New Tax Data Is Unambiguous: Black Money Is A Huge Part Of Indian Economy



The Income Tax(IT) Department has released some very interesting data today. The data basically reconfirms what we have known all along—that very few Indians pay income tax.

The number of Individuals with a permanent account number(PAN) for assessment year 2014-2015 (which basically means the income earned during the financial year 2013-2014, or the period between April 1, 2013 and March 31, 2014) stood at 4.86 crore. The income tax department calls them effective assessees. In the assessment year 2014-2015, the returns for the income earned in the financial year 2013-2014 had to be filed.

The number grew at a rate of 6% per year, over a three-year period between assessment year 2011-2012(i.e. the income earned during the financial year 2010-2011, or the period between April 1, 2010 and March 31, 2011) and assessment year 2014-2015.

Data from the World Bank tells us that in 2013(considering that we are talking about financial year 2013-2014 here), India’s population was at 127.9 crore. What does this basically mean? This means that around 3.8% of India’s population came under the income-tax net in assessment year 2014-2015.

The government has also released detailed data for the assessment year 2012-2013 (or income earned during the financial year 2011-2012, the period between April 1, 2011 and March 31, 2012).

And this data tells us something interesting as well. For the assessment year 2012-2013, a total of 2.88 crore income tax returns were filed by individuals.  The number of individuals with permanent account numbers for the assessment year 2012-2013 stood at 4.43 crore. This basically means that only 65% of individual permanent account number holders filed a tax return.

Data from World Bank tells us that India’s population in 2011 was around 124.7 crore. This means that only 2.3% of India’s population filed the income tax return in assessment year 2012-2013, when returns for the income earned during the course of financial year 2011-2012, had to be filed.

Hence, the actual number of individuals who file income tax returns is significantly lower than the total number of individuals who have a permanent account number. Also, it is safe to say that the actual number of tax payers would be more than those who file an income tax return, given that some individuals paying income taxes are clearly not filing returns.

The Income Tax department does talk about the fact that in many cases the “tax has been deducted at source from the income of the taxpayer but the taxpayers has not filed the return of income.” This gap is huge despite the so-called attempts of the government to simplify the tax-filing process every year. It tells us that the simplification process is clearly not working.

There are more interesting data points for the assessment year 2012-2013. The average individual had a returnable income of Rs 3.77 lakh and paid a tax of Rs 39,823. Further, the total number of tax payers with a returned income of greater than Rs 10 lakh is just 13.32 lakhs. The returned income is defined as the total income after taking deductions allowed under chapter VI-A deduction into account.

The chapter VI-A deductions essentially refers to deductions allowed for investments made into the Employees’ Provident Fund, the Public Provident Fund, tax saving mutual funds, life insurance policies and so on (Section 80C).

It also allows deductions of premium paid for buying a medical insurance policy for self as well as parents (Section 80D). Then there are deductions allowed for interest paid on an education loan (Section 80E), royalty on books (Section 80 QQB) etc. Deductions are also allowed for donations made to charitable institutions (Section 80G).

In most cases, a maximum deduction of Rs 1.5 lakh is allowed under Section 80C. This was limited to Rs 1 lakh earlier.  The point being that the Chapter VI A deductions in most cases can’t be over a couple of lakh rupees. Hence, there is a difference between total income of an individual and the returned income. Other than Chapter VI A deductions, there are other deductions allowed as well (interest on home loan being one).

Even with these limitations, the total number of tax payers with a returned income of greater than Rs 10 lakh at 13.32 lakhs in assessment year 2012-2013, is a very low number indeed. In fact, there were only 1.02 lakh tax payers with a returned income of more than Rs 50 lakh.

What does this tell us? It tells us that a major part of the country continues to be outside the income tax net. Of course, a major reason for this remains the fact that most Indians don’t earn enough to be paying income tax.

But it also tells us that there are many Indians out there who should be paying income tax but they don’t. The consumption patterns of luxury items clearly tell us that. And so does the price of real estate in many parts of the country. A major portion of the black money goes into real estate. Black money is essentially money which has been earned and has not been declared for tax purposes.

To conclude, the new data published by the Income Tax department is another indicator of the huge amount of black money that is a part of the Indian economy. Clearly no surprises there.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on Huffington Post India on April 29, 2016

Why Deposit Growth is at a Twenty-Five Year Low


The Reserve Bank of India releases the aggregate deposits with scheduled commercial bank data every week.

Data released on April 22, 2016, suggests that for the year 2015-2016, the aggregate deposits with scheduled commercial banks grew by 9.72%. This is the lowest in more than 25 years and the second lowest in more than 50 years.

Only in 1990-1991, the year before economic reforms were introduced, had the growth been slower at 9.65%. Also, this is the second lowest deposit growth since 1963-1964. Further, it is only the second time that deposit growth has been in single digits since 1963-1964.

And this is a worrying trend.

Why is this happening? One reason is that household savings as a whole have fallen over the years primarily because of the high rate of inflation that prevailed between 2008 and 2013. The household savings fell from 22.2% of gross national disposable income in 2011-2012 to 17.8% in 2013-2014. More recent data points are not available.

The household financial savings was at 7.5% of gross national disposable income in 2014-2015. As the RBI annual report for 2014-2015 points out: “Growth in aggregate deposits, which forms a major component of money supply, has generally been declining over the years in line with a decrease in the saving rate of the economy. In addition, slowdown in credit growth led to lower deposit mobilisation by banks.”

Raghuram Rajan, the governor of the Reserve Bank of India (RBI), has also offered another reason, whenever this question has been put to him. When deposit growth was faster inflation was also higher, he has explained. In 2010-2011, the aggregate deposits with scheduled commercial banks grew by 15.3%. The consumer price inflation during the year was at 10.45%. In 2012-2013, the deposits grew by 13.8% and the inflation was at 10.44%.

In 2015-2016, the consumer price inflation was 4.83% and the deposit growth was at 9.72%. Once we look the growth from this angle, suddenly it doesn’t look as bad.

In fact, there is another important reason for the fall in the aggregate deposits growth and this reason is not so obvious.

The loan growth of banks (i.e. non-food credit) has been slow over the last few years and this has led to slower deposit growth as well.

In 2015-2016, the total amount of loans given by scheduled commercial banks grew by 10.3%. This was better than the 9.3% growth seen in 2014-2015, but low nonetheless. In fact, the loan growth in the last two years has been the slowest since 1993-1994.

This has had an impact on deposit growth. And how is that? As Michael McLeay, Amar Radia and Ryland Thomas of the Bank of England write in a note titled Money Creation in the Modern Economy: “The vast majority of money held by the public takes the form of bank deposits. But where the stock of bank deposits comes from is often misunderstood. One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. In this view deposits are typically ‘created’ by the saving decisions of households, and banks then ‘lend out’ those existing deposits to borrowers, for example to companies looking to finance investment or individuals wanting to purchase houses.”

As it turns out, things are not as straightforward as that. As the Bank of England authors write: “Commercial banks create money, in the form of bank deposits, by making new loans.”

How is that possible? Let’s say an individual deposits money in a bank. The bank uses that money to make a car loan (assuming that the deposit is large enough). The money is deposited into the account of the borrower. The borrower of the car loan uses that money to buy a car and pays the car dealer. The money is deposited in the account of the car dealer. The car dealer in turn uses that money to pay his employees.

The employees when they are paid, money is deposited into their savings bank accounts. Hence, a loan creates more deposits. The employees then withdraw a part of that money to meet their monthly expenditure. They may also transfer a part of their deposit from a savings bank account into a fixed deposit.

A part of the money that the employees withdraw goes towards paying their local kirana wallah(or the mom and pop shop) from where their monthly grocery is bought. A part of this spend again finds its way back into the bank as a deposit.

This multiplier effect essentially ensures that new loans create more deposits. And given that loan growth of banks has been slow, it is not surprising that deposit growth is slow as well. Hence, for deposit growth to pick up loan growth will have to pick up.

And what needs to happen for loan growth to pick up? The simplistic answer is that lower interest rates will lead to higher loan growth. But things are not as simple as that. Interest rates also need to be maintained over the prevailing rate of inflation in order to encourage people to save. Further, lower interest rates do not always encourage people to borrow, as is more than obvious across large parts of the Western world, currently.

What needs to improve is the promoter interest in doing new business for which they need to borrow.

As Mahesh Vyas of Centre for Monitoring Indian Economy wrote in a recent piece: “Why do a significantly large number of projects continue to be stalled when most important reasons for phenomenon have already played themselves out? The most prominent reason turns out to be lack of promoter interest. One third of the total investments whose implementation was stalled in 2015-16 was because of lack of promoter interest. Another 15 per cent of the promoters who stalled implementation stated that the current market conditions were unfavourable to pursue their projects further. The two reasons are essentially the same – that these are not very good times to invest.”

The column originally appeared on The 5 Minute Wrapup on April 29, 2016

Does It Really Make Sense to Merge Public Sector Banks?


The government of India owns twenty-seven public sector banks(PSBs). It has often been suggested that the government should not be owning so many banks. Many of these banks are very small and hence, they should be merged so that they benefit from the economies of scale.

The situation was summarised by R Gandhi, deputy governor of the Reserve Bank of India, in a recent speech. As he said: “[The] banking system continues to be dominated by Public Sector Banks (PSBs) which still have more than 70 per cent market share of the banking system assets. At present there are 27 PSBs with varying sizes. State Bank of India, the largest bank, has balance sheet size which is roughly 17 times the size of smallest public sector bank.”

Gandhi further said: “Most PSBs follow roughly similar business models and many of them are also competing with each other in most market segments they are active in. Further, PSBs have broadly similar organisational structure and human resource policies. It has been argued that India has too many PSBs with similar characteristics and a consolidation among PSBs can result in reaping rich benefits of economies of scale and scope.”

The first thing that needs to be mentioned here is that most mergers fail. There is enough research going around to prove that. As the Harvard Business Review article titled The Big Idea: The New M&A Playbook points out: “Companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.

Hence, it is safe to say that most mergers fail and it is best to start with this assumption when any merger is proposed. And there is no reason to believe that the story for Indian public sector banks will be any different.

There have been two kinds of bank mergers in India. The first kind is when a bank which is about to fail is merged with a strong bank. The Sector 45 of the Banking Regulation Act 1949 empowers the RBI to “make a scheme of amalgamation of a bank with another bank if it is in the depositors’ interest or in the interest of overall banking system.”

The merger of Global Trust Bank with Oriental Bank of Commerce in 2004 is a good example of this. As Gandhi said in his speech: “Prior to 1999, most of the mergers were driven by resolution of weak banks under Section 45 of Banking Regulation Act 1949. However, after 1999, there has been increasing trend of voluntary mergers under Section 44A of Banking Regulation Act 1949.”

The second kind of merger is the voluntary merger. As far as voluntary mergers go, a good example is the recent merger of ING Vysya Bank with Kotak Mahindra Bank. This merger had the so called synergy necessary for a merger to take place.

As Gandhi said: “One and most obvious has been voluntary merger of banks driven by the need for synergy, growth and operational efficiency in operations. Recent merger of ING Vysya Bank with Kotak Mahindra Bank is an example of this kind of consolidation. ING Vysya Bank had a stronger presence in South India while Kotak had an extended franchise in the West and North India. The merger created a large financial institution with a pan-India presence.

The merger of Bank of Madura and Sangli Bank with ICICI Bank in 2001 and 2007, and the merger of Centurion Bank of Punjab by HDFC Bank in 2008, are other good examples of synergy based mergers.

But what does the word synergy really mean? One of former professors used to say that: “Since we are all born on this mother earth, there is some sort of synergy between us.” That was his way of saying that synergy is basically bullshit. Once a merger has been decided on then people go looking for reasons to justify it and that is synergy. While that may be a very cynical way of looking at things, there is some truth in it as well.

Nevertheless, author John Lanchester does define synergy in his book How to Speak Money. As he writes: “Synergy: Mainly BULLSHIT, but when it does mean anything it means merging two companies together and taking the opportunity to sack people.” He then goes on to explain the concept through an example.

As he writes “If two companies that make similar products merge, they will have a similar warehouse and delivery operations, so one of the two sets of employees will lose their jobs. The idea is that this will cut COSTS and increase profits, though that tends not to happen, and it is a proven fact that most mergers end by costing money…When two companies merge, the first thing that ANALYSTS look at when evaluating the deal is how many jobs have been lost: the higher the number, the better. That’s synergy.”

If two public sector banks are merged there are bound to be situations where both the banks have a presence in a given area. Synergy will demand that one of the branches be shut down. But given that the banks are government owned something like that is unlikely to happen.

Over and above this, there will be multiple people with the same skill at the corporate level. Will this duplicity of roles end, with people being fired? Highly unlikely.

Hence, the merger of two public sector banks, will give us a bigger inefficient bank. Further, there are very few examples of public sector banks being merged in the past.  So, there is nothing really to learn from.

As Gandhi said: “Recent merger of State Bank of Saurashtra and State Bank of Indore into State Bank of India may be seen as basically merger among group companies. The only example of merger of two PSBs is merger of New Bank of India with Punjab National Bank in 1993. However, this was not a voluntary merger.”

Also, it is worth remembering that public sector banks are facing huge bad loan problems. Many corporates who had taken on loans are not repaying them. In this scenario, if banks are merged without the bad loan problem being solved, we will have a situation where problems of two banks are basically passed on to one bank. That doesn’t make the situation any better.

As Gandhi summarises the situation: “PSBs as a group have not been performing well during the last few years. There has been a large increase in Non-Performing Assets (NPAs). As a part of managing large NPAs, some suggestions have been made that perhaps a consolidation of PSBs can render them more capable of managing such challenges relatively better…Merger of a weak bank with a strong bank may make combined entity weak if the merger process is not handled properly. The problems of capital shortages and higher NPAs may get transmitted to stronger bank due to unduly haste or a mechanical merger process.

The column originally appeared on the Vivek Kaul Diary on April 27, 2016

EPF issue: Why protests against rate cut show cussedness of trade unions


The interest on the Employees’ Provident Fund(EPF) for the year 2015-2016 has been set at 8.7%.

The Central Board of Trustees(CBT) of the Employees’ Provident Fund Organisation(EPFO) had proposed an interest of 8.8%, when they had met in February earlier this year. The ministry of finance finally decided on an interest rate which is 10 basis points lower at 8.7%, than what the Trustees of EPFO had proposed. One basis point is one hundredth of a percentage.

This hasn’t gone down well with the trade unions and they have decided to protest. Bhartiya Mazdoor Sangh (BMS), the trade union closest to the ruling Bhartiya Janata Party, given its affiliation to the Rashtriya Swayamsevak Sangh(RSS), has decided to hold protests across the country.

As its general secretary Virjesh Upadhyay told PTI: “BMS strongly condemns the cut in EPF interest rates and will hold demonstrations at EPF offices on April 27,” Sangh general secretary said, adding, the Fund is managed by the Central Board of Trustees (CBT), an independent and autonomous body.”

Other trade unions have also come out strongly against the move. But the entire thing is quite bizarre. The question is what are they protesting about? It seems the ministry of finance’s decision of cutting down the interest rate offered by 10 basis points to 8.7%, from the 8.8% proposed by the CBT of EPFO, hasn’t gone down well with the unions.

As AK Padmanabhan, board member of the CBT of EPFO and the president of Centre for Trade Union Congress told The Indian Express: “It’s unusual that after the CBT recommendation, the finance ministry has decided to cut interest rate.”

Maybe, the move is unusual, but are the trade unions also totally jobless? Allow me to explain. How much difference does the 10 basis point cut actually make? On a corpus of Rs 1 lakh, it makes a difference of Rs 100.

Also, the interest rate paid on EPF in 2014-2015 and 2013-2014 was 8.75%. In comparison to that, the interest for 2015-2016 will be lower by Rs 50 per lakh.

Is it worth protesting on something like this? What are the trade unions actually trying to achieve by doing this? Or since they are trade unions, they need to protest against everything?

Also, don’t the trade unions know that 8.7% interest being paid on EPFO, is the highest interest rate being offered by the government across all its schemes? It is sixty basis points more than the 8.1% per year interest currently being offered on the Public Provident Fund and the National Savings Certificate(NSC).

It is ten basis points more than the 8.6% on offer on the Senior Citizens’ Savings Scheme and Sukanya Samriddhi Account Scheme. Even the senior citizens who typically get paid more otherwise, are being paid lower than the interest being paid on EPF. So what are the trade unions protesting about?

The government is trying to move the country towards a lower interest rate regime. Fixed deposit rates are down by more than 100 basis points in the last one year. In comparison, the EPF interest rate has been slashed by just 5 basis points. Further, interest earned on fixed deposits is taxable. Interest earned on EPF is not.

If all these reasons are taken into account, the planned protests of the trade unions essentially look very hollow.

Also, what is the government trying to achieve by cutting the EPF interest rate by 10 basis points? In an ideal world, the government would have wanted to cut the EPF interest rate much more, to bring it in line with the other prevailing interest rates. But given all the hungama that has recently happened whenever the government has tried to bring any change to the EPF, it basically wasn’t in the mood to take on any more risk.

Having said that a 10 basis point cut in the EPF interest rate essentially achieves nothing.

Further, it needs to be asked, why a provident fund as big as EPF is, is not professionally managed? As on March 31, 2015, the EPFO managed funds worth Rs 6.34 lakh crore in total. Provisional estimates suggest that in 2015-2016, the EPFO saw Rs 1.02 lakh crore being invested in the three schemes that it runs. Of this around Rs 71,400 crore was invested in the EPF. This means as on March 31, 2016, the EPFO managed funds worth Rs 7.36 lakh crore in total.

This is a huge amount of money. The question is why is this money not being professionally managed. The CBT of EPFO essentially comprises of the labour minister, a few IAS officers, a few businessmen and a bunch of trade union representatives. Which one of these categories of people has some the expertise to manage investments?

Further, why does a committee need to meet to decide on an interest rate for EPF? Why can’t it simply be declared on the basis of returns on the investments made? Why can’t returns on EPF investments be declared on a regular basis? Why is there so much opaqueness in the entire process?

The only possible explanation is that if things do become transparent, then the trade unions controlling the CBT of EPFO, will essentially become useless. When it comes to transparency, it’s the same story everywhere.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Firstpost on April 26, 2016

Why we buy life insurance


Why do people buy life insurance? In a logical world, the answer would have been very straightforward.

People buy life insurance because they want to hedge against the probability of death. But is that really the case? The answer is no. Most life insurance that gets sold in this country is not really life insurance in the strictest sense of the term.

What gets sold as life insurance is essentially an investment plan with a dash of insurance. Hence, in most cases people who buy life insurance aren’t really adequately covered. So this brings us back to the question, why do people buy life insurance?

There are multiple answer to this question. I call a certain section of individuals buying life insurance as the “Papa Kehte Hain Types” or the PKHTs. The PKHTs buy insurance because their fathers ask them to do.

The only way their fathers have known to save is by buying life insurance policy regularly from the friendly neighbourhood agent.

Further, a major section of people graduate from being PKHTs. They dabble around on their own and figure out that if you buy insurance policies
save tax. This leads to people accumulating multiple insurance policies, without having much idea of what they are buying. Over the years, I have even known people who have had a dozen insurance policies and struggling to remember, when is the premium due on which policy.

Some others buy insurance because they need to oblige their friends, their relatives, their acquaintances, who have become insurance agents, for the lack of anything better to do. In fact, some portion of the PKHTs also fall into this category of buyers.

Still others are mis-sold insurance when they go into a bank to start a new fixed deposit or carry out some other transaction. In fact, given that I work as a freelance writer, my payments tend to be lumpy. The last time I went to my bank, a major payment had come through, and not surprisingly, the woman at the front desk, tried to sell me life insurance which, she said, would give me fantastic returns.

The moment I asked her, how can life insurance give returns, she got confused, and asked me to speak to her senior.

The point being that nobody really buys life insurance to hedge against the risk of dying. Further, given that most insurance policies are essentially investment plans, nobody really buys them as investment plans either.

The insurance companies are also happy letting people buy insurance for various reasons other than the probability of hedging against their death. Very rarely do insurance company advertisements talk about death. They do talk about investment but in a very vague sort of way, without really getting into the past performance of their investment plans.

As John Kay writes in Everlasting Light Bulbs—How Economics Illuminates the World: “Modern economies include many activities, like selling cars, where product quality and product attributes are complex and sellers know far more about what they sell than buyers about what they buy.” Insurance is one such product.

In case of insurance, the companies rarely go about filling the information gap and educating the buyer, through their advertising. When was the last time you saw an insurance company talk about the fantastic returns that its investment plans have generated? When was the last time you saw an insurance company talk about their premiums being the lowest?

In fact, as Kay writes: “Advertising is about managing that gap in information. And when you look more closely at advertising with that perspective, you see that the distinction between information and persuasion does not really stand up.”

Hence, the next time an agent tries to sell you life insurance, just ask them what has been the performance of their investment plan, over a period of five years, in comparison to other plans offered by other insurance companies.

Rest assured, the agent will not have an answer for this.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on April 27, 2016