French Humour

Checking Tax Evasion

There is increasing recognition of the urgency with which the menace of tax evasion, black money and corruption needs to be tackled. These have become burning issues due to the need to close the fiscal deficit, domestic pressure and increasing pressure in international forum such as G20.

Global Financial Integrity estimates illicit flows out of India of USD 462 Billion, between 1948 and 2008. The Budget FY’13 took a few measures to check tax evasion. In this Budget, the Government has now made it mandatory for disclosure of all assets held abroad.

India has recently signed the Multilateral Convention on Mutual Administrative Assistance on tax measures. This will enable better coordination among countries in matters related to tax information sharing. Also announced in the Budget FY’13,

• 82 Double Taxation Avoidance Agreements (DTAA) and 17 Tax Information Exchange Agreements (TIEA) have been finalized. The FM also stated that information regarding bank accounts and assets held by Indians abroad has started flowing in.
• Dedicated exchange of information cell for speedy exchange of tax information with treaty countries is fully functional in CBDT.

Further, Budget announced the establishment of Directorate of Income Tax Criminal Investigation in CBDT. A white paper on Black Money will also be presented in the current session of Parliament. Measures taken to deter the generation of unaccounted money include:

• Tax to be deducted at source on purchase bullion or jewellery worth over Rs 2 lakh in cash
• Tax to be deducted on transfer of immovable property (other than agricultural land) above a specified threshold
• Increased onus on closely held companies of proof for funds received from shareholders as well as taxing share premium in excess of fair market value
• Taxation of unexplained money, credits, investments, expenditures etc. will now be at the highest rate of 30 per cent irrespective of the slab of income.

The Budget has also proposed the introduction of a General Anti Avoidance Rule (GAAR) to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel.

Despite the World Bank Stolen Asset Recovery Initiative (tracing-freezing-ceasing-repatriating) and other information sharing initiatives at international forums and G20, a lot remains to be desired. The Financial Secrecy Index of the Tax Justice Network ranks countries according to their performance on tax information and financial secrecy.

Developed countries along with their satellites are the worst performers. Interestingly, most of these are a part of G20. This makes G20 an apt forum to carry negotiations and the dialogue further. Steps taken in India are small yet concrete and the initiative needs to be taken forward in the right earnest.

Unsanitary Sanitation

I visited some slums in Delhi in order to assess the availability and condition of sanitation facilities for a volunteer program. And ‘deplorable’ is the word.

The slums I visited were notified slums and had been provided community bathrooms and toilets by the Government. Some of these were in an unusable condition, effectively amounting to no access. By far the worst was the ‘Sonia Gandhi Camp’ at RK Puram, where the outlet pipes of the toilets were broken resulting in a stinking muck all around. The slum habitants waited for nightfall to defecate by the roadside, in the open. All slums had a government/NGO cleaner and mostly, the worker was irregular.More details on the visits can be found at: What's that Smell?

A UNICEF survey conducted in 2009 estimates that 1.2 billion across the world defecate openly. Of these, the largest number is of Indians: 665 million defecate openly.

Graph: Distribution by country of people defecating openly

Country; Population defecating openly; Population defecating openly in the country as percent of total world population defecating openly

Source: UNICEF

Poor sanitation has adverse health implications: deaths, productivity loss due to sickness, increased public health care costs. According to WHO, in 2008, 13% of child mortality under age of 13 was due to diarrhoea. Indeed there is significant economic cost of the productivity loss. Water and Sanitation Program estimates the loss in income at USD 54 billion, about 6.4% of India’s GDP: http://www.wsp.org/wsp/node/1150

The Cash Cow

In view of the latest sting operations that show crores of cash exchanging hands:

The problem is grave- a mix of greed, power, exchange of favours, underground economy (see The exponential rise of India's Black Economy, published Aug'10)

The solution needs to be a mix of change in regulation, monitoring, taxation laws (see Funding Political Campaigns, published Nov'10)

Dharavi in 2002:

Dharavi in 2010:

Outbursts of growth in the slum pocket of Mumbai. It is good to see India acquiring a fancy skyline but it is disheartening to see the condition of slum dwellers.

Cornerstones

Population aged under 15 years in 2005:

Sourced from Wiki: http://en.wikipedia.org/wiki/Youth

In a country like India, with over 400 million youth by 2022, the three most important policies that form the cornerstones of an economy include:

Basic Education Needless to say basic education, expected to be achieved through the Right To Education Act, is the most important step that has been taken in this direction.

However, it is unlikely that Indian economy can provide so many white collar jobs and therefore may result in inadequate returns to education. Besides, of course the issue of supply of education remains, after all only so many graduate out of the IIT and IIM. What is required is vocational training.

Given that cities are the places where a large proportion of this youth is likely to be employed, Housing policies assume as much importance as the above two. With the present land demand and supply dynamics, the real estate costs make it prohibitive for a large proportion to access affordable housing. Capabilities that enable one to earn livelihood but not enough to afford shelter are rendered useless! Constant exclusion makes white collar jobs with remunerative returns seem like the only solution to the issue of housing in cities. Govt. policies targeted towards provision of low cost housing are thus the third supporting pillar.

13 million hectares of forest land was diverted for non forest purposes each year between 2000 and 2010 according to the World Forest Resources Assessment (FRA) Report (also see 550 years, published Oct'10).

This piece is about the value of the forest resources.

Determining the value of Indian forests was a long drawn process, a Supreme Court referred committee estimates, which were to be vetted by the Central Govt. established committee.

The Central Empowered Committee placed a value of Rs 8 lakhs on a hectare of average forest land. More productive or more dense lands have a higher value, 8 lakhs scaled up by factor based on ‘judgment’. The process needless to say is non transparent and needs revision.

According to the FRA, revenue derived from forests is close to world average. Also, the value of fuel and wood products from Indian forests is relatively higher in India as compared to other countries.

The chart below shows per hectare forest revenue collected by country (2005, progressively darker implies a higher revenue, Source: FRA)

Sorry state of state finances

High Powered Expert Committee estimates requirement of Rs 39 lakh crores for urban infrastructure and a further Rs 20 lakh crores for operations and maintenance (O&;M) expenditure over a period of 20 years (in 2009-10 prices, all estimates exclusive of land acquisition charges).

The funding for the investment requirement envisages significant Urban Local Body (ULB) contribution. And obviously, this assumes immediate, effective reforms. Some of the most radical of envisaged reforms include introducing a ‘Local Bodies Finance List’ in the Constitution and empowering ULBs with ‘exclusive’ taxes including a property taxes, right to sell additional Floor Space Index, entertainment taxes etc. O&;M expenditure should be recovered through user charges.

The current situation is far from the ‘vision’. The three points of divergence that jump out are:

• The Perfunctory State Finance Corporations - SFCs are required which are required to set a formula for the devolution of state revenues to local governments. However, often the recommendations are not implemented. Besides, the recommendations themselves are reportedly prepared with half baked efforts – inadequate technical and financial resources.

• States’ cash management is erratic as is often seen in the surplus parked in 14 days intermediary Treasury Bills (which often has repercussions for the Central Government cash management!) and its drawls from the Small savings pools concentrated in the last quarter of the fiscal year. At the aggregate level state governments carry huge cash surplus which is suspected to be grossly imbalanced at disaggregated levels considering the bond issuances by states continue through the year (despite observed levels of surplus).

• ULB finances are thoroughly battered. Inferred from various examples from the report, user charges recoveries are highly inadequate. Water user charges for example, cover less than 35% of operating costs in India, compared with 100% in Philippines and Cambodia and 64% in Bangladesh. On an average, user charges cover less than 50% of O&M costs.

Rare success stories regarding imposition of user charges in India exist and should be replicated. Gulbarga in Karnataka provides round the clock water to the residents but imposes charges that cover expenditures. International success stories are more abundant.

ULB Finances need to be strengthened as a pre condition for any perceivable step up in urban infrastructure investment and for accessing any forms of external finances. Municipal bond market, which is extremely virtually nonexistent in India, but much needed, can only then be developed.

Fiscal implications of RTE

The GoI has enacted the RTE with a vision to provide ‘free’ elementary education (class one to eight) to ‘each’ child in the age group six to fourteen. Capital task, the need of the hour, particularly in view of the demographics of India where over 35 crores, currently in the zero – fourteen age group will add to work force over the next fifteen years.

However, RTE will have large fiscal implications, as the Govt will need to step up its education expenditure. Expenditure will rise on account of existing schools with current enrolments to become RTE norms compliant (in terms of infrastructure, number of teachers etc). Further, ‘compulsory’ education will entail students currently out of schools to be enrolled; new schools will need to be built and additional teachers employed. The act looks to provide training and learning material to teachers and schools. ‘Free’ education will entail reimbursing students’ textbook, writing material and uniform costs.

To see detailed estimates for two components of total costs - infrastructure and teachers, for govt. schools in rural India, please see:

http://www.accountabilityindia.in/sites/default/files/state-report-cards/paisa2010report.pdf

Demographic estimates from 'Indian Demographic Scenario, 2025' by Prof. P N Mari Bhatt

The life you wouldn't want...

8.9 mn shelterless households in India by 2012.

Picture above of squatters outside Mumbai local train station. (Source - Author)

In 2007, the housing shortage was estimated to be 24.7 mn housing units. Of this, new housing units requirement was estimated to be 7.5 mn. About 15 mn housing units were estimated to require upgradation or expansion. Over 2 mn houses were estimated to be in a 'bad' condition, or over 80 years old, requiring replacement. By 2012, shelterless households are estimated to increase to 8.9 mn and the housing shortage to rise to 26.5 mn units.

Cost of climate change

A changed climate, with intense rainfall, severe droughts, extreme temperatures will require adaptation measures by countries that will entail significant costs. The World Bank initial study estimates the costs for developing countries "between 2010 and 2050 of adapting to an approximately 2 deg C warmer world by 2050 is in the range of $70 billion to $100 billion a year".

While the exercise is intense, inclusive of all scenario analysis, required measures and the related costs, I have made a feeble attempt at estimating the amount the Indian Govt. spends currently, on adapting to climate change. This comes to about USD 3 bn a year. Following figures (in Rs crs) of all activities:

Some numbers and charts, analysis and review follows.

India is the third largest emitter of CO2 or equivalent gases. China the larges and USA second. The gap is incredibly large, China emissions amounted to over 6500 mil metric tonnes. USA 5800 MMT and India 1600 MMT in 2007!

India has one of the lowest per cap emission rates. More significantly, an improving energy efficiency, with the output produced per 1000 metric tonne of CO2 emission falling.

Funding Political Campaigns

Various reasons that suggest against the state funding of political campaigns. For one, political campaigns have become excessively costly. A less compelling, why should the taxpayer take the burden of funding campaign of those its ideologies do no jibe with? But voters do need to be aware of each one’s manifesto to be able to decide.

Corporate funding could, idealistically, could reduce the under-table black transactions. It could be Pro-Reforms, given that corporates would now have to earn funding, based on work done in past, policies and promises to deliver. However, corporate funding continues on an anonymous basis and a ‘quid pro quo’ basis. It lists towards support of more networked individuals, and are a natural bane to independent or new candidates.

Numerous examples right at home, right from Enron-Dabhol Power project, to the Reddy Brothers in Karnataka, the Maytas Infra group and the allotment of 2G Spectrum licences!

The various touted policy options include placement of spending limits. These of course would be unfair to the new candidates. In early 2010, it was promulgated by the US Supreme Court: “corporate funding of independent political broadcasts in candidate elections cannot be limited pursuant to the right of these entities to free speech’.

The more effective less easy solution seems to be increasing disclosures.

A thought crossed my mind, that some of the campaign expenses should be made evenly, equally free for all candidates. Possibility in terms of print material, airtime, fuel costs, and paid for by the respective corporations. Presumably this will lower the demand for additional funds. Of course, the brunt will be borne by the limited Media and Fuel industries.

The corporate funding to political parties, from a purely practical point of view, cannot be eliminated, not now when we are on our way to fiscal consolidation, and yet far from FRBM targets.

550 Years!

The annual average rate of gross deforestation is a little under 3.5 bn metric tonnes (2005-2009). India is responsible for ~10% of this. USA and China for another 11% and 9% respectively.

Following table: Percent share of countries (top 50%) in gross 3.3 bln mtrc tn deforestation in 2009:

The forest cover has depleted at a much higher rate of over 85,000 Sq Km between 1990-2000. This has moderated to close to 70,000-75,000 Sq Km in recent years. Nevertheless the rate is not innocuous. It is not just deforestation that contributes to green house effect and climate change, the effect is compounded also by the derived wood fuel that is burnt.

At this celerity, the forest land will completely disappear in ~550 years!!

the market solution to slum rehabilitation

I was recently introduced to the concept of market based solutions for slum rehabilitation.

At the fore: slums are not a result of market failure, rather a result of markets. The solution therefore, lies embedded in the working of markets.

The solution is provision of low cost housing to the slum inhabitants, who were too poor to afford extant housing. A prerequisite: inexpensive land. The current demand supply mismatch in the real estate market seems large. Authors suggested accelerated clearance of disputed land, conversion of unused public lands and conversion of agricultural lands at city periphery for urban use.

Following calculations based on cheapest available land around Bombay (Thane district?) at Rs 2,500 /sq ft show ~1,000 acres of residential land needs to be made available (further, land for infrastructure will also need to be made available) to meet demand. There may still be some people who may need titling benefits or subsidies.

Releasing this kind of land should not take much, it is only about 1% of Mumbai’s total land.

• Households with annual income less than Rs 90,000 per annum will be eligible for subsidies.
• Given the magnitude of 'inexpensive' land required, converting agricultural land and developing satellite towns may actually be the best available option.
• Substantial investments would have to be made for provision of infrastructure, particularly transport.

Paper: "Working with the Market: a New Approach to Reducing Urban Slums in India"

the scintillating urban and the static rural

Higher urban wages attract rural poor, leading to migration, unemployment, emergence of squatter settlements etc.

Higher wages or the ‘expected higher wages’ in the urban sector drive the immigrants.

Of course migration cannot be stanched. Two pronged policies:

• Cities should expand to keep pace with immigrant population. Policies to integrate informal into mainstream economy, Govt provision of adequate physical infrastructure.

• Productivity in rural areas can be enhanced (for example through imposition of minimum wages).

In India, rural labour market seems to have settled at a low productivity equilibrium encouraging migration.

Productivity in Agriculture sector has not progressed over past few years:

50% of India's growth emanates from 5 states alone

What may be surmised: unequal growth, unequal opportunities, rural urban divide, rural to urban migration, slums. It is not a coincidence that these are the states with the metropolis.

Growth needs to be more equal, rather made to be more equal; to tackle the migration problem and increase urbanization [more in next posts.]

Integration of the rural into mainstream economy is essential! If the rest of India grows at 8%, from the current ~6%, it could add a whole percentage point to the national output.

Data not available for all states FY07 onwards.

Why land titling does not work? It doesn't teach you how to earn!

Land titling is an incomplete solution. It does give the inhabitants a house but not the assured stream of income to maintain the house. Government should extend the policy purview (Rajiv Awas Yojna for slum rehabilitation) to include establishment of vocational training institutes that will provide the dwellers with the skill set required for sustenance. This can be implemented through a government financed slum development authority or through involvement of private developers.

Land titling is successful in so far it eliminates the need for the presence of an adult member in the house at all times to protect eviction from property. Thus, property rights provided to an x number of households makes available a comparable number of adults and consequently an equivalent amount of productive labour. Since the households become registered and therefore legal, numerous other problems such as electricity theft are alleviated.

However, any significant increase in access to credit has not been recorded, as a study in Peru, the developing country with the largest land titling program revealed. Plausible reasons are the costs associated with small ticket credit approval process; determination of creditworthiness of a borrower which entails evaluation of individuals on accounts of land available for collateral besides employment and level of income, education level, counter-guarantee, purpose of loan (productive or consumption) etc.

A potential problem with the land titling policy: reversion of the targeted group to slum dwelling and renting out the newly possessed property.

Slum rehabilitation authority with an initial paid up capital allocated in the budget. This authority should plan, aid and oversee the construction of a complete township. The house area, if we assume to be of double carpet area of the initial slum houses, and three storied, will leave almost one-third area available for workshops and other commercial trade centers.

This authority should undertake the establishment of vocational training institutes. Depending on the supply side feasibility, each slum can create a niche in some craft. The onus of marketing and the brand building exercise should also be on the authority. This is analogous to the highly successful state emporia model, an initiative of the state governments to showcase and sell its state’s traditional handicrafts.

This would also bring a sizable number of taxable transactions or sometimes even the flourishing black economy under the government net.

The program can also be designed to involve private developers who can use the land available commercially, while also showcasing the crafts associated with the slum.

Slums are a large part of the informal economy.

The exponential rise of India's Black Economy

The rising levels of currency with public are an indication of the rising unaccounted transactions, out of the tax nets:

Currency is withdrawn from the banking system at some point during the multiplier process after which it falls out of the tax net. If after this point in time, it is assumed that money changes hand even once (i.e. multiplier = 2), size of transactions that are unaccounted have doubled to 16 lakh crores from 8 lakh crores in the short span of 2006-2010.

A case in point is the FCI procurement payments, which are made in cheques up to the middle men arthias, but ultimately reach the farmer in cash who further uses the currency and makes some more cash transactions.

Why we need the Food Security Bill? Part 2

Another argument, seemingly less compelling but legitimate nevertheless, in favor of food security:

While much needed and absolutely commendable, it is commonly understood that hike in diesel prices will feed into food inflation; slightly dated but diesel costs were 7% of agricultural input costs in FY09.

Incorporating the current 7% hike in diesel prices, a preservation of farm incomes (agricultural GDP, Estimate 3 in table below) would require 2.3% rise in value of output i.e. farm prices: - value of output in case there were a 7% hike in diesel price and costs were passed on in full, is 2.3% higher than actual value in FY09, implying food inflation would have been higher by 2.3 pct points.

Figures in Rs crores

In Why we need the Food Security Bill? Part 1: How food inflation eats away real income.