News Papers EDITORIALS - 30 NOVEMBER 2016

   ✌✌✌✌  THE HINDU   ✌✌✌✌ 

✌✌  A last chance for amnesty   ✌✌

The amendments to the Income Tax law passed by the Lok Sabha now offer those with unaccounted cash a last shot at amnesty. They can pay half their cash as tax and deposit a quarter into a new Pradhan Mantri Garib Kalyan Yojana. Those who fail to do this voluntarily for bank deposits made since November 8 would end up retaining about 15 per cent of the total amount if they cannot establish a legitimate source for the funds. There is a Robinhood-esque edge to the PMGKY approach, directly linking the war on black money to welfare of the poor. Essentially an extension of the recent Income Disclosure Scheme that cleaned up about Rs.65,000 crore of undeclared income by levying 45 per cent tax, the December 30 deadline for bank deposits in demonetised notes gives a more purposeful push to the effort to clean out all the cash in the grey economy. The scheme for disclosing foreign assets last year had yielded just about Rs.2,400 crore in taxes, so a tougher approach was perhaps necessary to instil real fear among habitual tax evaders. Since the demonetisation of currency notes worth an estimated Rs.14.18 lakh crore, nearly Rs.8.45 lakh crore has been brought back into the system. If the proportion of notes deposited or exchanged is in line with their circulation prior to November 8, about Rs.2.56 lakh crore in Rs.1,000 notes and Rs.3.17 lakh crore worth of Rs.500 notes (that can be spent on exempted categories till December 15) is still out there.

Many clever ploys have been attempted to subvert this drive and convert black money into white: hiring people to exchange currency; tapping cash-in-hand entries of firms to launder illicit cash; pumping funds into bank accounts for the poor; purchasing goods in bulk where old notes are still allowed; even tipping off the taxman to conduct search-and-seizure operations on one’s own premises to avail of a provision that allows individuals to pay a mere 10 per cent penalty on such income if they admit to it. The government is trying to close the door on such ingenuity, and the latest tax law changes should be seen in this context. By early January, it will be clear how much money has been mopped up by the demonetisation operation. There is, however, no doubt that this tax manoeuvre is a neater way of gaining fiscal headroom than extinguishing the Reserve Bank of India’s liabilities to the extent of unreturned old Rs.500 and Rs.1,000 notes, and turning that into a special dividend to the exchequer.

  ✌✌  Finally, a step towards change   ✌✌

With the CPN(Maoist-Centre)-led government in Nepal approving amendments to the Constitution that will be tabled in Parliament, a first step towards positive change has been made in addressing federal concerns. The amendments include federal redrawing of boundaries that will allow for at least two Madhesi-dominated Terai provinces, substantial recognition of rights of naturalised citizens, especially women, and some degree of proportional representation in the Upper House. All these were major demands raised by Madhesi and other groups in agitations that lasted months and disrupted life. But with the opposition Communist Party of Nepal (Unified-Marxist Leninist) refusing to countenance any change, the Nepali Congress not providing adequate support to the government and the Madhesi parties refusing to budge from maximalist positions in the run-up to the move, it remains to be seen whether these amendments will pass. A failure would mean the political battle to honour the commitments made in the interim Constitution in 2007, which followed a series of agitations seeking a federal democratic character to Naya Nepal, is lost to the status quoists.

Last week marked the tenth anniversary of the Comprehensive Peace Accord (CPA) between mainstream political parties and the Nepali Maoists. It formally ended the decade-long civil war and paved the way for a constitutional republic. The initial achievements, painstakingly won, secured the peace process and mainstreamed the Maoists to bring a measure of stability to a country emerging not only from civil war but also a disastrous spell of rule by the palace. However, these last ten years have not quite seen the substantive change people had hoped for, with political parties abandoning the bipartisan approach to the CPA. Far from rising to the responsibilities of the new compact, the polity reverted to its default position of the 1990s, with short-termist power grabs and spells of political instability. This abdication resulted in a failure to forge consensus on the contentious issues of state restructuring and amendments to the Constitution to address the concerns of the Madhesis and other ethnic groups. The naysayers have cynically used the ‘nationalist’ line to resist the amendments, suggesting that these are directed by a foreign hand (read India). This ploy has been frequently used to resist democratic change. Unlike what the ‘nationalists’ claim, a truly federal Nepal is not a recipe for instability. Provinces sharing the power that is currently concentrated in Kathmandu would stabilise Nepali politics and empower marginalised communities. Prime Minister Pushpa Kamal Dahal ‘Prachanda’ took office promising momentum to the political process. Months later, he has taken the first step.

✌✌✌✌  THE ECONOMIC TIMES   ✌✌✌✌ 

✌✌  Compensate banks for CRR hike, RBI   ✌✌ 

The Reserve Bank of India’s (RBI) order to banks to set aside 100 per cent of the extraordinary spike in cash deposits between September 16 and November 11 is intended to slow down the excess liquidity in the system after the government’s November 8-9 move to take all extant Rs 500 and Rs 1,000 notes out of circulation. The decision is reasonable — after all, interest rates should be determined by inflation expectations and threats to financial stability, rather than an extraordinary liquidity spike. So, the excess money must be sterilised. Probably, the RBI finds it simpler to impound the gushing liquidity using the cash reserve ratio (CRR) mandate rather than the reverse repo mechanism — under which the RBI accepts money from banks by selling bonds that banks agree to sell back to the RBI at a predetermined price. The CRR hike essentially impounds around Rs 3.5 lakh crore of the cash with banks, turns them into compulsory reserves that earn no money and cannot be lent.

Before the RBI intervention, surplus liquidity had pushed banks to park funds with the RBI, the rush to buy bonds lowering yields below the repo rate. This inverted the yield curve and narrowed the gap between Indian and US interest rates, adding to the downward pressure on the rupee. Of course, the mopping up of extraordinary liquidity by way of a cash reserve will thwart one of the touted benefits of the demonetisation scheme: ultra-cheap loans. Even as the banks get no return on these CRR deposits, they are obliged to pay at least 4 per cent return on their deposits. This could cripple banks, given the volumes involved. The RBI must, therefore, compensate banks by paying interest — possibly between 4 per cent and 6 per cent — on the amount impounded under CRR.

Markets have taken note. The yield on 10-year benchmark government bonds has swung back above the repo rate, and overnight rates have shot up, sharply. The RBI cannot wait for its announced December 9 deadline to review things. It must immediately start paying banks interest on CRR. And speed up the pace of remonetisation.