Combating the Black Loot Stashed Abroad

The recent leak of financial data in 13.4 million documents— the largest ever— of Bermuda’s Appleby and Singapore’s Asiaciti has only reiterated the extent to the rich and mighty world over use shell companies and secret bank accounts for concealing illegal, ill-gotten, tax-evaded and laundered money in tax havens.

The treasure trove of financial evidence, corporate assets and transactional data, named “Paradise Papers”, spans 180 countries. Scores of Indian nationals, 714 to be precise, are featured in these documents. Companies of several prominent politicians, journalists, lobbyists, businessmen and film artistes are featured in the list. Those embroiled in the various leaks, to name a few, include Harsha Moily, Kalanithi Maran, Jayant Sinha, Karti Chidambaram, Sachin Pilot, YS Jagan Mohan Reddy, Vijay Mallya, Nand Lal Khemka (of Sun Group), Hinduja Brothers, Subhash Chandra (of Essel Group), Raghav Bahl (of Network18), Harish Salve, Shobhana Bhartia (of Hindustan Times Group), Sanjay Dutt, Amitabh Bachchan and Niira Radia.

The Emergent Pattern

The “Paradise Papers” expose comes on the heels of other collaborative investigations into offshore banking transactions in recent times. The first instalment of ‘offshore leaks’ made public in April 2013 related to companies incorporated in the British Virgin Islands. Next, the “Swiss Leaks”, which gave out data from the HSBC branch in Geneva, followed in February 2015. The “Panama Papers” leak came thereafter in April 2016.

Each of these leaks underscores the enormity of the deep-rooted, systemic malaise. The Tax Justice Network estimated the total volume of liquid, cross-border assets held in secret offshore accounts to be in excess of US$ 20 trillion in 2012. The quantum of illicit funds stashed abroad by Indians has been put between US$ 500 billion, as reported in the Supreme Court of India in July 2011, and US$ 1.4 trillion, as derived using unscientific, back-of-the-envelope methods by Global Financial Integrity (GFI) in 2008. 

Regardless of the magnitude of the illicit funds abroad, it is clear that Indian black money stashed illegally abroad has become a multi-headed, Hydra-like monster. A large, global network of lawyers, bankers, accountants and other operatives is at work overtime. They offer advisory services to help clients conceal their illegitimate wealth in secret tax haven destinations with devious ingenuity.

Action, Not Lip Service

The Finance Minister Arun Jaitley has promised to constitute a multi-agency team to probe the matter and act swiftly. Yet, the assurance of effectively unearthing foreign holdings of Indian citizens and entities rings hollow.

Why?

For one, initiatives of many such probe teams, committees and commissions instituted in the past have yielded zero results.

Two, Double Taxation Avoidance Agreements (DTAA) facilitate treaty shopping, which enable overseas corporate bodies (OCBs) incorporated in countries with lower taxation to enjoy tax benefits legally. Besides, DTAA is aimed at avoiding double taxation of declared ‘white’ incomes and not hidden ‘black’ incomes or assets.

Three, changing ownership of offshore companies, through trusts, investment funds and other vehicles, to unlawfully alter ownership of shares of Indian companies without paying capital gains tax is a common modus operandi adopted. It is extremely difficult to even track and detect, let alone the levy and collection of taxes.

Four, corporations are well within their rights to plan and manage financial affairs in a manner that reduces tax liability legitimately. This enables companies to engage a battery of professionals, who identify and exploit loopholes for avoiding, if not evading taxes through innovative book-keeping and financial planning practices under rather opaque and impermeable corporate veils.

Five, the burden of proof of tax evasion or financial impropriety rests with regulatory authorities, who are discouraged from second-guessing motives or fishing for evidence of suspected wrongdoing if prima facie transactions appear legitimate. Only if fraud seems to have been committed beyond reasonable doubt do courts permit the piercing of the corporate structure and the obscurity that it affords.

Six, Indian Government has often contended in Courts that it has to refrain from divulging names of Indian national holding monies in foreign bank accounts in order to not infringe upon the privacy rights. These tenuous arguments have stalled the revelation of names of “dirty” entities and their murky monetary affairs.

Finally, in the Indian context, the multitudinous enactments have so many lacunae, not to mention endemic delays in the Indian judicial apparatuses, that effective enforcement is a big challenge.

Checkmating Black Wealth Hoarders

Thus, in this cat-and-mouse, catch-me-if-you-can game, it appears that the hoarders of black money abroad are winning. 

Thus, many offshore companies, as the Paradise Papers reveal, are “sham”, “shell” entities. They are created typically to facilitate such nefarious purposes as tax evasion, stock market manipulation, money laundering (entailing structuring, micro-structuring and cuckoo-smurfing), hawala operations, over-invoicing of imports and under-invoicing of exports, round-tripping (i.e., taking untaxed money out of the country through inflated invoices and then bringing it back as investment), parking of dirty, tainted money obtained through criminal activities (such as, drug trafficking, illegal betting/gambling, prostitution, etc.), graft, bribery, concealment of income, inflation of deductions or expenses and so on.

Clearly, the ingenuity of the corrupt and the criminals has reached a crescendo. The existing laws of the country— such as the Benami Transactions (Prohibition) Act, 1988, the Foreign Exchange Management Act, 1999; the Prevention of Corruption Act, 1988; the Prevention of Money Laundering Act, 2002; the Securities Contracts (Regulation) Act, 1956; and so on— are ill-equipped to handle this kind of sophistication in moving funds across borders and managing finances stashed abroad.

Everlasting Solution

So then, is there a solution?

Well, desperate times call for desperate measures. Indeed, if the political dispensation is serious about fighting the scourges of: (a) tax evasion; (b) stashing of proceeds from crime & corruption; and (c) flight of capital to foreign destinations, it has to enact legislation for automatically nationalizing any and all illegal foreign properties of Indian nationals, be they liquid or illiquid, movable or immovable. The provisions should be stringent enough to presume guilt of owners of illegal foreign assets and holders of illicit monies abroad. Indeed, summary trial proceedings should be instituted in fast track courts with the onus of proving innocence squarely placed on the accused.

As a precursor to any such legislation though, government can introduce a “Voluntary Disclosure and Amnesty Programme”.

Can any sane, sensible voice deem the passing of any such law as extreme?

I mean, did past governments not have the moral spine, steely resolve and noble uprightness to do national good through measures such as bank nationalisation; zamindari abolition; annulment of privy purses; and, land reforms?

Unless a paradigm shift is brought in, all governmental assertions of sincerity in the fight against black wealth is mere lip service. A weak will in this endeavour to bring back home the loot stashed abroad is not only tacit approval, nay, abetment of crime, but also a mockery of law enforcement and abuse of legislative power.

INITIATIVES OF GOVERNMENT OF INDIA FOR BOOSTING UP THE ECONOMY

I reviewed the structural reforms, policy decisions, fiscal measures and budgetary provisions of the Government of India from 2014 till date to pen an essay on the economic outlook of the country.

I have uploaded this essay on SlideShare at the link below:

"Initiatives of Government of India for Boosting up the Economy"

Nothing political in my assessment. On the whole I am pleased with the direction in which the nation's economy is headed.

Agree? Disagree?

Please do post your comments! Please make them as objective as possible though.

DEMONETISATION: Panacea for Vulnerabilities in the Indian Financial System

In an earlier blog post, I had argued that demonetisation is by far the boldest and, perhaps, the best decision that government has taken since independence, notwithstanding the sloppy, if not negligent, execution. The economic benefits of the scheme are far-reaching in the medium- to long-term, both from the fiscal and monetary policy perspectives.

What many detractors of the move fail to realise is that demonetisation, and its tightly-coupled Siamese twin of “Cashless (or, Less-Cash) Economy”, have far-reaching implications on the robustness of our banking and financial systems too. It eliminates, or, in the least mitigates, the serious risk of vulnerabilities within our financial system being exploited by hostile nations.

Let me expound the details of why I believe the Indian financial system has been made more immune to inimical forces, courtesy demonetisation.

Economics of Rise in Property Values

To begin with, the high “currency in circulation” had created a vibrant parallel economy driven by the troika of graft, tax evasion and money laundering. In the result, real property prices have gone through the roof artificially, courtesy, sizeable hoarding of black money and its conversion through investments on benami holdings of property. Other sectors too─ for example, retail, hospitality and entertainment─ have served as vehicles for transforming crime and corruption money into legitimate assets and properties.

The “wealth effect” of the spiraling land and home prices further brings into play positive consumer sentiment, not to mention higher levels of consumer spend─ the consumption is often driven by ‘Keep up with the Jones' Effect’. The demand puts pressure on price indices and frequently also drives up consumer debt. The burgeoning property prices drive long-term capital gains (on resale of property), which further augments GDP growth and per capita income─ a mirage of sorts.

The buoyant consumer sentiment invariably triggers bullishness in the secondary markets. In such a scenario, retail investors tend to take undue risks driven totally by intuition and technical analyses rather than sound fundamentals of scrips.

Impact of the Parallel Economy

Further, as is well known, a thriving parallel “cash-based” economy not only hurts direct and indirect tax collections of government, but also leads to higher fiscal deficits. The tax evasion indeed spikes discretionary incomes and propensity to spend of households. Markets become price insensitive and demand inelastic. Thus, excess cash in the economy exerts inflationary pressures on the economy. Besides, it also drives up the demand for luxury products and imported (premium) goods (specifically, Giffen and Veblen goods). This increases current account deficit (CAD), which weakens the Rupee in currency markets.

The obvious result: The dreaded monster called “inflation”. And as a ripple effect: higher interest rates, which dampen domestic investment, thus slowing down the economy.

But, there is another not-so-obvious effect of excess cash, namely, “jobless growth”.

Currency-in-Circulation Levels

Several unique peculiarities exist in the Indian economy, including, but not limited to: (a) a young workforce; (b) 85% of the workforce employed in the informal sector; (c) large rural and agrarian demographic profile; (d) high levels of graft and corruption; (e) lack of transparency in governance; (f) bureaucratic apathy and inefficiencies; (g) judicial logjams; (h) ever widening “rich-poor gap”; (i) low base of only about 1.25 crore individual tax-payers; and, so on.

These characteristics are also manifest in the excessive currency hoarding and massive money laundering. RBI data clearly shows that “Currency in Circulation (CIC)” has risen exponentially [refer Graph-1 below] and totally disproportionate to the size of our economy and its needs.

CHART-1

The table above also shows that CIC rose alarmingly by 15% year-on-year to almost INR 16.65 lakh crores as on 31-3-2016. That means INR 2.2 lakh crores, that is, INR 2.2 trillion, was added to CIC in the year 2015-16. This is clearly reflective of the many systemic lacunae within our monetary system. Surely such insatiable appetite for currency notes is completely unsustainable in the long haul for any economy.

The demonetisation decision, aimed primarily at unearthing and eliminating black money, has a desirable side-effect, intended or otherwise. It has sucked out excess currency from the monetary system. This not only tames inflation, but also provides for a more balanced growth driven by domestic investment and development of infrastructure.

Ultimate Barometer of the Economy

Any economist or finance professional worth his salt will readily confirm that the final litmus test for economic outlook of a country is its capital market. The collective wisdom and sentiment of investors in the secondary market serves as a barometer for future economic prospects. This can be clearly witnessed in the BSE Sensex movement since the 1980s [refer Chart-2 below].

 CHART--2

Whenever a significant financial crisis has hit the country, the BSE Index has lost significantly. For instance, during the 60-day period immediately following the breakout of the “Big Bull (Harshad Mehta) Scam”, the BSE had dropped from 3,900 to 3,080 points, thereby loosing over 21% of its market capitalisation.

Market Reaction to Demonetisation

In comparison, from stock market trading trends and BSE Sensex movement (refer Chart-3 below), it is apparent that demonetisation has had minimal impact on investor sentiment. In fact, on Nov.9, 2016, the day following Prime Minister Narendra Modi’s announcement the bourse reacted positively. The index did loose some points and the markets were jittery post-demonetisation during November and December 2016. However, the markets have managed to recover all losses and as on Jan.9, 2017, BSE Sensex is marginally ahead vis-à-vis its value on Nov.8, 2016. 

CHART-3

Foreign Institutional Investor (FII) Activity

Of course, the remarkable thing about the post-demonetisation performance of the exchanges is that it has weathered the storm of FII’s collectively pulling out about US$20 billion out from their Assets under Custody (AUC) in all of November2016. So, the net fall in the value of FII investments post Nov.8, 2016 can be estimated at about US$14 billion. The data on the (notional) values of Overseas Derivative Instruments (ODIs) with FIIs for December 2016 has not been released by SEBI as on date.  

The net outflow of FII funds in November 2016 seems to have been driven by the impressive rally of the US$ against all other major currencies. This is a phenomenon that occurs every time the American Dollar strengthens in forex markets. The fact that FIIs are still invested in India to the tune of about US$300 billion is an indication of their intrinsic faith in the India growth story, notwithstanding the high levels of toxic, non-performing assets of Indian banks.

Vulnerabilities in the Financial System of India

Historical analysis of market performance shows that the participation of FIIs in trading on the Indian bourse has resulted in the tight integration of our economy with the global financial system. Market performance of BSE has mirrored the activity of FIIs (refer Chart-4 below) so closely that the time series plot of FII Assets under Custody (AUC) looks like a shadow of the BSE Index graph.

CHART-4

While such integration is welcome, it must be crucially noted that our economy is susceptible to a collapse, in the event of a bear-run (for any reason whatsoever) launched by FIIs. The ODI investments through the Participatory Notes (P-notes) route only exacerbates this risk, because of the anonymity afforded to overseas investors in P-notes.

Hypothetical Scenario
To drive home my point, I elaborate with a hypothetical scenario. Let us say, a hostile country in the region, for geo-political reasons, wants to impede, perhaps even derail the Indian economy. Suppose it sets up an offshore fund of, say, US$ 50 or 100 billion, and uses the entire amount to build its position in P-notes slowly and surreptitiously over several weeks. Those funds entering the system will surely buoy the markets, which will go on a bull run, which will definitely also drive the value of the fund’s investment by 2X or 3X.

So then, in such a scenario, the stress on the secondary markets would be enormous, if, at an opportune time when the market is at a peak, the enemy country were to suddenly pull out its entire investment in P-notes. Panic would set in and nose-diving stock prices would drive the market to abysmally low levels (despite circuit breakers being applied on trading each day). The bear market would: inflict serious losses on investors; impinge upon investor and consumer sentiments; erode corporate earnings; lead to job cuts; devalue the Rupee significantly and, curtail household expenditure. In other words, the India’s economy would head towards a recession and perhaps even a depression. 
It would surely take a long time for the country to recover from such a catastrophe.

Conclusions

The additional deposits mobilized by banks through demonetisation, if judiciously used, can be used to supply liquidity in both currency and stock markets. Margin pressure can be eased and recall risk can be averted by providing adequate credit covers in such emergent, apocalyptic scenarios. The "Money Multiplier" effect under the "Fractional Reserve" banking system would be the icing on the cake.
Indeed, the benefits of demonetisation are willy-nilly so far-reaching that the structural framework of the Indian financial system will become robust and resilient.

On top, the aggressive push toward a “Cashless/Less-Cash Economy” will further strengthen the economy and render it more immune to financial artifice, even while insulating it from economic shocks in the rest of the world. 
It perhaps makes sense for government to not only reduce its fiscal deficits, but also use the additional resources generated to create a sovereign fund for use as a stabilizer through market interventions in stock exchanges. Of course, a number of rough edges will have to be smoothed out before government can launch such an initiative.

All in all, demonetisation is a win-win for the country! Isn’t it?
The information released by the Income Tax Department do seem to indicate so. The markets too seem to have given "two-thumbs-up" to the move.

DEMONETISATION: A Big, Bold Move or Big, Bad Blunder?

True Tremors

Since November 8, 2016, a fierce debate is dominating public discourse in the country. Questions doing the rounds at many a round-table are:

“Will demonetisation (or, remonetisation, for technical accuracy) define India’s future? Or, will it destroy the economy?”

The answer most likely depends on your political affiliation, not on either your preferred mode for saving money for a “rainy day” or the impact of the demonetisation diktat on your personal wealth. Views are clearly polarised; opinions deep-rooted and convictions rock solid. Emotions no doubt are running high on both sides of the intellectual divide. So, to understand all the ramifications of the measure, I attempt a clinical, dispassionate assessment based on hard-nosed, economic considerations and not lily-livered, emotive compassions.

At the outset, is there money hoarding of cash in India at all?

Of course, it does not take a rocket scientist to intuitively and empirically know that the answer is a resounding “yes”. But, do cold facts back the view? My take follows.

All Economics; No Politics

The United States of America, with a GDP of about US$20 trillion, has “currency in circulation (CIC)” (the sum of all currency notes and coins out with the public) of about US$1 trillion, that is, about 5% of GDP. The US$ being a strong currency, it is a good hedge against future risks and uncertainties. Foreign bankers and investors alike prefer to stockpile it as a reserve currency. Hence, only about US$300 billion or 1.5% of GDP is the domestic CIC powering the US economy. This confirms that “money velocity” and “money multiplier”─ two CIC-linked measures that economists use to gauge economic health─ in the US economy are (as desired) high.

In contrast, India has a CIC of about US$0.3 trillion, which constitutes almost 15% of its GDP of a little over US$2 trillion. This is not only indicative of the presence of a significant cash-based, parallel economy, but also symptomatic of substantial tax evasion, money laundering and currency hoarding in India. High-denomination bills, of Rs.500 and Rs.1000, only facilitate the stashing of black money. Hence, the shock-‘n-awe of demonetisation presumably (temporarily, for sure) has driven a dagger right through the hearts of the black-moneyed and their activities.

It is well-settled in economic theory that high levels of money supply, specifically “currency in circulation” coupled with corruption and tax-evasion, are inflationary. The systemic onslaught of black money in the country has assumed endemic proportions. It has systematically eroded tax collections; created economic imbalances; impeded government spending on infrastructure and social sectors; and, led to burgeoning fiscal deficits.

Further, crime and corruption proceeds are typically channeled and laundered into certain cash-centrist sectors of the economy, such as, retail, real estate, restaurants, entertainment (films & the ilk). Excess (tax-evaded) cash─ chasing goods and services, particularly sin (viz., alcohol, tobacco, etc.) goods, luxury products, lifestyle services and high-end imports─ exerts inflationary pressure. Spiraling inflation leads to higher interest rates; it also dampens “consumer sentiment”, diminishes “real and discretionary incomes”, reduces “consumption”, drives down “industrial investment and job creation” and, potentially encumbers financial systems with “toxic loans and non-performing assets”. Further, it often creates a “residential investment” bubble.

Result: “Jobless growth”, which is detrimental to the economy in the long haul. It is these hollow, flawed fundamentals that have been a blemish on India’s growth story in recent times. Given this backdrop, a course correction to mitigate risks of an economic meltdown was surely kosher.

Some detractors of the bold move believe that demonetisation in India will fail to tackle black money. Demonetisation initiatives in Burma, North Korea, Nigeria, Zimbabwe, and even USSR are cited in support of the view. However, they gloss over the fact that in other countries, such as Australia where demonetisation was an anti-counterfeiting measure, it has been hugely successful.

The battle in India though is not just against black money, but also against several other economic ills and socio-political evils. Cash, as we know, is the lifeline of drug peddling, criminal activity, human trafficking, illegal betting, insurgency, Maoism, terrorist funding, hawala rackets, illegal chit-funds, usurious lending (mostly to lower strata of society), election campaign financing, etc. Given that corruption and tax evasion are prevalent in India, and the propensity of Indians to subvert the system, even if the “surgical strike” against black money fails, the downstream curtailment of other scourges, if not all, partly justifies the move.

Sound of the Death Knell

A few people hold the view that the measure was not well thought out. The evidence is in favour of just the opposite. Past moves of the government aimed at financial inclusion, such as, PM Jan Dhan Yojana, Aadhar-linked Direct Benefits Transfer, etc., were perhaps attempts to soft-land demonetisation. The amnesty afforded through voluntary income declaration schemes too was perhaps sugar-coating of the revolutionary move. Strengthening of the Benami Transactions Act, and notification of stringent rules thereunder, were also indications that demonetisation was a move conceived meticulously. Many surely thought it was business as usual, and hence, missed all the portents that forbore the drastic policy decision.

Conspiracy theorists have even speculated that bureaucrats, privy to the move, had leaked information and helped crony capitalists and politicians to proactively swap, deposit and convert hoarded cash. Demonetised currency holdings were surreptitiously converted or transitioned, they claim, into gold, diamonds, new currency, real estate, trusts, political parties, etc. To begin with, these laundering methods entail sub-optimal placement and layering techniques. Further, these transactions leave distinct money-flow footprints, which are easily detected during tax raids and statutory audits.

Others have been critical of the measure because cash constitutes only about 5% of black wealth. The complaint is that demonetisation infringes the "fundamental right” of people to withdraw monies from their bank accounts. Yet another red herring! The “right to hold property” is not an absolute, fundamental right under our Constitution. Persons can be deprived of property (movable or immovable) save by authority of law. Indeed, validation of zamindari abolition and agrarian reform laws, bank nationalisation and annulment of privy purses are all examples of past legislative and executive actions depriving people of property. Demonetisation, as we know, restricts only temporarily the access of people to their banked monies and assets.

Big Bang or Big Bust

In some quarters there is a belief that by December 30, 2016, most (if not all) of the old, demonetised Rs.500 and Rs.1000 notes in circulation (valued at about Rs.15.44 trillion) would enter the banking system. They argue that such an eventuality implies a botched attempt at rooting out illegal cash from the system─ estimates have put 25-40% of large-denomination notes to be black, laundered money. It defeats the very purpose of demonetisation.

In reality, though, such a scenario is highly desirable.

In the hypothetical context of all demonetised notes being redeemed, the Reserve Bank of India can effectively use modern software analytics tools and data mining techniques for: (a) detecting spikes in demand for new notes from bank branches; and, (b) identifying disproportionate deposits of cash in individual accounts. Based on the unearthed insights and intelligence, raids and investigations can be launched. The knowledge would help eliminate bad apples from within the banking industry. Indeed, black wealth often gets created only with the connivance of such black sheep. 

The geo-political scenario in the sub-continent makes India vulnerable to influxes of fake currency from hostile neighbors. Post surgical strike in the aftermath of the Uri attacks, there was a high risk of the Indian economy being crippled through the clandestine injection of massive quantities of counterfeit banknotes. The remonetisation move has necessitated perforce a significant thrust towards a cashless, e-monetised society. This ushers in a paradigm shift by making the country immune to subterfuge and unconventional, economic warfare tactics of inimical nations.   

Regardless of the value of old currency that gets redeemed, government is in for a windfall. Unreturned currency would reduce deficits and liabilities of government. The additional deposits mobilized and improved bank liquidity will enable RBI to adopt expansionary monetary policies, leading to the lower interest rates and cost of government borrowings. That surely would enable government to enhance fiscal allocations for social sector and infrastructure. GDP growth over the next couple of quarters may dip on account of productivity losses and subdued economic activity because of cash restrictions. The outlook though is bright in the mid- to long-term.

Concluding Remarks

In conclusion, I state that the true beneficiaries of the move are likely to be the underprivileged sections of society. Indeed the pain and agony of queuing up for hours is worth all the trouble. Too many people, particularly in rural India, have suffered silently for too long in anticipation of development and inclusive growth reaching them. The poorest of poor, who have been subjected to tougher challenges all their lives, surely are resilient enough to survive long waits in lines. The possibility of a new, corruption-free economic order, courtesy game-changing demonetisation, gives fresh hope and renewed vigor to aspirations for marginalised sections, be it better education, healthcare, infrastructure, opportunity or standard of living.

Therefore, regardless of how you slice and dice it, demonetisation holds a great promise of a better future for India and its citizenry. It is perhaps the most strategic policy decision since 1947. And, in my considered opinion, it is the panacea for many ills plaguing our nation.

The jury though is still out on how well this initiative has been implemented. But then, can one nitpick on the nitty-gritty of execution and risk missing the woods for the trees?

Bottom-line: Demonetisation, in tennis terms, is game, set and match, government!

MY "IN-A-NUTSHELL" TAKE ON THE UNION BUDGET 2016-17

Over two weeks ago, Sri. Arun Jaitley, the Finance Minister presented the Union Budget in the Lok Sabha for the Financial Year 2016-17. Since then, much has been said and much more has been written on the merits and demerits of the budgetary allocations, policy announcements and strategic decisions therein. So much so, that a few more words do not really matter much, do they? Besides, it is always better late than never. You surely agree, don’t you? 

So here’s my objective assessment of the FY 2016-17 budget. Since the T20 Cricket World Cup is well underway now, the "pros and cons" in my list of "Most Salient Aspects of the Budget" total twenty in number─ 15 "pros", or rather "sixes" deserving bouquets; and, 5 "cons", um..."misses" calling for brickbats.  

Overall, this budget gets a 8.0 on a scale of 10.0 in my books! 

First-up: The GOOD, nay, GREAT policies and provisions:

1. Major emphasis on farming and agriculture sectors; 
2. Massive outlay for the rural sector- significant allocations to gram panchayats and MNREGA; 
3. Scheme for giving LPG connections to women members of poor households; 
4. 100% FDI in food processing, which is sure to increase demand for produce and enhance earnings of farmers; 
5. Use of the Aadhar framework for direct benefits transfers (without using it to confer citizenship rights or to ascertain domicile), and thereby, plugging systemic leakages; 
6. Massive focus on irrigation; 
7. Allocation for converting city waste to compost; 
8. Huge push for creating transportation infrastructure- public investment of about Rs. 218,000 crores on roads and railways; 
9. Rationalisation and restructuring of 1500+ central plan schemes into 300 central sector and 30 centrally-sponsored schemes; 
10. Launch of innovative “Crop Insurance” and “Soil Health Card” initiatives; 
11. Unified agricultural marketing scheme and online procurement (MSP) of agricultural produce; 
12. Revamping of the National Land Record Modernisation Programme under the Digital India initiative to digitise land records for dispute-free titles; 
13. New health insurance scheme to be announced; 
14. 100% village electrification by May, 2018; 
15. A technology-driven platform for efficient and transparent procurement of goods and services by government;

Next up: The NOT-SO-GOOD aspects:

1. Cuts in food security expenditure, fertilizer and fuel subsidies; 
2. No plan for tackling the huge NPAs of public-sector banks [through either recapitalization or consolidation]; 
3. Lack of adequate clarity on outlays for the Startup India and Stand-up India initiatives; 
4. Inadequate allocation for jump-starting innovation and IP protection; 
5. No concrete long-term policy decisions or measures for boosting exports.

Twenty Questions on the Gold Monetisation Scheme

Indians have an insatiable appetite for gold, it seems. Despite prices going through the roof, demand has grown exponentially. By some estimates, private holdings of gold in India exceed 20,000 metric tonnes. Annual imports of gold are estimated to be in the range of 800-1,000 metric tonnes, which accounts for about 1.0-1.5% of GDP. Large and sustained gold imports, are a strain on the external sector's management, particularly when the Indian exports growth is not robust. Indeed not only does the craving for gold, and the imports thereof, have adverse impacts on current account deficits (CAD) and balance of payments (BoP) situation, it also weakens the Indian currency. 

Therefore, the K.U.B. Rao Committee recommended that the strategy to reduce the demand for gold should consist of a combination of demand reduction measures, supply management steps and increased monetisation of idle domestic gold stocks.

Draft Scheme Announcement

So the Finance Minister in the Union Budget of 2015-16 proposed the introduction of a “Gold Monetisation Scheme, [which] will allow the depositors of gold to earn interest...and the jewelers to obtain loans in their metal account. Banks/other dealers would also be able to monetize this gold.”

The draft “Gold Monetisation Scheme (GMS)” has been announced with the objectives of: 

1. Mobilizing the gold held by households and institutions in the country; 
2. Providing a fillip to the gems and jewellery sector in the country by making gold available as raw material on loan from the banks;
3. Reducing reliance on import of gold over time to meet domestic demand.

Gold depositors stand to gain from likely tax exemptions such as such as capital gains tax, wealth tax and income tax under the GMS after due examination. The bank will commit to paying an interest to the customer which will be payable after 30/60 days of opening of the Gold Savings Account. The interest rate to be given is proposed to be left to the banks to decide. The tenure of the deposit will be a minimum of one year and with a roll out in multiples of one year. Like a fixed deposit, breaking of lock-in period will be permissible.

The procedural aspects of the scheme work as follows (refer schematic above):

• Designated Purity Testing Centres (PTC) collect gold from customers, who get issued Gold Deposit Certificates (GDC) against the collected gold. The PTC charges customers a fee for the services rendered.
• The collected gold gets re-assayed and melted into conventional bars and coins.
•  Banks then open Gold Savings Accounts for customers based on the GDC. Customers are paid interest, perhaps tax-free, on the deposited gold;
• The re-assayed gold then is conveyed to Indian jewelers, who are sanctioned gold loans carrying appropriate interest rate. The interest rate charged to such borrowers will have to cover: (a) fees paid to refiners and the purity testing centres; (b) cost and overheads; and, (c) profit margins. Effectively, it is the same as leasing and re-hypothecation.
• Banks can get gold directly from international market on a consignment basis and lend it to the jewellers. 

By utilising this domestic supply, RBI hopes to curb gold imports. This eases the selling pressure on rupee, which boosts its value. Thus, the pros of the Gold Monetisation Scheme are obvious. Nevertheless, the draft has many gaps and lacunae, which are highlighted below.

Purity Verification and Deposit of Gold

• Question 1: Under the draft scheme announced, the customer needs to field “Know Your Customer (KYC)” form for deposit of gold. The information sought must include a declaration of total gold assets owned by the depositor to ensure that the GMS scheme does not serve as a safe harbor for benami assets, money launderers, hawala operators, tax evaders, black money hoarders, etc. PAN/TAN is a must. What customer details are planned to be collected under KYC norms? 

• Question 2: There has to be an image capture and recording process at the purity testing center to ensure that smuggled or contraband gold is not brought into the system surreptitiously. Neither should the PTC function as a fence for stolen or misappropriated property. This is particularly crucial in case a customer turns in bullion. What is the verification process envisaged for ensuring that the gold articles and artifacts turned in at the Purity Testing Centre (PTC) are lawfully, legally owned and possessed?  

• Question 3: The scheme is silent too about whether a “Declaration of Source” on the gold being deposited will be sought from prospective clients. It seems like the scheme is likely to be operationalized with no questions asked on source. No mention is made too on what countermeasures the tax authorities are likely to take against laundered or illegal gold deposits. Is an amnesty programme or a waiver of disclosure part of the monetisation scheme?

• Question 4: The draft GMS document ambiguously states that capital gain tax, wealth tax and income tax exemptions are ‘likely’ to be made available to the depositor. The capital gain, wealth and income tax implications on maturity of deposit must be made amply clear to customers. Are any stratified taxation structures and/or exemption plans envisaged for making the scheme attractive to depositors?

• Question 5: The scheme is also targeted at small, marginal depositors. It is quite possible that some customers, gullible or otherwise, might bring in high-value antique jewelry or gold artifacts to the PTC. What processes are planned to be taken to avoid the melting of high-value gold articles at the PTC? 

• Question 6: The minimum quantity of gold that a customer can bring is proposed to be set at 30 grams. Is the minimum quantity set at 30 grams of pure 24-carat gold?

Opening of Gold Savings Account With Banks

• Question 7: The draft stipulates that depositors must exercise the option of redemption/withdrawal in cash or in gold at the time of opening the gold account with the bank. Such a lock-in option could work to the detriment of either the bank or the investor depending on the movement of gold prices in the market. Can the scheme permit greater flexibility on the timing of the exercise of that option without jeopardizing the interests of the bank or other financial institution taking in the gold deposit?

• Question 8: The draft states that the Gold Savings Accounts will earn interest in gold. Both principal and interest, payable to depositors of gold, will be ‘valued’ in gold. For example, if a customer deposits 100 gm. of gold and gets 1 per cent interest, then, on maturity 101 gm of gold is credited into the account. This calls for a need to protect the interests of depositors who exercise the option of redeeming deposits in cash. Does the scheme guarantee a minimum return on gold savings accounts just in case gold prices were to crash in the international market?

• Question 9: The scheme says that gold saving account will be opened based on the gold deposit certificate (GDC) issued by the PTC. What anti-fraud measures and / or verification mechanisms are planned for ensuring that fake, forged or counterfeit instruments are not deposited?  

• Question 10: It is clearly not enough for the Purity Testing Center (PTC) to confirm the receipt of gold and the validity of the gold deposit certificate (GDC) to the bank. Communication too must flow back to the PTC from the bank accepting the deposit of the GDC to minimize the risk of fraudulent opening of multiple accounts with duplicate, counterfeit gold deposit certificates. Ideally, a depository must be instituted to monitor the dematerialized flow of gold. What are the plans or mechanisms envisaged in this regard?

• Question 11: The draft does not mention any insurance or other means for providing a safety net to depositors of gold. What measures― such as, deposit insurance, sovereign guarantees, underwritten losses, etc.― are planned to safeguard the interests of depositors in case the bank declares insolvency, say, due to scams, non-performing assets, or otherwise?

Transfer of Gold to Refiners

• Question 12: Per the draft scheme, banks pay the refiner for services provided. Needless to say, there is the likelihood of gold purity losses during the refinement process. Who will bear such gold weight losses during purification?

Utilisation of Deposited Gold

• Question 13: The draft mentions that the gold mobilized can be deposited with RBI to meet Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms. It is silent on whether the SLR and CRR stipulations apply to the gold deposits― made either in gold-weight terms or rupee-equivalent-value terms― that banks mobilize from customers. Can this be clarified?

• Question 14: The scheme is silent about whether certificates of gold deposited or gold saving account can be used as collateral security. There is no mention of whether nomination, transfer or gift of the certificate of the gold deposited or the gold savings account can be made. Can the position be clarified?

• Question 15: The GMS draft document permits the sale of gold for generation of foreign currency or delivery of gold to domestic commodity exchanges by banks. However, banks and exporters are not permitted to export bullion at present, which perhaps will be allowed to do so in the future. Besides the regulatory controls by RBI over each such transaction, what norms and limits are likely to be imposed on such operations to mitigate market risks?

• Question 16: Suppose the international prices of gold crash or nosedive, say, because of weak demand for the metal or bearish conditions in the commodities market. A bank run or panic could get triggered for premature withdrawal / redemption of gold deposits. What are the precautionary measures envisaged to protect the interests of investors in such scenarios?

• Question 17: On the flip side, if gold prices skyrocket, the yield of gold deposits in rupee-value terms will be much higher, thus leading to significant losses for banks. What is the mechanism envisaged for mitigation of such risk for banks?

• Question 18: The scheme is silent about hedging mechanisms for eliminating price risks of gold collected. What is proposed with regards to tacking such fluctuation in gold prices?

Lending the Gold to Jewellers

• Question 19: The announced GMS draft makes no mention of how interest will be charged on gold loans to jewellers. Since gold deposit accounts earn interest in gold, it is perhaps a safe assumption that gold loans to jewellers will carry interest payable in either gold or equivalent value. Can some light be thrown on this?

• Question 20: The scheme does not reveal much about customs duty component. Suppose a jeweler takes a gold loan and exports gold jewelry, will any duty drawback or exemption be applicable?

Conclusion

On the whole, I am foxed that the attempt is to introduced a radically new scheme. A less risk prone approach would have been to do away with the current mechanism of auctions held by "Gold Loan NBFCs-ND-SI" (Systemically Important Non-Deposit-taking Non-Banking Financial Companies). 

Then, instead, the pledged jewellery of such defaulters could have been mandatorily liquidated through a process of re-assaying and refining. Not only would this system protect customer/borrower interest better, it would also have curbed many malpractices of the "Gold Loan NBFCs-ND-SI". The gold bullion so recovered would surely have reduced the imports burden.

Nevertheless, there is a lack of clarity on several fronts in the draft GMS document. Complete transparency and no ambiguity on the modus operandi is needed; if not, then there is the risk of gold monetisation turning into a Ponzi scheme.