India scraps its two largest rupee notes in shocking anti-corruption move

As we had often come back to discussing economic benefits/impact of sports I thought it was about time for an economic discussion forum.
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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Mon Sep 04, 2017 4:42 pm

Jay's argument is that you could not do amnesty at a lower tax rate. I think you can. You put a lower tax rate, which may be the 75% of the average tax rate. And, then you say that whatever money is recovered will be sent out to everyone as a check. Or tax credit. People will be okay with getting some money back instead of complaining that someone got a better deal. Those someones are already getting a better deal at 0%. Now the deal would just be a bit less lucrative for them if they pay 15% taxes. I think Indians are pragmatic that they would be fine with it. But, I suppose if the check is for Rs. 5 per person, the "look, I am getting money back for you" argument may not work and there will be some animosity. Don't know whether it would have worked or not. But, if anyone could have made it palatable our PR master could have made it palatable to the masses saying hey, 15 is better than 0.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Mon Sep 04, 2017 5:36 pm

Mugundan wrote:
Mon Sep 04, 2017 2:40 pm
I go by figures being supplied by various writers and publications The Wire has been giving quite a lot of stats. I had already put a link to what Mr James Wilson wrote. He seems to have credible statistics, too since these figures look authentic.
Here's his latest:
https://thewire.in/173706/demonetisatio ... -tax-base/
This doesn't show tax collection has gone up 2016-17 compared to previous years. In fact it has gone down. This despite amnesties, threat of heavier taxes if wealth other than declared found out etc.
Nah, I spent considerable time going back to every document John Wilson finds. It is bad form for me to question the motives or analysis of a fellow-civil-engineer from my state, Kerala (that too a fellow-arm-chair-analyst with zero background in tax and finance matters), but I must. John Wilson is confusing the hell out of himself in his analysis where he uses a lot of good numbers and then makes assumptions on some key numbers. Then he says "I have solved the puzzle" in his latest blog. Only that he hasn't. As far I can see, he is using a number of about 78 lakh new taxpayers added in 2014-15 after the government changed the definition of Tax base which he himself points out (funny that I had ended up on the exact key item he yellow-marked, when I looked at the Finance Ministry's 2014-2015 annual report!), and a subsequent 99.8 lakh increase in 2015-16, to figure out the normal growth rate of the additional tax payers. In other words he is claiming that one data point under a changed definition the previous year as the "INCREASE in the increasing rate" (finding a second derivative change using the minimum 2 data points, that is!). He is claiming that the same "increase in increasing rate" found for 2015-16 can be used to define what is "normal" and compare the 2016-17 numbers against. And so he finds that we have added hardly anything new because of demonetization. That is stretching it. Especially when we are talking about numbers which show 10 to 20% growth in the tax base per year, the rate itself growing at 25+% per year, based on just a couple of data points. That too when things have been so much in flux due to tremendous increase in e-filing (like 30-40% per year over the last few years), changing definitions of the tax base itself, Pan/Aadhar details, a huge recent increase in the number of bank acconts, a tax amnesty, and then demonetization. Too many variables.

I am not saying for sure that John Wilson is wrong here. But I find more palatable the other number that the press has been quoting, that 60 lakh gets normally added with 10 lakhs leaving the base every year, which actually has some evidence in some of the tables he himself quotes on "effective assessees". But he chooses to focus on the numbers that makes his case - which has always been, as in all his blog posts on this, to prove that Modi is playing some game, and that the government is on some calculated propaganda to fool the people. Rather, my opinion is that Modi, Jaitley and others are totally confused about the numbers too, and are quoting some number or other that the minions are feeding them (the minions in the tax area themselves being quite unsure).

After seeing a lot of these numbers, and going back and forth quite a bit, the general feeling I have is that we did indeed add around 41 lakhs people to the tax base. I really cannot say how much of this is due to "borrowed account" manipulation using the proverbial cooks and drivers. I have to wait to see numbers on the increase of exempt filings. That would take a while to come, it seems. If anecdotal evidence is right, a good number of them should be exempt filings showing somewhere just below 2.5 lakhs, and about 40 or 50 lakh such new filings should be there. It could be as low as 5 or 10 lakhs (and much less of a success) if John Wilson's selective stats are correct. I doubt it, but who knows! We will wait and see.

The real problem is the urge in people like John Wilson to find whatever fault they can, with Modi, and in some of the Modi chelas to go to the other extreme to make it all sound incredible. The truth is somewhere in between, but whatever is the true level of money that became fluid recently, it is all good for the nation.
No, Jay, I didn't mean to say tax collection goes up only because of salary hikes. That is one of the reasons. Obviously when a Demon type of measure is taken a lot of people (if not all) are bound to come out with some portion (if not all) of their black money and pay taxes from 40 per cent to 50 per cent to 85 per cent or whatever. The total collection would thus have gone up.
True. But I was not focusing on the total tax collections, which has been going up quite nicely in recent years for various reasons, and should show a nice jump due to demonetization, as already seen. All I was talking about, was estimating the number of accounts where black money turned into white (and fluid, as an economic stimulus) - the total amount of which I would guess to be roughly Rs 2.5 lakhs per account. But the number of such accounts is still difficult to estimate. Maybe anywhere from 20 lakhs to 60 lakhs accounts, let us say :)

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Mon Sep 04, 2017 7:04 pm

prasen9 wrote:
Mon Sep 04, 2017 4:42 pm
Jay's argument is that you could not do amnesty at a lower tax rate. I think you can. You put a lower tax rate, which may be the 75% of the average tax rate. And, then you say that whatever money is recovered will be sent out to everyone as a check. Or tax credit. People will be okay with getting some money back instead of complaining that someone got a better deal.
The problem here is that there is still no enforcement mechanism. Even if you offered 20% tax, most tax cheats won't pay. Why should they? They have the rupees sitting with them, and they have not had to pay any tax on them. What changed, just because a tax amnesty offer for 20% tax is there? If you are hoarding 1 crore, and you know that there is no way the government can find your 1 crore currency, giving away 20 lakhs won't even enter the thought process of even 5% of the tax cheats.

The *only* ones who would take up on the tax amnesty are people who are aware that there may be some paper trail out there that could get to their money quickly, and they could go to jail. Those are the people who disclosed money at 45% tax last year. They disclosed some RS 65000 crore, that yielded about 30000 crore tax revenue.

But In most cases, tax cheats hoarding currency would not have any proper paper trial. If there are questionable numbers in the paper trail that the taxman can follow up on, it is on things like low-stated property values, which are so wide-spread that the tax cheats know that there is only very very little chance for our enforcement wing to ever catch any of them - because there are way too many to catch, and it is too difficult to establish legal culpability. So, beyond the money that got disclosed at 45% tax last year, we were probably not going to get all that much more disclosure, whatever low rate we would've set.

Bottom line - even 10% or 20% tax in an amnesty program would not have made a dent. Beyond the money that last year's tax amnesty netted, we would have only got say 5% of an estimated remaining 3 lakh crore hoarded currency to get disclosed. That is 15000 crore. We would have had 3000-6000 crore in tax revenue, and we would have netted less total, because we would be assessing only 10 or 20% on the top 0.65 lakh crore (unlike the 45% we got last year). That would have netted between 10K crore and 20K crore, instead of the 30K crore we got! Sending 20K crore back to say the lower 20 crore (80%) of households in India would be a Rs 1000 per household to spend as stimulus. Not too great.

So, in the absence of any way to enforce things, a tax amnesty does not work if it is done with low rates. Set the high rate, and get the money from people who are very worried that it is easy for them to get caught and go to jail -- that is all our option is. We did precisely that last year. (Same reason why Obama did the same thing on offshore accounts etc in the USA. High tax rates and penalties during the tax amnesty).

On the other hand, if the remaining 3 lakh crore of currency actually did move around to other accounts (cooks', drivers', relatives') at a 20 percent commission, we are looking at 60000 crore that got into the economy as white money to spend, and we did that while government got the 30000 crore from the tax amnesty already. Good and good, right?

If that wild guess from me proves correct, then 3-4 lakh crore black money basically became white and added a 0.9 lakh crore to the economy as tax revenue and direct money for people to spend. About 8% of the per capita income in about 5.5% direct income increase for "cooks and drivers" and the remaining going to the government and getting spent. Pretty substantial as a one time stimulus.

The question is on how much black money it was, that changed hands and resulted in commission payments. If it is 60,000 crore in commission to "cooks and drivers"? I don't know yet. But it has to be at least 20,000 crore and as much as say 1 lakh crore. I just don't see how 3 or 4 lakh crore of black money could've turned white otherwise. Or, maybe we just didn't have as much black money in India in currencies as we thought. Possible.

Hey, this stuff is beginning to make sense to a layman, me, after all :)

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by VReddy » Mon Sep 04, 2017 8:56 pm

[Offtopic post] I pinned this thread for myself to read through on Friday/Saturday but wanted to say, great job Prasen in making Jay active on this forum again! :clap: woohoo

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by arjun2761 » Mon Sep 04, 2017 9:55 pm

On the other hand, if the remaining 3 lakh crore of currency actually did move around to other accounts (cooks', drivers', relatives') at a 20 percent commission, we are looking at 60000 crore that got into the economy as white money to spend, and we did that while government got the 30000 crore from the tax amnesty already. Good and good, right?
Short term, though, excess liquidity may cause inflation (which is something Mugu alluded to). However, if the government doesn't choke production and productivity (as the Congress government did for the first 50 years of Indian independence), I am pretty sure our supply side will step up and make India a wealthier country overall.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Tue Sep 05, 2017 12:42 am

VReddy wrote:
Mon Sep 04, 2017 8:56 pm
[Offtopic post] I pinned this thread for myself to read through on Friday/Saturday but wanted to say, great job Prasen in making Jay active on this forum again! :clap: woohoo
You are welcome. He is one who never attacks the messenger but argues the points. I like that and admire and respect him. Great to have him back. Maybe he has moved to politics from sports. So, Jay, should we start a Politics-India Community forum and then we can hear from you everyday?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Tue Sep 05, 2017 2:12 am

No prasen. I am just killing time, waiting for India's football match against Macau in a few hours, though I may fall asleep by then. A down year for arguments in sports, it seems (maybe because of no Olympics, Asiad etc)... But Modi is always there to argue about.

And thanks VReddy. I will try to not go away too far, and come back to kick up some arguments every now and then :)

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Atithee » Tue Sep 05, 2017 3:48 am

How about some discourse on Babas then, Jay? I'm curious, is this a north India disease or same everywhere else in India? Does Kerala have such God men? Or are there equivalent catholic priests there?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by suresh » Tue Sep 05, 2017 4:31 am

Atithee wrote:
Tue Sep 05, 2017 3:48 am
Does Kerala have such God men?
Yes. Here is one ("God woman") from Kerala: Mata Amritanandamayi aka Amma

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Atithee » Tue Sep 05, 2017 4:43 am

Oh yes, the hugging one, right? She's largely controversy free although I'm sure there are some. Even mother Teresa had some.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by prasen9 » Tue Sep 05, 2017 5:19 am

I am no fan of Mother Theresa's, but, to the extent I know, wrt Mother Theresa there were no criminal controversies. Maybe some financial irregularities and the abject conditions she subjected the people who were dying. Despite having the money and capability of giving them a decent last few days, she refused to do so.

But, some of the Babas today are first-class bona-fide criminals. Is there any Vivekananda-Aurobindo (I may be biased in my selection of the two, but, you get the point as to the class I am referring to) of today? Or they all cheats of various kinds?

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Tue Sep 05, 2017 6:04 am

Atithee wrote:
Tue Sep 05, 2017 4:43 am
Oh yes, the hugging one, right? She's largely controversy free although I'm sure there are some. Even mother Teresa had some.
Oh yeah, this is Kerala you are talking about. God's own country, and the place where Hinduism took re-birth with SankarAchArya. The one place where the biggest enemy of Hindus are Hindus who cut down any Hindu's progress, no matter if it is a Hindu human or even a Hindu God. From all evidence (and some personal and family experiences too - I am after all from a place barely 20 km from where Amma is based), she is closer to God than almost anybody alive in this world. But that doesn't stop people trying to cut her down to size. Nothing is ever found to be based on even marginal evidence in the end, but it goes on. And Amma just continues hugging people and talking about love, which is all she does.

The vice chancellor of Amrita University, Prof. Venkata Rangan, was a couple of years senior to me at IIT Madras, in the same hostel, and has been a long-time friend of mine, as he was later also a highly-respected professor at our Univ of California sister campus in San Diego. Amma is his boss, as the chancellor of Amrita university, and that is not just a title. The details Venkat has told me about the eye-popping progress of that university and Amma's decisions and directives to him that made it all possible, are unbelievable. Things like suddenly telling him to call some university in Germany or USA, because she felt there was some connection ready to happen, with some odd description in Malayalam of some technical stuff about which she had no idea herself. This is from a lady who hardly finished high school, and only speaks Malayalam. She is somehow clued into the universe and knows/feels things that are happening. Venkat would then be on the run, trying to find out what she was seeing, and in no time he would get stunned that some research liaison or new development was waiting to happen. It was mind-blowing to hear those kinds of stories.

But then it wasn't very surprising to me. Near where I am from, a lot of people had known all along that there was something special about Amma. How do thousands of Americans wait for hours to only get a 30 second hug from her and hardly a word in English? And then they feel like all their life's problems are lifted, and they return and wait a whole day next year when she comes back, for just another hug. This is not like other Indian swamis who talked philosophy and built disciples in the west. She doesn't speak much philosophy; at best a few lines that somebody might translate. How the heck? Just by hugging, this old lady can get such a following? Who knows how!

I have, however, always felt that spirituality was real. Human brains have the ability to connect to the world and the sort of "equations" that define the world, if the brains are taken to a reference frame that believes that it is possible. Humans, due to evolutionary necessity, needed to preserve individuality and thus our brains are defined to be individualistic and not in communication with the universal equations that they are part of (this is what mAaya is, by old Indian logic). At the same time, some people are born with certain mutated wiring in the brain that leaves them with very little if any "ahamkAram" (self-centered-ness) - so by old Indian logic, they are much less tied down (brainwashed) by mAya. They are the ones who show some spiritual abilities. Very rarely though, some extreme case of mutation happens and you end up with a Rama, Krishna, Buddha, a Purandara Dasa, a Ramakrishna Paramahamsa, a Sathyasai Baba or an Amma (I will refrain from listing those from other religions, as it might be offensive to the followers). They are almost Gods, so we can call them "avatAras" (of various degrees). The brains of such rare individuals would feel the universe much better than all of us, and feel a lot of truths that others won't feel. That is because others' self-centered brains make them each a separate individual, which by definition can only make them stay unconnected to the universal continuum. Okay, that is enough philosophy from me! Amma is probably an extreme case of all that. This is why it is all love for her, and she is as close to aham brahmAsmi (I am the universe) as any individual can get. At least, all indications are in that direction. She is not "God", which by definition is "nothingness/undefinable" (to me as a Hindu). She is human, so she cannot be God. But, again, she is probably among the closest to God among humans out there. It is all just how her brain is wired.

So yes, Kerala does have a pretty good God-woman. But no, Kerala has not had any God-men or God-women who were into riding motorcycles, acting in movies, buying Rolls Royces, or anything of that sort! It won't work in God's own country :)

This has nothing to do with demonetization though. Just to bring the topic back, I believe there was no accusation that Amma's people were lining up to exchange black money stacks she was keeping! I think she has been paying tax to GOI.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan » Tue Sep 05, 2017 10:06 am

jayakris wrote:
Mon Sep 04, 2017 7:04 pm
The question is on how much black money it was, that changed hands and resulted in commission payments. If it is 60,000 crore in commission to "cooks and drivers"? I don't know yet. But it has to be at least 20,000 crore and as much as say 1 lakh crore. I just don't see how 3 or 4 lakh crore of black money could've turned white otherwise. Or, maybe we just didn't have as much black money in India in currencies as we thought. Possible.

Hey, this stuff is beginning to make sense to a layman, me, after all :)
This is of course possible Jay. Every estimate of supposed-to-be black money was basically guess work. It started off at 4-5 lakh crore, then to 3 lakh crore and still again to 1.5 to 2.5 lakh crore.
Has Govt declared that they collected Rs 30,000 crores from amnesty scheme? Not sure about this.
Suppose 1 lakh crore got distributed through cooks and drivers and 20 per cent got into formal economy (banks) as commission and Rs 30,000 came from extra taxes, will Rs 50,000 crores be justifiable reason for the hardship and deaths?
STAR paid Rs 16347.50 crores for IPL rights for five years just yesterday!

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by Mugundan » Tue Sep 05, 2017 10:30 am

Jay, I haven't understood one point in all these explanations regarding "economic stimulus".
If the idea was just to get back all the black money into the system (may be Rs 5 lakh crore or may be Rs 1 lakh crore) and not be bothered about tax amnesty, tax rates, prosecution etc why couldn't have the Govt declared an amnesty with zero tax liability and asked all those holding more than Rs two lakhs to come and deposit the money in the banks?
In this case there wouldn't have been any need for demonetization; just a notification that all those who are having more than Rs two lakhs in cash may come and deposit all their money into their accounts by Dec 31, 2016 (or March 31, 2017). The Govt could have specified a lock-in period without interest and allowed people to withdraw their money in smaller instalments from the new financial year.
The same notification route could also have been tried for a "cashless economy" or a "less cash economy"; just declare that payment of anything over Rs two lakhs (even one lakh) could be made through cheque/digital transaction. No need to declare currency illegal tender. No need to push people into queues, for people to starve, for people to lose their jobs, for farmers to dump their produce on the roads, for men and women to beg for money to treat their sons and grandsons in hospitals, for people to die.
May be a blanket amnesty would have amounted to lawlessness and might have encouraged more lawlessness. People would hope to get such amnesty in future too and may amass more black money/wealth. But the banks would have benefited and the poor too could have hoped to gain.

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Re: India scraps its two largest rupee notes in shocking anti-corruption move

Post by jayakris » Wed Sep 06, 2017 1:36 am

Mugu, is that a different case than what prasen said above (low tax rates on an amnesty) which I explained to him as not possible nor productive, in my opinion. How can we tax people who legitimately made say 4 lakhs (who probably had that tax withdrawn from their salary), and not those who simply showed 4 lakhs under your program? The standard income tax rate has to be an absolute minimum on any amnesty. That means it is no different than the cheats deciding to pay tax. Reducing the extra penalty is all we can really do. And as I was explaining, if the people know that there is no record that can be used to find their cash stacks, and that there cannot be enforcement mechanisms to find it (which is how/why black money gets stacked), why do they have to take up on a tax amnesty? Did I miss your point?

I think the amnesty we gave last year was pretty much what we could give. We made the tax money we could get out of it. Not sure if all the tax on disclosed money has come in yet, but once they have declared their money, I am sure the government will get the tax on it from them sooner or later.

Funny that you brought up the 16000 crore for IPL TV rights. I too was comparing it to the numbers above, when I saw it. That is Rs 1,250 per capita. Just less than 1% of what an Indian earns a year. The money that I was wildly guessing to have got mobilized due to tax amnesty and demonetization, is basically 3 to 6 times that, if I didn't make a mistake. No surprise. That is how big cricket is in India.

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