Demonetisation not the only reason
.
Is the Indian economy slowing down or is it on a correction path? Was the high growth rate of 11.4 per cent in the first quarter of 2010 an aberration? The country is stalked with many questions and myriad problems.
Jobs, a key indicator for the economy, are simply not growing. Investments are not coming from internal sources. Foreign Direct Investment promises are there but at the actual level the pouring is rather slow. People invest when they have assurance of a return. The FDI is a long-term commitment so the wariness is more the normal.
Are we erring? May be. Many, including Finance Minister Jaitley, attribute the present sudden fall in GDP growth of 5.7 to demonetisation. It may partly be true. But to say that it is all due to that factor alone isn’t true. It hit the cash flow –certainly a method for fast transaction. Bank transactions are cumbersome and expensive. All businesses avoid such methods. It certainly impacts delivery, demand and growth.
The banks are worried about getting flushed with unwanted funds. The Reserve Bank of India (RBI) has estimated that banks made a net interest income (NII) of Rs 4,500 crore from increased deposits in a quarter after demonetisation. It is a cost on the banking system.
The earnings were for an average deployment of Rs 6 lakh crore (current and savings account). The banks earned a return of 6.23 to 6.33 crore under reverse repos and market stabilisation scheme (MSS) as against the cost of current and savings accounts (CASA) deposits of around 3.2 per cent. This is the hidden economics. The RBI, people’s fund repository, in other words lost Rs 4,500 crore to banks. These also earned low on CASA as the money parked with them could not be put to productive use as the demand for investment slowed down.
Add to this the earnings of banks from unethically increased charges on bank transactions, approximately over Rs 600 crore. This is a drain on the Indian economy, as it parked a huge sum that was in circulation and boosting the economy leading to a slowdown in the business. It lost approximately Rs 5,000 crore to banks for no productivity.
While the Jan Dhan accounts surged to Rs 74,600 crore by December 7, 2016, it lost over Rs 10,300 crore by March 1, 2017 and total deposits slumped to Rs 64,300 crore. It should be considered a good sign. The money withdrawn from banks presumably goes into the system and creates a demand.
This also raises the question while those not so affluent are expected to have bank accounts, if they don’t and even most citizens don’t, it reduces social cost of maintaining accounts that earn less deposits. Why can’t the economy do without bank accounts?
The Indian economy is different from the western one. That is why the banking system suffered heavily post-2007-08 sub-prime western crisis. India needn’t have followed the western and give incentives to the richest 50 corporates, who added to almost Rs 12 lakh crore NPA. But overall growth of Indian economy was not hit. The parallel system of cash economy carried it to the boom of 2010. The banks did not do that.
The strength of the Indian economy is its mixed system – partly individual, partly corporate, partly public sector. And it is not centralised. Even if one aspect suffers the other gears it up. The present situation is caused as we are trying to choke other sources and route through only one channel i.e. the official, the banks. The purpose though not stated is to keep a keen eye on the movement of currency and to check the mythical black money.
The world needs to understand that people evade taxes, when the rates are too high and unaffordable. Often, the nation boasts that we have a mere 33 per cent income tax. It forgets it is up and above an atrocious 40 per cent indirect tax. Even GST has not brought it down effectively as it has not subsumed many other levies.
The country needs to rethink about its tax policies. Having lost four to five months’ wages to income tax and another 40 per cent to indirect tax, high cost of education, medical care, irrationally high rail fare and transportation cost, toll, innumerable so-called development cesses, such as airport, udaan et al, the people are left with little to spend. If they do not spend, the market does not thrive and every day and all over shops, malls (including that of large companies) and establishments are seen to close down.
The society has to change this unsavoury paradigm. Piecemeal efforts like demonetisation alone cannot boost the economy. To say that note ban did not reduce terror funding in Jammu and Kashmir and Chhattisgarh would not be correct. On other fronts, it may have been partially successful. But it was a bold and risky decision that the Narendra Modi government took. It has to now go beyond it and correct some of the ill-effects.
The note-ban hit the rural and remote area economies. The chocking of cash has had its toll. It followed an inspector raj and rent seeking. Even the rural mahajans (money lenders) were raided and suffered heavy demands. This is the bane of income tax. The government now has to have a complete look at the tax system.
The GST has done one good thing. Indirect tax realisation has reached around Rs 93,000 core in less than two months. There are flaws in it and the government has assured to correct it. The government also needs to assess how much tax actually a salaried or regular wage earner could pay. It has to reduce it or can even abolish IT.
The free flow of money to the salaried would boost every sector of the economy. Prime Minister Modi in Udaipur recently launched Rs 15,000 crore infra projects. But the user does not have the money to afford it. It has to be made affordable. Manmohan Singh’s regime unfortunately tightened screws and made things expensive.
Modi has to correct it. He has to ensure a free-flowing high growth economy without shackles as per the philosophy of Deendayal Upadhyay and Dattopant Thengdi. Let every individual and corporate take a leap.
By Shivaji Sarkar
www.fotavgeia.blogspot.com
.
Is the Indian economy slowing down or is it on a correction path? Was the high growth rate of 11.4 per cent in the first quarter of 2010 an aberration? The country is stalked with many questions and myriad problems.
Jobs, a key indicator for the economy, are simply not growing. Investments are not coming from internal sources. Foreign Direct Investment promises are there but at the actual level the pouring is rather slow. People invest when they have assurance of a return. The FDI is a long-term commitment so the wariness is more the normal.
Are we erring? May be. Many, including Finance Minister Jaitley, attribute the present sudden fall in GDP growth of 5.7 to demonetisation. It may partly be true. But to say that it is all due to that factor alone isn’t true. It hit the cash flow –certainly a method for fast transaction. Bank transactions are cumbersome and expensive. All businesses avoid such methods. It certainly impacts delivery, demand and growth.
The banks are worried about getting flushed with unwanted funds. The Reserve Bank of India (RBI) has estimated that banks made a net interest income (NII) of Rs 4,500 crore from increased deposits in a quarter after demonetisation. It is a cost on the banking system.
The earnings were for an average deployment of Rs 6 lakh crore (current and savings account). The banks earned a return of 6.23 to 6.33 crore under reverse repos and market stabilisation scheme (MSS) as against the cost of current and savings accounts (CASA) deposits of around 3.2 per cent. This is the hidden economics. The RBI, people’s fund repository, in other words lost Rs 4,500 crore to banks. These also earned low on CASA as the money parked with them could not be put to productive use as the demand for investment slowed down.
Add to this the earnings of banks from unethically increased charges on bank transactions, approximately over Rs 600 crore. This is a drain on the Indian economy, as it parked a huge sum that was in circulation and boosting the economy leading to a slowdown in the business. It lost approximately Rs 5,000 crore to banks for no productivity.
While the Jan Dhan accounts surged to Rs 74,600 crore by December 7, 2016, it lost over Rs 10,300 crore by March 1, 2017 and total deposits slumped to Rs 64,300 crore. It should be considered a good sign. The money withdrawn from banks presumably goes into the system and creates a demand.
This also raises the question while those not so affluent are expected to have bank accounts, if they don’t and even most citizens don’t, it reduces social cost of maintaining accounts that earn less deposits. Why can’t the economy do without bank accounts?
The Indian economy is different from the western one. That is why the banking system suffered heavily post-2007-08 sub-prime western crisis. India needn’t have followed the western and give incentives to the richest 50 corporates, who added to almost Rs 12 lakh crore NPA. But overall growth of Indian economy was not hit. The parallel system of cash economy carried it to the boom of 2010. The banks did not do that.
The strength of the Indian economy is its mixed system – partly individual, partly corporate, partly public sector. And it is not centralised. Even if one aspect suffers the other gears it up. The present situation is caused as we are trying to choke other sources and route through only one channel i.e. the official, the banks. The purpose though not stated is to keep a keen eye on the movement of currency and to check the mythical black money.
The world needs to understand that people evade taxes, when the rates are too high and unaffordable. Often, the nation boasts that we have a mere 33 per cent income tax. It forgets it is up and above an atrocious 40 per cent indirect tax. Even GST has not brought it down effectively as it has not subsumed many other levies.
The country needs to rethink about its tax policies. Having lost four to five months’ wages to income tax and another 40 per cent to indirect tax, high cost of education, medical care, irrationally high rail fare and transportation cost, toll, innumerable so-called development cesses, such as airport, udaan et al, the people are left with little to spend. If they do not spend, the market does not thrive and every day and all over shops, malls (including that of large companies) and establishments are seen to close down.
The society has to change this unsavoury paradigm. Piecemeal efforts like demonetisation alone cannot boost the economy. To say that note ban did not reduce terror funding in Jammu and Kashmir and Chhattisgarh would not be correct. On other fronts, it may have been partially successful. But it was a bold and risky decision that the Narendra Modi government took. It has to now go beyond it and correct some of the ill-effects.
The note-ban hit the rural and remote area economies. The chocking of cash has had its toll. It followed an inspector raj and rent seeking. Even the rural mahajans (money lenders) were raided and suffered heavy demands. This is the bane of income tax. The government now has to have a complete look at the tax system.
The GST has done one good thing. Indirect tax realisation has reached around Rs 93,000 core in less than two months. There are flaws in it and the government has assured to correct it. The government also needs to assess how much tax actually a salaried or regular wage earner could pay. It has to reduce it or can even abolish IT.
The free flow of money to the salaried would boost every sector of the economy. Prime Minister Modi in Udaipur recently launched Rs 15,000 crore infra projects. But the user does not have the money to afford it. It has to be made affordable. Manmohan Singh’s regime unfortunately tightened screws and made things expensive.
Modi has to correct it. He has to ensure a free-flowing high growth economy without shackles as per the philosophy of Deendayal Upadhyay and Dattopant Thengdi. Let every individual and corporate take a leap.
By Shivaji Sarkar
www.fotavgeia.blogspot.com
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