'Pakorawallah' and Modi's mind game for elections 2019

   

On Nov 21, 2013 while addressing election rally in Agra, BJP's Prime Ministerial candidate Narendra Modi promised to provide one crore jobs to the youth of the country, if voted to power at the Centre. He became PM in 2014 and at the end of his 4 of 5 year tenure, Modi stares at elusive jobs against the backdrop of debacle of his disruptive reforms like demonetisation, GST etc and growing realization that the government will not be able to create formal jobs for over 6-7 million joining the country’s workforce annually. In 2016-17, actual jobs created were just 4.1 lakh as against the BJP’s electoral promise of creating one crore jobs annually. Unable to destroy non-tax paying informal sector and expanding tax paying formal sector, Modi is now embracing informal sector for his 2019 electoral campaign. 'Pakorawallah' is an indication of his newest mind game.

• Creating jobs is India’s biggest worry and it will only get worse. 
• India is expected to have 100 crore people aged between 15 and 64 years of age by 2027, which means the world’s largest and youngest workforce. As the economy progresses, millions of people employed in low productivity farm sector will have to be moved to higher-productivity non-farm jobs. Barring China, this scale of migration has no precedent in history.
• India’s self-employed is and will remain humungous. Self-employment is common in India. Sometimes, it is out of choice but more often it is out of compulsion. 
• They represent 47% of India’s 470 million workforce. They include street vendors, rickshaw pullers, carpenters, plumbers, chaiwallahs, grocers, taxi drivers, doctors, accountants, pakorawallahs etc. Most of the self-employed are below the economic radar. 
• The scope of tax evasion makes informal sector even more attractive. 
• They are homeless, office-less and unbanked. They are vulnerable and footloose and live on the fringes. They rarely figure in government policies or statistics, or even statements. 
• Self-employed is not a homogeneous group. Income instability is their biggest problem. One serious illness can set them back by several years.
• With economic growth regular and casual workers have risen while the number of self-employed has dipped. ILO says 77% of Indian workers will be engaged in vulnerable employment by 2019.
• Last month, self employed pakoda sellers made headlines when Modi said, “Youth selling pakora outside… and earning Rs.200 a day also means creation of jobs.” 
• The Economic Survey 2018 defines formal employment as, one, where the employers are providing some kind of social security (like EPF and health or life insurance) to their employees, and, two, where firms are part of the tax net. According to the first definition based on social security, 31% of India’s non-agricultural workforce, 75 million out of an estimated at 240 million, have formal employment. According to the employers-in-the-tax-net second definition, 54% (or 127 million) of the non-agricultural workforce is in the formal sector. What is it Modi is trying to convey by redefining 'employment' with his own way?
• Mudra loans are disbursed for non-agricultural activities, including dairy, poultry and beekeeping. 90% of the loans to over 10 crore beneficiaries in last three years were under the ‘Shishu’ category averaging Rs 43,000. Labour ministry might be working out a formula under which 40-50% of the 104 million beneficiaries of the Pradhan Mantri Mudra Yojana could be bracketed as employed.
• If India has to progress, mainstreaming its 470 million self-employed will be an important stepping stone. Modi knows that confronting unemployment head-on rather than sidestepping it may be a smarter strategy.
• India’s IT industry is in a crisis, with technological changes forcing them to pivot or perish. Almost 65% of its 4 million IT workers are not retrainable and runs the risk of losing jobs.
• The degree of disruption technology will cause, with the automation wave is certain to cull jobs. 
• If we want growth with jobs, the push has to be on small industries, and not on the middle or the top. But the biggest beneficiary of initiatives like 'ease of doing business' will be the MSMEs who also bear the biggest brunt of the inefficiencies in the system.
• India's employment elasticity – number of jobs created per percentage of GDP growth — has been among the lowest. It is now declining – from 0.3% between 1991 to 2007 has halved today. This is mainly because India’s growth, dominated by the services sector and not labour-intensive manufacturing, has a bias for skilled workers. 
• The majority of India’s workforce is engaged in informal, unorganised, low-income, low-productivity jobs. This is not self-employment. This is self-exploitation. They need to be moved up from 'subsistence-based livelihood' to 'good self-employment'. Policy makers should focus on increasing formal wage employment and good self-employment. 

The Modi government, in its last year, is short on time. And India’s job seekers short on patience. In politics, perception management is as important as the change on the ground. Modi government likely to lean 'more on perception management' with narratives, publicities and media management rather than any change on the ground to face general elections in 2019. 

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Political language makes lies sound truthful and murder respectable but Modi must remember that he can't fool all the people all the times despite his oratory skills and media management. Voters have their own way of understanding what is good for them and whom they should vote. Narratives and money power works some times only. Rajasthan bye poll results has already sent spine chilling message to Modi which is reflected by Amit Shah's lackluster postmortem analysis. Surfacing scandals is another cause for worry for Modi. Above all rising graph Rahul Gandhi gives him sleepless nights.

Reform Tax Officials first

 

Among the 'corruption' effected departments, Commercial Taxes Department stands tallest followed by Income Tax Department etc. Without sterilizing these departments first, Modi & Jaitley venturing on GST Roll out and tax reforms tantamount to waging war with common man of India and will get defeated. The stories of corrupt tax officials harassing commoners are innumerable and surface incessantly. The fact is that every citizen of the country resorts to tax evasion and handles 'black money' and the bigger the tax evaded amount the smarter is that person. This excludes poorest classes of the nation.

GST to end of informal sector?

 

• The tax evasion propensity of Indians stem from some deep seated hangover from feudal times when the state was exploitative and citizens considered taxation system as - exorbitant and arbitrary; fundamentally illegitimate; excessively burdensome; irrationally complex; patently corrupt; simple greed. It is usually a varying combination of the above. As long as people are poor and less educated and governments are irresponsible, inefficient and blatantly corrupt in public spending, efforts for higher tax realizations will be thwarted by its citizens.
• GST is supposed to absorb informal sector into formal economy and result in higher payment of taxes to exchequer with builtin incentives for compliance. This also leaves trails of transactions making difficult for the GST dealer escape from income tax. 
• Any tax policy is as good as it is administered. One of the worst effected wings of government by 'corruption' are commercial and income tax departments. So without even evaluation it can be safely concluded that GST would have very limited success in increasing tax realization, at least to begin with.
• Without tax evasion what would chartered accountants and lawyers would do? At least 50% of them are engaged in tax evasion activities not only in India, but world wide.
• No one in the world pays taxes smilingly. That would be very strange economics and irrational. Even in USA, income tax compliance is estimated at 80% and they are proud of it as an achievement. For India to reach that level it would be long and focused journey.
• The informal sector dealer is now compelled to maintain books of accounts, raise invoices for all transactions, pay income tax, file GST and IT returns etc. This increases its over heads reduces its inability to operate on razor thin margins, raise funds with high interest rates etc.
• Informal sector owned by less educated people and operated by semi skilled people get no support from government, banks or institutions and survive on their own with their borrowing interest rates as high as 36% per annum and survive on razor thin margins. They work long hours with less or no holidays and provide livelihood to 90% people and contribute to GDP by over 45%. Most of them doesn't have enough margins to comply with GST requirements. GST is an attempt to destroy them and is not in national interest. Unless government provides as much support they provide to formal economy they have no business to interfere in their working. Just because government issued a fiat, they are not going to wind up their activity and vanish. They will survive adjusting in what ever the way it is possible. The corrupt officers will end up squeezing out more money from them.
• So far 'cash economy' and 'white economy' are largely intertwined. With GST making such things difficult 'cash economy' will run in parallel with 'white economy' which is even more dangerous.
• Those who can modernize, raise bank loans for its working capital etc will go ahead and survive or they will completely migrate into 'formal economy'. Lacking intrinsic financial strength and ability to comply with the complexities and overhead expenses most will opt for going out completely into 'cash economy'.
• This would result in one more layer between consumers and manufacturers with proportionate increase in prices. 
• This parallel 'cash economy' will thrive unless GST rates are brought down to below 10% which renders 'cash economy' nonviable.

Anywhere in the world in the past, GST was adopted by several countries to streamline business activities so that tax compliance becomes simple, affordable and hassle free. In Australia, with full one year preparation, GST roll out impacted economy significantly and intangible benefits started accruing after two years. Only in India, mangled GST (which is no different to VAT) was seen as sacred cow which would eliminate tax evasion, increase tax collections for governments and would push GDP growth upwards. Impatient to wait for preparations to get completed which needs about an year, GST was rolled out with in 3 months with weak GSTN infrastructure and ample confusion everywhere. Expectedly, economic activity was seriously impacted and informal economy got adjusted with cash transactions and loss of jobs were enormous in SME segment. And now Govt is looking towards sky for God's help, who in any case won't help any one. Govt pundits must understand that incentivisation means not refunding a portion of tax paid on compliance but minimise taxes so that voluntary compliance increases. Finally, no matter what our pundits in ivory towers do, informal economy is going to stay in some form or other for many more years or even decades.

Jaitley: Take plunge or do nothing at all?

• India tax to GDP ratio is 16.6% compared to 21% in emerging economies and 34% in developed countries.
• But those nations provide excellent quality of governance and welfare measures with corruption at ground level unheard. Where as in India, there is such thing called governance in rural areas and in towns and cities it is mostly confined to catering services to upper classes.
• Welfare activities especially in education, healthcare, drinking water supply and sanitation sectors are at their worst. 
• Corruption bleeding the whole nation even 16.6% tax is unjustified. More tax compliance will only make rogues much richer while poor will remain poor.
• In a large & diverse nation like India, GST undermines federal polity of constitution leaving states hitherto financially autonomous to fund their activities depend on centre for funds. Their ability to extend help to people during natural calamities will also gets diminished. That is the reason why USA has not adopted GST.
• Indian version of GST with six slabs (0 to 28%), multiple tax rates for the same item, additional cesses as high as 290%, complicated tax credit procedures, with important items like petroleum products, alcoholic beverages etc excluded, it is not GST at all. It is simply improved version of VAT. The opportunity is squandered away by Modi & Jaitley. 
• Among the virtues of all classes of people in India, tax evasion and robbing government money are predominantly prevalent. No one really thinks they are offences and unethical. Given this mindset, people will invent several loop holes in GST procedures and its effectiveness without co-operation of people will be insignificant.
• Plunging with game changing tax reforms like GST roll out, without IT readiness, databases not up to date, and with out creating awareness even among enforcing officials is nothing but insanity and resultant chaotic conditions are most likely to pull down our precarious economy. 
• Modi, Jaitley & Co haven't learnt any lesson from 'failed demonetization 2016' which costed nation more than Rs.150,000 crores and erosion of GDP growth by 1.5% which troubled everyone (especially poorer classes, informal sector and farmers) missing all its intended goals and nation is saddled with unintended consequences like expensive cashless transactions.
• More importantly Modi & Jaitley did nothing during first two years except fudging economic data and trying to lobby for ratings upgrade from 'near junk status' which was refused citing high levels of national debt and mounting NPA's by public sector banks.
• Modi & Jaitley, who opposed Congress sponsored better version of GST six years ago citing states autonomy compromising and violation of federal spirit of constitution, rolled out degraded and mangled GST hurriedly only to please FIIs and World Bank for ratings improvement. Otherwise there is no reason to do this way had they had any sense of realities of India.

Tax policy is as good as it is administered

My View:

Human trajectories doesn't change so easily. As long as people and enforcers are not honest to the nation, GST will also not give desired benefits similar to that of VAT & MODVAT some ten years ago, which failed to change anything. Incidentally in the name of GST much is publicized of simplicity of indirect taxation, compliance and ease of doing business without really doing any research or testing on the ground reality. Hence results could be very different. It may take over an year for stabilizing with GST during which period nation will face supply chain disturbance, artificial shortages, inflation, loss of jobs, and positive results could be expected only from third year on wards. Like 'failed demonetization' brunt will be borne by poorer classes, informal sector and agriculture while other well to do classes will  remain less affected. After two years several global & national economic factors will determine the state of economy and benefits of GST will never be known accurately. Instead of undertaking high risk whole sale reform with unknown results, it would have been wiser to identify and eliminate flaws in the existing taxation system itself would have been much easier, less riskier, less painful and more beneficial. Modi & Jaitley introducing GST a constitutional amendment bill as 'money bill' in Lok Sabha depriving Rajya Sabha its rights and privileges is a proof that the Constitution and the rule of law meant nothing to them, who are just third rated politicians not statesman. I suspect Modi's deep desire to go down in history as the greatest tax former, with eyes on 2019 elections, is the real reason. Sanity prevailing, he wouldn't have done this type of disturbing adventures at an overall expense of Rs.100,000 crores at the least, with unknown results. Another thing is that Modi & Jaitley are hell bent on destroying informal economy which provides livelihood to large number of uneducated and unskilled people but contributes very less in taxes and and take care of only cash cows i.e. formal sector which employs only 10% of people that too educated and skilled. These buffoons doesn't know that formal sector is hugely supported by informal sector for all their needs. How many times Modi will prove himself as a demagogue and worst economic manager of the nation?

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.