich

Move towards cashless transactions and benami transaction bill to transform black economy into white.

Would have had more punch if all retail transactions above 50K were made cashless. Who carries around 50K for buying stuff unless its illegal money. Till such measures are taken this is toothless.

Rs.1.25 lakh crore ($21 billion) in public spending including Rs.70000cr in capital investment.

Depends upon what is being invested in

Emphasis on replacing subsidies with direct cash transfer. Economic survey underlined how subsidies benefit the rich more than the poor, and that cash transfers are more effective.

UPA-2 scheme being improved and implemented

Nationwide social security net in the form of .accident, disability and life insurance coverage. Extremely important for those living a marginal existence

Good long term scheme provided the Government ensures that it does not become a mess like the US one has become.

Simplified corporate tax structure. Lower rates, fewer exemptions means better compliance and more revenues

Only in theory, since effective exemption was 23% and now its 25%, so corporates will actually pay more. It may spectacularly backfire as well.

[gakakkad]

Anything the middle class uses, has become cheaper? Last I head only leather shoe has become cheaper. I am now having serious doubts about the "ache din" slogan....

everything in the long run...more manufacturing in India-less imports-cheaper cost of manufacturing-positive balance of trade-current account surplus-appreciated currency-cheaper prices...

Please note that government is not and should not be in the business of making things cheaper...price is decided by the market...government merely collects a tax on the price and increase or decrease the tax collection..

we must change this thought procedure of cheaper/more expensive...if the government is able to lower the cost of manufacturing by providing cheaper power, cheaper land and faster clearances..things become cheaper regarding the % of tax collected over them...if people find price less affordable due to increase service tax , companies would be forced to sell for cheaper...and they have been given a breathing space by lower corporate tax...

[gakakkad]

Budget 2015: Indirect taxes– One of the growth catalysts

http://economictimes.indiatimes.com/art ... aign=cppst

It is almost second-nature for India to expect something out of every budget. This budget is no different. However, one could certainly say that probably bets placed on this budget far exceed what is normally seen. It is almost as if the expectation is that it would be 'road-map' budget for the next 4 years of this present Government.

I expect this budget to be 'Growth-focussed Budget'. Focus would be on encouraging investment, improving productivity, reducing compliance and more effect ..

[subhamoy.das]

I think AKJ single handedly sunk the NAMO ship. Are these folks stupid or middle class is not their vote bank any more. Hell, with 20L per annum, it is still basic living for me and all I can save is my EPF and that too when my house is paid for. I can image what will be the situation of somebody doing 5L per annum after this budget. He will be forced to work hard and pretty much stay at home on the week ends! WHAT A LET DOWN!

[gakakkad]

Budget 2015: How indirect taxes will act as growth catalysts

As envisaged, this budget has focussed on encouraging investment, improving productivity, reducing compliance and doing away with non-adversarial tax administration. Several key indirect tax reforms expected by Industry have been met by the proposal under Budget 2015-16.

From a service tax perspective, the biggest change to impact service providers is the increase in the service tax rate. The effective rate is increased to 14% and an incremental Swachh Bharat cess of 2% to be levied on ..


http://economictimes.indiatimes.com/art ... aign=cppst

[member_28722]

^^^ That's a very risky way to do things
In typically planning we cannot assume that everything will happen goody goody and plan accordingly. This budget assumes that a lot of things will positively happen. Its all good projecting an economic growth of 8% or even in double digits but we cannot and should not plan our policies around the projected growth.
If the economy grows at 8% or above in 2015, if lots of new jobs are created, if agricultural growth is rekindled etc ... then this budget will be excellent, but if they do not then we have a major problem on hand.

All policy planning should only be around current figures, while this budget seems to have been planned around assumed figures.

[subhamoy.das]

Common people donot care boss! They have been hearing that things will get fixed in the long run for last 60 years. Common people want to see a fall in price of goods and service. period. That is what "acche din" is all about. They are not interested in economic mumbo jumbo. This budget has just jacked up the price of all services and has brought in bure-din.

[gakakkad]

so he is hedging for positive things to happen... it is a risk I admit...but there was nothing else he could have done...

if he reduces all taxes , where does the money come from...suddenly doing away with subsidies would be disastrous ... the devil of this budget lies implementation... yes it will be a disaster , should crude climb up to 3 digits in the next 6 months...or we have a nuclear war...or a 20% reduction in crop output...but these would have been pretty bad in any case...

what he did was predictable ...an increase in indirect taxes was predicted and talked about by many... many businesses had already braced for this...it is not really all that bad.

there is nothing I can think of that could have been done but was not done...w.r.t gold monetization , read Turkeys example as a case study...it is not hogwash..it is well thought after..

.what proportion of household income goes in direct/indirect taxes ? it is just doom gloom piskology that we are wired to ..a multiplex ticket cost 100 INR...2 % Increase in service tax would make it cost an additional 2 INR more...increase in restaurant bill would be 10 INR...

[member_28722]

Of course there are... things have gone up by 10% and expected to become more expensive with rail budget actions. So increasing the tax slab to 3 or 3.5 was not a major problem. The current tax slabs are fleecing the lower income people in India. Its pretty stupid to let it continue as it is.

No individual item feels expensive, but when you add all things together, then the pinch is there. And btw Multiples tickets 100, in which world. You won't even get CCD coffe for that much. Even a crap movie like Ab Tak Chappan 2 has a ticket of Rs. 280 today for basic seat in multiplexes.

[gakakkad]

common people would love a bullet train..and 24 hours uninterrupted electricity...good roads ... and good education..an increase in probabilty for their kids going to AIIMS/IIM/IIT ... denmark has close to 60% direct tax rate...and Danish people have excellent social and health cover... they don't really mind it...

the budget is excellent as long as it is implemented right.. if it is implemented badly , it ll be a mess..and they ll pay for it in the next electoral cycle...

[Virupaksha]

I do not agree with removing the wealth tax. It is only with wealth tax + income tax that a continuous stream of income counting can be done by govt.

It provides a disincentive for people who simply hoard wealth without putting it to productive use. It should not be large but it should exist.