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

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010

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

Moral problem of Swacch Bharat cess


In November last year, the Narendra Modi government introduced a Swacch Bharat Cess of 0.5%. As the press release announcing the decision said: “Swachh Bharat Cess is not another tax but a step towards involving each and every citizen in making contribution to Swachh Bharat…The proceeds from this cess will be exclusively used for Swachh Bharat initiatives.”

In short, the money raised from this cess would be used for keeping India clean. The government hopes to raise close to Rs 10,000 crore through this cess, during the course of a full financial year.

There are several questions that this new cess raises. The first being that if the government has to introduce a cess to keep India clean, then what does it use its main tax revenues for? If a portion of these tax revenues are not being spent on something as important as keeping India clean, then what is the point in taxing citizens?

Nevertheless, there is a more important question that needs to be raised here. Should the government be taxing citizens to keep the country clean? An economist might believe that this is the right thing to do but the introduction of cess has diluted the moral incentive that citizens have to keep the areas that they live in, clean.

What does this mean? Let’s try and understand this through something that happened in Israel. As philosopher Michael Sandel writes in What Money Can’t BuyThe Moral Limits of Markets: “Often, market incentives erode or crowd out non market incentives. A study of some child-care centres in Israel shows how this can happen. The centres faced a familiar problem: parents sometimes came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centres imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased.”

What happened here? The child-care centres actually introduced a fine for parents turning up late. The idea was that with the threat of a fine hanging over their heads, the parents would come on time to pick-up their kids. Economic thinking was at work. But what happened was exactly the opposite.

The question is why? As Sandel writes: “Introducing a monetary payment changed the norms. Before, parents who came late felt guilty; they were imposing an inconvenience on the teachers. Now parents considered a late pickup as a service for which they were willing to pay. They treated the fine as it were a fee. Rather than imposing on the teacher, they were simply paying her to work longer.”

The introduction of a fine was basically treated by the parents as a fee and this led to the opposite result. As economist Dani Rodrik writes regarding the same study in his book Economics Rules: “A moral injunction that previously had kept parents’ behaviour in check was relaxed once the monetary penalty came into play.”

Now how is this linked to the Swacch Bharat Cess? Until the cess was introduced, any conscientious citizen would feel guilty when he saw garbage in his locality or in his area of work. He would think twice before littering as well.

This moral incentive changed the moment people started paying the Swacch Bharat Cess. Now the citizen is paying the government to make sure that his area of work or residence remains clean. And if that is not the case, then it is clearly not his problem, given that he has done his bit by paying a cess (or a fee) to the government.

Sandel summarises the situation best when he says: “Putting a price on the good in life can corrupt them…[and] also corrupt the meaning of citizenship.” And this is something those who introduced the Swacch Bharat Cess need to carefully think about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])
The column originally appeared in the Bangalore Mirror on February 17, 2016

What have we done, Maggie what have we done?

margaret-thatcherJohn Maynard Keynes, the greatest economist of the twentieth century, had a line for most occasions. In his magnum opus The General Theory of Employment, Interest and Money, publishedin 1936, Keynes wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Margaret Thatcher, more popularly known as “Maggie”, the longest serving British Prime Minister of the twentieth century, who died of a stroke yesterday, was no different on this front. As an obituary in The New York Times points out “Mrs. Thatcher’s prescription for change was based on the ideas of the conservative economists Friedrich von Hayek and Milton Friedman. Hayek believed that political and economic freedom were inseparable; Friedman argued that economic productivity and inflation were determined by the amount of money the government put into the economy, and that the heavy government spending advocated by Keynesian economics distorted the natural strength of the marketplace.”
When Thatcher first took over as the Prime Minister in 1979, Great Britain had become the sick man of Europe ( a tag which was usually used for Turkey). To revive the moribund economy Thatcher fell back on the ideas of von Hayek and Friedman. Thatcher went after the trade unions which had a stranglehold on the British industry. She sold off government firms, cut subsidies to the the firms which were piling on losses (in the process many of them went bankrupt) and resisted suggestions that the government should carry out more social spending and create jobs. She introduced both tax and spending cuts.
Like her intellectual gurus Hayek and Friedman, Thatcher was a firm believer in the “free market”, over and above everything else. As The Economist writes in an obituary of her: “
Mrs Thatcher believed that societies have to encourage and reward the risk-takers, the entrepreneurs, who alone create the wealth without which governments cannot do anything, let alone help the weak.”
Thatcher was not the only politician at that point of time who believed in the primacy of the market. Ronald Reagan, who was the President of the United States at almost the same point of time, also shared her belief.
And this unleashed an era of market triumphalism. As Michael Sandel, one of the greatest living philosophers, who works at the Harvard University, writes in
What Money Can’t Buy – The Moral Limits of Markets “The era (of market triumphalism) began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom. And it continued in the 1990s, with the market-friendly liberalism of Bill Clinton and Tony Blair, who moderated but consolidated the faith that markets are the primary means for achieving public good.”
And this belief in the markets led to the proliferation of market values into spheres of life where they don’t belong, feels Sandel. As he writes in a piece in The Atlantic “We live in a time when almost everything can be bought and sold. Over the past three decades, markets—and market values—have come to govern our lives as never before. We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us.”
This led to ‘market values’ playing a bigger role in social life. As Sandel writes “Economics was becoming an imperial domain. Today, the logic of buying and selling no longer applies to material goods alone. It increasingly governs the whole of life.”
Sandel provides many examples of the same. There were more private contractors fighting the war in Afghanistan and Iraq, than American military troops. In fact, an individual can fight in Afghanistan or Somalia for as much as $1000 a day. “The pay varies according to qualifications, experience, and nationality,” points out Sandal. At $2,50,000 you can shoot an endangered black rhino in South Africa. Western couples can pay as little as $8000 to hire the service of an Indian surrogate mother. You can sell space to display advertising on your forehead for $10,000. Becoming a guinea pig for the big pharma companies in their drug trials can pay as much as $7,500. “The pay can be higher or lower, depending on the invasiveness of the procedure used to test the drug’s effect and the discomfort involved,” writes Sandal.
In the Great Britain and United States public safety has been taken over by private security firms. The number of private guards is nearly double the number of police officers. When Pope Benedict XVI, who recently retired, first visited America, tickets for his stadium masses were distributed for free. Soon they were selling on the internet for more than $200. Even religious goods have been turned into instruments of profits (On a different note this has been a great business model for all the babas and gurus who have popped up all over India).
As the above examples show profits could be made on almost anything, including death. And in her death even Margaret Thatcher became a part of the market triumphalism that she helped unleash.
Death pool is a popular game on the internet where people bet on celebrities they think will die by the end of the year. “Serious players do not make their picks lightly; they scour entertainment magazines and tabloids for news and ailing stars…popular pool choices are Kirk Douglas,
Margaret Thatcher, Nancy Reagan, Muhammed Ali…Stephen Hawking, Aretha Franklin, and Ariel Sharon,” writes Sandel in What Money Can’t Buy. People who would have bet on Thatcher dying before the end of 2013, would have won some money by now.
While market values have grown into the western society steadily over the last three decades, they have grown much more faster in the financial sector where a price tag has been put on almost everything. Two particular concepts that were widely used to do this were securitisation and credit default swaps.
Around 2002, American banks (and even banks in Europe) started giving out subprime home loans. The best customers of the bank were prime customers. Those who did not fall into the category and were seen as not good enough to be lend to, were known as subprime customers.
Those were days that anybody and everybody got a home loan including subprime customers. This was primarily because banks did not keep loans on their books. They securitised them away. T
hey bundled these loans together and sold bonds against them. The interest paid on these bonds was lower than the interest the bank was charging on the home loan. The difference in interest was the money made by the bank. This process was referred to as securitisation.
This process worked not only on home loans but it also worked on auto loans, consumer loans, credit card receivables, student loans, and what not.
The bonds were bought by investors of various kinds. When the borrowers of loans paid interest on their loans that interest was pooled together and used to pay interest to those investors who had bought these bonds. The same thing happened with the principal on the loan that was repaid by the borrowers. It was pooled together and used to pay off the investors who had bought these bonds.
By doing this banks no longer carried the risk of the borrower defaulting. It was passed onto the investor buying the bonds. Also the bank securitising the loan got back its money immediately and could thus give out fresh loans. And the more fresh loans banks made, the more bonds they could securitise. And they more bonds they securitised, the more bonds they could sell and charge commissions on that. Given this the banks were more interested in giving out more and more loans, securitising them and making commission on selling them, instead of checking the credibility of the borrower and whether he would be in a position to repay the loan.
Investors were not borrowed about the quality of the borrowers because the rating agencies had given AAA or the best ratings to these bonds. More than that they had also managed to buy insurance on these bonds. In 1997, JP Morgan had developed a financial instrument known as the credit default swap (CDS).
Investors who bought securitised bonds also bought a CDS against those bonds. They paid an insurance premium to the firm selling the CDS. And in case the underlying borrowers of the bonds that investors had bought defaulted, the investors got compensated for the losses by the firm selling the CDS. It worked like any other insurance contract would.
But over a period of time investors could buy a CDS even on a bond they did not own.
In simple English this is what it meant. I can go and buy a life insurance on my life or for my car. If I die then my nominee gets paid by the life insurance company. If my car is damaged then the insurance company pays me the cost of getting the car repaired.
The CDS version of the same would be that anyone could go and buy life insurance on me or an insurance on my car for that matter. And as long as they paid their premiums if I died or my car was damaged they would be compensated.
The primarily player in the CDS market was the financial products divisions of the insurance major AIG, which was based out of London. So everybody thought they would live happily ever after because they had paid a ‘market price’ for being adequately protected. But that was not to be.
The borrowers started defaulting and this finally led to the financial crisis, the aftermaths of which are still on. All this could have been avoided if a ‘market price’ had not been put on everything and banks would have checked the credibility of the borrower before lending them money. But that was not to be as good old fashioned banking had been destroyed. And it all started with Ronald Reagan and Margaret Thatcher believing that markets were over everything else.
Let me conclude with some lines Roger Waters, that other Great Brit, once wrote:

What have we done, Maggie what have we done?
What have we done to England?
Should we shout, should we scream
“What happened to the post war dream?”
Oh Maggie, Maggie what have we done?
The Post War Dream – Pink Floyd.

The article originally appeared on on April 9,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Ads everywhere: Do we want a society where everything’s for sale?

Vivek Kaul 
Innovation is a weird word. It means different things to different people. For people working in the marketing department of a newspaper it sometimes means an advertisement which makes it difficult for the readers to read the newspaper.
It could mean a sidebar before the front page which makes holding the newspaper difficult. Or it could mean a newspaper smelling in a particular way on a particular day. It could also mean an advertisement as the front page of the newspaper, something that can really get the regular reader irritated.
And at times it could mean an advertisement being splashed across different stories that appear on the front page of the newspaper.  Most editions of The Times of India, for example,have one such advertisement of Britannia Good Day biscuits.
When money becomes the be all and end all of all decisions in life market values tend to crowd out non market values.
The advertisement comes with a  tagline har ghante ek tola sona khanke. Five gold biscuits with Good Day printed in their middle are spread through the front page of the newspaper.
One such Britannia gold biscuit in the Mumbai edition of the newspaper appears bang in the middle of a story about a twin murder, where a father strangled his two kids and tried to kill himself.
Surely, the marketing department that places the ads would not have known that a gruesome story would be wrapping the biscuits. Nor could the advertiser have known that his ad may appear at an inappropriate place.
The issue does not relate just to print advertising. Ads placed on internet sites – including possibly this publication – may sometimes send the reading public that money can buy everything. This is how mishaps occur. Also are brands as big as Britannia is okay with advertising themselves in such a way? Bang in the middle of the story of a father strangulating his kids and then trying to kill himself. Is this the association that they want to build for themselves? Or has it all become about hit and run where you can just put an advertisement one day and forget about it the next day?
The question is can money buy everything now? This clearly seems to be the issue in this case.
I recently spoke to Michael Sandel, the foremost political philosopher of our times, who is a professor at Harvard University. A part of this interview appeared in the Daily News and Analysis. Sandel has most recently written What Money Can’t Buy: The Moral Limits of Markets.
As Sandel put it, “The last three decades have been a period of market triumphalism…We have drifted from having a market economy to becoming a market society. And the difference is this. A market economy is a valuable and effective tool for organising productie activity. And market economy has brought prosperity and affluence to countries around the world. A market society is different. A market society is a place where almost everything is up for sale. It’s a way of life in which society uses markets to allocate health, education, public safety, national security, environmental protection, recreation, procreation, and other social goods.”
The Britannia gold biscuit advertisement is a part of this larger phenomenon. Even a story of a father killing his two daughters and then trying to kill himself is – inadvertently – up for sale. As long as some money can be made, nothing else really matters.
And this is a phenomenon visible at other places as well, even temples. You don’t want to stand in the long queue at the Siddhivinayak temple in Mumbai; you can just pay a few hundred rupees extra and beat the queue. Other temples across the country allow you specialdarshan if you can pay a little extra. Religion and god have been turned into a perfect business model which never goes out of fashion. Ask those who paid Rs 2,000 to get darshan of Nirmal Baba.
Sandel gave me an interesting example of  Pope Benedict XVI on his first visit to the United States. “When Pope Benedict XVI made his first visit to the United States, free tickets were distributed through local parishes. But the demand for tickets far exceeded the supply of seats. And soon a market for those tickets started to develop and one ticket sold online for more than $200. Church officials condemned this on the grounds that you cannot pay to celebrate a sacrament. Turning what are essentially sacred goods into what are essentially instruments of profits values them in the wrong way.”
This phenomenon has even been visible everywhere from war to even medicines. “In Iraq and Afghanistan there were more paid military private contractors on the ground than US military troops. We never had a public debate whether we wanted to outsource war to private companies,” said Sandel. “Or consider the aggressive marketing of prescription drugs by pharmaceutical companies in rich countries. The funny thing is if you have ever seen the television commercials that accompany the evening news in the United States, you might come around to believing that the greatest health crisis in the world is not malaria or river blindness or sleeping sickness, but erectile dysfunction,” he added.
When money becomes the be-all and end-all of all decisions in life, market values tend to crowd out non-market values. Let me explain this through an example narrated to me by Sandel. “Some years ago in Switzerland they were trying to decide where to locate a nuclear waste site….There was a small town that seemed to be the likely place for the nuclear place site. The residents of the town were asked to, in a survey carried out by economists…if they would vote to accept a nuclear waste site in their community, if the Swiss Parliament decided to build it there. Around 51 percent, or a little over half of the respondents, said they would accept it.”
The economists then asked a second question. “They asked the residents of the community that suppose the parliament proposed building the nuclear waste facility in their community and at the same time offered to compensate them with an annual monetary payment, would they still favour it? You might sense that the number would have gone up to 80 or 90 percent but in fact the opposite happened. The support went down and not up. Adding the financial inducement to the offer reduced the rate of acceptance to 25 percent from the earlier 51 percent. Even when the economists upped the monetary incentive further the decision of the people did not change. The residents stood firm even when they were offered yearly cash payments of $8,700, which was more than the median monthly income of the area.”
So what is the moral of the story? “This is an illustration in which a cash payment can crowd out a non market value. When the people were asked to make a sacrifice for a common good without paying them the majority said yes out of a sense of civic responsibility. But when they were asked to change their mind (with money) many of them said we didn’t want to be bribed. The offer of money changed the character of the offer.”
A similar thing could be happening with the sale of advertising space in newspapers to the highest bidder. If Goliath sets a trend, the Davids are more than likely to follow.
And in this case it isn’t really a good trend. Do you want newspaper readers reading the story of a father killing his daughters and feeling disturbed by it or do you want them looking at the Britannia Gold biscuit ad which appears bang in the middle of the story and thinking maybe even I can win them? Do we want to build a society that is sensitive to what is happening around it? Or do we want to build a society which thinks of winning gold biscuits all the time?
As Sandel put it, “Most people would agree that there is a difference between prostitution, which is paid sex, and non-instrumental and non-monetised sexual intimacy… So do we want a society where everything is up for sale? Or are there certain moral and civic goods that markets do not honour and money cannot buy?”
And that is something worth thinking about.
The article originally appeared on November 23, 2012 on
Vivek Kaul is a writer. He can be reached at [email protected]. He has worked for the Times Group in the past.