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Daily Editorial – Economic Survey on “Demonetization”


  • Economic Survey on “Demonetization”
  1. Short-term costs of Demonetization
  2. Demonetization affects the economy through three different channels
  3. Macroeconomic consequences of Demonetization
  4. Benefits of Demonetization
  5. The follow up action suggestions as made by economic survey are

Economic Survey on “Demonetization”


This year’s survey is out and has a full chapter dedicated to on the aspect of “Demonetization”, which is summarized in this article.

Survey describes Demonetization as

“A radical governance-cum-social engineering measure, radical and unprecedented step with short term costs and long term benefits where the aim of the action was:

  • to curb corruption,
  • counterfeiting,
  • the use of high denomination notes for terrorist activities, and
  • The accumulation of “black money”, generated by income that has not been declared to the tax authorities.
  • To signal a regime change, emphasizing the government’s determination to penalize illicit activities and the associated wealth.

Survey also describes ‘Demonetization’ as unique and unprecedented in international economic history, as it combines secrecy and suddenness amidst normal political and economic conditions. All other steps in the world were under the conditions of hyperinflation, wars and political upheavals.

Survey also called this move as unconventional monetary policy because, in the wake of Global Financial crisis (GFC) advanced economies used monetary policy to stimulate growth like negative interest rates and “helicopter drops” (referring to expansion of money supply) of money. This move was reverse of it, it has reduced the cash supply, hence it could be considered “helicopter hoover”

The survey says that the action was taken as follow-up step to a series of earlier efforts to curb such illicit activities.

  1. Creation of the Special Investigation Team (SIT) in the 2014 budget;
  2. The Black Money Act, 2015;
  3. The Benami Transactions Act of 2016;
  4. The information exchange agreement with Switzerland;
  5. Changes in the tax treaties with Mauritius and Cyprus; and
  6. The Income Disclosure Scheme.

Short-term costs of Demonetization


  • Inconvenience and hardships- especially of those in the informal sectors and cash intensive sectors of the economy who may have lost income and unemployment.
  • Reduction in consumption there by Growth slowed, as demonetisation reduced demand (cash, private wealth), supply (reduced liquidity and working capital, and disrupted supply chains), and increased uncertainty
  • Job losses, decline in farm incomes, social disruption, especially in cash-intensive sectors
  • Uncertainty increased, as firms and households were unsure of the economic impact and implications for future policy Investment decisions and durable goods purchases postponed.

Demonetization affects the economy through three different channels


  1. Aggregate demand shock- because it reduces the supply of money in the form of cash and affects the private wealth i.e., unaccounted money
  2. Aggregate supply shock- for ex, agricultural production might be affected since sowing requires laborers to be paid in cash, and also make it difficult for them to buy inputs.
  3. Uncertainty shock- because agents of the economy face confusion related to the magnitude and duration of the cash shortage and policy response.

Macroeconomic consequences of Demonetization


 

After the demonetization move, bond yields have increased in almost all major economies, but it decreases in India by 32 basis points. (for ex, US bonds increased by 58 basis points.)

 

The Macro assessment is made on five broad factors.

  1. Agriculture (rabi) sowing
  2. Indirect Tax revenues – as a measure of production and sales
  3. Auto Sales-as a measure discretionary consumer spending
  4. Real Credit growth
  5. Real estate prices.
  • Agriculture sowing has increased for wheat and pulses when compared to last year by 7% and 10.7% contrary to fears, probably because of good monsoon and favorable weather conditions.
  • Indirect tax revenues have increased, probable because the dues were allowed to be paid in demonetized notes.
  • Passenger cars and two wheeler sales have decreased.
  • Credit growth has weakened
  • Real estate prices have seen a drop in all the major cities.

Benefits of Demonetization


  1. It can be viewed as a tax administration measure, a mode to separate white incomes from black. The black money thus retrieved could be used in productive ways – to recapitalize banks, to retire government debt, or to redistribute to the private sector, increase welfare spending. Aids tax administration by also shifting the transactions out of cash economy to formal payments.
  2. Tax Compliance: Indicating the regime shift on the part of government- demonstrating state’s resolve to crackdown on illicit ways of tax evasion, leading to financial penalty and social condemnation, which can bring about lasting effects on behaviour to comply with the tax laws.
  3. It will formalize savings, by bringing them into banks, which will provide a base for banks to give out more loans at lower interest rates.
  4. Digitalization: Demonetization has forced economy to move less cash or cash-lite transactions which reduces the anonymity in transaction which has been misused to do illegal transactions. Digital transactions will help
    1. Bring people into wired era and thereby increasing financial inclusion.
    2. Increase savings
    3. Reduce tax evasion by leaving trials easy to track.
    4. Bring level playing fields between tax evading and tax compliant people.
    5. Reduce the charges of maintenance and costs of handling cash for banks.
  5. Indirect and corporate taxes could over long run, increase as formalization expands and compliance improves.
  6. Informal output could decline but recorded GDP would increase as the economy becomes more formalized.
  7. Demonetisation could have particularly profound impact on the real estate sector. In the past, much of the black

money accumulated was ultimately used to evade taxes on property sales. To the extent that black money is reduced and financial transactions increasingly take place through electronic means, this type of tax evasion will also diminish.

On the whole demonetization can be very beneficial in the long run, if the follow up actions required for the minimizing the costs and maximizing the benefits are taken.


The follow up action suggestions as made by economic survey are


  1. Fast and demand driven re-monetization
  2. furthering of tax reforms (DTC)
  3. Bringing land and real estate into GST
  4. Reducing the tax rates and stamp duties
  5. Acting to reduce anxieties of the investors and tax-payers about over-zealous tax administration.

 

 

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Economic Survey 2016-17 : 5 Things you should know.

The Economic Survey 2016-17 will be released today. Here are five things to know.

download economic survey 2017

1. What is the Economic Survey 2017?

Economic Survey 2017 is an assessment documents that presents a picture of the Economic Landscape of the country. The Economic Survey is released one day before the Budget.

The Budget is for the fiscal year 2017-2018, while the Economic Survey is as assessment of the last fiscal year , preceding it , that is 2016-2017.

It basically gives a detailed overview of different sectors and suggests the reforms measures required.

2. When is the Economic Survey Released ?

The Economic Survey is released one day before the Budget. The Budget is set to be presented on February 1, 2017. The Economic Survey is released on January 31, 2017 this year.

3. Who prepares the Economic Survey?

The Economic Survey is presented by the Chief Economic Adviser to the Government of India. Arvind Subramaniam and his team will be presenting the Economic Survey 2017.

4. What is the significance of the Economic Survey?

First, the Economic Survey gives a holistic overview of the economy and sector specific issues.

Second. problems assessed in the Economic Survey and policy suggested, are often put to use in the coming years by the government. For example, Direct Benefit Transfer was much talked about in the past economic surveys and is being implemented right now.

5. What can we expect in the Economic Survey 2017?

One of the key things we can expect is Universal Basic Income.  It may be recommended by the Economic Survey – a form of social security that can be paid to individuals.

The government is not bound to follow the recommendations of the Survey. Government have been known to not follow very rational policy measures suggested by the Economic Survey.

Similarly, we can expect Banking Transaction Tax – a tax on all banking transactions ( one original proposal says – declare cash holdings as illegal, remove income tax, and have only Banking Transaction Charge) and lowering corporate tax, in light of government’s demonetization initiative.

Happy Waiting 🙂

And those of you waiting to get a print-out, you can pre-order one  at Flavido.com.

 

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Economic Survey Highlights : – Problems with APMCs and possible solutions

Current Scenario

Presently, markets in agricultural products are regulated under the Agricultural Produce Market Committee (APMC) Act enacted by respective State Government. This Act notifies agricultural commodities produced in the region such as cereal, pulses, edible oilseed and even chicken, goat etc. The first sale in these commodities can be conducted only under the aegis of APMC through the commission agents licensed by the APMC. The typical amenities available in or around the APMC are: auction halls, weigh bridges, godowns, shops for retailers, farmer’s amenity center etc. Various taxes, fees/charges and cess levied on the trades conducted in the Mandis are also notified under the Act.

Problems

• APMCs charge multiple fees, of substantial magnitude, that are non-transparent. They charge a market fee of buyers, and they charge a licensing fee from the commissioning agents and licensing fees from a whole range of functionaries. In addition, commissioning agents charge commission fees on transactions between buyers and farmers. Also the commissions charged by commission agents are exorbitant as they are often charged on entire value of product sold rather than the net value. There is a perception that the positions in market committees and market boards are occupied by the politically influential and leading to the formation of cartels in APMC. The APMC operations are hidden from scrutiny as the fee collected is not under State legislature approval.• These statutory levies/mandi tax, VAT etc. varying from state to state are the major source of market distortion. Such high level of taxes at the first level of trading has significant cascading effects on the price.

• The APMC Act treats APMC as an arm of the state and the market fee as the tax levied by the state, rather than fee charged for providing services. This provision acts as a major impediment to creating national common market.

Model APMC Act

Ministry of Agriculture developed a Model APMC Act, 2003 for the freedom of farmers to sell their produce. The farmers could sell their produce directly to the contract-sponsors or in the market set up by private individuals, consumers or producers. The Model Act also increases the competitiveness of the market of agricultural produce by allowing common registration of market intermediaries. Many of the States have partially adopted the provisions of model Act and some states such as Karnataka have adopted changes to create greater competition within State. Karnataka Model provides for a single licensing system, offers automated auction and post auction facilities. It also facilitate warehouse-based sale of produce, facilitate commodity funding, prices dissemination by leveraging technology and private sector investment in marketing infrastructure.
However, the Model APMC Act does not go far enough to create a national or even state level common market for agriculture commodities. The Act retains the mandatory requirement of the buyers having to pay APMC charges even when the produce is sold directly outside the APMC area. Though the Model Act provides for setting up of markets by private sector, this is not adequate to create competition even within the state since the owner will have to collect fees/taxes on behalf of the APMC in addition to their own charges.
The Economic Survey emphasizes on the need for a national common agricultural market.
Major problem in agricultural growth has been un-integrated and distortion ridden agricultural market.

What are the possible solutions then ?

The Economic Survey suggests 3 incremental steps as possible solutions, building on the Budget 2014 recognition for setting up a national market, farmers’ markets and need for the Central Government and the State Government to work closely to reorient their respective APMC Act.

Possible solutions

1. It may be possible to get all States to drop fruits and vegetables from APMC schedule of regulated commodities and followed by other commodities.

2. State governments should also be specifically persuaded to provide policy support for alternative or special markets in private sector.

3. In view of the difficulties in attracting domestic capital for the setting-up marketing infrastructure, liberalization in FDI in retail could create possibilities for filling in the massive investment and infrastructure deficit in supply chain inefficiencies.

4. Creation of a National Common Market 

• Use Constitutional provisions to create a national common market for agricultural commodities.

– Concurrent List – Entry 33 covers trade and commerce and production, supply and distribution of food stuff including edible oilseeds and oils, raw cotton, raw jute etc.

– Union List – Entry 42 Interstate trade and commerce also allows a role for the Union.

 

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Economic Survey Highlights : – Manufacturing or Services ?

Excerpts from Economic Survey –
In order to bring about expansion and structural transformation, India should utilize its dominant resource of unskilled labour. But, “What should India make?Manufacturing or Services? ”
The Economic Survey distinguishes registered manufacturing ( formal sector) from the general manufacturing which covers informal sector as well.
Advantages of Registered Manufacturing ( Formal Sector )
  • Has the potential for structural transformation.
  • Exhibits high productivity compared to other sectors of the economy.
Issues with Registered manufacturing ?
  • Manufacturing productivity in India lags behind other nations.
  • All Indian states exhibit declining share of manufacturing in the State GDP.
  • Registered manufacturing couldn’t bridge regional disparities in India.
  • Registered manufacturing now in India has been identified as skill intensive which is not in line with the India’s comparative advantage in unskilled labour.
Factors for non development of manufacturing as an engine of economic growth :- 

• Distortions in Labour Market

• Distortions in Capital Market

• Distortions in Land Market

• Specialization not in line with India’s comparative advantage in unskilled labour

Certain subsectors of services – financial services and business services, exhibit higher productivity levels than registered manufacturing. However, these sectors being highly skill intensive (excluding construction) are out of line with the skill profile of the Indian labour force. They are unlikely to generate widely shared and inclusive growth. Though, service sector has the potential for domestic growth convergence across regions.