Pandemic: time for haircut and write-offs

Source: TaxGuru.in

An additional 230 million people have quietly slid below the poverty line during the first year of the pandemic, reports the Centre for Sustainable Employment at the Azim Premji University (APU). In another study, the Pew Research Centre had computed the middle class to have shrunk by an estimated 32 million. This estimate is again for the first year of the pandemic. However, both the studies are a grim reminder of the severe blow of the pandemic that struck the middle class and the poor.  

We still do not know how severely (or relatively softly) the devastating second wave has impacted. While all sections of the society have been hit in varying proportions, with household savings coming down drastically, and unemployment soaring, forcing the government to extend till November the 5-kg free ration scheme for the 800 million needy, the good news is that the corporate net profits of listed companies have soared by 57.6 per cent in the last fiscal. At a time when economy is struggling to cope with the impact, the stock markets, fuelled by surplus money, too have been rallying high. While the wealth of India’s billionaires has gone up by 35 per cent, Bloomberg says the wealth of top two – Ambani and Adani – has jumped to $ 84 billion and $ 78 billion, respectively. 

The rich continue to amass wealth, while the pandemic has driven the poor against the wall.

Let’s dig still deeper. The increase in corporate profits does not however translate into higher tax collection from the rich. In reality, while the rich get hefty tax concessions and easy money, the rest of the country ends up paying more taxes. Corporate tax collections have declined significantly, reaching its lowest in ten years. The systematic reduction in corporate tax is in sync with the global trend. The Finance Minister had in Sept 2019 lowered the corporate tax base from 30 to 22 per cent, and reduced the corporate tax for the new manufacturing companies from 25 to 15 per cent. This costs the exchequer Rs 1.45-lakh crore by way of revenue foregone every year.  

Now let us take a look at how the tax base has shifted from the corporate to the average households. Against the direct tax collections – corporate and personal income tax -- for 2020-21, which amounts to Rs 9.45-lakh crore, the indirect tax collections have exceeded it, and reached a high of Rs 11.37-lakh crore. In addition, the common person in the street ended up paying over Rs 5.70 lakh crore as taxes (excise and VAT) on petrol and diesel, with roughly 60 per cent of fuel tax coming from two-wheelers. Add to it the electricity duty that consumer pays along with taxes on real estate registry and excise duty on liquor, the share of indirect tax that a common person finally ends up paying is enormous. At least now the individual tax payers cannot claim they alone provide resources for development. The non-tax payers too have made a significantly higher contribution in generating revenue. Let’s not forget, even a labourer wearing a plastic chappal (bathroom slipper) pays GST. In fact, it should now be abundantly clear: everyone pays tax.   

What may appear baffling is that at a time when the share of corporate profit in the country’s GDP has reached a 10-year high of 2.63 per cent, Indian banks had written-off a whopping Rs 1.53-lakh crore of corporate bad loans in 2020-21. As per RBI estimates, non-performing assets (NPAs) of banks are expected to increase further. Meanwhile, the total write-off in the past four years, since 2017-18, stands at a staggering Rs 6.96-lakh crore. A lot of hue and cry erupts whenever farm loans are waived but the periodic NPA write-off by the banks goes rather unnoticed.

As if this is not enough, a newspaper report, based on an RTI reply, showed how Rs 5-lakh crore of bank money is struck in frauds. Accordingly, the top 50 credit accounts contributed 76 per cent to these dubious transactions. 

Interestingly, the Insolvency and Bankruptcy Code (IBC) was enacted with the aim to punish the chronic defaulters but has left much to be desired. The two recent insolvency proceedings, where the banks/lenders have been forced to take a ‘haircut’ of 93 to 96 per cent, have evoked a lot of public anger. In a resolution plan, approved by the National Company Law Tribunal (NCLT), the bidder -- Twin Star Technologies of Vedanta group -- gets control of 13 companies of the debt-ridden Videocon group by ‘paying almost nothing’. Against the admitted claims of Rs 64,838.63-crore, Vedanta group walks away by paying only Rs 2,962.02-crore as one time settlement which is merely 4.15 per cent of the total amount. In other words, the creditors, including banks, have agreed to waive the remaining 95.85 per cent of the outstanding amount. 

In another insolvency resolution, lenders of the Shiva Industries and Holdings, including several banks, have agreed to take a ‘haircut’ of 93.5 per cent. Of the total outstanding of Rs 4,863-crore, the creditors will get only Rs 313-crore. Of this, the company has agreed to pay upfront only Rs 5-crore. Quipped the well-known financial journalist and author, Sucheta Dalal: “Now take a bicycle loan and see how banks treat you.” 

There are numerous such cases, where the bidders have walked away with cheap deals, leaving the banks (and other lenders) to take a heavy cut, often in the range of 80 to 95 per cent. The general impression is that it is public money that is being siphoned-off through a legitimate route. After all, the banks hold public money, and any write-off means public money lost. 

Probably this is what irked industrialist Harsh Goenka who tweeted: “Promoters stash away money on the side, take the company to the cleaners, get a 80-90% haircut from bankers/NCLT - that’s the new game in town.” he wrote, adding: “A lot of institutions cleansed by the government – NCLT next please @PMOIndia. We can’t have our hard earned money being stolen.”

Public money write-off calls for accountability. The Tribune. June 28, 2021. https://www.tribuneindia.com/news/comment/public-money-write-off-calls-for-accountability-274934 

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How the rich become richer, and the poor are driven to the wall

Ever since the first wave of coronavirus pushed countries into a lockdown, the central banks, mainly in the rich countries, printed US $ 9 trillion of surplus money. Well, the underlying objective was to infuse this surplus money into the pandemic hit economies, which had been left gasping for breath.

According to economist Ruchir Sharma, Chief Global Strategist at the Morgan Stanley Investment Management, this pandemic stimulus in turn made the rich add on to their wealth. “Much of that stimulus had gone into financial markets and from there into the net worth of ultra-rich,” he wrote (Financial Times, May 16). The total wealth of the super rich has increased in the same period to somewhere between $ 5 trillion to $ 13 trillion. No wonder, markets are awash with money, while countries are struggling to pull economy out of slump.

The sad irony is that what appears to be an ingenious way to indirectly transfer wealth from public coffers into the pockets of the ultra-rich happened at a time when Brookings estimated that an additional 144 million people globally, in 2020, slipped below the stringently kept poverty line. Using the World Bank and IMF poverty estimates, the calculations show that India has surpassed Nigeria when it comes to having the largest population of people living in extreme poverty. India added another 85 million poor to its existing huge numbers that have somehow been surviving below the poverty line. The devastating second wave of Covid-19 may leave a still bigger dent in poverty estimates.    

But perhaps what we do not realise is that all it requires to eradicate extreme poverty from the globe is US $100 billion, a tiny fraction of the pandemic stimulus that was pumped in to revive the global economy and instead ended up rewarding the billionaires by helping them to amass more wealth. This is not the first time that such astonishing amounts of surplus money have been pumped indirectly into the hands of the super rich. For quite a number of years, central banks in rich countries have been printing surplus money. However, what remains unexplained is how come there is all the money for the rich, but the world is still unable to find enough money to fight poverty.

If only a fraction of the pandemic stimulus had gone to where it was needed -- to remove poverty, the world would have been a much better place to live.

Meanwhile, the pandemic has further widened income inequality taking it to obnoxious levels. In America, the Institute for Policy Study says the combined wealth of its billionaires increased by 44.6 per cent during the pandemic. During the same period an estimated 80 million people lost their jobs. In any case, top 50 super rich in America hold as much wealth as the bottom 165 million. In India, the income inequality is no less glaring. Just to give you an idea, the average farm income as worked out by 2013 National Sample Survey Office (NSSO) report, for roughly 50 per cent of the population dependent largely on farming, stands at a paltry Rs 6,426 per month (roughly half of it coming from non-farm activities). That is why protesting farmers have been demanding an assured income by way of an assured price for their produce.

Compare this with what an Oxfam’s ‘Inequality Virus Report’ brings out. The combined wealth of India’s billionaires has risen by 35 per cent during the pandemic, and to explain how the increase would translate in simple terms, the report states that the rise in wealth of just top 11 billionaires alone is enough to pay for MNREGA work for ten years. In any case, the top 1 per cent holds four times the wealth that the bottom 953 million has.  

To understand how an increase in income works wonders for the poor, look at the outcome of this experiment on the feasibility of universal basic income. Two years before the pandemic struck, in early 2018, Foundation for Social Change, a charitable organisation, along with the University of British Columbia in Canada gave $ 7,500 Canadian dollars (or US $ 6,206) to 50 homeless families in the Vancouver region. A year later, during which time the charity kept a tab on how the money was being utilised, the results that emerged were not only astounding, but equally encouraging. More or less same results have been achieved in almost similar kind of studies conducted elsewhere.

Contrary to the public perception wherein it is generally believed that the poor don’t know how to handle money, the results clearly brought out how wisely they made use of the limited financial support, spending it on necessities like food, clothes, housing and other utilities. According to news reports, while the consumption of basic food needs went up by 37 per cent; the poor had actually cut down on drug and alcohol by 39 per cent. By moving fast into housing, these homeless actually worked to ensure a roof over their head. What the study therefore conclusively established is the significance of roti, kapda and makaan for the poor households everywhere in the world, and their strenuous efforts to work towards attaining it. In other words, such petty cash transfers have the potential to uplift the poor from the clutches of poverty.

Instead, we see more money being routed to the rich by way of tax concessions, economic stimulus packages, bank write-offs, bailouts and massive subsidies in the name of incentives for growth to bolster corporation profits with the faulty assumption that some of it will trickle down to the poor and needy. When it comes to giving poor their share, the argument is that by giving surplus money directly into the hands of the poor everyone will have more to spend, and that will lead to higher inflation.  

The economic growth model therefore has been very cleverly designed to help widen income inequality, and make the fat cows still fatter. The poor are expected to fend for themselves. #

Growth should take the poor into account. The Tribune. May 22, 2021 https://www.tribuneindia.com/news/comment/growth-should-take-the-poor-into-account-256674?fbclid=IwAR3OX6dgsHwmg3kBgPxtksZkQKxPaSjOxe9v10eK0wxIlMXZskwip2RXvAE

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Is Rahul Gandhi's minimum income guarantee scheme, NYAY, economically viable? My interview

Pic: from the web

Will Congress president Rahul Gandhi's proposed minimum income guarantee scheme, Nyuntam Aay Yojna, or NYAY, free India from poverty? This question was asked by India Today to six economists.  

Here is my reply. You can see the detailed response from all of us if you click on the link at the end of the interview. 

Q: Is a scheme that promises Rs 72,000 a year to 25 crore Indians below the poverty line economically viable?

Surely, implementing a guaranteed minimum income package benefitting 20 per cent of India’s poorest is economically viable. It all depends on the intent behind it. If the government wants to really help the poorest, finding adequate money is never a problem. But I find it strange that this question is invariably asked whenever some allocations are made for the poor. No one asked when the 7^TH Pay Commission was announced, which when implemented across the States, PSUs, Colleges/Universities will bring in an additional annual burden in the range of Rs 4.5 to Rs 4.8-lakh crore every year. No one ever asked the same question when massive corporate bad loans are written-off by the banks, Rs 3.17-lakh crore between 2014 and 2018. Former CEA Arvind Subramanian had even said that writing-off corporate loans leads to economic growth. But on the contrary waiving farm loans for the poor farmers are viewed as credit indiscipline. This is a reflection of the inherent bias in modern economic thinking.  

Q: What do you think will be the challenges in implementing such a scheme?

Although Rahul Gandhi has still to spell out the delivery mechanism that is expected to provide Rs 6,000 every month to 20 per cent poorest households in the country, the task of indentifying the real beneficiaries will certainly be an administrative nightmare. Estimating the income level of the poor to draw out the real beneficiaries will of course be a cumbersome process. But I am sure as the scheme progresses, since it is to be implemented in a phased manner, it will be possible to iron out the bottlenecks and remove other hurdles. It has to be planned in such a manner that it turns out to be inclusive. 

Take a lesson from Telangana, which launched the much talked about Rythu Bandhu scheme, providing direct financial support twice in a year to farmers. In 2018 kharif season, Telangana government has transferred Rs 5, 257-cr to over 51 lakh farmers. Not a small achievement but before launching the scheme, Telangana officials had moved in swiftly across the districts to set the land records right and to remove other hiccups. If the will is there, a suitable pathway can always be created.    

Q: Will it address the issue of rural distress and can it boost the economy?

Investing in rural areas is the only viable long term solution to many of the problems India faces – hunger, poverty, youth unemployment, forced migration and climate change. The promise of Rs 72,000 per year to the poorest points to a significant shift in economic thinking – moving from credit to income support. More money in the hands of the rural poor means more demand will be created, and more demand will reignite the wheels of the industry thereby boosting economic growth.

Considering a decline in casual farm labour to the extent of 40 per cent between 2011-12 and 2017-18, and even the non-farm wages shrinking in the last five years, the job crisis in rural areas is certainly explosive. Added with the steeply declining farm incomes, which have already touched the lowest in 14 years, rural India is crying for attention. More so at a time when public sector investments in agriculture had remained abysmally low, hovering between 0.3 to 0.5 per cent of the GDP between 2011 and 2017.  Rural India therefore is the future. In fact, I have been saying for long that addressing rural distress, beginning with revival of agriculture alone has the potential to reboot the economy.

Q: What are the long term implications of such a scheme on poverty reduction?

In the long-term, direct income support is one of the major effective instruments to fight poverty. MNREGA in that sense is a classic example. This has to be of course accompanies by a set of economic reform measures, including investments education, health and rural infrastructure. Providing more money into the hands of the poor, who also carry dreams and aspirations like anyone else, gives them an opportunity to unleash their entrepreneurship ability.

To be born in debt and live in debt all through his life is virtually like living in a hell. Normally the poor, and that includes farmers, often are born in debt and die in debt. A direct income support provides them an opportunity to emerge out of the shackles of indebtedness. And this will have long term consequences in making poverty history.

Trickle-down theory has failed to make an impact. Trickle-up is what is desperately required.

Q: How does the promised scheme compare with existing welfare schemes of the government?

The proposed Nyay scheme should not be considered as a welfare scheme that we generally know about. It is an income augmentation scheme, and should be considered as a powerful mechanism to revitalise economic activity in the rural areas thereby reducing rural to urban migration. It will reduce inequality, help reduce rural distress, and pull out masses from abject poverty. Unlike the existing 950 central government schemes, direct income support alone has the potential to reboot the rural economy, and if executed well it may perhaps change the face of Indian economy – leading truly to Sabka Saath Sabka Vikas.

Q: Do you think it will help the Congress woo the electorate better?

Well, that depends on how the Congress is able to take the message to the masses. #

The price of NYAY. India Today. April 8, 2019.

https://www.indiatoday.in/magazine/cover-story/story/20190408-the-price-of-nyay-1488343-2019-03-29?fbclid=IwAR0_6eou841nOP7Xf3tI523Ujjjjf3Yesbb4LQnIq1fhS7DTWcAosT3ups0

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