Excess debt is self destructive

When money is free, discipline evaporates and decisions are disastrous

Whatever is free is squandered. Money that can be borrowed for very low interest and in unlimited quantities is essentially "free". Nothing enduringly productive can be built without discipline and a steady focus on the bottom line. What USA has accomplished by borrowing and blowing $9 trillion in additional national debt over the past eight years other than funding medicare and medicaid costs that are largely skims, scams, and fraud? With interest rates near-zero and the credit line of the nation unlimited, Fed has created $3.5 trillion of additional paper money only to buy federal bonds to avoid difficult choices that is, discipline. Politicians are only too willing to borrow trillions from future generations to assure their re-election, and let future taxpayers figure out what to do about the crushing burden of debt we're leaving them? With "free" money, there's no need for justification of the expenditure. With the need for discipline eliminated, there's no motivation not to gamble wildly, fund every special interest group's demand, and grease the palms of every insider, every crony and every oligarch. This is how a great nation will self-destruct itself. The only possible output of a system lacking any discipline is self-destruction.

The same is very true for India and its states as well resulted in many white elephants, massive corruption, crony capitalists, fragile banks, loss making infra companies etc, resulting in wider rich-poor divide and depriving basic amenities to poorer classes. India's rating is near junk with fragile banks and excessive debt.

Modi unveiling cash restrictions and police raj

Cash is one form of wealth like gold, house, land, bank deposits, stocks, bonds etc. It is citizen's right to hold his wealth in what ever form he wishes. In fact no sane person will hoard cash or in bank deposits with inflation corrected bank deposits yielding negative returns. Prudent person will either invest cash or rotate it to earn more returns. In the recent hearing of Jayalalitha's disproportionate assets case, the Supreme Court Bench observed that merely possessing assets disproportionate to known income does not amount to corruption unless the source of that income is illegal.

Our Indian banks has of late became precariously unsafe with NPA's increasing manifold leading to downgrading of ratings to a notch above junk status. No prudent person will keep his wealth in bank deposits. However India has many weak, old and vulnerable persons who hold their wealth in the form of bank deposits. RBI's deposit guarantee is limited to just Rs. One lakh per person. In the absence of returns & safety, government coercing its citizens to maintain their wealth in bank deposits with negative yields is nothing but cruelty.

Cashless transactions is another fraud. In a country with 40% illiteracy and 80% internet banking illiteracy compelling electronic payments without reliable infrastructure, robust privacy laws, unbearable transaction charges and high level of frauds is nothing but enabling corporate's flourish at the expense of poor & needy and in violation of fundamental rights.

No one in the world pays taxes willingly and smilingly. Tax evasion in India is primarily due to unreasonable high tax regime, uncourteous and blatantly corrupt tax administration with umpteen loopholes deliberately meant for corrupt activities. Make taxes reasonable and taxmen citizen friendly, infrastructure reliable,  robust privacy laws protecting citizen rights, and cashless transactions affordable and people will use them as they see benefits. Without these in place, pressurizing citizens compromising their freedom & rights will prove counter productive.

Most of the cash wealth is getting rotated in informal economy which contributed 45% of GDP and employs 90% of people who are mostly less educated, less skilled and under qualified who are otherwise not employable in formal sector. Migrating them into tax compliant formal sector is slow process and government must promote the same with incentives and creating awareness rather than sudden changes of laws and unleashing taxmen & policemen with long sticks.

Almost all black money hoarders are from cities & towns and none from rural areas. Enacting laws which make all these men criminals and taxmen chasing them doesn't produce any positive results except for publicizing the government's efforts to fight corruption which any way doesn't yield desired results.

The recent demonetization has diverted large portion of working capital of informal economy into banking channels. Deprivation of working capital has crippled informal economy, which hitherto was booming since a decade, with millions losing livelihood and returning to their villages, and those who survived are making earnings at half level. No announcement was made by government to provide them with working capital infusing arrangements. Informal economy and formal economy are so much interdependent on each other, formal economy is likely get affected with a time lag of two quarters. The devastating effects and unintended consequences will surface incessantly for next two years and nothing can be done except dazing at them.

Modi's restrictions on cash at Rs. 3 lakh level will do no good to economy except it seems to increase tax compliance. Govt might get higher income tax collections but overall reduced economic activity will result in indirect taxes crumbling, offsetting gains and overall tax collections looking southward. On other hand increasing government will have disastrous effects like citizen harassment, legal entanglements, increase in corruption, ease of doing business looking southward, FDI's reduction and ratings remaining at junk level will do no good to any one. Authoritarian type of decisions will yield quick results in dictator ruled small countries but while doing no good, will run into legal tangles in large democracy like India.

Modi has ignited 'spiraling down' of economy with his senseless, authoritarian, illegal actions destroying institutions like RBI, without even pretense of process of law and now he has no 'magic wand' to control it or stop it and normalization is two years away and in the mean time common man is the casualty.

All dirty politics!!


My View:
Modi badly managed Indian economy during past 30 months, despite favorable crude oil prices and retaining 85% in the form of increased duties, and growth of over 7.5% highest in the world, inflation fairly in limits of below 8% mainly due to his industrialist friends defaulting on bank loans with NPA's rising alarmingly manifold and crippling banks with no funds even for their normal operations and not taking any solid action against willful defaulters despite warnings. Even in 4th budget revenue deficit is at unacceptably more than 3% of GDP. He is under pressure from World Bank and rating agencies to set house in order and unleashed quack advised senseless demonetization for quick benefits of Rs. 4-5 lakh crores as disclosed in affidavit filed in Supreme Court. With deposits exceeding 97.5% of cash in circulation his scheme failed miserably and is dramatizing with cashless transactions and as lone crusader against corruption, which requires focused efforts continuously for few decades.  In a hurry to make quick financial and political gains Modi is resorting to half baked actions with loop holes which will end up in fiascoes and citizen harassment. He is not bothered about long term national gains but focusing on the immediate political mileage needed to win UP, Punjab elections in the aftermath of demonetization pain inflicted on rural masses and urban poor. Attempting to manage country's finances in this botched fashion will only end up horribly both for people and for himself, with no gains whatsoever.

This is no way to manage country's finances!

1. Modi & Jaitley's Budget 2017 - Snap shot is as given above.
2. Definitely you don't spend your earnings the way Modi & Jaitley are spending nation's money.
3. With monthly income of Rs. 100,000 spending is Rs.125,000 (revenue deficit of Rs. 300,000 per annum).
4. Borrowing of Rs.500,000 (fiscal defict) is OK if it is meant for investments like buying car or apartment or resalable assets like gold, shares etc. but within limits. Surely fiscal deficit of Rs.500,000 which is 42% of tax revenues is untenable.
5. Borrowing is deplorable it it is meant for luxury expenses like holidaying, buying durables or spending for fun.
6. Deficits are neither bad nor avoidable but within permissible limits and must not be passed on to children.
7. For the country to develop, it must not have 'revenue deficit' but could have a small  'fiscal deficit' which could be bridged by long term soft loans from World Bank/IMF etc
8. Any prudent person will save 30-40% of net revenue (after tax income) for gold, investments etc. and will manage family expenses with 60-70% of net revenues.
9. That is why rating agencies have downgraded India, two years ago, to 'baa' (only a notch above junk status) and bluntly told Modi & Jaitley,recently, to cleanup balance sheet by enforcing reforms and also stated that upgrading is at least two years away. 
10. With this rating all cheaper interest foreign investments shy away from India. 
11. Only hedge funds with 'flight capital' and looking for big returns with some risk invest in India in small amounts.

Congress led UPA had revenue deficit prior to 2013 mainly to due to high crude oil prices and their pro-poor welfare schemes. During Modi's rule of 3 years, bank NPA's has trebled to nearly 6 lakh crores during past 2 years and became worthless. Modi with low oil price (almost 1/3rd) regime since 3 years had saved nearly Rs.4 lakh crores in the last 3 years with just 15% passed on to consumers and with minimum welfare where the money has gone??  Guess!

Moody's rejects ratings upgrade lobby by Modi

• India's current rating by Moody's stands at Baa3, the lowest investment grade, a notch above junk status.
• US-based agency, Moody's, declined to budge citing concerns over the country's debt levels and fragile banks.
• Winning a better credit rating on India's sovereign debt would have been a much-needed endorsement of Prime Minister Narendra Modi's economic stewardship, helping to attract foreign investment and accelerate growth.
• Moody's said India's debt situation was not as rosy as the government maintained and its banks were a cause for concern.
• India has been the world's fastest growing major economy over the past two years, but that rapid expansion has done little to broaden the government's revenue base.
• At nearly 21% of gross domestic product (GDP), India's revenues are lower than the 27.1% median for Baa-rated countries. India is rated at Baa3 by Moody's, the agency's lowest notch for debt considered investment grade. A higher rating would signify to bond investors that India was more creditworthy and help to lower its borrowing costs.
• India's debt-to-GDP ratio has dropped to 66.7% from 79.5% in 2004-05, interest payments absorb more than a fifth of government revenues.
• The ministry attempting to impress that the government's resolve to contain the fiscal deficit at 3.5 per cent of GDP in the current financial year didn't impress the agency.
• Diron had told local media that a ratings upgrade for India was some years away, depending on the progress on reforms.
• Diron said that, not only was India's debt burden high relative to other countries with the same credit rating, but its debt affordability was also low. She added that a resolution to the banking sector's bad loan problems was "unlikely" in the near-term.
• Moody's on November 16 affirmed its Baa3 issuer rating for India, while maintaining a positive outlook, saying the government's efforts had not yet achieved conditions that would support an upgrade.

My View:

Trying to influence for better ratings, whether deserving or not, is not uncommon but definitely is beneficial to the nation. Attempting to influence rating agencies without taking any pragmatic corrective steps and getting deeply involved in petty politics is unbecoming of leader of the nation. Ask a farmer and he will tell you, fields tilling, irrigating, seeding, cultivating, applying fertilizers and harvesting in a sequential manner over a certain time only will result in good harvest. Nothing can be achieved overnight. In a country with 125 crore people, diverse cultures and saddled with illiteracy, poverty, belief systems and spread over 600,000 villages development is a slow process. In the process inflicting injuries on the lowest strata is immoral and must be avoided. Above all principles of democracy and constitutional obligations should never be given go by.