the postage stamp long economics

A few months before the general elections 2014, P Chidambaram, made a statement on the NDA's Prime Ministerial candidate - "Modi's knowledge of economics can be written on the back of a postage stamp" [ We all know Chidambaram's skill at economics, going by what his son has earned] 

Modi replied in a Feb 2014 speech -  "My knowledge is so small that you do not even need a postal stamp to write it. It is encapsulated in just one word - trustee, like Gandhi-ji talked of trusteeship. You are the trustee of the country's resources, not its owner. For me, this much knowledge is enough,"

Let me start of saying, I perhaps don't even know that much on economics.. If I remember it right, during my BTech at IITM, the lowest ever grade I got was for economics :-) .. but that shouldn't stop me from jumping into the bandwagon of giving an opinion or two on DeMo and GST !


In particular, there has been a slew in articles in MSM about "economic slowdown". The major trigger may have been the GDP 5.7% numbers. And this triggered a "backward analysis" leading up to criticism of DeMo. Yet again, I am no expert here, but here are certain things to consider 

1) Take a simple example - In Kerala, my home state, the flow of black money in the real estate market is an open secret -- especially in the Malabar area where there has been a big flow on non-tax-paid money from the Gulf. You buy a land for 50lakhs, what you show on paper (and hence pay tax for) is something like 1 lakh !! Yes, you heard it right, 98% black money. 

And right after DeMo, I heard (and the situation more or less continues even now), that real estate transactions became far less in number - almost came to a stand still. Yes, slow down - but isn't it worth it ? One may argue, oh well, things will slowly go back to normal (read as the 98% black money situation) eventually, so what has one gained ? Well, I am pretty sure there are many many who would have made a decision that they are never going to invest their hard earned salaried money in such a market. Perhaps even shy away from dealing with black money in the lakhs.. These folks will remain silent, of course - but let that not be misread as "no impact". 

The impact of DeMo in cutting the money for the Kashmiri terrorists and naxals are also well know.. and indeed the crackdown on shell companies.. the reduction in the "check-post corruption" - Suffice to say, there has been enough evidence of reduced corruption.. something that noone easily "admits", because that amounts to accepting a high corruption in the days before the DeMo

2) There was an article about a real estate transaction in Bangalore - all papers were clean, and yet he had to pay bribe - but because it was post DeMo, he had to pay in thousands and not in lakhs as it used to be before DeMo . Again, one may say, look, you did not clean up the system, you just reduced its level of "evilness" - true, but again, that has a cascading impact... and no wonder, some people are pained and yet "silent"- isn't it a "slowdown" that one prefers ?

The same applies for apartment prices also - they were skyrocketing, and suddenly, it stagnated. Now, is it Modi's fault that the prices were going into such a bloated up situation , without any logic, that those who bought it the time when they were are its peak, are now disappointed ?  

3) Coming to GST - well, the key point, in my opinion, is this - IF .. and that is a big IF , someone were paying sales tax sincerely, I believe GST (in most cases) would have made his business better. But the fact of the matter was, sadly, that many were just not paying the taxes... and now they are forced to (to get the benefits) - and so naturally, it became a losing game for them.  Interestingly, most of them transferred the burden on to the end customer... A hotel that sold food at 100 rupee before, was perhaps supposed to pay a tax of 15 rupees.. but the guy never did.. thanks to a weak system. Now he has to pay 12 rupee GST, and he doesn't want lose his original 100 rupee revenue (all of which went into his pocket).. and so he adds 12 rupee to the 100 and charges the customer 112.. In the end it looks as though because of GST the prices went up - well, it did, but simply because the trader never paid tax to begin with. 

4) Well, one may ask - so what.. may be Modi did the right thing.. but aren't perceptions that matter ? A business man who is now forced to pay GST , is going to vote against Modi next time.. the end customer, many of whom the salaried class are also going to vote against Modi because the burden has ultimately been carried to them... well well well - at the surface yes.. but the Indian electorate - perhaps its vastness, perhaps its diversity -- has been something that nobody has been able to decode correctly. That mind, will only.. I repeat - only be fully known in the next elections .. and by the way, isn't "how is India after 20 years" more important than "how India votes after 2 years" ?   

I believe Chanakya Niti Chapter 6, shloka 16 says 

प्रभूतं कार्यमपि वा तत्परः प्रकर्तुमिच्छति।
सर्वारम्भेण तत्कार्यं सिंहादेकं प्रचक्षते॥

can be translated as.  The one excellent thing that can be learned from a lion is that whatever a man intends doing should be done by him with a wholehearted and strenuous effort (reference) or Without considering about the quantum of a Work, doing work with full devotion/strength/capacity is the prime traits of a Lion. We should the same (reference)

If Modi is indeed doing that, in the spirit of Trusteeship, then its short term pain for long term gain


Sarath said…
The land deal in Kerala - a) If some one buys land using 50 lkhs for which he has paid income tax, how does it become 98% black money ? b) Actually, if he pays land tax for full 50 lakhs, is it not double taxation - the guy has already paid income tax. So is it not unjust ?
drisyadrisya said…

a) The seller gets 50lakhs of which only 1 lakh is shown on paper. Rest 49 lakhs is unaccounted money into the system - i.e black money. and even the buyer, next time he tries to sell it, is likely to get it back in black, unless the guy himself is willing to pay the tax

b) Actually it is not the "land tax" I guess, but the registration tax - the tax associated with the buying which normally the buyer pays (the seller has to pay "profit tax"). First of all, that registration tax (or may be its not called tax, stamp duty or whatever) goes to the state govt, the Income tax goes to central. I am actually not an expert at this, perhaps that stamp duty basically comes from the funda that ultimately all land is that of the state and what you are paying is an amount to keep it registered in your name. So I am not sure if that can be mixed up with a tax and called a double taxation, and the essence of my post was not about that. Now, the stamp duty many times is kept high knowing that people do not show the full amount. For 1 lakh, even at 15%, government gets only 15000. Imagine if the registration cost were just 1%, and IF the party shows full amount, government gets 50000 --> and the buyer/seller can have peace of mind for it being an all-white transaction. Unfortunately that just doesn't happen. Governments have always argued that you make it 1% also people are going to show only 1 lakh.. may be 5 lakh at best and government will end up with 5000 . Vicious circle ? Its all about how much you can implement law, and how much you can "catch" avoidance....