Land Slide

the callousness and ineptitude with which India deals with its limited resources is not just astonishing but appalling.

Land, being a limited resource is one of the most important economic key resources for any country. It is surprising that India is still devoid of modern land laws and much awaited land reform bill namely Land Acquisition, Rehabilitation and Resettlement Bill (LARR) has been languishing from one committee to another for more than three years. Once again the discussion on the same remained inconclusive in all party meet which is to be held again on 20^th March 13.

Land laws in India are highly complicated and archaic. It still follows century old Land Acquisition Act of 1894 (amended in 1962 and 1984) which empowers the investment hungry Govt. to forcibly acquire any area of land it deems fit in the name of ‘emergency’ and ‘public purpose’ and in the process uprooting many people from their place and depriving them of their only livelihood, that too without much compensation and in some cases no compensation at all. Thus denuding them of their primary civil right i.e. right to live and earn livelihood.

Fine difference there is between lands grab and land development. There are quite a few examples of powerful personage grabbing thousands of acres of land illegally under the nose of Govt. yet it prefers to turn a blind eye. Successive Governments in India has an abysmal track record of implementing land reforms. Land ceiling laws and laws against land grab have been openly violated. Earlier in the tenure of BJP, various massive benami land transactions were effected by Ramalinga Raju of Satyama and recently Robert Vadra, son-in-law of Sonia Gandhi violated land rules and acquired lands in Rajashthan and Haryana and resold it at a premium. Yamuna Express Way project of JP Infratech approved by Mayawati also shows the disregard of Govt. towards the interests of land holders. Governments, mouthing virtuous slogans of ‘development,’ have actually justified massive land grab to feed corporate greed. It seems that it is playing the role of property dealer for industrialists and it is only poor land owners and farmers who lose in this game.

Another lacuna leading to faulty land laws is that Acquisition and requisition of property falls in the concurrent list, which means that both the centre and the state government can make laws on the matter. There are a number of local and specific laws which provide for acquisition of land under them though the main law that deals with acquisition remains Land Acquisition Act, 1894. Upcoming land reforms must take into account that uniform land laws across the states are of immense importance otherwise competitive policies of various states to attract investment will bear negative consequences for inclusive growth of Indian states.

The new bill does propose for various measures significant for land owners, livelihood earners and also for land purchaser. Much debated issues such as definition of ‘public purpose’, compensation to both the land and livelihood losers, loss of housing, tribal displacement plan, compensation more than on market prices etc are being well addressed in LARR. However whether or not these provisions will be implemented in spirit is the real question to ponder over. As of now the future of the bill itself appears uncertain which did receive momentum in Jun 2011 when Rahul Gnadhi visited Bhatta Parsol but only to be hanging again in parliament due to never ending battle between central and state Govt. It is notable that the original LARR was designed by National Advisory Council headed by Sonia Gandhi. Despite being an issue flagged by Rahul and Sonia Gandhi, it is hanging in balance since long. One must doubt if they are actually concerned with implementing the bill.

Land is a burning issue in all over the India. It is the most sensitive resource to tackle politically and economically. Being the 7^th largest country in the world having 8.76 cr acre of land, there is certainly no dearth of land in India yet the country seems land scarce just because of defective land policies giving leeway to corruption. Even Supreme Court has observed the need to scrap ‘fraud’ Land Acquisition Act of 1894 devised by some ‘sick people’. Countries worldwide try their best to make the most of their natural resources preserving it at the same time with all their might by keeping robust and rigorous natural resources laws. However, the callousness with which India deals with its limited resources is not just astonishing but appalling. 2G spectrum scam, coal scam, Maharashtra water scam etc bear the testimony of how better Indian Govt.is poised with addressing laws concerning its scarce possessions. It is high time that it realizes the havoc what bad management of limited resources can bring. After all you can import anything but natural resources!!  

Baffling Budget

At the end of the day,people at large were relieved that at least current budget didn't make their life any worse if not better.

 “Much ado about nothing”. This is what Union Budget 2013 was all about. Budget trouble might have passed for PC but it has gone to an extreme level for the people of the country. Budget completely disregarded what an aam aadami expected from it. No matter what happens with fiscal deficit or GDP, rising cost of living, something which common men are most concerned with, certainly not going to recede.  FM in no ways makes it any easy for the people putting up with plummeting inflation against their steady income. Following are the issues which needed an immediate consideration on the part of him. Some of them did receive his attention yet core problems related to those were completely left unaddressed.

Real Estate:

With the intent of providing affordable housing, FM proposed a 2.5 lakh deduction on the total taxable income on home loans less than 25 lakh. As if he doesn’t know that finding a home on that price in itself is a herculean task in Indian cities. Apart from this, first time home buyers can now get up to rs. 5.5 lakh of income exempted from tax. Again the point is will they even get a low cost home given the present scenario of skyrocketing property prices.

Indian realty sector is faced with multi faceted regulatory challenge. On one hand the sector is tainted with the circulation of black money on the other genuine buyers are bereft with affordable housing. Nexus between people sitting on wads of cash and avaricious dealers has made it a nightmare for a middle class house hunter to even dream of a dream house.

FM would have done well had he announced for a Real Estate National Regulator, as earlier stated, who could maintain transparency and provide real picture of demand and supply in the realty market. FM must be aware of the fact that it is affordable abode not some scant relief on home-loan interest payments what a middle income earner expects for. 

Savings against inflation:

Acknowledging the people’s lure for gold and decreasing rate of savings in financial instruments, FM has proposed for tax free bonds in Infrastructure sector and also increased the gross income level to 12 lakh from earlier 10 lakh for investing in Rajiv Gandhi Equity Savings Scheme (RGESS). However, it is dubious whether these meager steps towards fighting gold lure will be of any avail.

FM has also proposed the idea of launching Inflation Indexed Bonds with the consultation of RBI in order to lessen the gold demand. IIBs are those bonds overall return on which is adjusted with increasing inflation. Given that India has several inflation measuring indices, ranging from Wholesale to retail Inflation, it is still not clear which one would be used for pegging return on IIB. Whatever be the index parameter IIBs can never yield the same benefit as gold does. It would have been better had he proposed to instead launch gold index bonds, returns on which could be adjusted with floating gold prices. IIBs including other proposed savings alternatives will certainly fail to catch people’s attention against their penchant for gold.

Urbanization:

India is fast urbanizing. Its urban population would grow from 340 million in 2008 to 590 million by 2030 (according to a 2010 Mc Kinsey & Company report.) It is unfortunate that an efficient FM like Chidambaram failed to provide a farsighted vision to make Indian cities accommodate this huge influx of population. Apart from doubling the fund allocation to Jawaharlal Nehru National Urban Renewal Mission (JNNURM) -- the UPA government's flagship urban modernization program, there were no critical steps towards making India urbanized in planned manner, a much-needed effort on the part of Govt. in the present time.

Tax reforms:

Keeping in mind the next year general election, FM left the personal income tax slabs unchanged and apart from this he has given 2000 rs tax credit to people earning between 2-5 lakh. However, he levied 10% surcharge on people earning more than 1 cr who are just 42800 in number. It is beyond understanding how the surcharge on this meager number of riches will generate enough revenue to swell Govt. exchequer.

It is time that major tax reforms are incorporated in India. Current range of taxation was last revised more than a decade ago in 1997 when people earning close to fifteen lakh used to be considered among top slot of income holders. Now annual income of a good chunk of Indian population has gone up to 40-50 lacs. It is irrational that people earning 15 lakh and someone who earns just double of that is taxed at the same rate. FM should have dared to make changes in the marginal tax rates for much needed tax reforms.

Conclusion:

All in all Union Budget 2013-14 was a huge disappointment. It was a formality, an attempt on the part of FM to play the game safe with one eye on voter and other on foreign investors and rating agencies. This budget had nothing to offer for which FM had to wait for this auspicious annual economic event. At the end of the day, despite huge expectations, people at large were relieved that at least it didn’t make their life any worse if not better.

  

Real State of Challenges

Govt. must try to not only weed out the black money from realty market but also provide affordable housing to its burgeoning middle class. 

India’s growing realty sector has become a multi faceted regulatory challenge for the Govt. On one hand the very purpose of providing affordable housing has fallen flat, on the other it has given rise to the circulation of black money in the absence of stringent regulations. In a bid to regulate this shoddy real estate market, the forthcoming budget might bring in a Real Estate Regulatory Authority. Flourishing realty sector is paramount as it is a 5% contributor to GDP and a huge source of job provider to unskilled labor. The multiplier impact of the same on its ancillary segments is also abundant. With the rapidly growing urban population providing affordable accommodation to them is the foremost duty of the Govt. It would be interesting to watch how it ensures transparency and affordability in the Indian Real Estate Sector through its recent effort of appointing a National Regulator.

The biggest trouble with the realty sector is that it has become a reliable source of parking black money emerging as one of the best investment option to evade taxes for people sitting on wads of unaccounted money. In addition to this numerous approvals needed for property purchase provides chain of chances to make many people party to corruption. This cartel of dealers, brokers, investors and corrupt bureaucrats involved in illicit transactions and illegal land acquisition makes it a tough call, a nightmare for middle class salaried house-hunters to even think of owning a house. Stringent RBI guidelines for land loans and the fact that most of the real estate transactions are made in cash makes it even tougher for them to acquire enough money to go for such high profile land deals. In the end it is only high-heeled crooks who grab the land and sells it on even higher prices giving birth to a vicious cycle. It seems that real sector boom is not because of the maxim of demand and supply but that of spare black money and no other option to invest.

While India is among the top countries in terms of housing and work space needs, it ranks 181 in construction permission processes according to the World Bank Doing Business Report 2012. Delays in consents add 40% to a project’s cost. It is in this back drop that Real Estate sector is in hope of acquiring industry and infrastructure status, a demand further endorsed by Confederation of Real Estate Developers' Associations of India (CREDAI) - NCR and Federation of Indian Chambers of Commerce and Industry (FICCI). It will make affordable housing a sub-sector which will reduce the no. of approvals requisite from the state Govt. It will also help cash strapped developers to easily procure finance from banks.

As above mentioned, efforts are made in the forthcoming budget session to approve a Real Estate Regulatory bill in order to keep a check over unrestrained and concealed land transactions. As per this regulatory bill, the developer has to get accreditation from national regulator and make a public disclosure of on-sale property intimating them with all necessary details. Regulator will also ensure that separate bank accounts for each project are maintained to collect payments from buyers. However, strong nexus between real estate market players and politicians leaves the success of this real estate regulatory bill suspicious.

Govt. must recall that the three major economies i.e. of USA, UK and to some extent of China went into a deep slowdown just because their real estate market failed. The significance of realty sector is bumping up day by day with the ever increasing population. It is high time that the actual status of demand and supply of housing is maintained so that a middle class salaried person isn’t charged exorbitantly out of market price. It is required that whatever measures are being taken in the upcoming budget session, must be impeccable enough to strongly tighten the Indian Real Estate Sector.

Dirty data

It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official economic data.

The fundamentals of Indian policy making is under deep suspicion now with an ever increasing erosion of authenticity and quality of India's economic data. It is unfortunate that even macro economy data such as inflation, GDP figure, and IIP or export rate, which are the backbone of the economy, have been misreported in India, let alone micro economy data. Whole data quality in the country is dubious and is being put under serious question by various corners. Finance Ministry itself questioned the veracity of statistical data given by one of its own arms i.e. Central Statistical Organization (CSO). Such incidents strengthens the roots of unreliability in the minds of investors, economists, policy-makers or researchers who find themselves confounded with whether to trust on India’s officially acclaimed economic data or not.

As above mentioned, inflation, GDP, Export data and IIP are four major key determinants of monetary policy and surprisingly statistics of all these significant data have been wrongly reported time and again. To discuss recent examples, the IIP growth figures for January 2012 were scaled down sharply to 1.1 per cent from earlier estimates of 6.8 per cent. The reason given was wrong reporting of sugar data, which stood at 58.09 lakh tonnes, not the earlier reported 134.08 lakh tonnes.  It is surprising that no statistician could notice unprecedented surge in sugar production data. Apart from this, GDP data for the first quarter of 2010-11 was also miscalculated because the price deflator was incorrectly used. A similar error was reported in country’s export data in 2011 which was erroneously inflated by $9 billion due to some software glitch. Besides, it seems that inflation miscalculation in India has become somewhat a norm. Last year within a span of six months inflation data was revised two times first in April (March inflation data) then in July (April inflation data). All these glaring errors are suggestive of lackadaisical attitude of Govt. that it cannot even ensure to provide authentic statistical data of the country.

It is paradoxical that India who trumpets its being IT-power could not even manage to develop an efficient quality of data-estimation. Not only does it faulty, but also incomprehensive. Many commodities and services are left in data aggregation. Sometimes when prices on certain products come too late to be included in the data release, the missing quotations are repeated or estimated depending on commodity nature which certainly not gives a clear but notional picture of reality. Given creaky data collection system in the country, it is grossly pathetic on the part of Govt. if even data computation falls prey to languid system. Getting data estimates wrong bears sweeping repercussions on policy-making. Socio-economic welfare of the country rests on acquiring correct socio-economic data such as education, health, poverty, unemployment, birth rate, death rate etc., collection of which is worse than macro economy data and which is a major factor that impedes the crafting of policies that can strengthen the links between growth, poverty reduction, and development.

Robust and authentic economic data is the least that a Govt. is supposed to provide transparently. It is pertinent to recall the repercussions European Union faced due to data-fizzing executed by Greek Govt. just to avail EU’s membership. Highly significant it is for Govt. worldwide not to fiddle with statistical data because sooner or later harsh and hidden economic reality does bare itself resulting in to disastrous aftermath. It is high time that those responsible for maintaining economic statistics sincerely maneuvers to restore people’s confidence in official data which is the grist of each policy-formulation and economic decisions. 

Creaky Consensus

Genuine doubts on success of GST are still looming large as consensus on the introduction of the same appears loose and creaky.

After a long and arduous test of central government’s persuasive skills, states have finally agreed to the introduction of the long awaited Goods and Services Tax (GST). Decks have been cleared for the nationwide roll-out of GST in 2014 albeit by the new government after general elections. Genuine doubts on success of GST are still looming large despite a broad agreement with states on the contours of GST. Value Added Tax (VAT) experience coming  handy to this apprehension. All the hoopla created around  (VAT) has been fizzled out just in few years due to the over tinkering of VAT rates by the states. This has   defeated  the very purpose of harmonized taxation system for goods across the states.  

GST being at second level after VAT is more comprehensive in nature. It, as the name suggests, will be applicable to goods and services both and will replace litany of indirect taxes at state as well as at central level. Taxing services which yet falls in Central Govt. territory will come in the purview of state Govt in a limited manner. Although political reverberations on this radical tax hint that even if it is implemented, it may face the same fate as VAT did.

Indirect taxes, levied on the consumption goods are quite heterogeneous. Taxes like excise duty, custom duty, services tax, Central sales tax  are put by the central Govt while VAT/sales tax, Octroi are levied by the state govts. Rates of state level indirect taxes are varied in various states leading to incongruity and confusion for producers and consumers. As India is going to adopt dual GST i.e. the combination of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST), it has potential to set aside these several central and state level indirect taxes by mere a single tax. CGST will subsume excise duty, services tax and additional duties of custom while SGST will substitute VAT/sales tax, octroi,state surcharges etc. This SGST rate is supposed to be uniform across the states. Uniform GST will help reduce inflation as common tax regime can take off the demand pressures from the market, a fact endorsed by RBI deputy Governor Sudhir Gokharan.

Another characteristic of GST is that it is a destination/consumption based tax i.e. it will be charged only on value added at every single stage of production. The tax on value addition is ensured through a tax credit mechanism throughout the supply chain. GST paid on the procurement of goods and services is available for set-off against the GST payable on the supply of goods or services. The idea is that the final consumer will bear the GST charged to him by the last person in the supply chain. This mechanism of GST has instilled a sense of excitement among industries which have gone wary of giving plethora of taxes to plethora of departments. Consumers will also be benefited as industries will pass on their profit to consumers in the long run by lowering down prices.

It is true that no ideal tax model can be fitted in all countries but any internationally-experimented model, if adopted, must not be tampered with to the extent that the real purpose of the same loses its value. That is exactly what happened with VAT and is happening with GST model in India. Brinkmanship of state politicos has neither let survive any tax reform in India before, nor would it now. The fact that GST will restrict the power of state govt. to levy additional discretionary taxes and that no state will like its state exchequer get totally dependent on central bounties, they will try their best to deviate themselves from it. The adhocism of taxation structure is the real cause of worry as state Govts have not yet subscribed the fact that a stable tax regime is a must for growth. Consensus on introduction of GST appears creaky and loose. Hence, at central level GST might work but the fate is uncertain for states. if GST could be implemented homogeneously across the states keeping in view the revenue-neutral rates for them, it is well and good, otherwise trampled GST, the one in discussion right now will take it nowhere but VAT way. 

Bond against Inflation

With an ever increasing import of gold and nose-diving Rupee, government is forced to reckon with the idea of providing a hedge  to investors against  the return eating monster i.e. inflation.  Gold has become  only solace for investors to park their surplus as every other financial instrument has surrendered before the might of stubborn double digit Inflation. Reserve bank of India is now seriously considering to open the window of Inflation Index bonds- a  debt instrument  offering protection against high inflation.

India’s fresh lure of gold is predominantly driven by financial investment needs. Gold imports in India have risen to its peak and resulted in a panicky level of current account deficit and weak rupee resultantly. Apart form making gold imports costlier govt wants to divert the gold buying frenzy towards a befitting investment alternative. Inflation Indexed bond comes as an appropriate option in this context.

Inflation indexed bonds are those overall return on which is adjusted against increasing inflation. Inflation indexed bonds are popular and successful in USA, UK, Australia, Sweden and many other developed countries.  India introduced a derivative of the same i.e. capital indexed bonds earlier in 1997, then again in 2004 but the bond failed to garner attention as only principal amount was indexed against inflation not the coupon rate, consequently the real returns remained unprotected from inflation. RBI is again considering for a new avatar of IIB amid a couple of ifs and buts.

A robust inflation index is the most important pre-requisite for IIBs. India has several inflation measuring indices, ranging from wholesale to retail Inflation. It is still not clear which one would be used for pegging return on IIB . That IIB may disrupt the G-sec market is also a prevailing concern for the central bank. Government securities are the major source of govt  borrowings.  Fixed interest of G-sec will surely make the former i.e. IIBs a preferable investment option over the latter.

The timing of issuing IIBs is also a point to ponder.  Govt or issuer has to shell out  more money during the high inflation period. Considerate thought must also be given to defining tax rate on IIBs returns. Higher taxation on the same will eat into the vitals of returns.  It would be ideally prudent that IIBs are left tax-exempted otherwise it will be of no significance to investors.

IIBs are a welcome concept but the current challenge is to tame the lure of gold to contain higher gold imports. Given the policy bottlenecks of IIBs, it seems doubtful if it can provide equivalent benefit as gold does. Returns on gold is already three times higher than inflation rate with the prospect of spurring further. Gold-indexed bonds , yielding similar returns as this metal does in physical form, could become a better idea in the short run. A cornucopia of IIB and GIB  may do a lot better in the given situation of Indian economy.

Taxing Zenith

Thanks to US president Barak Obama, the new fashion of taxing super-rich has finally come to Indian shores. Prime Minister’s economic adviser C. Rangarajan recently suggested imposing surcharge on income of India’s neo crème de la crème. With an endorsement from the Finance Minister P. Chidambaram the idea of taxing super riches may become a reality in the forthcoming budget. This idea has a stock justification as Indian economy is reeling under the pressure of high fiscal deficit.  Political connotations also appear apt in the given scenario.   But proposal of this taxation seems to be a delicate choice for the finance minister as black economy dimension of higher taxation is no less befitting. Increased taxes on wealthiest elite may fuel the exodus of black money to tax-havens or stimulate them to move in to countries having lower income tax rates.

Current income tax rates are divided into three slabs of 10%, 20% and 30%. Earnings more than 15 lakh are taxed at the highest tax rate.  This range of taxation was last revised more than a decade ago in 1997 when people earning close to fifteen lakh used to be considered among top slot of income holders. Now annual income of a good chunk of Indian population has gone up to 40-50 lacs. Hence it is irrational that people earning 15 lakh and someone who earns just double of that is taxed at the same rate. Pranab Mukherjee in his recent presidential speech accepted the fact that the fruits of liberalization have been increasingly savored by a handful number of people. It didn't trickle down to the scale as was expected. Therefore taxing super rich, at least for the time being, is a concept in chorus with the political thinking of the existing government.

People standing at the peak of income pyramid have reached to the saturation of their consuming power. Their investments are landing at the dead assets like land or gold. While exempting or incentivizing lower income groups in tax rate stimulates general consumption and savings.

This is not all a wild guess that higher taxes may incite people to implicitly flood money towards tax sanctuaries. A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank,   estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. Income tax base in India is meager and only 5.6 percent taxpayers have a declared income of more than 10 lacs. However, the rate at which luxury cars, pent houses and other extremely expensive and swanky items are being sold in the country is a proof of a gross underreporting of income. Finance ministry has enough data of high value transactions to corroborate this enigma of wealth and rampant tax evasion.

It is historically proven that lower level of tax rates increases tax compliance and higher tax rates result into tax evasion. Therefore higher tax might be temporarily levied on well-heeled population as an instant remedy to the fiscal illness but economy is looking for the long term, stable and transparent tax regime. Widening tax base and strong setup for the prevention of tax evasion is the only panacea for our debilitated tax system.