The Economy Is Down: Bring Back The Primacy Of Cash

The Economy Is Down: Bring Back The Primacy Of Cash

Even as a cyclic upturn is starting to send out green shoots to revive India’s slowing economy, we need to take a few lessons to heart before the next downswing. A cyclic rescue is not the same, after all, as one engineered by good economic policy. But for the year ahead, we can expect much better times. Call it luck if you like. A cycle swinging upwards has a way of compensating for all the pain of the stagnant years.

The stock market has begun to revive. It won’t be surprising if by this time next year, the Sensex is at 50,000 and the beaten down midcap and smallcap stocks have returned over 50% from their lows. Rural consumer demand, tired of its self-imposed austerity, has picked up. The automobile sector showed some spirit over Diwali, and the new launches are doing well.

Gold, expensive at Dhanteras, even as its prices are declining now, sold in several tonnes countrywide. We have more gold in our homes than all the bank vaults of the world put together. But the government’s reported plans to get hold of it is a bad idea. Indians hoard gold precisely as a hedge against instability and bad governance. And for traditional, cultural, reasons - besides crafting exquisite jewellery from it.

The telecom sector, hit by huge “frequency” rent arrears after it lost its lawsuit against the government, has decided to raise tariffs. It has realised that over a billion customers collectively, many of them smart phone/internet broadband users, will not reduce or give up their phone habit just because there are going to be higher costs.

But what has been going on for most of these six years since 2014? Why is every Modi government union budget and economic incentive tentative?  How much of the  current slowdown is due to global recessionary winds and US-China tariff wars? What part of the downturn is the Indian economy doing badly because of its own misguided policies?

Is it time for the government to take steps to incorporate the cash economy by mainstreaming it? For this, it will have to remove most of the taxes and laws that make it profitable to cheat. Gold also used to be smuggled when there was a considerable arbitrage opportunity. Similarly, the hawala trade,  till the differences in rates was eliminated,  was the preferred, efficient, and profitable way to send money back to India from the Gulf and elsewhere. India is, to date, consistently the No. 1 beneficiary of inward remittances in the world. It receives billions of US dollars worth every year.   

The government strategists tasked with the issue, as well as the finance ministry bureaucracy that advises it, spend most of their time on devising ways to maximise government revenue. This means ever increasing taxation. Albeit, the resulting revenue is to support various development and welfare programmes, pay interest on loans taken, return monies that have fallen due. But, these taxes also go towards supporting the very expensive and ever expanding government.

Perhaps these same people could benefit everybody by devising ways to fuse the bank and cash economies together. They may not get as much by way of direct taxes which would need to be abolished. A select few, compared to the overall population of over 1.3 billion, have to foot all the direct and corporate taxes even after seven decades since independence. This has built a certain natural antagonism into the system and attempts to enforce taxation strictly are bound to be resisted in inventive ways.

Does the government need to change the tone of its economic policies to become more inclusive of all the productive forces in the economy? It would benefit from much faster GDP growth if the entire economy was pulling in the same direction. 

Indirect taxes paid by all citizens and visitors to this country are also too numerous, but at least even-handed. Has the government ever stopped to think what excessive taxation is doing to growth?

A number of low yielding custom duties and others such as capital gains on shares and property should be abolished. These are routinely gamed by those affected, resulting in pools of black money formation and capital flight too. No taxes in this area would mean that people could put their profits to productive use beyond a cramped consumption. It would go a long way towards restoring the elusive animal spirits.

The government naturally aims its welfare programmes to benefit the very poor, both rural and urban, and this is laudable. But it is the middle classes and above, the rich, services, business, industry, that fuel these born-again socialist furnaces. It is these citizens that account for a country’s credit rating.

This aspect needs to be revisited and revamped. Rural India including the entire landed and landless farming universe, may contain 60% of the  population, and, no doubt, a high percentage of the voters, but it contributes less than 15% of GDP now.

Has the government also overdone its digital push? Is it, inclusive of the attempt to force fast-tag on every vehicle plying on our toll-charging highways, a kind of financial put-it-all-in-the-bank rape?

The well- intentioned idea of attacking black money, must be supplanted with new incentives that come out of new thinking. And not just the supposedly virtuous white money universe. Otherwise, you damage, if not take away, an engine of growth that is almost a parallel economy in size.

When you bravely flush out most of the rabbits from the underbrush in the banking universe, long used to evergreening bad loans,  it is bound to stand exposed. The public sector banks, as well as some of their racier private sector cousins, have reached this pass because they were pigs in the same  wallow along with their customers. As for the political overlords, it could not have happened, all 11% -15% of the bank funds that are NPAs, without the politicians receiving their cut.

And the answer cannot be just to top up these corrupt banks with fresh tax payer funds!

Real estate, highly leveraged at the best of times, cannot recover without the excitement of speculation. Speculation demands cash under the present system. If you suck it out, all you’re left with are the 10 to 20% of end-users. The office rental sector is reviving on its own, and this is good news indeed. 

However, to rescue millions of flat buyers stuck in unfinished projects, you need the speculators back. Rs. 25,000 crores offered by the government is much too little. The taxes on the sector must go, including the high stamp duties.

At its best, this much maligned real estate industry represented 12% of GDP, almost as much as farming. It supports at least 50 industries and millions of jobs in its wake. Can the government policy of housing for all by 2022, which is essentially low-cost housing for those who  currently live in hovels, be a substitute for the near death of real estate?

The synergy between a booming real estate market and Dalal Street is also gone. The only money coming in is from FIIs who invest according to their own lights. The Government of India cannot do much about how FIIs perceive their priorities. If it suits them, they come. If it suits them, they go.

The GST is a stream-lined tax, though far too ubiquitous for comfort. But it is easy enough to dodge if you make the sale below the radar in cash with no bill. This is why collections are declining. The answer is to make the GST tax low, with just one slab, applicable not to everything, but a selection of goods and services. It should then be frontloaded without the complexity of the present system. Even now, one can’t dodge GST in those instances when the person before your vendor has notched it up already.

Besides, every state keeps the juicy items out of GST. They profiteer on fuel and liquor, for instance.

The job of government is to facilitate growth in the economy, not make the whole country swim upstream, however laudable its intentions.Particularly, when it places no curbs on its own excesses.  

The primacy of cash must be acknowledged, and the government would do well to come to terms with it. Economics too has its own politics, and this highly political administration would do well to pay heed.

(1,393 words)

For: The Sunday Guardian

December 3^rd, 2019

Gautam Mukherjee