A case study of Indian Finance Management

Dr. N. Bhattachatya

The National Democratic Alliance II (NDA II) led by the Bharatiya Janata Party (BJP) formed the government in Delhi in mid 2014. After subsequent state elections, the NDA captured power in 21 states and only 8 states remained with opposition parties. Mr. Narendra Modi as Prime Minister of India gradually started unfolding his government’s economic agenda.

In 2016 the NDA government announced two controversial economic policies:

1. Demonetisation from midnight of 8th November 2016 and
2. Goods and Service Tax Act (GST Act) from July 2017.

A review of implementation process of these two policies gives an idea how his Government functioned during these 4 years.

a) Demonetisation

The entire country was in a Deepavali induced festive mood until the 1st week of November, 2016 and on 8th of November night the people were instructed by the Prime Minister that ‘Demonetisation’ of certain types of currency notes would take effect at midnight. It was said that all cash transactions with demonetised currency would officially stop by midnight. The press reported a constant stream of massive illegal transactions until early morning of 9th November and there was none to stop that. They rather claim that dark deeds are always better done in dark! The banking system of the entire country was brought to a halt by such unplanned and avoidable ‘demonetisation’ policies. Every one, poor and rich, old and young were punished for having cash at home of certain denominations of banned currency. If Government did some planning without leaking out the project some unfortunate deaths of people waiting peacefully in long queues in front of bank offices could be easily avoided!

The Reserve Bank India (RBI) being the custodian of banking system of this vast country surprisingly never bothered to make the demonetisation process more civilised even though it was affecting millions of people coming from all social groups. Even minimum comforts were not made available in the long and painful waits. The elaborate and comfortable seating arrangements that are made in the election meetings of Mr. Modi was forgotten when ‘demonetisation’ policy was announced. Each customer of every bank pays cent-percent running expenditures of the banks. Banks are there for these customers and they pay for it. It is their right to get all the facilities while doing banking transactions. Banking regulators treated these customers as condemned beggars because they were compelled to come and change the notes declared illegal by their own government. These individuals were humiliated and harassed by compelling them to stand in infinite queues for unlimited hours in waiting. Total anarchy prevailed in ATM booths throughout the country with ‘NO CASH’ tagged on the doors. Bank employees were paid ‘overtime wage’ for working for unlimited hours for this unbearable work burden sincerely and faithfully and this work continued even after the official demonetisation transactions were over. However, the extra wage paid for extra time work was taken back by the bank management, as reported in press! The entire economy of our country with 1.3 billion people was subject to untold sufferings without any apology to the nation for such awful economic policies guided by dictatorial mind­set.

It has now been disclosed (after more than 20 months) that a lot of co­operative banks (especially in Gujarat and Maharashtra) received huge amounts of demonetised currency as deposits and these were shown as non-taxable agricultural income of the depositors. Well known politicians of these states were heading these cooperative banks for it is these affluent citizens that benefit from these tax rebates. There is no report by the RBI whether any enquiry was made on these deposits or not. Similarly, Zero Balance Jan Dhan accounts were opened some time prior to demonetisation scheme to help financially weaker sections and a lot of these accounts were reported to be overflowing with huge deposits of cash during the demonetisation process! No disclosure has yet been made to the public regarding whose money was deposited in these accounts. The net result is that despite maximum near-criminal torture of ordinary bank customers throughout the country and for nearly two months, more or less all the ‘demonetised notes’ issued by the RBI were returned (around 93 percent) and the government’s attempt to unearth a ‘huge quantity of black money’ miserably failed! The RBI failed to point out names of those who were found to be defaulters in the demonetisation process. If the information on black money was correct, ‘fake and illegal currency’ collection should have been much more than 7 to 10 percent.

The government will be well advised not to repeat such adventures without proper preparation even if it were warranted. After all the citizens deserve a decent treatment at the hands of the bureaucracy they pay for.

When every sector of Indian economy was suffering from the disastrous effect of demonetisation, the Goods and Services Tax Act (GST Act) was implemented from 1st July, 2017. It is a new indirect tax which replaces all state and central taxes on goods and services produced in the country. The objective of this tax was to rationalise indirect taxation in the country and unify the tariff regime so as to strengthen the national market. The idea was also to widen the tax network so as to bring the unorganised and informal sector within the ambit of the tax net. However, it was so shoddily planned and implemented and its procedures so complicated and tedious that small and medium business units were compelled to close down. Both employers and lakhs of their employees returned back to their homes shortly after its implementation. Initially, it was torturing even to well organised traditional business units. Except the corporate houses, the rest suffered losses and many closed their units. Its working was bewildering requiring experts to handle them and it was time consuming. This adversely impacted small firms employing only family labour. After 12-15 months of its introduction, both traders and consumers are unhappy with the new indirect taxation system. Its complexity and administrative procedures are changing very fast and it is very difficult to adjust to them. The small scale business community are not habituated to such modern techniques. Both central and state governments are unhappy as actual tax collection is much below the projected figures. What is peculiar is that petroleum products for some reason have been kept out of the GST. That has proved a bonanza for both centre and states when the imported price of petroleum products went up. Naturally, the excise collection by the centre is going up as it is based on the cost of petroleum products. Pollution level in Delhi will thus be reduced drastically in the near future in the absence of private vehicles on road! Foreign trade is also affected by the confusions created by the introduction of the GST.

The value of the US $ is moving higher and higher because the US Federal Reserve is increasing the rate of interest and there is a mad rush to liquidate foreign direct investments (FDI) in India and invest back in USA Bonds. At the same time the prices of petroleum products are increasing in the international market due to the ‘sanction policy’ of USA on Iran oil from November 2018. Already hedging insurance on forward contract on Iran oil has stopped. The trade war between the USA and China has reduced exports from India. Stress on US Dollar supply has devalued the Indian Rupee and it is moving up and up with every hike in petrol price. Both petrol per litre in the Indian Rupee and Rupee per US Dollar may reach a figure of 100 in the near future. Inflation is seen all around but the Monetary Policy Committee of the RBI refused to take any measure in its bimonthly meeting held in October 2018. The current account deficit is also against the interest of India, hovering around 3 percent against 2 percent during this time last year. Dollar deposits with the RBI may temporarily work as buffer, but not for long. The Forex reserve dropped by $ 5.14 billion in the seven days ending on 12.10.18. On 13.4.2018 the foreign exchange reserve of India was $ 426.08 billion and it reached $ 394.46 billion on 12.10.18 a decline of $ 31.62 billion in around 6 months. The USA, as a super power orders India to stop import of petrol from Iran. There is no suggestion, however, whether USA will compensate India by increasing imports from India, so that India can pay for the increased oil bill. USA is self-sufficient in petroleum and can pressurise OPEC to increase the production of petroleum but its own interest will suffer. The USA pretends to fight with China on foreign trade issue, but these rich countries have no permanent enemies, nor any permanent friends. They bother only for their own narrow selfish interest. Let us wait and see how NDA Government reacts!

It is now an accepted policy to carry on export and import trade through tax heavens. An Indian company, imports coal, for example, from Indonesia and those ships with coal from Indonesian ports come direct to India, but the papers submitted to Indian authorities are prepared not in importing countries but in tax heavens like Mauritius or Dubai. India pays a larger quantity of Foreign Exchange for the import of coal and on export from

India receives lesser foreign exchange. Everyone knows it but these traders are friends of our politicians. Almost all the power generating companies are in the red and they demand relief both ways, writing off outstanding bank loans and increasing tariffs on consumers. Politicians are collaborating with these corrupt businessmen. They don’t want to send these businessmen to bankruptcy courts! The country wastes a huge quantity of scarce foreign exchange for such manipulative foreign trade business which is carried on for decades.

The 2011 census reports that around 69 percent of Indians are living in Rural India and their main occupation is farming. Any discussion on the Indian economy in 2018 must include the state of affairs in rural India. Recently a large number of well to do farmers from some north Indian States like Punjab, Haryana, western Uttar Pradesh, etc. reached Delhi on cars, tractors, bikes, etc. Thousands reached the Delhi Border but the Central Government refused to allow them to enter Delhi. The Bharatya Kisan Union of North India led by Mr. Mahendra Singh Tikait 30 years back created complete nervousness in Indian Bureaucracy and the state had to accept all their demands. Many in the present Central Government were supporting the Kisan Union movement 30 years back, now they are in receiving end! Frequently farmers from various states are coming to Delhi with their charter of demands. It means people living in rural areas of the country feel neglected and ignored both by the states and the Centre.

Certain important information has been revealed by the recently published Agricultural Census data of 2015-16 by Government of India. The salient points are:

Table I Agricultural Holdings in India

The above figures clearly indicate the nature of the sickness of Indian Agriculture. The farming area has gone down due to urbanisation, road building etc. At the same time the number of land holdings has gone up resulting in the reduction of the average size of holdings to 1.08 hectares from 1.15 hectares. Thus the operational holding size is gradually becoming more and more uneconomical. There was a time when the demand was for the ‘land to the tillers’, it now appears that unless the land holding size is economical, it is difficult to earn a living. Though Co-operative farming is not liked here, in many states small and marginal farmers have to pull their holdings together to carry on cultivation with modern scientific mechanical techniques. The Report further explains the following as in 2015-16:

1. 86.21 % of holdings were small and marginal holdings (0 to 2 hectares) and their share in operational holdings was 47.34 %
2. Average Size of small and marginal holdings was just 0.6 hectares and it was mainly in UP and Bihar
3. Semi and medium holdings (2 to 10 hectares) — 13.22% of holdings and its share in operational area was 43. 62%
4. Large holdings (Size 10 hectares and above) only 0.57 percent of holdings but the share in operational area was 9.04 percent of total area.

Based on the current Agricultural census data 2015-16, it is evident that land holding is uneconomical and even the rich cultivators of India are relatively poorer than their counterparts in urban areas. That suggests that in India agriculture alone cannot sustain a family and it has to be supplemented by other professional jobs for rural households. Moreover, to support many other occupations viz. industry, trade and professional etc. there are many organisations; for people engaged in agriculture there is hardly any scope for a supplementary job. Even timely supply of water in the fields cannot be assured without organised irrigation channels maintained by small and marginal farmers jointly.

While discussing cultivation in India an investigation is made about ‘Tribals’ still living in forests of India who account for around 9 percent of Indian population. Though tribals are still living in the forests of India, modern industry has virtually taken over their ancestral land, forest and livelihood. They are gradually being displaced by miners and industrialists. Though there is a law called the ‘Forest Rights Act’, passed by the Parliament in 2006, it is only in the statute books. Recently the Maharashtra Government showed some initiative and made some land allotments on paper. However, the bureaucracy as usual is issuing new orders just to harass them. Tribals are humans in the rule book but they are treated as animals by the bureaucracy. Some human rights organisations are working hard in courts of the country for giving tribals their due share as per the laws of the country, but vested interests are putting these ‘human right activists’ behind bars. The Government has enough laws in the statute books to punish these activists and they are treated as ‘URBAN NAXALS’.

IV

Indian public sector banks never functioned under the strict control of the banking regulator, the Reserve Bank of India. Politicians played a very dirty role to make these banks sick. The result experienced during last 5 years is simply condemnable. One after another, the criminals of Indian Trade, Industry and Cricket cheated the Indian Banks and they were allowed by authorities to leave the country and honourably settle in foreign countries. These banks are now declared sick and Government is trying to arrange ‘first aid’ for some of these banks. The Life Insurance Corporation (LIC), a public sector insurance company is being misused to help these sick banks. The Government ordered the LIC to purchase majority shares of IDBI bank. Then three banks, Bank of Baroda, Vijaya Bank and Dena Bank were ordered to merge. It is hoped that after merger of the subsidiary banks with the parent bank, the State Bank of India will be economically sound. Table II will explain economic health of some of these banks in India for the three years starting from 2015 to 2017.