Category: Indian Economy

Demonetization and the Outlook

My take on Demonetization of Currency Notes announced on 8th of November in India :

Approx. US$250 Bln is official money circulation in economy by RBI. This appears as a liability in RBI’s books. 85% of the circulated amounts are in denominations of 500 and 1000 (US$ 212 Bln) .If we consider 40% of the transactions to be in informal economy, the amount comes to about US $85 Bln.

What happens next?

Those with legitimate income – No issues – they can deposit the money in the banks or exchange through banks. We shall see deposit in banks to the extent of 250 * 0.85 * 0.6 = US$125 Bln by March, 2017

Those with un-accounted cash / black money – Informal economy – 250*0.85*0.4 = US$ 85 Bln

a. It will either expire as the holder shall not deposit with banks due to fear of getting caught by revenue authorities

b. Declare the unaccounted cash, pay taxes on it (up to 60 – 80%)

Advantages for RBI, Government, Economy –

a. Out of the US$85m in the informal economy, say 50% comes through official channel (house hold deposits), still about US $40-45 Bln value of notes would expire after March 2017 resulting in either reducing the liability of the RBI or increasing tax collections by the government due to tax penalties on declared unaccounted cash.

b. Fiscal deficits would be largely set-off due to the above gains. This would allow the government to significantly increase their planned expenditures in future.

c. Another significant benefit would be discontinuance of existing fake notes.

Economic Outlook

Short term (next 6 months)

a. Hassles for individuals in depositing old notes and exchanging /withdrawing new notes through ATMs/Banks,

b. Real estate sector takes the biggest hit in the short term and illicit money would no longer be available to buy the assets, prices should drop and hence the buyers would watch the market and wait for the opportune time to buy properties.

c. As the illicit money would not find its place and with limitations in the money supply, the consumer spending would be lower in the short term and hence we shall witness a lower economic and GDP growth, lower inflation in the next 3-6 months.

Medium term (after 6 months)

a. The demand for real estate sector and properties might increase due to drop in property prices and lower interest rate for the individuals/corporates

b. The money circulation in the economy would increase due to increased banking, payment platforms, e-wallets which would increase the banking and online transactions ( money multiplier effect) and hence income for banks allowing them to reduce the interest rates

c. Due to higher consumptions/demands and lower interest rates, GDP and Inflation would increase.

d. INR against USD might appreciate due to inflation drop (though short term) interest rate drop, improved domestic sentiment, lower deficits etc

e. Gold Market – Gold demand and hence prices might increase in future as the hoarders would like to invest in gold which is considered as a better bet

f. Equity Markets – Equity Valuations should improve due to increase in present value of future cash flow impacted by lower interest or discounting rate.

g. Government would definitely demonetize and discontinue 2000 note in future. Currently it has been issued to handle liquidity and logistical challenges.

 

Benami Transactions : Consequence and Compliance

After the currency demonetization drive to curb black money, the next focused initiative of the government is tracking benami transactions and punishing the tax evaders.

Benami Transactions –

The benami transaction is any transaction in which property is transferred to one person for a consideration paid by another person with a purpose of evading taxes. The real beneficiary is not the one in whose name the property is purchased but just a mask of the real beneficiary.

What isn’t a Benami transaction?

1. Property held under the name of spouse or child, for which the amount is being paid through a known source of income.

2. A joint property with brother, sister or other relatives for which the amount is paid out of known sources of income.

3. Property held by someone in a fiduciary capacity; that is, transaction involving a trustee and a beneficiary.

This means, by law, if you buy a property in name of your parents, too, can be declared as benami.

What falls under benami transaction?

Assets of any kind — movable (vehicles), immovable (land, building), gold or financial securities (shares, fixed deposits, bonds)

Statutory Provisions:

The NDA government has amended the earlier Benami Transactions (Prohibition) Bill, 2011 to make it stricter to be known as The Benami Transactions (Prohibition) Amendment Act, 2016 which has been implemented since 1st November, 2016

Consequences for Violation:

1.  Those found guilty of having violated the provisions of the proposed law face rigorous imprisonment for a term not less than one year, but which may go up to seven years, along with a fine which may extend to 25 per cent of the fair market value of the property.

2.  If any person who is required to furnish information under this Act knowingly furnishes false information, he/she will face rigorous imprisonment of not less than six months, but which may extend to five years, along with a fine of 10 per cent of the fair market value of the property.

Suggestions on tax planning and compliance:

1.  In case the properties are being registered in the name of spouse, children by the individual with source of funds –

2.   while filing tax returns, any rental incomes/ capital gains etc should be better clubbed under your tax return u/s 264 (Clubbing of Incomes). The impact (additional tax) would be to the extent of standard deduction not claimable, when the income is clubbed

3. While registering similar transactions in the name of your parent/parents, be a joint owner

 

“8 key issues facing Young India and a possible combined solution”

8 key issues or priorities for the government, making news in India recently –

  1. Alarming Pollution level in the capital cities of India
  2. Government’s plan and vision to build Smart Cities in Indi
  3. Make In India
  4. Unsustainable Real Estate prices in major cities making it difficult for the middle class to buy properties in these cities
  5. Level of Unemployment
  6. India’s Economic Growth
  7. VIP Culture for Politicians (massive bungalows in posh locations)
  8. Level of Fiscal Deficit and burden of servicing the interest cost for the government

Possible Solution to address the above issues (not sure if stupid or practical 🙂

“We shift our 30 capital cities (Country and States) to developing/under-developed cities in a phased manner over the next 10 years”. It has been done in the past too for the country (Patna to Calcutta to Delhi) and states so is doable.

There would be two aspects to be looked at –

a) how does it help in addressing the issues :  

  1. The new capital cities could be well developed as planned, modern, clean and hi-tech cities with better infrastructure (as compared to polluted, populated, congested, unplanned cities), improving the government efficiency and image of the country and
  2. It would take the load off the capital cities in Delhi, Mumbai, Chennai, Kolkata, Lucknow, Hyderabad and so on making them less polluted with the reduction in population.
  3. Reducing the load in the existing capital cities would reduce land and real estate prices to affordable and sustainable levels, thereby reducing inflation. Middle class could then afford to buy homes in these cities thereby increasing the quality of their lives.
  4. Developing new capital cities would increase the demand for various manufactured goods required for building infrastructure (achieving Make in India vision), bring foreign investments and FX in multiple manufacturing sectors with positive impact on Rupee strengthening , would create new jobs in abundance (significantly reducing unemployment and poverty) and finally increasing the GDP and economic growth for the country.
  5. Apartments in average localities (as compared to Bungalows in acres in posh places) with necessary facilities can be built in the new capital cities for most of the Politicians – Ministers, MPs, MLAs, reducing the impact of VIP culture. In a low-income democracy. An MP or Minster housing in a 1-Acre Bungalow (valued at 100 Crore) in posh Delhi locations, does not justify a poor or low-income India. They are public representatives and need to live within public vicinity.

b) how would the government fund the infrastructure, real estate development in the new capital cities : 

  1. The government sells up to 50-60% of its properties in these 30 capital cities at the current prices.- Government land, Minister’s / MP’s massive bungalows (current market valuation of 1 bungalow in Delhi is over 100 Crore), Government Offices, Museums / Heritage Properties in posh locations (CP in Delhi, Nariman Point in Mumbai)
  2. It will then generate enough money to build over 250-300 modern and smart cities (my estimate of the properties prices between posh locations in capital cities and developing/under-developed cities is at 20: 1, assume 10 times conservatively). 1,000 acres of Government properties in posh Delhi localities alone is estimated to have a conservative value of over Rs. 1,00,000 Crore. 650 Bungalows in Central Delhi alone for Ministers, Secretaries and other VVIPs could value anywhere between 50,000 -1,00,000 Crore. This is the blocked opportunity capital for the government. Similar properties can in new cities can be built at less than 10% of the cost and hence the balance can be used to build infrastructure, smart cities and to reduce the government’s fiscal deficit. Similar capital cost can be released in all the capital cities.
  3. Since we need to build 30 smart capital cities, the balance funds can be used to significantly reduce the government’s debt which is over 60% of the GDP (65-70 Lacs Crore).

 

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