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Cracking the GDP mystery – OPINION – The Hindu

http://www.thehindu.com/todays-paper/tp-opinion/cracking-the-gdp-mystery/article17420118.ece

  • Latest second advance estimates from the Central Statistics Office (CSO) which peg FY17 GDP growth at 7.1%.

    • Commentators who believe that the economy has suffered a debilitating blow from the note ban are not willing to rest their case here.

  • A closer analysis of the CSO’s estimates suggests that, contrary to perception, they do factor in the impact of the note ban.

    • And while India’s GDP estimation method could certainly do with improvements, the CSO has been both transparent and consistent with its methods, allowing little room for suspicions of window-dressing.

  • Why so high?

      • The 7.1% number is unchanged from the CSO’s initial estimates and is also well above the 6.5%-6.8% growth estimated by most private forecasters.
      • To gauge the actual level of economic activity, Gross Value Added (GVA) is the more pertinent number than GDP.
        • The GVA measures the value of output created by different segments of the economy.
        • Indirect taxes (minus subsidies) are added to it, to arrive at the GDP.
      • The GVA for FY17, as per CSO data, does show a dent from demonetisation. At 6.7% it has registered a sharp decline of 110 basis points from 7.8% (revised estimate) for FY16.
      • While GVA growth is pretty close to private forecasts, what lifted the GDP is the strong 12.3% surge in indirect taxes that the CSO estimates for this fiscal.
        • This is a plausible number, given that the Centre’s indirect tax collections already surged by 25% in April-December 2016, powered by higher excise duty on fuel and service tax.
      • There is no obfuscation here, because assessing the GVA and adding back net taxes is the global prescription for GDP estimation by the output method.

  • Too mild?

      • Commentators cite some key indicators to ‘prove’ that economic activity shrank in the note ban months. For instance, two-wheeler sales collapsed by 22% year-on-year in December, banks reported anaemic loan growth at 5%, cement despatches fell by 9% and realtors saw a 40% dip in home sales.( just study some of the facts
      • But given that the economy is made up of literally hundreds of products and sectors, it is well within the realm of possibility that the economy did well even while these indicators slowed.
      • (Another Fact set ) December month, steel output grew by 15%, power generation surged by 6% and refinery output expanded 6.4%.
    • CSO estimates do show that some sectors of the economy took it on the chin in the demonetisation quarter
    • Manufacturing saw its GVA growth slide from 12.8% in Q3 2015 to 8.3% in Q3 2016. Finance, real estate and services saw growth collapse from 10.4% to 3.1%. Construction weakened from 3.2% to 2.7%
    • 6% rebound in agriculture (2.2% shrinkage last year), 6.8% increase in electricity, gas and water supply and a bumper 11.9% hike in ‘public administration, defence and other services’ which lifted the GVA.
    • Agricultural output bounced back due to a good monsoon after consecutive drought years. Electricity generation was up on better coal availability. ‘Public administration’ reflects higher government payouts on salaries and pensions after the Seventh Pay Commission.
    • As the cash situation normalises, these one-offs should get ironed out, moderating GVA growth for the March quarter. But this doesn’t imply that the Q3 GDP numbers are suspect.

  • Informal left out?

    • A third criticism of the CSO estimate is that it fails to capture the performance of the informal economy, which clearly bore the brunt of the note ban.
    • Over 40-45% of the Indian economy is informal and hardly any data points relating to it are available at a quarterly frequency.
    • Therefore, what the CSO does to arrive at its quick estimates of the GDP is to take the available data from the organised sector and extrapolate it to infer informal activity.
    • Owing to such guesswork, it is quite likely that the quarterly GVA estimate, which mainly uses data from the formal sector, painted a rosier picture of growth than the ground reality.
  • More accurate estimates of what really transpired in the Indian economy post-demonetisation will be available when the CSO publishes its first revised GDP estimates, with more ground-level data, in January 2018.

All those who are out of the tax net – OPINION – The Hindu

http://www.thehindu.com/todays-paper/tp-opinion/all-those-who-are-out-of-the-tax-net/article17420120.ece

  • This article gives another angle for low Income Tax net in country
  • It is not entirely surprising that only about 3% of Indians pay income tax, Of nearly 127 crore Indians, only 2.6 crore pay income tax (FACT)

    • The fact that less than 3% of Indians pay income tax is automatically construed to imply that a large majority avoid paying income tax.

  • What data say

      • India’s per capita GDP is roughly Rs. 1 lakh, i.e. the average Indian earns a lakh of rupees every year.
      • The income tax exemption threshold in India is Rs. 2.5 lakh, i.e. anyone earning below Rs. 2.5 lakh need not pay income tax.

  • When a majority of Indians earn less than Rs. 1 lakh, an income tax exemption threshold of Rs. 2.5 lakh is sure to leave a vast majority out of the tax bracket.

      • Recent research by the National Sample Survey Office (NSSO) and Peoples Research on India’s Consumer Economy (PRICE) that the average income of the richest 20% of Indians is Rs. 95,000. This means that even a large majority of the richest 20% of Indians do not qualify to pay income taxes.

  • In this context, it is not entirely surprising that only 3% of Indians pay tax.

      • It is the mere reflection of the fact that India is a terribly poor country with an extremely high income tax exemption threshold.

  • Global comparisons

      • India is the only large economy with an income tax exemption threshold that is 2.5 times the average national per capita income.
      • In most countries, including in emerging economies such as China, Brazil and Argentina, anyone earning more than half the average national income falls under the income tax bracket.
      • India has increased the income tax exemption threshold on seven occasions, from Rs. 40,000 to Rs. 2.5 lakh in the last two decades.

  • If India lowers its income tax exemption to, say, Rs. 1 lakh from the current Rs. 2.5 lakh to be more in line with the rest of the world, nearly 1.5 crore more Indians will fall under the tax bracket.

        • To be clear, such a move will not fetch any meaningful extra tax revenues for the government but will merely bring more people into the tax bracket.
      • But of 68 crore adults in India, 24 lakh people earning more than Rs. 10 lakh per year or 42,800 earning more than Rs. 1 crore is not as abnormal as the Prime Minister or Mr. Chidambaram suggest. This is not to imply that there is no tax evasion in India but to say that the number of Indians paying income tax or earning high incomes is not nearly as outlandishly small as claimed.

  • Political rhetoric

    • Most urban Indians are unable to fathom the scale and size of India’s poverty.
    • Their immediate, lived experiences lure them into this belief that a significant majority of Indians earn more than Rs. 20,000 a month to qualify to pay income taxes.
    • But the Finance Minister’s grand proclamation that India is a tax non-compliant society can be true only if India is much richer than her GDP numbers reveal and is merely hiding behind a veil of feigned poverty.

The Tawang test – OPINION – The Hindu

http://www.thehindu.com/todays-paper/tp-opinion/the-tawang-test/article17420115.ece

  • Delhi and Beijing must manage tensions and focus on the big bilateral issues

    • china’s statement that it is “gravely concerned” over the government’s decision to allow the Dalai Lama to visit Arunachal Pradesh’s Tawang monastery in early April, and that it would “seriously damage” bilateral ties, is unwarranted.

  • THE CONTROVERSY OVER TAWANG

      • The controversy over the Tawang area goes back to the Shimla meet of 1914, when the Chinese representatives just initialled, and didn’t sign, a trilateral agreement with British India and Tibet.
      • Later, in 1959, when the current Dalai Lama fled Tibet, he came into India through Tawang.
      • He has not visited Arunachal Pradesh since 2009, when he retraced his 1959 journey. On that occasion too, his itinerary had evoked threats from Beijing, but eventually bilateral concerns outweighed them.
      • Chinese government would do well to not allow tensions with India over the issue of Arunachal Pradesh to spill into other spheres of engagement, and perhaps to also recall its own talks with representatives of the Dalai Lama that broke down after nine rounds in 2010 when it seeks to castigate him and New Delhi for their engagement.

  • Beijing’s objections over access for the Dalai Lama as a spiritual leader to a religious shrine obviously cannot be allowed to intimidate India into restricting his free movement.

  • At the same time, New Delhi must calibrate its moves to avoid misperceptions that it is indulging in political power-play.
  • Recent developments, such as visits to Tawang by American diplomats including the U.S. Ambassador, and an official dinner at the U.S. Embassy attended by a Minister and leader of the “Tibetan government in exile” based in Dharamshala, could be interpreted as messages aimed at China,
  • The bid for Nuclear Suppliers Group membership and having Masood Azhar placed on the UN terrorists’ list have occupied much of the bilateral canvas, while the larger issue of the boundary resolution hasn’t been addressed adequately.
  • Statements last week from former Chinese special envoy Dai Bingguo, who suggested that flexibility from India over the “eastern boundary” in Arunachal Pradesh could yield flexibility from China over “other areas”, that is, the western boundary in J&K, are significant. If the statements are an indication that the 20th round of talks between the special representatives expected this year will see an opening for progress, then that is a more worthwhile goal for New Delhi and Beijing to be preoccupied with.

Last mile concerns – OPINION – The Hindu

http://www.thehindu.com/todays-paper/tp-opinion/last-mile-concerns/article17420114.ece

  • The common ground on GST should be accompanied by clarity on the road map

    • More than six months after the Constitution was amended to enable the Goods and Services Tax (GST), the Centre and States have managed to find considerable common ground on the long-debated indirect tax system

  • the GST Council approved final drafts of the Central and Integrated GST Bills, which should be placed in the public domain as soon as possible.

    • With the law to compensate States already cleared, the only pending legislative negotiation left for the Council, which is expected to meet again on March 16, involves the State and Union Territories’ GST bills.
    • As these bills secure assent from State Assemblies and Parliament, and swiftly, the operational rules for the GST must be readied.
    • Moreover, switching to a new indirect tax system in the middle of a financial year will bring its own subset of accounting complications.
    • The Central government should resist a pushback on the roll-out date, and expedite efforts to ensure everyone is ready to get on board the new system with early clarity on what rates would apply to different goods and services.

  • Clearer communication of intent is equally essential
  • What started out as a single tax, single market dream for industry has now degenerated into five tax rates, a cess on top, with additional uncertainty about tax rates.

  • In the current rate structure, a cess has been proposed on luxury and sin goods over and above the highest GST rate of 28%. The cess would finance compensation payouts to States for the first five years.
  • After that, it could be replaced with a higher GST rate to retain the same tax treatment on sin goods, without fresh parliamentary approval.
  • The GST’s anti-profiteering penal provisions are far too vague and draconian, and could discourage companies from making efficiency improvements in supply chains if they are required to pass on the entire benefit to consumers.

Reforming funding of polls and parties – OPINION – The Hindu

http://www.thehindu.com/todays-paper/tp-opinion/reforming-funding-of-polls-and-parties/article17420122.ece

  • corruption in India has thrived despite some legal and civic will to fight it
  • Evolution of political funding corruption

      • the post-Independence Licence Raj combined with a ban on corporate donations — instituted to prevent corporations from exerting a disproportionate influence on the elections — meant that there were those seeking regulatory favours from the government and a paucity of electoral funds.
      • By the time corporate donations were legalised in 1985, it was too late. The system had grown used to black money and there were neither tax incentives nor privacy laws to aid corporate donations.
      • While there was some improvement in transparency in the first decade of this century, the system continued to incentivise evasiveness and false declarations
      • For instance, a 2003 law that capped expenditure by candidates but allowed parties and independent supporters to spend on their behalf meant that candidates were under-reporting expenditure
    • The implications of the current regulatory environment include a dependence on black money due to a lack of public funding, low financial accountability caused by a lack of transparency and democracy within parties, and the transaction costs of numerous small donations relative to a few large ones.
    • Raising the ceiling of corporate donations too would help transparent funding.
    • To altogether shift away from donations by large corporations or a wealthy few, the authors suggest nudging the system towards many smaller contributions as has been done successfully in a number of countries, such as Canada, France, Germany and the Netherlands.

  • Indirect subsidies and individual offsetting tax credits for political contributions have helped effect this shift.

  • Additionally, parties could receive monies from a public fund in proportion to how much grassroots funding they receive.
  • These policies come with their own risks but are possible steps in the right direction.