Tag: Budget | Vivek Kaul

4 February, 2021

Budget 2021: Govt’s Claim of a Sharp Increase in Capital Expenditure Doesn’t Really Hold

Good analysis takes time.

It’s been three days since the finance minister Nirmala Sitharaman presented the annual budget of the union government and now my brain has really opened up and can see things that it couldn’t earlier.

On February 2, I wrote a piece which basically looked in detail at the fiscal deficit of 9.5% of the gross domestic product (GDP) and why the government’s claim of spending more this year and the next, to become the spender of the last resort and get the economy going again, didn’t really hold.

This piece is basically an extension of the same idea. Ideally, you should read the February 2 piece before you read this. Nevertheless, this piece is also complete on its own and if you are short on time, then just reading this piece should be enough to understand what I am trying to say.

One of the claims made by the finance minister in her budget speech was that the government was increasing the capital expenditure this year and the next. The mainstream media and the stock market wallahs have also tom tommed this line over the last few days. Nevertheless, as my analysis shows, this claim doesn’t really hold to the extent it is being made out to be.

As the finance minister said in her speech:

“In the BE 2020-21, we had provided Rs 4.12 lakh crores for capital expenditure. It was our effort that in spite of resource crunch we should spend more on capital and we are likely to end the year at around Rs 4.39 lakh crores which I have provided in the RE 2020-21. For 2021-22, I propose a sharp increase [emphasis added] in capital expenditure and thus have provided Rs 5.54 lakh crores which is 34.5% more than the BE of 2020-21.”

Let’s try and understand what the finance minister is saying here pointwise. (BE = budget estimate. RE = revised estimate. When the budget is presented a budget estimate is made. When the next budget is presented a revised estimate is put forward).

1) Capital expenditure is basically money spent on creating assets, in particular physical infrastructure like roads, railway lines, factories, ports, etc. Revenue expenditure is basically money spent in paying salaries and pensions, financing subsidies, etc. Over and above this, interest paid on the outstanding debt or borrowings of the government, is also a part of revenue expenditure. In fact, interest payments on outstanding debt are the biggest expenditure in the union budget. In 2020-21, it forms 20% of the total government expenditure and it jumps to 23.3% in 2021-22.

The usefulness of capital expenditure made by the government can be experienced in the years to come as well and it is believed that it adds to economic activity more than the revenue expenditure. Hence, economists, journalists and policy analysts, while analysing the union budget like to look at the money that has been allocated towards capital expenditure.

2) In 2019-20, the government spent Rs 3.36 lakh crore on capital expenditure. In 2020-21, it is expected to end up spending Rs 4.39 lakh crore, which is 30.7% more. But the thing to understand here is that when the government presented the budget for this financial year in February 2020, it had already budgeted to spend Rs 4.12 lakh crore or around 22.6% more.

It is worth remembering that when the budget for this financial year was presented, the fear of covid and the negative impact it would have on the economy, hadn’t been realised as yet. In the aftermath of covid, the capital expenditure went up from the budgeted Rs 4.12 lakh crore (or the budget estimate) to the revised estimate (RE) of Rs 4.39 lakh crore. Hence, the post covid increase in capital expenditure has been around 6.6%.

Given this, the increase in capital expenditure in 2020-21 had already been budgeted for pre-covid and there was a small increase post-covid. Once we know this, things don’t sound as exciting as the finance minister made it sound in her budget speech.

3) How will things look in 2021-22 when it comes to capital expenditure? The finance minister said that the capital expenditure will grow by 34.5% to Rs 5.54 lakh crore in 2021-22 in comparison to the budgeted expenditure of Rs 4.12 lakh crore in 2020-21.

The question is why would you compare next year’s budget estimate with the current year’s budget estimate when the revised estimate number for the year is already available. You would only do it, if you wanted to show a higher jump. Anyway, the finance minister of a country should be using some better mathematical tricks than such an elementary one.

Also, even when we compare next year’s budgeted capital expenditure with this year’s revised one, the jump is substantial. The capital expenditure will jump from Rs 4.39 lakh crore to Rs 5.54 lakh crore. This is a jump of 26.2%, which looks to be very good.

4) So far so good. The trouble is that the finance minister just spoke about the budgeted capital expenditure of the government in her budget speech and not the total capital expenditure of government. You can click on this and go to page 8 to get the numbers for the total capital expenditure of the government, which are also published in the budget.

The total capital expenditure of the government includes what is in the budget plus internal and extra budgeted resources (IEBR). The IEBR consists of money raised by the public sector enterprises owned by the union government through profits, loans as well as equity, for capital expenditure. It also includes the Indian Railways. This is also a part of government’s overall capital expenditure though it is off-budget and not a part of it.

The total capital expenditure of the government in 2019-20 stood at Rs 9,77,280 crore (It will soon become clear why I am using full numbers and not representing them in lakh crore). The revised estimate for the total capital expenditure in 2020-21 stood at Rs 10,84,651 crore, which is around 11% more. A 11% jump year on year sounds decent.

Nevertheless, one needs to take into account the fact that the budgeted capital expenditure of the union government when the budget for this year was presented in February 2020 had stood at Rs 10,84,748 crore.

As I said earlier, the budget was presented before covid struck. In that sense, the revised capital expenditure of 2020-21 is actually slightly lower than the budgeted one. This again punctures the government’s claim of spending more to get the economy going again post covid. They are spending a tad lower than what they had planned to spend before covid struck.

5) How does 2021-22 look? The government is planning to spend Rs 11,37,067 crore towards capital expenditure. This is 4.8% more than the current financial year. This when the government expects the nominal gross domestic product (GDP), not adjusted for inflation, to jump by 14.4% during 2021-22. The Economic Survey expects the nominal GDP to jump by 15.4%.

Once this is taken into account, it is safe to say that if the government sticks to these numbers, there will be barely any increase in capital expenditure between this year and the next.

Of course, the narrative of the government increasing its capital expenditure has been set. That’s what we have been told over and over again over the last few days. The stock market seems to believe it as well.

This entire exercise also tells you how nuanced numbers can get once you start really digging them up and setting them up in the right context. This is something you won’t see much in the mainstream media. Given this, it is very important that you please continue supporting my writing.

PS: I would like to thank, Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, whose research note on the budget, helped me think through this issue, in a much better way.

2 February, 20212 February, 2021

“We have spent, we have spent and we have spent” – But Where Madam FM?

Those of you who read me regularly would know that I look at the government budget more as a statement of financial accounts and not much as an actual policy document, as many people do.

The reason is simple. The government has an opportunity to do right policy 365 days a year. But the annual budget numbers are released only once a year.

Keeping this in mind, in this piece I will look at the massive fiscal deficit that the union government will run this year and try to analyse it in different ways and try connecting it to what it means for the economy as a whole and the ability of the government to spend money.

We will also look at whether the government is spending more money in order to get the economy going, as it has claimed to.
Let’s take a look at this pointwise.

1) The fiscal deficit for 2020-21 is projected to be at 9.5% of the gross domestic product (GDP). This is the highest fiscal deficit figure between 1970-71 and now (The fiscal deficit data is available in the Centre for Monitoring Indian Economy database from 1970-71 onwards). While this shouldn’t be surprising, the spread of the covid pandemic is not the only reason for it.

Fiscal deficit is the difference between what a government earns and what it spends and it is expressed as a percentage of GDP. Somehow, once expressed as a percentage of GDP, the fiscal deficit never sounds big enough.

In absolute terms, the fiscal deficit for this year is expected to be at Rs 18.49 lakh crore. Now that is one big number. Especially if you compare it to the fact that the fiscal deficit expected when the budget for this year was presented in February 2020, was Rs 7.96 lakh crore. The deficit turned out 132% more than what was forecast before the year began.

2) There is another interesting way to look at fiscal deficit. You might think that I am torturing numbers here and you are right to some extent, but I am only trying to show how big this fiscal deficit actually is.

Take a look at the following chart. It plots the fiscal deficit as a percentage of total government expenditure, over the years.

Source: Author calculations on data from Centre for Monitoring Indian Economy.

What does this chart tell us? It tells us that in 2020-21, the fiscal deficit as a percentage of government expenditure will be at 53.6%. This is the highest ever level. Hence, a bulk of the government expenditure during 2020-21 will not be financed by its earnings. This tells us how high the fiscal deficit really is.

3) The question is why has the fiscal deficit jumped to such a high level? The simple answer is that the government hasn’t earned the total amount of tax it had projected, thanks to the spread of the covid pandemic. Let’s start with the net tax revenue or what is left after the government has shared the tax collected with the state governments.

The government expected to earn a net tax revenue of Rs 16.36 lakh crore this year, when the budget for this year was presented in February 2020. It now hopes to earn Rs 13.45 lakh crore. This is Rs 2.89 lakh crore or 17.8% lower. This explains a part of the jump in the fiscal deficit from an expected level of Rs 7.96 lakh crore to Rs 18.49 lakh crore. But it still doesn’t give us the complete story.

4) In 2020-21, the government expected to earn a significant amount of money by selling or disinvesting its stakes in public sector enterprises. The amount it expected to earn through disinvestment was Rs 2.1 lakh crore. It has now been revised to just Rs 32,000 crore or 15.2% of the expected amount. There is gap of Rs 1.78 lakh crore here and this has also majorly pushed up the fiscal deficit.

The government’s excuse for this is covid. While, that might have been true for the first half of the year, it just doesn’t work for the second half of the year, when the stock market has gone from strength to strength and the government could easily have divested its stakes in public sector enterprises.

The only possible explanation here is that the government, as usual, has moved very very slowly on the procedural formalities required to disinvest its stakes in public sector firms.

5) A lower tax collection of Rs 2.89 lakh crore and lower disinvestment receipts of Rs 1.78 lakh crore, still only add up to around Rs 4.67 lakh crore and doesn’t totally explain the huge jump in the fiscal deficit.

There is a third major reason. I write about it in detail here. And I urge you click on this link and read it. I will offer a short summary here. The Food Corporation of India (FCI) buys rice and wheat directly from farmers at a minimum support price announced by the government. It then sells this rice and wheat through the public distribution system at a much lower price, in order to meet the needs of food security.

The government has to compensate the FCI for this difference. It does that by allocating money towards food subsidy in the budget. Over the years, the money allocated towards food subsidy has never been enough. In 2019-20, the FCI ‘s food subsidy bill was close to Rs 3.18 lakh crore. The government gave it Rs 75,000 crore.

Much of this gap was filled by FCI taking on loans from the National Small Savings Fund, where all the money collected under the various small savings schemes, ends up. As of March 2020, the FCI owed NSSF Rs 2.55 lakh crore.

The accounting jugglery over the years, essentially helped the government to declare a lower expenditure and hence, a lower fiscal deficit.

The government has now decided to end this and take on the total food subsidy offered by FCI as an expenditure. Hence, in February 2020, when the budget for this year was presented the allocation of food subsidy to FCI had stood at Rs 77,983 crore. It has now been revised to Rs 3.44 lakh crore. In fact, the overall food subsidy has been increased from Rs 1.16 lakh crore to Rs 4.23 lakh crore. This is a good thing that has happened because ultimately the main aim of the government budget is to present financial accounts as correctly as possible.

This has added Rs 3.07 lakh crore (Rs 4.23 lakh crore minus Rs 1.16 lakh crore) more to the government expenditure and hence, to the fiscal deficit as well. Hence, the three reasons discussed up until now increased the fiscal deficit by Rs 7.74 lakh crore (Rs 2.89 lakh crore + Rs 1.78 lakh crore + Rs 3.07 lakh crore). This still doesn’t explain the total difference.

6) Other than taxes and disinvestment, the government also earns money under the heading non tax revenue. This includes dividends that the government earns from public sector enterprises, public sector banks, financial institutions like the Life Insurance Corporation of India and the dividend from the Reserve Bank of India. It also includes many other ways of making money.

The non tax revenue that the government had hoped to earn this year was Rs 3.85 lakh crore and it ended up earning Rs 2.11 lakh crore, which was Rs 1.74 lakh crore lower. This was primarily on account a massive fall in dividends earned.

If we add this to the earlier Rs 7.74 lakh crore, we get Rs 9.48 lakh crore. The fiscal deficit went up from a projected Rs 7.96 lakh crore to Rs 18.49 lakh crore primarily because of these four reasons.

Three of these reasons, lower tax collections, lower disinvestment receipts and lower non tax revenue, are on the earnings side. And one reason, higher food subsidy is on the expenditure side.

7) The finance minister Nirmala Sitharaman in her post budget interaction with the media said the government has spent a lot of money in order to get the economy going. The Business Standard reports her as saying, we have spent, we have spent and we have spent. The logic here is that in an environment where personal consumption has slowed down and industrial expansion is not happening, the government has to become the spender of the last resort, in order to get the economy going again.

The business media today is full of headlines around the government spending its way out of trouble. But do the budget numbers really reflect that?

Let’s try and see what the numbers tell us. The total government expenditure budgeted for 2021-22 is Rs 34.83 lakh crore. This is just a little more than the Rs 34.5 lakh crore the government expects to spend this year.

Here’s the interesting thing. In 2021-22, the government expects to spend Rs 8.1 lakh crore on paying interest on its outstanding debt. Once we adjust for this, the total government expenditure in 2021-22 stands at Rs 26.73 lakh crore (Rs 34.83 lakh crore minus Rs 8.1 lakh crore).

In 2020-21, the government expects to spend Rs 6.93 lakh crore on paying interest on its debt. Once we adjust for this, the total government expenditure in 2020-21 stands at Rs 27.57 lakh crore (Rs 34.5 lakh crore minus Rs 6.93 lakh crore).

Hence, the year on year, overall government spending next year will actually come down and not go up. Having said that, the capital expenditure in 2021-22 is budgeted to be at Rs 5.54 lakh crore, which is 26.2% more than the Rs 4.39 lakh crore, the government expects to spend in 2020-21. This is some good news, but doesn’t deserve the emphatic spend, spend, spend, statement.

The extra Rs 1.15 lakh crore (Rs 5.54 lakh crore minus Rs 4.39 lakh crore) works out to 0.5% of the GDP projected for 2021-22. While something is better than nothing, it clearly isn’t much.

8) What about the current financial year? The government plans to spend a total of Rs 34.5 lakh crore. This is 13.4% more than the Rs 30.42 lakh crore it had planned to spend when it presented the budget. Once we adjust for the fact the food subsidies have been properly accounted for and that has added Rs 3.07 lakh crore to the government expenditure, the actual expenditure goes down to Rs 31.43 lakh crore (Rs 34.5 lakh crore minus Rs 3.07 lakh crore). This is around 3.3% more than the amount budgeted of Rs 30.42 lakh crore, at the time of the presentation of the budget.

In fact, if we look at the food subsidy paid during April to December 2020, it amounts to Rs 1.25 lakh crore. With the budgeted amount being at Rs 4.23 lakh crore, close to Rs 3 lakh crore of food subsidy still remains unpaid. This will be paid during the last three months of 2020-21.

This money has already been spent by FCI and other agencies during this year and years gone by. Once FCI receives this money, it will pay off the money it owes to NSSF. Hence, there is really no extra spending happening here.

9) Now let’s compare, the spending in 2020-21 with that in 2019-20. The total expenditure in 2019-20 had stood at Rs 26.86 lakh crore. Once we take the increase in food subsidies out, the total expenditure in 2020-21 stands at Rs 31.43 lakh crore (Rs 34.5 lakh crore minus Rs 3.07 lakh crore). The spending in 2020-21 is thus around 17% more than the last financial year. But much of it was budgeted for in February 2020, when the budget for this year was first presented.

Hence, the increase in spending in 2020-21, or the fiscal stimulus as economists like to call it, hasn’t been because of the covid pandemic, it was happening anyway.

To conclude, it is clear that the government is not spending more in 2021-22 on the whole, though there is some increase in capital expenditure and that’s good. In 2020-21, the government has actually spent more, but then much of it was planned before covid and not after it.

It also tells us that once we take the real fiscal deficit into account, there isn’t much that the government can do to spend its way out of trouble. The good thing is that the government has decided to clean up its books. And that will have repercussions on the total amount of money it is able to spend during the course of this year and the next. The mistakes that we make in our past always come back to haunt us.

Dear Reader, clearly this piece should tell you how nuanced numbers can get, if one decides to dig a little deeper. Of course, you won’t get such a nuanced reading of the budget numbers anywhere in the mainstream media.

Hence, it is important that you continue supporting my work.

1 February, 2017

India Budget 2017: Spending to get out of trouble

In January 2017, the ministry of statistics and programme implementation of the Indian government, came up with the economic growth prediction for 2016-2017 (i.e. the period between April 1, 2016 and March 31, 2017).

The numbers showed that incremental government expenditure made up for one-third of the increase in the Indian gross domestic product(GDP) in 2016-2017. What did this mean in simple English? This essentially meant that increased spending by the government would be responsible for one-third of the Indian GDP growth in 2016-2017.

In 2015-2016, the contribution of increased government expenditure to Indian economic growth was just a little over 3 per cent. Hence, what it essentially means is that in the current financial year, the Indian government will primarily drive economic growth.

And from the looks of it, this is likely to continue in 2017-2018 as well. The annual budget presented by the finance minister Arun Jaitley on February 1, 2017, seems to suggest so. Let’s look at this in some detail.

The government has allocated Rs 48,000 crore to the Mahatma Gandhi National Rural Employment Guarantee(MGNREGA) programme. The
of MGNREGA is to provide at least 100 days of guaranteed work during the course of a financial year to adult members of every rural household who are willing to do unskilled manual work.

The Rs 48,000 crore allocation to MGNREGA is the highest allocation ever made to the programme. In 2016-2017, the government had allocated Rs 38,500 crore to MGNREGA, though it will end up spending Rs 47,499 crore on it. The increased spending on MGNREGA is to alleviate the negative impact of demonetisation being felt in the rural and the semi-rural areas of India, where major part of transactions happen in cash. And after demonetisation cash has been in short supply.

It is also expected to alleviate the negative impact of demonetisation on the informal manufacturing sector which operates in cash and tends to employ many semi and unskilled people migrating from rural India. From the midnight of November 8 and 9, 2016, the Narendra Modi government demonetised Rs 500 and Rs 1,000 notes, and made them useless.

Interestingly, in 2013-2014, the Indian government had spent Rs 39,778 crore on MGNREGA. Hence, in inflation-adjusted terms, the Rs 48,000 crore allocation is around the same. Given this, the allocation to this cash for work programme is not as much as is being made out to be.

The government has also increased the allocation to the Prime Minister Housing Scheme-Rural by more than 50 per cent to Rs 23,000 crore. This is expected to create some jobs in rural India where disguised unemployment is extremely high. Close to half of India’s population is engaged in agriculture which contributes only around 18 per cent of the GDP.

On the physical infrastructure front, the government has increased the allocation to build highways by 12 per cent to Rs 64,900 crore. Further, the total capital and development expenditure of Railways has been pegged at Rs 1,31,000 crores. This includes Rs 55,000 crores provided by the government.

The allocation to 29 schemes sponsored by the central government has gone up by 21.6 per cent to Rs 3,35,461 crore, in comparison to the allocation made in 2016-2017. The allocation to the infrastructure sector has gone up by 13.5 per cent to Rs 3,96,135 crore. Also, the total resources being transferred to the States and the Union Territories with Legislatures in 2017-2018 is Rs 4.11 lakh crores, against Rs 3.60 lakh crores in this financial year, the finance minister pointed out. This is a jump of 14.2 per cent.

Over and above this, the government has increased the lending target under the Prime Minister’s Mudra Scheme by 100 per cent to Rs 2.44 lakh crore. Under this scheme, the Micro Units Development and Refinance Agency (or Mudra) provides loans at low interest rates to micro-finance institutions and non-banking finance institutions which in turn lend money to micro/small business entities engaged in manufacturing, trading and services activities.

Further, in the budget speech, the finance minister said: “I have stepped up the allocation for Capital expenditure by 25.4% over the previous year”. Also, capital expenditure will form 14.4 per cent of the total expenditure of the government in 2017-2018. This is the highest since 2008-2009. Capital expenditure leads to the creation of assets and hence, is a good thing.

Long story short—the Modi government is trying to spend its way out of trouble. Though at the same time it needs to be said that it is not going overboard with it. A part of this pump-priming became necessary because of the self-goal of demonetisation, which is expected to pull down economic growth in 2016-2017. The Economic Survey for 2016-2017 released on January 31, 2017, expects GDP growth to be between 6.5-6.75 per cent in 2016-2017. India grew by 7.9 per cent in 2015-2016. The question is what would the economic growth have been if the Modi government hadn’t scored the self-goal of demonetisation?

When pushed to a corner, most governments try to spend their way out of trouble. Nevertheless, the government spending is not always as effective as private spending. In the Indian case, a major reason is massive leakage. A large portion of the government spending does not reach those it meant for and is siphoned off by the bureaucracy expected to distribute it.

One way of tackling this is for the government to concentrate on running a few important schemes on which it can spend a bulk of its money and focus its time and attention on. The Economic Survey points out that “the Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India.”

One negative impact of running so many schemes is that “in many cases, the poorest districts are the ones grappling with inadequate funds – this is evidence of acute misallocation. Many districts in Uttar Pradesh, Bihar, Chhattisgarh, parts of Jharkhand, eastern Maharashtra, Madhya Pradesh and Karnataka, among others, account for a large share of the poor and receive a less-than-equal share of resources”.

A very important part of economic reform in India is to bring down the number of these schemes. But that as they always say is easier said than done. And as always, this budget missed out on this opportunity as well.

The column was originally published on BBC.com on February 1, 2017

8 March, 2016

#EPFnotax: Six reasons why taxing EPF was a stupid idea in the first place

The Narendra Modi government has decided to withdraw their plan to tax the corpus accumulated by investing in the Employees’ Provident Fund(EPF). As the finance minister Arun Jaitley said in the Lok Sabha today: “In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal.”

This is a sensible decision to withdraw what was basically a very stupid idea at multiple levels.

a) The finance minister Arun Jaitley in his budget speech had said that only 40% of the corpus accumulated by investing in EPF would be tax free. This would apply on investments made after April 1, 2016.

The entire 100% accumulated corpus could be made tax free by investing 60% of the corpus in annuities. Annuities are essentially policies sold by insurance companies which can be used to generate a regular income.

The trouble is that most annuities in India give a return of around 5-7%. Given this, they remain a bad way to invest a large corpus. Even investing in a long term fixed deposit can give you a better return.

Some savings bank accounts also pay more than the returns that can be generated by investing in annuities. The annuities in their current are essentially nothing but a rip-off and anyone in their right mind would stay away from investing in them.

Then there is the Senior Citizens Savings Scheme, which allows a senior citizen to invest up to Rs 15 lakh. The scheme pays an interest of 9.3%per year. Given that better returns are available elsewhere, why force people to invest 60% of their provident fund corpus into annuities paying 5-7% per year.

b) Also, the change applied only to private sector employees with a salary of greater than Rs 15,000. This meant that the government employees investing in the General Provident Fund (GPF) or employees of public sector companies investing in other recognised provident funds, could withdraw 100% of their accumulated corpus and need not have paid any income tax on it.

Why was the change proposed only for private sector employees? Why was this distinction made on the basis of the employer? If the idea was to tax, the tax should have applied to everyone and not just the private sector employees.

In the way things had been proposed, a private sector employee making Rs 16,000 per month would have had to pay a tax on the accumulated corpus. A government employee need not have done anything like that. How is that fair and equitable?

c) The government has defended this move on the logic of moving towards a “pensioned society”. As the clarification issued by the ministry of finance a few days back pointed out: “The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.”

Why was only the private sector encouraged to move towards a pensioned society? Also, what about those people who are earning less than Rs 15,000 per month. Their need for a regular income after retirement is even greater than those making more money.

d) Also, why make only EPF and other recognised provident funds taxable at maturity. Why leave out the Public Provident Fund? Shouldn’t self-employed professionals who invest in PPF to possibly accumulate a retirement corpus, also be encouraged to become a part of the pensioned society?

e) The government also planned to tax the principal amount invested in the EPF. How fair is this? While calculating capital gains for investments made in stocks or real estate, the principal amount is not included. Also, investments made in real estate and debt mutual funds get indexation benefits, where the impact of inflation is taken into account while calculating the cost of purchasing the asset. This brings down the capital gains on which income tax is paid.

Further, there is no tax on long-term capital gains made on stocks and equity mutual funds. Taking all this into account, how fair was it to decide to tax EPF? Why leave out the investing modes of the rich and decide to tax the middle class EPF?

f) Further, it needs to be realised that different people have different needs. As Jaitley said in the Lok Sabha today: “”Employees should have the choice of where to invest. Theoretically such freedom is desirable, but it is important the government to achieve policy objective by instrumentality of taxation. In the present form, the policy objective is not to get more revenue but to encourage people to join the pension scheme.”

For that to happen there are so many other things that need to be set right. People use their retirement corpus for various things. They use the money to get their children married, educated and so on. While the government may look at this as something that shouldn’t be done but at times there is no option.

Sometimes emergency medical costs are also met out of withdrawing out of the corpus accumulated by investing in the EPF. In a country where there is almost no insurance for the old, how fair is to deny them access to the EPF corpus by deciding to tax it?

What all these points clearly tell us is that the Modi government clearly introduced the idea of taxing the EPF corpus in a hurry. There is clearly more thinking needed on it. Also, several things need to change before such a tax is introduced. And these changes are not going to happen any time soon.

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

The column originally appeared on Firstpost on March 8, 2016

4 March, 2016

Mr Jaitley, Before Striking a Deal with Black Money Wallahs, Let’s Try Selling ITC

A perhaps apocryphal story goes that photographers and journalists working for this entertainment supplement of a newspaper would take money and put in news items and photographs of celebrities who were willing to pay.

Of course, the management was smart enough to soon figure this out. Further, they thought, if the journalists could make money, why not the company.

Hence, thereon you could simply go to their office, pay them, get a receipt and get stuff published in the entertainment supplement, for a certain price. What was essentially a bribe, became a smart business model.

The government of India has done something similar by coming up with the black money compliance window. Up until, the black money wallahs may have had to pay off the tax department to make sure they don’t come after them.

The government is now telling the black money wallahs instead of bribing my employees, pay us 15% extra (7.5% surcharge, 7.5% penalty over and above a 30% tax) and we won’t come after you. The black money wallahs will have total immunity from prosecution as well.

As finance minister Arun Jaitley said during the course of the budget speech: “I propose a limited period Compliance Window for domestic taxpayers to declare undisclosed income or income represented in the form of any asset and clear up their past tax transgressions by paying tax at 30%, and surcharge at 7.5% and penalty at 7.5%, which is a total of 45% of the undisclosed income. There will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act and the declarants will have immunity from prosecution.”

What this essentially means is that if you have black money and are willing to pay 15% extra to the government, the law of the land won’t apply to you. Also, look at it this way, if you miss an advance tax payment, you pay a fine at the rate of 1% per month. But you pay 15% extra on your black money on which you have never paid tax and the government will look the other way.

As philosopher Michael Sandel writes in What Money Can’t Buy—The Moral Limits of Markets: “Why worry that we are moving toward a society in which everything is up for sale?…In a society where everything is for sale, life is harder for those with modest means. The more money can buy, the more affluence (or the lack of it) matters.”

The simple explanation for why the government is doing this is that they need money to match the expenditure that they have planned during the course of 2016-2017. So it is about money. Having said that there are other ways of earning it as well.

Take the case of ITC. As I have pointed out in the past, the government owns 11.19% of this company, which primarily makes money through selling cigarettes. The stake is owned through the Specified Undertaking of the Unit Trust of India. Why does the government continue to own this stake?

Over and above this, the Life Insurance Corporation(LIC) of India owns a 14.41% stake in the company. Effectively, the government owns one-fourth of ITC. Hence, this stake can easily be strategically sold at a price, which is better than the prevailing market.

The 11% stake through SUUTI would be worth Rs 28,471 crore as of yesterday. The government also owns stakes in L&T and Axis Bank through SUUTI. Why is the government holding on to these shares?

Is the government likely to sell these shares in 2016-2017? It is unlikely. Why do I say that? In the budget, the government has given an estimate of the amount of money it targets to earn during the course of this year, through disinvestment. It plans to raise Rs 56,500 crore through disinvestment. Of this Rs 36,000 crore is expected to be earned through the disinvestment of shares in companies that it owns.

Rs 20,500 crore is expected to come in through sale of shares in companies in which the government owns minor stakes. The government’s stake in ITC is worth much more than that. Hence, it is more than likely that the government will continue to own ITC during the course of this year as well. At the same time, it is ready to pardon people who have black money if they pay 15% extra to the government. It is also ready to tax 60% of the maturity corpus of Employees’ Provident Fund of private sector employees.

At the same time, it continues to finance loss making public sector enterprises. The Economic Survey released before the budget had a very interesting data point. Up to March 2014, the accumulated losses of public sector enterprises stood at a whopping Rs 1.04 lakh crore. The government continues to finance these loss making firms and in the process has to strike a deal with black money wallahs to ensure that it has enough money.

Further, these loss making public sector enterprises are sitting on a huge amount of land and there has almost no effort to monetise this land and make some money in the process. The latest Economic Survey does recommend the sale of land of public sector enterprises. Let’s see if that happens.

The point being that the Modi government could have done several things to earn money before getting into striking deals with those who have black money.

Meanwhile, the government will continue running anti-tobacco advertisements. Funny country we are.

The column originally appeared on the Vivek Kaul’s Diary on March 4, 2016