Rupee hits historic low of ₹71 per USD

USD INR breaches life time low of  ₹71

The Indian rupee touched a historic low of ₹71 against the US dollar on Fri Aug 31, 2018, falling 26 paise today, 1.55% during the week and more than 11% year-to-date. It was trading at around ₹64 to the dollar on same day last year. 

The causes of supporting USD and INR weakening are:

• Consistent demand for the USD from oil importers.
• Fall in EM currencies.
• Rising crude oil prices.
• Inflationary pressures.
• Lingering Sino-US trade tensions.
• Looming US sanctions against Iran's oil exports.
• Shutdowns in Libya, debt crisis in Venezuela have led to crude oil supply constraints. 
• India's widening current account deficit.
• INR is under performing its emerging market (EM) counterparts.
• US economy reported best performance in last nearly 4 years, showing 4.2% growth. 
• As the US economy is growing and US Federal Reserve raising interest rates, the demand for dollar has also been increasing.

Rupee is still overvalued and healthy forex reserves may limit the downside of the rupee. RBI may crush speculative longs but it can do little to prevent INR opening weaker on gaps. RBI is unlikely to intervene as the rupee is still overvalued and currencies of EMs are also depreciating. 

Since the present situation that is strengthening USD and weakening INR is likely to continue for some more time, USD-INR rate could touch ₹80 by end of the year. Despite good monsoon, depreciating rupee and its consequences on domestic price rises etc could spell doom for Modi since general elections are just 8 months away and there is very little he could do to contain damages.

Income tax reduction doesn't impact economic growth

No one likes to pay taxes, particularly more taxes. Discussions about tax rates rouse emotions as discussions about where those taxes are spent. The influence of tax rates isn’t as significant as the emotional response to them might suggest. The basic question is: Do tax rates—by adding money when cut or subtracting money when raised—result in economic growth or contraction, meaning more or fewer jobs? The structure and financing of a tax change are critical to achieving economic growth. If the tax cuts are not financed by immediate spending cuts, they will result in an increased budget deficit, which will result in inflation and increased interest rates. The net impact on growth is either small or negative or uncertain. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits. They may also reallocate resources across sectors toward their economic use, increased efficiency and raising the overall size of the economy. All tax changes will not have the same impact on growth. Reforms that improve incentives, reduce subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the size of the economy, but may also create trade-offs between equity and efficiency. 

• The tax policy can influence economic choices, it is by no means obvious that tax rate cuts will ultimately lead to a larger economy in the long run. 
• The income tax rate cuts would raise the after-tax income to working, saving, and investing, they would also lessens their need to work, save, and invest. The first effect raises economic activity, while the second effect reduces it.
• Tax cuts financed by immediate cuts in unproductive government spending could raise output, but tax cuts financed by reductions in government investment could reduce output.
• If they are not financed by spending cuts, tax cuts will lead to an increase in government borrowing, which in turn, will reduce long-term growth. 
• The historical evidence and analysis suggest that tax cuts that are financed by debt for an extended period of time will actually reduce growth.
• Tax reform is complex, as it involves tax rate cuts as well as base-broadening changes. Such changes should raise the overall size of the economy in the long-term, but the magnitude of the impact are uncertain. 
• Broadening the tax base by reducing or eliminating tax expenditures raises the effective tax rate and hence will operate in a direction opposite to rate cuts and mitigate their effects on economic growth. But base-broadening has the benefit of reallocating resources to sectors that have the highest economic return, which should increase the overall size of the economy.
• A well-designed tax policies have the potential to raise economic growth, but there are many stumbling blocks along the way and certainly no guarantee that all tax changes will improve economic performance. 
• A tax change will be more growth-inducing to the extent that it involves (i) large positive incentive effects that encourage work, saving, and investment; (ii) small or negative income effects, including a careful targeting of tax cuts toward new economic activity, rather than providing windfall gains for previous activities; (iii) reductions in distortions across economic sectors and across different types of income and consumption; and (iv) minimal increases in, or reductions in, the budget deficit.
• Debt-financed tax cuts will tend to boost short-term growth, but also tend to reduce long-term growth, if they are financed eventually by higher taxes. Second, revenue-neutral income tax reform can provide a modest boost to economic growth.
• The tax rate on the average American was around 21% in 1947 and declined to around 15.5%, in 2015. The tax rates for the highest earners dropped from 86.45% in 1947 to 39.60% in 2015.  During this period US economy (GDP) grew from $243 billion in 1947 to $18,905 in 2017. Over that period, taxes increased and decreased; wages climbed and dropped; interest rates rose and fell; and so on. But GDP grew year after. It grew because something other than money drives the spirit.
• Income beyond $250,000 per annum gets tossed into savings & investment account and gets utilized for vulgar spending like gambling, trading, holidaying, ornaments, real estate, vulgar homes, money laundering etc and taxing this money doesn't make any difference to anybody.

Tax cuts that target new economic activity, reduce distortions to the allocation of capital, and are not deficit financed are more likely to lead to economic growth. Advanced countries that decrease their tax rates do not experience less economic growth as changes to the top individual income tax rate are not associated with economic growth. Studies show that the US economy has not grown in conjunction with large changes to individual income tax policy. In summary, the impact of tax cuts on growth depends on how the tax cut is financed and the assumed international capital flows. Failure of capital to flow internationally reduces the likelihood of success of tax rate cuts.

Read the source article

The income tax created more criminals 

than any other single act of government ... Barry Goldwater

Almost all studies indicated that, income tax reduction has significant and negative impact on economic development. Hence income tax reforms aiming to reduce tax rates benefits only rich to become much richer and is in violation principles of democracy and equality. The present tax regime which taxes class four employees is ridiculous while almost all businessmen pays meager taxes that never exceed 10% of their real income, where as TDS deductions for salaried class starts at Rs.2.5 lakhs pa. The suggested rationalization of tax rates to be as under with stringent penalties for violations.

Since broadening tax base has evil aim of taxing the poor while doling out concessions to the rich with other hand and is unacceptable non-sense as it results in much work and little gain. Riches beyond certain point neither increases consumer spending nor capital accumulation but goes into unproductive spending & laundering that burdens the economy and abuses nature. While intelligence, talent & hard work must be rewarded, the high:low wage ratio of over 10,000 is untenable and must be brought to acceptable 200. Extreme poverty must be subsidized heavily and extreme wealth must be taxed heavily.

Risk of doing nothing

 

Hardly a day goes by without a story that financial markets are in “bubble” territory. Stock markets around the world are at record highs and bond yields are at record lows. The former means that valuations are at the upper end of historic ranges. The latter has meant that many unusual things can be sold to investors anxious for yield. 

• Investors remain nervous and many choose to hold significant amounts of cash. This appears to be a conservative strategy but in fact it is a rather risky one. The obvious problem is that with rates at record lows you receive virtually no interest on your capital.
• The bigger problem is that with inflation running well above the level of interest rates the conservative strategy of putting money in the bank is actually destroying your purchasing power at an alarming rate. As inflation has been higher than the interest you have been receiving, your purchasing power has been declining.
• Bank interest rates are likely take a long time before the bank rate gets above the inflation rate. Consequently this trend of real capital loss from holding cash will continue for years.
• While we are conscious that there are fewer opportunities to find attractively valued investments, we continue to dedicate your resources to finding such opportunities.
• Risks that affect investments are -- doing nothing risk, inflation risk, market risk, specific risk, currency risk, default risk, sector risk, liquidity risk, false confidence risk, duration risk and leverage risk.

A diversified equity portfolio, or a balanced portfolio of equities, corporate credit and government bonds, are expected to continue to provide investors with capital growth in real terms. In fact such portfolios may be less risky to your financial well-being than sticking your money in the bank.

The only certainty is uncertainty. There is no such thing as “risk free”. 

Even government and banks can or have the potential to default. 

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is never guaranteed. Yields on investments may fall or rise on the performance of the investment and the financial markets.  As such no warranty can be given that the yields will consistently attain such levels over any given period.

Low inflation is an anemic economic condition

• Low inflation at 2.28%, IIP at 3.12% is due to low food prices and only indicates anemic state of economy which is unable to produce more and spend more. There is  no need to greet 'low inflation' with a hurrah, which is a symptom of ailing economy.
• Modi administration has laundered away savings due to low oil prices on his mindless adventures in the name of reforms.
• Make in India campaign without any ground work has deindustrialized India and our economy dependent on Chinese imports so much like never before.
• Low food prices and low consumption has not increased the consumption pattern. Low consumption is injurious to market economy and indicates declining economy.
• Farmers are on street agitation due to prices not even covering production expenses.
• Low crude oil prices for last three years even though good for consuming countries like India is destroying economies of oil producing countries.
• RBI's higher interest rates and not cutting them are not indicative of inhibiting expenditure and holding back consumption. It is weak demand that is culprit.
• Higher inflation within a band is preferable, because it means economy is moving and sputtering.
• It is Modi & BJP's failure to spur growth even after three years. Blaming predecessor doesn't work beyond two years.
• The over publicized 'demonetization' has failed to achieve any of its stated objectives but has jolted informal sector which operates on cash that brought its economy to its ominous halt. What ever good it may do in long term, demonetization has proved to be painful and disastrous in short term.
• The other big decision of Modi administration is uniform GST rate across nation, w.e.f. July 1, 2017, is supposed to improve tax compliance and governments will be able to spend more money on infrastructure and enable people to produce more, sell more and buy more and will result in economic growth. Paradoxically, benefits might come only in long term but its devastating short term effects are to be coped with by our already ailing economy. The transition to GST and its impact on lower tax compliance might persist over an year. 
• There is hardly any activity on ground. Economy needs a push. GST is going to be a speed breaker rather than a stimulus at least during first year. It is not going to energize our economy, which at the moment is going nowhere.
• Low inflation, low growth, demonetization and GST are aggravating the already bleak situation and when economy will become better is a million dollar question? In the meantime, how many will vanish or perish?

Inflation is taxation without legislation ... Milton Friedman
Inflation effectively transfers wealth from savers to borrowers.

The government will always tell you that it wants low inflation. 

The real issue is the horizon over which to bring inflation down ... Raghuram Rajan

My View:

Low inflation and low growth are features of rich & developed nations. Their economy is largely dependent on consumption. Yet they grow rather slowly. For a developing nation like India with considerable infrastructure activity, higher inflation rates within a band is necessary for good growth associated with job creation. Here, RBI's primary role is to contain inflation within the band by managing interest rates and bank's CRR & SRR ratios. India with 40% people below poverty line and half of the population without personal latrines, low inflation and low growth regimes are undesirable. Modi government resorting to high speed & high risk financial reforms only to please rating agencies and foreign financial institutions, indicates his lack of understanding of the ground realities and exposes his incompetency as a sound economic manager. Today, instead of creating a million jobs every month, reckless Modinomics resulted in deindustrialization, exorbitant Chinese imports, loss of millions of livelihoods in informal sector is what he has done so far. Modi must realize that perpetual promises and blaming predecessors work well during initial years only but not during fourth year. Prolonged low inflation resulted in agriculture becoming a loss making activity and with no support from government, farmers have taken to streets. GDP growth with  job losses is an astonishing feature of Modi's achievement. Pep talk & unsubstantiated publicity won't do any trick.

RBI Reduces Interest Rates

Under pressure from Finance Ministry and Industry & Businesses, in the name of reducing borrowing rates competitive & affordable and to push growth rate, RBI announced its interest rate deduction. It has its side effects as well.

1. Lowering rates makes more cash available in the market and pushes inflation upward which hurts middle class, lower class & daily wage earners very badly.
2. Banks saddled with more cash will be under pressure to do market lending and eventually gets easily entangled in the hands of cheaters and looters, especially from high value business class thus pushing NPAs.
3. Banks will reduce deposit & lending rates. This would hurt savers and benefit borrowers.
   Not a great idea in our country.
4. Most depositors are retired people & senior citizens and their budgets gets effected.

We need to remember that "Culture of a person / society / government is the way they treat their weaker sections, women, children , old people, handicapped & minorities". In the absence adequate social security & affordable healthcare, in India, reduction of interest rates will adversely effect lifestyle of senior citizens.

Inflation increase is nothing but RBI Abrogating its primary responsibility.

My view: In order to protect senior citizens dependent on fixed deposit interest amount for their living, banks should pay for fixed deposits up to Rs. 50 lakhs, for Indians resident in India aged 60 and above, at minimum of 12% per annum interest payable monthly and deposit amount locked for 5 years or death which ever is earlier. Premature withdrawal of deposits should be settled at 3/4th interest rate or 9% p.a.