Type: op-ed snap

Context

• Paperless payments have been a big national goal ever since 8 November 2016, when India rendered ₹500 and ₹1,000 currency notes useless in a stunning decision that was upheld as valid by the Supreme Court on recently. Today, our cash intensity remains roughly on the same incline as it was earlier. But online payments have soared. This means a fine policy judgement call will need to be made soon.

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Demonetization: A brief Analysis

• The supreme court rejected petitions arguing that demonetization was done illegally and by 4:1 bench majority Supreme court held the process as satisfactory.
• The overnight note-ban was also found to satisfy a general test of proportionality. For all the hardship caused by weeks of cash starvation, that exercise of authority was not judged too drastic for its aims.
• The extent to which unaccounted-for money was flushed out, terror funding frozen and commerce formalized cannot reliably be estimated, but small businesses were clearly hit hard and India’s economy slowed down soon after.

The changing trend: How we are transacting?

• Rise of digitals payments: The past half decade’s big trend in our use of money has been the exponential rise of a platform that’s part of our digital stack of public goods.
• Spectacular success of UPI: Designed for instant transfers between bank accounts done via mobile phones, the Unified Payments Interface (UPI) has been a spectacular success since its 2016 launch.
• UPI transactions for instance: According to National Payments Corporation of India (NPCI), its operator, UPI processed more than 74 billion transactions in 2022, up 90% over 2021, worth almost ₹126 trillion, a 76% leap.

Examining feasibility of levying user fee on UPI and the E-rupee

• Financial support to UPI: The case for UPI as India’s payment bedrock is weakened by the fact that while it levies no user fee, it isn’t a costless service. Last year, the finance ministry justified financial support for UPI on the ground that it’s a digital public good with immense convenience for the public and productivity gains for the economy.
• Coast benefit review must be done: If public funds are increasingly needed to back UPI as it expands, we must put it to a cost-benefit review as we go along; UPI is already logging huge sums and the total for 2023 may be much more.
• Promoting E-rupee: It’s not just a cost consideration that should make us promote RBI’s retail e-rupee instead for routine payments.
• E-rupee is a direct liability of RBI: The E-rupee’s mass usage would involve circulation of money that’s a direct liability of the central bank (an IOU issued by it, i.e., like cash), which would better serve the cause of economic stability. This is because what RBI owes its currency bearers is entirely free of risk, while the same cannot be said of banks.

Why India needs a digital rupee?

• Online transactions: India is a leader in digital payments, but cash remains dominant for small-value transactions.
• High currency in circulation: India has a fairly high currency-to-GDP ratio.
• Cost of currency management: An official digital currency would reduce the cost of currency management while enabling real-time payments without any inter-bank settlement.

Conclusion

• For superior systemic safety, the e-rupee should get a significant share of online payment swipes. Even if its holdings earn no interest, it could catch on if the security of its value, ease of liquidity and erasure of data trails (below a limit) are duly advertised. For an e-rupee to aid macro level prudence, it will have to eat into UPI.

Context

• The discourse on efficient, effective and equitable public spending often takes us into the realm of limited resources facing competing demands. India definitely needs to widen its revenue collection as well as base. In this context its time to consider a wealth tax.

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What is wealth tax?

• Wealth tax is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
• It aims to reduce the inequalities of wealth.
• It is based on the market value of assets owned by a taxpayer and charged on the net wealth of super rich individuals.

Wealth Tax in India

• Abolished wealth tax: The government abolished wealth tax as announced in the budget 2015. In its place, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. (Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher).
• Abolished to simplify tax structure and discourage tax evasion: The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
• No wealth tax at present: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.

What is the need for levying a wealth tax?

• High inequality: India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022.
• Massive accumulation of wealth in a few hands: A small section of people has access to a large share of economic assets and resources that remain almost completely untaxed and thus unavailable for public allocation.
• Capital gains tax has limited base: Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base.
• Wealth largely depends on inheritance and privilege: Wealth, much less than even income, has little to do with one’s education, merit or efforts; it is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes.
• India does not have inheritance tax: India scrapped its estate duty in 1985 and has no inheritance tax.
• Almost entirely exemptions on gift tax: Although the receipt of gifts is subject to income tax in the beneficiary’s hands, it has various exemptions; it is almost entirely exempt if received from within the family, including the extended family of self and spouse. These exemptions shrink the base significantly, as most accumulated wealth is acquired through family, and that remains outside the gift tax’s ambit. Given the cultural context of wealth inheritance, some exemptions make sense, but upper thresholds can be easily added to make it more effective.

Comprehensive PoV: Why wealth tax is necessary at present economic condition

• Wealth of rich doubled during the pandemic but not channelised well to create productive resou: An Oxfam report has highlighted how India’s richest doubled their wealth during the pandemic. This happened for a variety of reasons. despite facing grave financial and economic challenges, has no means to convert any of this growing wealth into productive resources that can generate employment opportunities and push up the incomes of multitudes, which in turn can drive demand for goods something that is needed to counter an economic drag-down.
• There is no sufficient increase in private investment: The government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment. Obviously, there is something else at work, and one cannot assume that accumulated wealth in private hands will necessarily be invested in the domestic economy.
• Not only investment is important but also the right application is important: It is not only investment that is important, but also where that investment is going and whether it is creating employment opportunities for the youth.

Present status and economic projections

• Data on youth unemployment: Data from diverse sources show high unemployment rates during May-July 2022 for the youth: 28.3% in the 15-24 age group and an even higher 43.3% for the 20-24 age-group.
• Likely global recession overhead: The likelihood of a global recession and the related layoffs being announced by corporate giants will make the situation worse.
• Jobless growth and wealth inequality: The recent economic growth experienced in India, especially in the post-covid recovery phase, has largely been jobless growth and can further deepen both income and wealth inequalities.
• Economy cannot afford to have such high level of youth unemployment: No economy can afford to have such youth unemployment rates for long without adversely affecting economic growth and social cohesion.

Way ahead

• A number of Latin American countries, including Argentina, Peru and Bolivia, have either introduced or are introducing a progressive annual wealth tax levied on the wealth gains of each year or a one-time covid ‘solidarity’ tax.
• There is no reason why India cannot do so too. This is the right time to introduce a progressive wealth tax along with other fiscal steps that can directly reverse the trend of growing inequalities in the country.

Conclusion

• India needs a shift in its fiscal policy, as suggested by a number of economists, to adopt measures that create employment opportunities and in turn drive demand for products made by small and medium level producers. This would also push up growth while not necessarily widening inequalities.

Mains question

Q. What is wealth tax? Why wealth tax abolished? Considering the present economic situation Discuss the need to levy wealth tax in India?

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Context

• Even as the RBI steadily downgraded India’s growth forecasts for the year from 7.2 per cent in April to 6.8 per cent in December, and the benchmark Nifty50 index ended the year up a mere 4.1 per cent, a handful of stocks delivered outsized returns to investors.

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Expansion of business and reward

• Adani gained because of expansion: The top trade was undoubtedly that of Adani Enterprises with the stock more than doubling over the year. But that should not come as a surprise. After all, the group has embarked on a breathless pace of expansion (both organic and inorganic) that is perhaps unparalleled in recent times.
• Unexpected rise in prices: Share prices of associated companies such as Adani Green have also seen a remarkable surge, catapulting the group into the top leagues of Indian conglomerates.
• Risky price-to-rent ratio: One should be forgiven for thinking that residential real estate in Delhi, with a price-to-rent ratio that ranges between 40-50, is expensive. Adani Enterprises is currently trading at a price-to-equity ratio of 394 as per NSE. The Nifty50, in comparison, is trading just above 21.

Performance of Public sector banks

• SBI AND PNB gained: The year also belonged to Indian banks, more specifically to public sector banks, who at last seemed to have turned the corner. SBI is up more than 30 per cent, while Punjab National Bank is up almost 50 per cent. Others like Bank of Baroda and UCO Bank have more than doubled.
• Outperforming private banks: While private sector bank stocks have also seen a sharp rise Axis is up almost 35 per cent, while ICICI is up 17 per cent, public sector banks have outperformed their private counterparts by a significant margin. The Nifty PSU bank index is up 70 per cent for the year, while in comparison, the private bank index is up only 21 per cent. This was perhaps to be expected.
• Cleaning up balance sheet: Public sector banks have been on a multi-year drive to clean up their balance sheets, and shore up capital. And while there are still some concerns over possible slippages from accounts that were restructured during the pandemic, gross non-performing assets or bad loans were down to 6.5 per cent at the end of September 2022.
• Rising lending rates: Moreover, lending is growing at a brisk pace. And banks’ spreads also have improved with the interest rate cycle on the upswing. In typical fashion, lending rates have risen faster than deposit rates. But, as credit growth picks up and competition for deposits among banks begins to intensify, deposit rates are likely to edge upwards, putting pressure on the spread.

Status of Consumption and auto sector

• Consumption is up: while concerns over the unevenness of the economic recovery persist, consumption stocks have fared well. ITC is up more than 50 per cent, as are Britannia (almost 20 per cent) and HUL (9 per cent).
• Real wages have not increased: But with firms underlining the continuing pressure on volumes with elevated inflation, real wage growth has been subdued in rural areas it is likely that in some product segments, the formalisation theme is still playing out.
• Size of market is not expanding: The bigger formal firms gaining market share even as the overall size of the market isn’t expanding as hoped.
• Auto sector have done well: Among the auto stocks, M&M and Maruti are up 50 per cent and 12 per cent respectively, though Tata motors is down 22 per cent, while among the two-wheelers, both Bajaj and Hero are up.

Better performance of Infrastructure

• Moderate uptick in infrastructure: Infrastructure stocks are a mixed bag. Larsen & Toubro, often thought of as a proxy for the domestic capex cycle, is up almost 9 per cent, recently hitting a new high.
• Impact of PLI scheme: Perhaps, this reflects a pick up in the public sector capex or the private sector push under the government’s production-linked investment scheme.
• Mix picture of steel and cement: Among cement stocks, Ultratech is down, though ACC is up, while among steel stocks, SAIL is down, Tata steel is almost flat, but JSW Steel is up.

IT sector was worst performing

• IT NIFTY significantly down: The sector which has taken a beating has been IT. The Nifty IT index is down 26 per cent.
• Heavy correction in market: All major IT firms from TCS to Infosys to Wipro have witnessed heavy correction.
• Impact of slowdown in advanced economy: Valuations of the sector will be heavily influenced by market views over the slowdown in advanced economies which are major revenue centres for these firms.

Conclusion

• Though stock market doesn’t reflect the entirely true picture of economy but it certainly a good indicator of where the retail investor and common man invest his money. India’s stock market is going to be top 3 in the world. SEBI must protect the retail investor from this highly volatile terrain.

Mains Question

Q. Analyze the performance of the auto and IT sector in India through lenses of stock market? Why the balance sheet of public sector banks is improving?

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