Demonetisation Update 31 – no slamdunk

On March 30, two pieces on demonetisation appeared in Indian press (websites). Professors Jagdish Bhagwati, Pravin Krishna and Vivek Dehejia wrote a piece for ET and Times of India that all concerns of the critics of demonetisation have been proven wrong. There is no palpable impact on growth, the economy has been smoothly re-monetised and the political outcome of the UP elections has been in favour of the government.

India’s economic growth statistics are still unconvincing. With more than 90% of all the enterprises being informal and with a large portion of the formal enterprises being small, the uncertainty and unreliability band around India’s economic data are so wide that any estimate can pass. That is why the Central Statistical Organisation (CSO) uses base year calculations and use lots of extrapolations assumptions based on base year ratios.

Further, after the base year was reset to 2011-12, the CSO had revised growth estimates for 2012-13 and for 2013-14 too. That was utterly inconsistent with other pieces of real economy data such as mobile phone sales, vehicle sales, air passenger and cargo traffic, etc. That is why, with its prints of 7+% real economic growth in India, the CSO may be doing a big disservice to Indian policymakers and the public. It weakens the resolve to do the right things, even if temporarily unpopular, unpalatable and painful.

As for remonetisation, that is a bit like a kid wanting to be praised for fixing something it broke. As for the political outcome, had the outcome been different, clearly, everyone would have linked it to demonetisation. But, a successful election outcome does not mean that demonetisation, per se, has been vindicated. It is one of those ‘asymmetric’ things. But, even if we accept the argument that the election outcome vindicates the government on demonetisation, the real vindication will have to be in the economics sphere.

On that score, it is still too early to say. But, early indications are not encouraging. There is a  war on cash. But, digitisation is not the panacea and second, concentration of information with the taxman is not a guarantor of a corruption-mukt India.

The 2000-Rupee Note stays. The 500-Rupee note has been replaced. How exactly does this help? With the 2000-Rupee note replacing the 1000-Rupee note, the appeal of cash as a store of value in India has only become stronger and not weaker.

The government has not yet disclosed the amount of cash that did not come back. Nor does the government’s Pradhan Mantri Gharib Kalyan Yojana (PMGKY) appear to have mobilised some revenues. On the same day, their article appeared,  a former Income-Tax commissioner has written an article in MoneyControl.com on why the PMGKY has failed to mobilise the kind of revenues that the government has expected.  It is worth a read.

Labour, taxes and inspector-raj have to go for informality to make way for formality.  India has a long, long way to go and the budget has missed an opportunity.

Much as I would like to join the three distinguished academics, I am unable to get myself to do so.

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What are the Indian government’s aims and purposes?

A good friend had forwarded this article written by the OSD to a Member of Parliament in India. I am in agreement with the philosophical message of the article. I like the style and the GIFs. They lighten the atmospherics and reduces scope for bitter polemics.

Indeed, there is a tendency on the part of the government – as has been the case with past governments and nowdays, in other countries – to take short cuts. They are necessitated in large part, by the bitter partisan politics. Democratic norms are flouted by either side of the aisle. But, the criticisms are directed only at those with whom one is ideologically opposed. But, at the same time, the situation, overall, erodes government accountability.

In India, the Rajya Sabha has not been allowed to function. It is in a permanent filibuster mode. Yes, some exceptions were there in one particular session of the Parliament – was it in the February – April 2015 period that several Bills were passed? My recollection is not strong.

Other than that, it is in a permanent lockdown mode. It is neither debating nor rejecting legislations. So, one bad behaviour seems to beget another.

But, that does not address the issue of why no debate was even allowed to take place in the Lok Sabha, by circulating documents at the eleventh hour. That is undemocratic and dangerous.

But, the author has also been very clever in taking some slight liberties with truth – not outright distortions but some liberties.

I deal with specific issues below.

Contributions to political parties

(1) The possibility of making unlimited anonymous donations if made by cheque or through the Electoral Bonds was implicit in the paragraph 165 of the FM’s Budget Speech made on Feb. 1, 2017

There was also a mention of 100% tax exemption for donations made to trusts set by political parties as pass-through funding vehicles in the Budget Speech for 2009-10 (paragraph 98) delivered on July 6, 2009:

98.       The House will agree that it is desirable to bring about transparency in the funding of political parties in the country. With a view to reforming the system of funding of political parties, I propose to provide that donations to electoral trusts shall be allowed as a 100 per cent deduction in the computation of the income of the donor.  For this purpose, Electoral Trusts will be such trusts as are set up as pass-through vehicles for routing the donations to political parties and are approved by CBDT. [Link] 

The important thing is that the then Finance Minister Pranab Mukherjee did not specify any monetary ceiling either, for availing of this exemption.

But, the anonymous nature of the electoral bonds is a matter for discussion, even though this government can argue that it has only further extended the situation already in force, arising out of the budget document 2009-10.

In this regard, notice that the anonymity was always available to companies if the donation was made to ‘Electoral Trust Companies’ which were pass-through vehicles for political parties, as envisaged in the Budget document presented in July 2009 for 2009-10. See the government clarification here, issued on December 10, 2013.

Also, this link will show clearly what the Amendment to the Finance Bill removes in the existing provisions of the Section 182 of the Companies Act, 2013. To see that, you have to open the ‘Amendments to the Finance Bill’ document (link) and see page 5.

But, while this government is only further extending the non-transparency afforded by the previous government, it can and should be faulted for not moving in the opposite direction of greater transparency. Indeed, it reinforces the non-trasparency.

Second, the information of the donation made through account payee cheque is available with the bank and hence can be requested by the government (and the political party) in office, through the taxman. In that sense, the information can still be used to threaten or extract more favours from the company or pursue vindictive action against them, as the case may be.

That is not necessarily the underlying purpose of seeking to ban cash transactions.

The proposed amendments do not affect information (and may even strengthen it) available to the taxman and the government but it does nothing to improve transparency of funding and hence, transparency of governance. Clearly, it deals a setback by extending the anonymity available for donations to ‘Electoral Trust Companies’ to donations made directly to political parties.

Therefore, I would deem this a fair criticism of the government’s move.

Merger and Consolidation of Tribunals

(2) On the merging of tribunals, the Finance Minister had made a mention if it in his speech (paragraph 128).

So, the author is wrong in saying that “he did not utter a single word about the provisions on making Aadhaar mandatory for income tax filing or the merging of tribunals”. So, some sloppy homework on his part.

But, that said, the FM mentioning it in his speech does not preclude a discussion on the same, on the rationale for the actual scheme of merger and consolidation of tribunals, etc.

Further, the discussion of the issues surrounding the Union government taking over the power to appoint the office bearers of the tribunal, prescribe their qualifications, terms of appointment including salary, tenure, etc., are theoretically correct. See here.

But, I am not sure how, in practice, they differ from the status quo. After all, the government is a litigant and makes rules in many areas. There is a conflict of interest in many areas. That is in the nature of things.

The Acts may prescribe the Tribunal’s formation, its powers and the terms of appointment of the members of the Tribunal, prescribe their qualifications, etc., but, in the end, the selection of personnel has always been made by the Government. So, in reality, what has changed materially?

All the same, happy and grateful to be educated if I am missing something here.

Search and Seizure

(3) On the ‘Search and Seizure’ without disclosing source, they were mentioned in the Finance Bill as originally introduced in the Lok Sabha on Feb.1, 2017. The insertions were by way of ‘Explanation’ and they were necessitated because some judicial pronouncements introduced some ambiguity.

I had blogged on it here and it clarifies the situation. In short, nothing has changed and nothing new has been created.

Overall impression

There may be a justification – partial – for introducing several things as a Money Bill. All the same, it is a unhealthy state of affairs. Read my column on what Mexico did in 2012-13. That is healthy democratic practice, in my view. Further, even as a Money Bill, not allowing scope for discussion even in the Lok Sabha is not healthy democratic practice at all.

Further, the issues of donations of corporations to political parties must go for wider consultation before amendments are made and certainly, not rushed through like this.

These changes, together with the government’s thrust on digitisation actually are troubling: Digitisation will not do much to expand the underlying economic activity. But, it would make available and concentrate information with the government and with tax authorities.

That would offer tremendous scope for abuse and vindictiveness. Mere promises to refrain from such abuse and vindictiveness would not cut it. Even if credible and implemented, these promises are not bearer instruments and not hence are not transferable whereas laws, rules and regulations are seemingly in perpetuity.

Together with the government’s obsession on digitisation and gathering of information, I am worried as to the underlying intent of the Note ban move, especially that there seems to be no hurry to withdraw the Rs. 2000 Note. Was the move meant to address informality or meant to gather information? The implications of either are rather different for the country and for its political and economic governance. Some of these concerns informed my MINT column of Tuesday.

Post-script:

Some friends forwarded me an article by Mihir Sharma for Bloomberg and said that there was a convergence of views between him and me. I cringe actually. He is politically motivated. He cannot find anything redeeming in what this government does. This is neither informed nor constructive criticism. The real issue is not the use of Money Bill route to push through legislative agenda that cannot be considered part of ‘Money Bill’. Second, he is completely wrong about the ‘Search and Seizure’. I had explained this above and also blogged on it before.

 

Trade vs. Technology

This is one more in the series of unsubstantiated articles that attempts to whitewash China’s role in the decline of manufacturing employment in the West, particularly in the United States.

It is one thing to argue that protectionism would hurt China and the U.S because of the geopolitical implications of Chinese reactions, etc.

But, it is another thing to argue, without evidence, that technology and not trade took away U.S. jobs. That is bollocks 🙂

We have research by Schott and Pierce, by David Autor and by two other researchers in the case of UK showing that trade with China has had a big role to play.  Not to mention Brad Setser’s article on China in WTO 15 years on. All of them had been blogged in this site before.

The concerted attempt to downplay that effect is another one of those elite cover-ups, perhaps, just as is the case with Islamic fundamentalism and terrorism.

China was not one of those standard small, open economies (SOE) where enhanced trade co-operation results in a win-win for both the SOE and the larger trading partner. China is an outlier with its size and with financial and other forms of repression, it was clearly a special case. China’s WTO entry was a big disruptive event for world trade and for developed
world manufacturing.

One must also read the Chairman’s statement of M&T Bank, 2016.  Released last month. Blogged here.

Indeed, the failure of informal employment in developing world to decline along with economic growth is due to the erosion of competitiveness vs. China both in terms of direct import competition with Chinese-made goods and in third-country markets.

Kevin P. Gallagher is sold. Sample this conclusion from his article in FT:

The Trump administration’s proposed cuts to global economic institutions appear to be yet another sign of a US retreat into isolationism. Rather than withdrawing, Washington should be leading the way to embrace China’s efforts and figure out ways to co-ordinate with, and complement, China’s new global economic prowess. [Link]

CSSA and the CCCP

The Chinese students aren’t really disengaged, however. They are just immersed in a world that is largely invisible to the rest of the university. At its centre is the Chinese Students and Scholars Association (CSSA), funded and monitored by the consulate in Chicago. Its structure even mimics the Communist hierarchy, with a “propaganda department” and a tight circle of leaders tacitly approved by the consulate. It puts on four big events each year aimed almost exclusively at Chinese students, including a Lunar New Year gala marking the biggest holiday in China. Last November, Mingjian attended a CSSA “speed dating” show in which male students in tuxes declared their love for female students in flouncy dresses, with nearly 300 students egging them on. It was conducted entirely in Mandarin.

One of CSSA’s main purposes is to make students aware that Beijing is watching over them. A Communist Party directive last year exhorted members to “assemble the broad numbers of students abroad as a positive patriotic energy”. At Iowa, the effort starts even before the students leave China: at the university’s pre-orientation session in Shanghai last summer, student-information packets included a dvd produced by the Chinese consulate in Chicago called “Rules for Studying Abroad”. And in January, the CSSA posted on social media a Lunar New Year’s greeting from the Chinese students’ official minder, Chicago consul-general Hong Lei. “He is the idol of students in the United States!” the message went. “He is the pride of the Chinese people!”

The CSSA also stands ready to protest against any campus speaker deemed harmful to China’s interests. In February, the CSSA at the University of California, San Diego, blasted the university’s choice of commencement speaker, the Dalai Lama, whom Beijing considers a traitorous monk, saying in a letter that it was “awaiting the advice of the Consulate General.” Over the past few years, the Chinese government’s direct involvement in CSSAs has prompted two other universities, Columbia and Cambridge, to ban them temporarily.

While helping newcomers in from the airport, CSSA representatives welcome them with advice about settling in – and a reminder that their behaviour reflects on the entire Chinese nation. The students do not really need reminding, for their education at home has inculcated in them the virtues of, and importance of loyalty to, the Communist Party. Their own encounters with American students – whose views on China can be condescending, even hostile – tend to intensify their reflexive patriotism, even if, like Sophie, they choose to keep their opinions to themselves.

Outspoken patriotic fury tends to be reserved for fellow Chinese. Last October, after Professor Tang gave a talk about Beijing’s sensitivity to public opinion, he received an angry email from a Chinese student: “I’m so ashamed of you. You just bought into American propaganda against China. Where is your moral limit as a Chinese citizen?” Tang, who is now an American citizen, shakes his head. “This generation has been indoctrinated since day one.” [Link]

Read the entire article about Chinese students in a University in Iowa. Worth it.

Obama’s watergate and other matters

There is near-total exhultation among mainstream media that President Trump’s plans to overhaul Obamacare have temporarily stalled as the Republican party could not achieve consensus within its own ranks. Of course, David Stockman praises the ‘Freedom Caucus’ for holding out because he calls the plan that Paul Ryan came up with, ‘Obamacare lite’.

Quite apart from that, it is more than sixty days since President Trump came to office. He has attempted a travel ban from select countries. Knowledgeable people have critcised the attitude taken by the judge in Hawaii who blocked the move. Indians must be familiar with this. Judicial overreach has reached American shores.

In the meantime, the head of FBI has decided to categorically rule out that there was no substance in President Trump’s accusations that he was wiretapped and added for good measure that he was investigating the contacts between Trump’s campaign team and Russia.

Dribs and drabs of evidence are coming out that there was indeed surveillance on President Trump’s team, if not President Trump himself:

there’s evidence to show that communications involving people connected with the Trump transition were collected by America’s intelligence apparatus….Things begin to get a little frightening when we learn that this inadvertent collection of Trump staff conversations was followed up with transcriptions of those conversations and the disclosure (or unmasking) of the persons involved in the conversation…. The raw transcripts of masked persons—or unmasked persons, or U.S. persons who can be easily identified—making their way to the White House is very likely unprecedented.  [Link]

Holman W. Jenkins, Jr. wants American media to get a grip. Well, they won’t. They are going crazy over a report a Trump campaign manager (who was fired) had offered to help President Putin with PR efforts in the West in 2005. Yes, in 2005!

Holman reminds us that it was the period when the United States needed Russia’s support for its operations in Afghanistan:

Not without irony, most of the U.S. freight for the war ended up flowing over Soviet rail lines built to support its own Afghanistan war in the 1980s. Hundreds of U.S. troops a week passed through Russian airspace on their way to the battle….The Russians even then were prepping for America’s use a former Soviet air hub in Ulyanovsk, birthplace of Lenin. ….

As for Trump “collusion,” where there’s smoke, there’s fire, goes a typical bit of journalistic deep thinking. But sometimes there’s just a smoke machine furiously being cranked by Rep. Adam Schiff, ranking Democrat of the House Intelligence Committee.

In the end, Mr. Schiff will likely prove right about one thing only: his oft-stated complaint that the Obama administration did little to deter Mr. Putin’s adventurism. [Link]

Here, Daniel Henninger in WSJ channels a NYT story on what the Obama administration did in its closing days. He echoes what Peter Hoekstra wrote (see first link above).

“In the Obama administration’s last days, some White House officials scrambled to spread information about Russian efforts to undermine the presidential election—and about possible contacts between associates of President-elect Donald J. Trump and Russians—across the government.”

This is what they did: “At intelligence agencies, there was a push to process as much raw intelligence as possible into analyses, and to keep the reports at a relatively low classification level to ensure as wide a readership as possible across the government—and, in some cases, among European allies.”….

That is, the Obama administration put in motion the tsunami of anonymously attributed stories that is engulfing and disabling America’s government today. [Link]

The information within quotes are from the NYT story. The outgoing administration had let loose the intelligence agencies to look for any dirt on the rival campaign team, had gained access to raw intelligence reports and was distributing them to foreign countries too!

In most countries around the world, this would be deemed a criminal act. It is, indeed, Obama’s Watergate. Trump was right that he was ‘tapped’.

There is almost a paranoia-dripped obsession to gut the new President. It is not just a loser’s gripe anymore. It smells like some great plan has gone awry and they are very angry about it. What is it?

The world needs to know because if America is gutted, the world will be gutted for there will be a power vacuum in the world filled by very dangerous elements.

The Professor (Allison Stanger) who invited Charles Murray, scholar at the American Enterprise Institute, to speak at Middlebury college and endured physical injury wrote this:

Americans today are deeply susceptible to a renunciation of reason and celebration of ignorance. They know what they know without reading, discussing or engaging those who might disagree with them. People from both sides of the aisle reject calm logic, eager to embrace the alternative news that supports their prejudices. [Link]

She added and concluded:

More broadly, our constitutional democracy will depend on whether Americans can relearn how to engage civilly with one another, something that is admittedly hard to do with a bullying president as a role model.

I would have been educated had she provided evidence of his bullying and whether he had cowed down or intimidated anyone or that anyone had engaged in self-censorship because of his ‘bullying’. If anything, his critics are too voluble so much so that they are drowning out alternate voices.

Despite his blundering ways, let us not forget that he was right on Sweden and he has been right that he was ‘spied upon’ by his country’s intelligence agencies because he happened to be a rival candidate. Shame on his critics and opponents.

America survived the decade of the Sixties and the economic stagnation of the Seventies. Fifty years later, America faces another existential crisis. Whether it has the inner resilience to emerge stronger out of this – and the crisis is not just about politics – is a qustion mark. The answer is not necessarily easy and affirmative.

Fake news or demented poetry

About five days ago, Chris Balding tweeted this:

I am going to pound this into the ground because its true: China promoting free trade is fake news

Perhaps, Martin Wolf should have had a word with him before he wrote his piece on Xi Jinping offering lessons to President Trump on the merits of liberal global trade.

To believe that China takes ‘ liberal global trade’ seriously is either seriously ignorant or a serious miscalculation, perhaps, arising out of Mr. Wolf’s recent visit to the China Development Forum.

Commenting on the remarks of Larry Summers that “Trump’s ‘alternative facts’ were costing America the coin of the realm”, Chris Balding wondered how much these people were paid to come and attend such forums in China.

Just to get a sense of the Chinese understanding of the ‘merits of liberal global trade’, Mr. Wolf would do well to read these stories:

(i) China’s trading partners alarmed by food import controls

(ii) Call to tackle China’s soaring aluminium output (“Despite a tentative recovery in prices following a five-year slump, experts warn that China’s pledge has not yet reduced net capacity”)

(iii) China’s Taxes on Imported Cars Feed Trade Tensions With U.S.

(iv) Head of China’s industry ministry says country right to limit market access:

More than 80 percent of members of a U.S. business lobby in China say foreign companies are less welcome than in the past, a survey released in January showed, with most saying they have little confidence in China’s vows to open its markets.

What we see in Mr. Wolf’s article is a problem that is all too familiar. Journalists play plaintiff, judge, jury and executioner when it comes to their pet hates and, in the process, fail the most important hallmark of intellectual credibility and integrity and that is, intellectual consistency and uniform application of yardsticks. They failed to do that when globalisation was at its peak. Now that its adverse consequences are coming home to roost, they are very eloquently warning us of the dangers of reversing globalisation.

Ordinary folks wonder what is so complicated and difficult about rolling back something that did not deliver anything of value to them but only destroyed their economic well-being and their communities. Chinese imports and outsourcing/offshoring of production were visible signs of that globalisation. To be taken seriously is to analyse rigorously and objectively.

It is far too easy to say President Trump has low or no credibility but what about an inward gaze?

Again, let us turn to Chris Balding’s brilliant tweet:

The astounding hypocrisy between those screeching about Trump while apologizing for Beijing is nothing less than demented poetry [Link]

What prompted this tweet?

Reuters calling China’s punitive measures against South Korea for the deployment of THAAD missiles just a ‘chill’:

The mainland chill on popular Korean entertainment in China is driving fans underground for their “K-culture” fix [Link]  – via this tweet.

There is a big tale in this story

Revisited Chris Balding’s Twitter handle after a while. Came across this gem. (Arrived at this through this tweet)

According to new research based on data obtained under a Freedom of Information request by Hasan Tevfik and Peter Liu, research analysts at Credit Suisse, foreigners are buying property at an annualised rate of $8 billion per annum, equating to 25% of new supply in New South Wales and 16% in Victoria in the past 12 months….

… The bombshell figures suggest that, along with local investors, the level of foreign investor activity in the housing markets has been a significant driver of the price growth of recent years, and the overwhelming majority — a staggering 80% in NSW — is coming from China.

Chinese buyers are evidently not having any problem in finding money to pay for the purchases even though Australian banks are not extending credit and that there are alleged capital controls imposed by China.

Now, if Australia were to impose restrictions on Chinese buying of Australian property, it would be dubbed anti-globalisation and anti-foreigner. But, that would be a perfectly legitimate response because this additional demand is making homes unaffordable for Australians. Now, if ordinary Australians therefore vote for a politician who clamps down foreign ownership of Australian property, would he necessarily be a reckless and dangerous demagogue?

Would commentators argue that such real estate bubbles and unaffordability are necessary evils for keeping the world open? How many ordinary people would subscribe to such a philosophical stance? How many ‘philosophers’ would take such a stance if they were personally affected?