Economic Issues

Congratulations!!! You have been Bamboozled.

As this is a long read, let’s start with a little laughter. Trust me it is relevant.

Credit : NDTV

This is the exact case scenario at hand with the recently announced economic package of Rupees 20 Lakh Crore. While the figures are very interesting and attractive, it is pertinent to know how much Central Government is shredding out of it’s account in order to provide this big a package.

TDS / TCS – Government claims this will add Rs. 0.5 Lakh Crore to liquidity.

Just to clarify, 10% TDS/TCS is just an advance tax. When government says that they are waiving of the applicability of provision, which requires employer to deduct/collect advance taxes from the payments being made, then that doesn’t mean in any manner that the tax component has been waived off. This just means that the businesses and individuals having a cash flow industry, will have some more money left with them in hand, for a limited period of time. It for no far long means that the tax liability has been waived off or relaxed.

At the same time, if you have earned interest of more than Rs. 10,000/- then a deduction by bank was done at the rate of 10%, which has now been reduced to 7.5%. Therefore, if you earned an interest of Rs. 50,000/- then instead of collecting Rs. 5,000/- bank would be collecting Rs.3,750. This primarily looks like that you have saved Rs. 1,250/- however, that’s again a misconception. While filing ITR, you have to include income earned through interest, and therefore you had to enter Rs. 50,000/- there. You just saved some money in the advance tax, which has given you Rs. 1,250/- in hand until return filed.

Also, just to give you an idea, you need to have Rs. 14,28,571.43/- in your saving accounts for earning an interest of Rs. 50,000/- in an year @ 3.5%.

Result: No money put into your hand. You have been just given some more money to spend, but remember, there will be no relaxation for payment. Not a single penny paid from the accounts of Central Government.

Power Sector: Government has announced infusion of 0.9 Lakh Crore in power distribution sector for bettering its condition.

The moves directed two Public Sector Enterprises (PFC Ltd. & REC Ltd.) to infuse the promised amount as loan to the power distributing company, owed towards power generating company. Guarantor against the said loans have been announced to be respective State Governments.

Result: Income of a company being forwarded as a loan, and in case of default the loss has to be restituted by State fund. Yet, not a single penny from paid from the accounts of Central Government.

Provident Fund: Government claims this will add liquidity support of Rs. 6750 Crore.

At present, PF requires employer to deduct 12% of salary (Basic + DA) of the employee for put in retiral benefit, and add it up by putting in same amount from its side. This creates post retiral social security to the employees, and also works as a tax saver whiling filling of return.

The present move will allow to lower the contribution of the employee and employer to 10%, which will lead to increment in the take home salary as a short term benefit. However, as your take home amount increases, your taxable income increases as well. More taxable income means, more tax paid by you to the Government.

Meanwhile, it also means lower amount of money going into the retirement fund, and lower interest generated over that fund in over years, leading to loss of money.

Result: You will pay higher taxes and will be left with lower PF amount at the time of retirement. Again, not a single penny paid from the accounts of Central Government.

Collateral Free & Partially Guaranteed Loans: Government announced Rs. 3 Lakh Crore worth loans to MSMEs.

Loan is to be issued by Banks and NBFCs, which is guaranteed by Government of India. So the Banks and NBFCs will be loaning out the funds to the MSMEs which has tenure of around 4 years and in case of default lender will be required to make a claim from GOI.

No comments are being made on the commonly known factual aspect that collateral free loans are misappropriated at the hand of either end-user in conspiracy with bank and government officials (where the loss to lender is inevitable) or the middle-men who takes a cut from the loan in order to make it available (thereby leaving the amount in hand so less, that the business is ought to fail).

Meanwhile, another announcement of Rs. 30,000 Crore in liquidity scheme for investment through debt instruments in NBFCs, HFCs etc. which are loaning funds to MSMEs. Such investments are guaranteed by GOI.

Thereafter, partial guarantee of up to first 20% of the loss suffered by NBFC has been announced by GOI, which is expected to be of Rs. 45,000 Crore value. Rest 80% of the loss to NBFC is to borne by them, which in case of multiple defaults take them out of business.

Result: Investors invest in NBFCs, which will further loan amount to MSMEs. Even though there exists a guarantee (absolute and partial), there is not a single penny paid from the accounts of CG at the moment, The amount will be mentioned as contingent claims and will be triggered at the end of loan tenure and moratorium.

Free Food to Migrants: Government suggests it will consume Rs. 3,500 Crores.

The scheme provides free allocated ration (5kg of flour/rice per person and 1kg chana per family) to migrant workers for next two months. Not getting into the debate of quantity, this has been announced to be executed “through” State Governments.

Result: We will have to wait for further modalities to come into play to know if Central Government is funding this or is it going from State’s fund.

Things to remember

Credit: Shri Narendra Modi

Well, if you haven’t understood the game till now, then this clip might be helpful. Remember, it is just an example.

Rs. 100 Lakh Crore investment in Jharkhand.

Before, you start raising arguments like Public Sector Banks and Undertakings are semi-government bodies and hence are liable to take these risks implied upon them, let me remind you of basic of corporate laws, of a concept caller separate legal entity. Also, let me remind you that in past because of such decisions of the Government many PSBs and PSUs have suffered tremendous loss which has resulted in creating arguments for money minded governments and its supporters to privatize/disinvest such entities, after reaping all its benefits.

Demand-Supply Conundrum

I am not going to even start on the basic economic flaw that has been in the government’s understanding since day one. They have failed to understand the concept of demand and supply from Economics-101. A problem pertaining to a demand side can never be solved by a solution from supply side and vice-versa.

Unemployment rate is at all time high since last couple of years. Government is not opening vacancies; if vacancies are opened then exams aren’t conducted; if exams are conducted then result keeps pending for years.

If you read my last post, you will know, that there has been 12.2 Crore job cuts due to COVID, and over and above labour laws have been diluted.

When there is no money in the hand, then there is no buying capacity. When there is no buying capacity in the market the demand falls. The falling demand can ever be boosted up by providing benefits to the producers and corporates, who essentially are the part of supply side. Wages are not being increased by the benefits provided to the supply side, on the contrary jobs are being cut, and therefore the schemes aren’t going to help boosting the demand side.

Nobel Laureate Abhijit Banerjee and Former RBI Governor Raghuram Rajan, both of whom are internationally acknowledged as best economists of their time, have made it specifically clear that the government needs to put money in the hand of the people to boost the demand side.

Based on what I tried to explain earlier in this post, you would know that the money put in your hand through the announcements made till now, is your own money and not of government’s.

Yes yes. You. You the citizen of India. Congratulations!!! YOU HAVE BEEN BAMBOOZLED.

(This piece have been written based on the information collected from Firstpost, Economic Times, New Indian Express &The Print.)

Tagged , , ,

About Abhijeet

An individual trying to inject some humanity in the modern beings of binary understandings.
View all posts by Abhijeet →

Leave a Reply

Your email address will not be published. Required fields are marked *