U(r)LIP or Mine?

A couple of smug rookies posturing as 'Relationship Managers' at my bank, an almost equally minuscule clique that seeks me out for investment advice, and hordes of DNC-dismissive telemarketers peddling insurance — all can stand testimony to my ULIP-agnostic personal finance strategy. My stance is hardly original — most experts of any standing shun ULIPs in their shopping cart must-haves. Despite this rare unanimity and strong arguments against the product class, it has drawn investor interest consistently. Reasons behind this ostensible anomaly, or the product's long-term prognostications, have assumed centrestage with recent developments in the shape of a SEBI-IRDA jurisdictional battle. At the heart of this are changed regulations that address opacity and investor-unfriendly practices that ail ULIP sales and service, or inherent design.

To appreciate the context of the proposed changes, one must recognize that ULIPs have been sold in a manner completely antithetical to the fundamentals of the family to which they ostensibly belong. (Most people one knows, when buying a ULIP, actually believe they are taking 'smart' life cover.) The lure of entering an asset class where 'your money is not idle' but 'deployed to maximize returns' and offer 'better term cover', has been irresistible for the typical gullible investor, fed on years of stodgy state-run insurance firms’ (often unfairly so dubbed) unimaginative offerings and dull salesfolk. A general expectation of market efficiency over public sector sloth thus plays into the aggressively positioned ULIP schemes promising lay investors the moon.

Again, an investment offering of this kind, with significant dependence on market performance, usually comes into its own in the long run (and this is not 3 or 5 years that qualify as 'lifetime' to 25-year-olds nowadays). Think 10-15 years, or 20 if not more, and cyclical noise is factored out of markets and sensible stockpicking yields results fully. Admittedly, this is market investment spiel (for, say, equity MF) but unfortunately not what many newbie investors readily bite, obsessed as they are with 'timing' the market. The same investor, when thinking term cover, expects longer tenors in line with life expectancy. The resultant surge of patience, sweetened with promise of exceptional returns, draws savings to ULIP schemes by the boatloads.

Of course, it is obvious that such troths of exponential growth do not sit well with life cover. Yet, spurred by extraordinary incentives that can only come from heavily front-loaded cost structures (45% of Y1 premium, no less!), a bevy of insurance salesmen position ULIP as a best-of-both-worlds insurance product generating assured returns over months and years. The post-sale dissonance that naturally results (it is difficult to think a worse period of investor sentiment and market return than the last two years) leads to massive exits. Yet, unlike market instruments where such attrition is visible (and actionable), ULIP truancy figures are hardly the most advertised. Hence the ecosystem of under-informed investors, malintentioned agents, and lazy insurance firms continues to flourish unashamedly.

At another level, ULIPs represent a large (if invisible) problem for private sector insurance companies. There is a highly credible school of thought that unravels what drives this disproportionate focus on the win-today-worry-tomorrow rat race for the investable rupee. The motivation seemingly comes from higher capital adequacy norms for guaranteed (term insurance) vs market-linked (investment) assets. This makes minimization of life cover (per rupee vested) a lucrative short-term strategy. Unfortunately, this evanescence creates not merely an economic but a potentially significant social issue that can wreck us in the long run. In an under-insured nation like India, with rising healthcare demand (and costs) yet inadequate social security structures, such mis-selling of investment in the garb of insurance can lead to consequences far more dramatic than most of us care to think. (Term cover, after all, is for those eventualities of life that leave us at our most frail and disturbed.)

All this has been known for a while. Yet, aside from individual decisions like mine (big picture-inconsequential, likely), not much was attempted to correct this systemically (or if something was in the works, it was certainly not PDQ pace!). To this extent, the very public spat between our hyperactive market regulator and their largely somnolent insurance cousin was most welcome. In characteristic Bhave fashion, SEBI initiated measures to clear the mess under an investor friendly bias. In the ensuing turf battle, however, the IRDA came up trumps (SEBI's knock on the Supreme Court’s doors was in vain: GOI nipped it in the bud with an IRDA-primacy ordinance before milords could weigh in — all while CBB was away on business in Canada!).

Cynics in our midst ought to be unsurprised - the venerable J Hari Narayan has impeccable credentials to win any back-room battle. Years spent in the government have admirably equipped the ex-IAS officer to work the Establishment. (Interestingly, despite similar pedigree, Bhave does not have the same reputation.) Equally, while missing the visible zeal of his no-nonsense SEBI counterpart, the charitable can point to JHN’s record of not shirking from a tough stand in the face of controversy. In any case, he has Pranab-da’s mandate.

Regardless, the verdict in the territorial fracas is hardly the key issue. Of essence is whether and how the Govt and its now unequivocally empowered regulator finally set the house in order. Even if one were to ignore my arguably over-pessimistic predilections on the social impact of messing with the small saver, there can be little doubt that Shri Hari Narayan presides over a window of opportunity — to serve the lay investor well, while providing an overdue lifeline to ULIPs. Else, the victory, so to speak, may remain Pyrrhic.

Shoania, Show-Inane-Yeah

Incessant appetite for scurrilous gossip and celebrity obsession can hardly be classified as inventions of contemporary vintage. However, the heights (or depth, as seems a more apt description) this theatre of the Absurd has attained of late is certainly without precedent. This is mostly an inevitable fallout of advances in Media – the breadth leads some of its participants to stoop (competition, anyone?), and penetration allows its variegated output to become inescapable reality.

In the Indian context, media omnipresence has been pervasive (invasive some would aver) ever since one Pappu (Prince actually) fell down a tube-well and the nation woke up to Reality TV. Yet, its extent struck me this week when asked for my opinion on the ludicrous Shoaib-Sania tamasha over a meal with some office colleagues. Granted that a non-event like this must have an audience in TRP targets somewhere in our Great Unwashed, that it could wing its way to more pretentious dinner table conversations was a potent reminder of how much of an equalizer TV has become.

At one level, many aspects of the episode (soap opera, if you like) may interest the anthropologically inclined. One of these is clearly why so much collective consciousness need have been expended on this tragicomedy. Mind you, this is not elitist rant. One merely finds it difficult to turn from the fact (even for her most ardent fans) of Ms Mirza’s athletic prowess being decidedly higher on glamour quotient than sporting achievement. In fact, despite superior professional history, that it is Lee-Hesh’s (occasional) romantic dalliances or (not so occasional) fratricidal strife which has consumed more newsprint, buttresses the argument. Follow this line of reasoning and one can hypothesize that, culturally, embarrassing scrutiny is anathema to Indian sensibilities. We revel in demi-god status for those with more immodest track records in any walk of life. In fact, but for moviedom (where controversy may well be courted in the name of publicity), we have mostly shunned discussions even remotely suggestive of the human frailties of our icons.

Another distasteful (if not downright dangerous) facet of the media onslaught is the bevy of armchair experts only too happy to turn it into TRP-rich Indo-Pak confrontation. Neighbourly engagements in most parts of the world are reasonably complex but ours with the failed state to our West is special even in these terms. With a few wars fought, not to forget an ongoing proxy one, and Terrorism, Kashmir, Nuclear Proliferation etc to queer the pitch, the last we need is trivial nonsense to whip up jingoistic frenzy. That more of this despicable posturing stems from Shoaib & Co’s antics (or across the LOC in general) is immaterial. Some serious soul-searching is in order if India is not large-hearted and confident enough to dismiss such frivolity with the contempt it deserves. (Equally, who cares what flag adorns Sania’s epaulette, given the flimsy chances of her making it to the podium!)

Similarly trifling has been the attempt by some to use this occasion for characteristic Islam bashing. There may well be merit in debating Muslim Personal Law in India — in situ, or vis-à-vis Sharia-governed Pakistan (or Turkey, or Indonesia) — but an important, complex social issue is sadly trivialized to link it with Ayesha’s marital status. Crucial debates on woman’s rights, legitimacy of telephonic nikah, polygamy, etc make for difficult resolution with virtually administered polygraph tests for Shoaib Malik or Chand Mohammed’s sleeping arrangements. Such sensationalism loses us the battle — and the war is already lost.

Perhaps most enduring though, is an immanent need for introspection in our media moguls (or at least their electronic brood). Fourth Estate is vital to a vibrant democracy but an overdose of the inane is a sad abuse of its reach. It is truly beyond me as to how or who decides that the attention of the entire nation needs be converged on Sania’s break-up with Sohrab, her choice of Shoaib, Ayesha’s copious (and credulous?) tears, and so on — across news channels and without break.

Extend the argument, and the ravings of assorted fanatics or pronouncements of perennially affixed experts (the same set is sought, and duly supplies pithily TRP-arousing views irrespective of topic) are all media-created monsters (raise your hands if you see less of Shri Laloo Prasad now that he has 4 seats versus 30) under the sham of good copy. This circus, together with the adultery-rebirth obsessed tearjerker ‘general entertainment’ fare, makes one wonder which channels the media barons’ children watch. Cover it by all means, but for God’s sake, give us some choice!

Else let us all retire to watch Discovery Travel & Living.

A Follow On Inning

For a prolonged period in the Nineties the powder keg of India's growth story provided a discernible fillip to equity values, including a booming primary market. To boot, some aggressive issue pricing meant even neophyte investors made a fair killing through a buy-IPO-sell-listing strategy. It was too good to last, and the market eventually turned a great leveler as it must. Despite this, some hangover of those glory days seems to pull the retail investor (sample the now-thankfully-dear-departed 'MF IPO' mela) even to this day.

As it turned out, my college wallet was hardly corpulent enough to afford any investible surplus in this happy period. The result was that my initial flirtations with stock-picking missed any skew or confident swagger from tenderfoot success. Yet, learning the hard way (and armed with pearls from two notable masters in Messrs Buffett and Lynch), my confidence gradually crept up enough to venture opinion on the table. And when for a few years my portfolio reflected better returns on direct equity investments vis-a-vis the Sensex (or via the Fund route), a tendency to play to the gallery won me to freely dispense stock advice!

Unfortunately, lately my acquaintance with that familiar spoilsport: Time (or more accurately, its paucity), grew by leaps and bounds. Consequently, most of my theories were tested vicariously — and though the results were not entirely discouraging, the discipline to tend consistently to my portfolio was found wanting. It is in this backdrop (and to accompanying bugle calls from a generally bullish market) that NTPC announced its mega FPO. Persisting with the axiom of my stock-picking being based on more mature considerations, this is how the issue appeared to stack up:

• NTPC easily stood out as the largest Indian power utility, with reasonable historical revenue/profit track record and operating efficiency in load/ availability factor terms
• The firm boasted a healthy topline growth with plans to ramp up capacity by ~10K MW (over a third), assuming timely execution and minimal equipment delays or risk (important also given a somewhat sub-optimal debt-equity ratio, with scope for putting more equity to use)
• Significantly it was an infrastructure major with very low liquidity pressure atypical of the long gestation in the sector; and a comfortable funding position (~INR 17.5K Cr in cash alone) that weighed on its ROE as much as providing opportunity for backward integration
• Raw material pipeline looked robust — a new 20 yr coal supply agreement with Coal India for 12 of existing 15 units, supplemented by captive coal mines and KG basin gas (in next 2 years). Possible overseas mining acquisitions would provide additional flexibility
  
• From a product mix perspective, hydro projects could be a concern but strong partnership potential in 2000 MW nuclear power JV and ventures with BHEL and Bharat Forge to manage engineering and equipment needs provided a cushion
• Potential upside also existed from sectoral deregulation, specifically unallocated power sale, short term trading (#2 player), and the 3P modernization/ life extension practice.

Yet, for the retail investor, the icing on the cake could only come from price. Indeed, it was key to whether the issue would draw more than institutional interest. The latter, some argued, would commit anyhow, a volume player being inelastic to entry point in view of the overall mood and potential. Given the value-unlocking protestations in UPA 2.0 policy (disinvestment being no more a dirty word), it was critical and expected for the floor to be suitably defined to set the right tone for the aam aadmi.

Unfortunately, by any reasonable yardstick, the pricing and the issue came up short, saved the blushes only through 'motivated' subscription from SBI, LIC and other PSU players. The drama in the FPO (and my own morbid interest) were served well by a simplified version of this script (rob Peter to pay Paul etc) but the back-room shenanigans transcended the discreet approach that the Govt and its hired guns usually adopt in such situations. In fact, despite commonly held misgivings on price, PSU entities actually bid at the high end, much in excess of the market or floor price (and that when FII interest was almost nonexistent)! Extending the line was a series of seemingly unorchestrated sound-bytes (Goebbelsian devices that would have done any crafty market manipulator proud — case in point: Reliance Power) hinting at bear cartels at work to drive price below its 'natural' 230 levels! And if any argument were left to be had, one merely had to look at the complete absence of commitment from NTPC employees. They knew!

In short, the promoter, the Govt of India, obviously needed the money — and as appears in retrospect, badly enough to brazenly flirt with the grey in a manner unprecedented. Be that as it may, it is obvious that such insidious conveyances could be a short term tactic at best. Over the course of what promises to be a long summer, FinMin mandarins would do well to truly imbibe their much-professed principles of policymaking (public sector = public ownership). Not only is the capital requirement in the current Grand PSU Sale way too high to afford being limited to incestuous bargains, but there is real fiduciary merit in spreading the family silver over a larger investor base. To boot, there may be electoral arithmetic benefit in promoting an aam aadmi (or middle class, at the very least) lilt in any future auctions (at the cost of a marginal discount).

For now though the NTPC FPO kissa does leave more questions than it did answers, such was the Government's conduct. And one thought the ignominy in a follow on was restricted to cricket.

Ode in Time of Crisis

Looking back the last few months, it is impossible to miss a humbling feeling of being amidst epochal events. Personally, last September was a heady high, a celebration of creation that rendered me well nigh unequal to the task of putting it to words! Time has flown since, each day a nouvelle discovery of wondrous joys, yet occasionally tinged with an undefinable sense of vulnerability. In my thirty-some years on the planet, this palette of emotions is sans parallel: cheer and blessing, joie de vivre, if ever!

The world, on the other hand, has been seized with circumstances of a lot less happy nature, best epitomized by episodes a year older. With the global financial system at its epicenter, an unprecedented and unrelenting series of economic upheavals have challenged life as we know it. Without getting into inordinate details of these trying times, suffice it to say that no walk of life nor section of society has been left untouched. Moreover, at least in some cases, things will never be the same again. Equally, though the worst is likely behind us, we are not fully out of the doghouse yet. It is clear that the speed, quality and sustainability of recovery depend on our generation's ability to rebuild the economic edifice. This effort must incorporate lessons from the current turmoil. Likewise, it is incumbent on us to have a sense of urgency lest the events and their aftermath fade from proverbially short public memory post recovery.

So what should constitute the bulwark of the Reset Economy? At the heart of reform must be a robust financial system that does not merely withstand future shock but proactively alerts us to impending danger. In fact, the latter, curiously and completely missing in the run-up to the Lehman collapse or the events that followed, is a critical test for any proposed structural change. Unfortunately, at least for now, our response appears to be coming up short. As a first step therefore, let me try and outline today a broad agenda, hoping to see the rest fleshed out in the New Year. (That which springs eternal in the human breast only magnifies early in a new year that also happens to be a new decade, and when penning one's return blog after an interregnum!)

Firstly, we must recognize the character of the current downturn. Like someone put it, the crisis was a lethal combination of market turmoil that turned a banking crisis and eventually led to broader economic consequences. Obviously such a debacle puts into the dock governments, central banks, regulators, banks, and lending institutions as well as corporates. It points directly to lack of coordination between these players, and piecemeal or inadequate appreciation of crisis drivers. Thus, a harmonized non-fragmented response and review is critical to future success.

Next we have the extent of the crisis and the pace of its transmission. For the malaise to spread like it did, the key ingredient was the interconnectedness of financial systems worldwide. This network is directly linked to ever-increasing Globalization of world economy; and aided by rapid advances in Information and Communications Technology. In tandem, these ensure an all-time high factor mobility, making the butterfly-in-China-shapes-NYC-weather connectedness an extant reality rather than a mere Chaos Theory shibboleth.

Does this mean we turn contrarian to the forces of Globalization? One would think not. Not only is this fungibility not easily reversible, there are clear benefits the world has derived from them. This holds true for Technology too. In fact even contemplating any (even if theoretical) reversal effort suggests a need for a lot more calibration than the opposite — a coordinated global effort at crisis-corrective actions. Hence the near-consensus currently seen in implementation of near term solutions must stay the course for the longer term root cause fixes. With the plethora of stakeholders involved (and assuming you agree with me on the low feasibility for an outside observer to grasp its nuances), governments the world over have the primary onus to navigate through the intricacies of (micro and macro) prudential and accounting policies.

The logical extension to this argument is that we cannot let our focus waver even on exit strategies for the short-medium term policy and market interventions. Harmonizing these globally may be a tough ask despite broad unanimity on its goals, namely sustaining the nascent recovery, maintaining financial stability, and protecting a global level playing field. Policymakers would do well to use risk of unintended consequences as the touchstone for their formulations rather than unidimensional desired results. For instance, instead of getting swept off the feet by the obvious, namely increasing capital standards, consequences like drop in capital availability and inefficiency in the banking system, must be factored. (Interestingly, subprime mortgage, now such a dirty word, was the output of one such political agenda, namely incentivization of housing ownership, where side-effects were not considered!)

Looking into 2010, the ball, as it does for most largescale change initiatives, is in the court of the Political kind (bureaucracy included by definition, for simplicity). The stakes are enormous, probably never bigger. Is the species up to it?

No More (Hopefully) Tax!

Some people are difficult to please. And when they belong to the tribe of left-leaning issue-hunting chatterati of our country, woe betide those that seek to propitiate them. So ran my thoughts on getting a buzz from the same Economics Einstein friend of mine who had played catalyst to my last post. He was incensed by my conciliatory gesture of a post — and the suggestion of using a credit-debit card driven payment system as antidote to the cash impelled parallel economy. He called it many names — but the tags principal to his argument were three: it was effete, elitist (Long Live Comrade Dasgupta!) and uni-dimensional.

To the last of these, let me plead guilty immediately — the idea of a carded economy was admittedly an appetizer to deeper policy action. As such, other thoughts that came to me at various times this week:

• Speedy adoption of VAT and GST, something that has been argued in these pages earlier, underscored here since they track the production process through the value chain and hence enable significant MIS
• Comprehensive implementation of UID (linked with PAN) — with all registrars computerised across asset classes as well as company registration, customs and excise, tax, passport, licences etc — and cross-tabbed as needed with HNI indicators like asset ownership and lifestyle spends
• Better enforcement of annual personal tax returns and perhaps early bird incentives, not merely penalty for delay or default. (No doubt my friend would be happier to hear words around greater powers to agencies but very rarely have our national issues been about legislation instead of execution, and we perennially run the risk of bad intention.) My only exception would be for relatively high visibility downstream impact like on personal rights of holding elected office, driving licence etc
• Clarity and continuity in wording rules and regulations, limiting the need for judicial interpretation that may be time-taking and (occasionally) contradictory. One can extend this to talk of faster determination of tax disputes but the need for specialized courts and higher judge-population ratio is a more widely-felt and urgently-needed action

Now, the other two charges. At the core of my premise of effectiveness in advocating an electronic payment system was its ability to capture information in a digital form, coincident with the actual transaction. Equally, the effort in its transmission, storage or retrieval would be marginal save for the investment in scaling up transaction infrastructure in a country as vast as ours (but which, in my defence, shibboleths of Financial Inclusion and Productivity would any ways force on the banking system). The data thus recorded could be mined to model smarter risk-based pricing solutions to help customers and banks, while sharpening the I-T department’s claws (with less false-positive).

Almost in anticipation of this, my friend had pointed me to the PAN/ AIR project and its relative failure in achieving similar results — at least at the government end. He sent me an article from HT on 24 Aug too, with analogous lamentations. The sum and substance of this report went thus:

• Compulsory PAN citation for all high-value transactions has not worked. Of the INR 55.7 Lakh Cr total value reported in 2007-08, 30% were missing PAN. For instance, in realty deals (a known home of Black Economy) of declared value over INR 30 Lakh, capture was ~25%; saving bank deposits of INR 10 Lakh plus, it was one-third etc (Folks with dark humour will savour the fact that ~10% of 3100 RBI bond sales over INR 5 Lakh got away without a PAN); and
• Cases of fake/ multiple cards abound, limiting the department’s ability to trace any transaction back to beneficiary. It is any ways over its head in water on the high-value AIRs for investigation/ matching with IT returns (rumour has it that the department has been trying to build 360 degree profiles of HNI’s — politicians, bureaucrats, corporate honchos, high-growth businessmen AKA people with flashy lifestyle not commensurate with known income sources etc) using AIR data for over three years).

But perhaps we write the epitaph of this effort too soon. One can equally note that high-value transaction capture was up 2X between 2007-08 and its preceding year — indicating detection success more than economic boom. Equally, the march of technology in the banking industry is relentless, making the switch to electronic financial administration easier by the day. Or, for that matter, let us not ignore the large-scale adoption of computers by Indians at large. Mind you, we speak not merely of super-bright precocious pre-teens of the current day; this trend is discernible across age and economic strata. (My father, loath to the PC most of his life — or perhaps never having needed to take to one, courtesy a sarkari lifestyle — is now not only a ‘Friend’ on my social networking account, but preaching the virtues of Skype to me the other day!)

The fun times, however, are yet to roll. To my mind, far more than banking industry paradigms or designs of FinMin mandarins — or even technology’s constant down-spiral of prices and advances in user-friendliness — the real clincher is, literally, in our hands. The convergence of mobile-phone and computing is where my oracular protestations will be put to test. As more and more of India takes to the ubiquitous phone for functionalities beyond voice, they will buy in to its convenience for financial transactions too. If this adoption gets sweetened by promises of greater speed, increased transparency, and lower transaction cost (why ever not, one would think), then the inclusion revolution shall fly bottom upwards.

Empowered handhelds will thus achieve what its voice cousins have already done — bridge divides that most thought an impossibility in our context just years ago. Not only will this spread make the ‘card’ all pervasive, it will put pressure on high value transactions to conform and drive an enormously shrunk cash economy in the future. Hence, card, we dream… Goodbye elitism, farewell effete :D

Waxing Tax Too

In response to last Friday evening's post, one of my left-leaning intellectual (tautology, really!) friends called me for a not-so-quick tête-à-tête. Though certainly short of acrimony, the censorious tone of this conversation was hard to miss. The upshot of the lesson in economic history — or indeed its trigger — lay in how my blog piece in question had seemingly glossed over the Black Economy of India (emphasis as supplied), the continued advance of this Public Enemy Number One, and the calamitous consequences thereof. In other words, direct taxation reform was a condemnable (the word bourgeois was carefully avoided) distraction.

Frankly, this set me thinking. It does not require Keynesian genius to deduce skews in any economic structure hampered by the presence of an illegal economy. The news gets worse if this parallel economy breasts the tape at one-fifth the total, as ours arguably does. So how does this work? In simple terms, high preponderance and resultant cultural acceptance make such an economy difficult to unravel. Again, unfettered access to markets minus the burden of tax makes its cash transactions cheaper. The consequently uncompetitive legal economy thence loses marketshare, profit, and investible surplus. Clogging growth implies less employment and more pressure on government – more so in a regime of floundering tax collections. Need to shore up revenues to fund government spending pushes tax rates north, potentially incentivizing further tax evasion and hence growth of the illegal economy.

So far so good (or bad), in theory. In our case, one could well retrace the path to the days we made our ‘tryst with destiny’. Illegal economic activity had mushroomed in the run-up to independence, typical of wartime economics across centuries, and ramped up further in post-1947 nation-building economic action. The Nehruvian model was resource hungry – revenue had to feed substantial public sector investments, but equally prone to lip-service. The result was aggressive taxation coupled with a maze of incentives ostensibly put in place to foster savings. The fledgling Indian state just did not have the wherewithal to overcome the resultant tax administration challenges.

As it turned out, the next few decades saw a pronounced socialistic tilt in our policy. The consequent licence raj added further question-marks around intent, to a tax regime with already suspect capabilities. While profiteering via artificial supply imbalances had been around for years, under the quota-permit system, policy formulation as well as enforcement became tools for malfeasance. (This in fact stays the biggest reason for celebrating the open-door approach in Direct Tax Code reform in my last post.)

Be that as it may, the most potent constituent of the parallel economy was the hawala-hundi system that enabled any ill-gotten gains to find their way to safe havens, as well as to become a tool to finance economic activity (leading to further proliferation) – and eventually, politics. Hence, even as the formal economy was constrained with pricing, taxation, forex and current/ capital account convertibility restrictions, enormous money transfers via the illegal market became a fact of life. If cash was in play as input or output (and what nefarious purpose doesn’t do both!) the answer in form of this high velocity-instant speed-currency agnostic money system became the oil greasing the Black Economy.

As various studies point out, these Augean stables have a far and deep impact. The endemic corruption bred by such a humiliatingly pervasive Black Economy saps individual will away. Hence, one does not need to conduct a Buddha’s Three Questions type of experiment to understand why it is well-nigh impossible to go without cash ("...is king") in life if registering a property, selling your car, or even making sundry household expenses. When the PM-in-waiting laments distribution losses, one sits up and takes notice!

Which brings us to now and whither the disconnect with my more learned friend, as one may ask. It lies in the essentially populist, two-dimensional corrective action he and his ilk typically advocate. Increasing taxes and duties changes the risk-reward equation making evasion more lucrative; adding legislative muscle to our inefficient executive breeds more corruption; and expecting a proletariat revolution that solves world hunger is, frankly, far-fetched.

So whence the solution (only followers of Marx have the liberty to merely preach symptoms without offering a meaningful cure!), pray? There must be many, but today let me merely place the Korea model (if one plug be allowed) for consideration. This involves a large-scale and comprehensive adoption of cards as the sole payment mechanism for a multitude of transactions (over a ceiling value, potentially) for individuals, with multifold, multi-layered benefits.

In short, being electronic, credit-debit cards can easily counter the ‘good’ of transaction speed and high-velocity rotations in the Black Economy value-proposition. With increasing computerisation, e-banking can work in tandem with such a payment system, also addressing the Government’s benefit end-user discovery issue. The data explosion thus generated would do wonders for risk mitigation for any self-respecting funding institution – also helping buyer and seller price credit right. The government could use this information to plug tax evasion at lower cost, greater accuracy, and faster speed. And if a clincher was needed, for a terrorism frontline state as ours, one can well imagine the internal security benefits from better enforcement.

But, better not to stretch my ‘one plug’ luck too much, even for the hand that feeds etc!

Waxing Tax

Earlier this month, the Government of India placed a paper on a new Direct Taxation Code in the public domain for discussion. Such progressive procedure is as uncommon as it is laudable in a nation where administrative opaqueness has often been used to create latitude for backroom manoeuvering. In fact, the play in influence-peddling is believed to be so potent and widespread (so difficult to miss in Dilli's flaunt-it-if-ye-have-it culture) that subterfuge of this kind is not merely accepted but expected. Drawing inspiration from the fortunes of sundry such power-broking carpetbaggers, if no other reason, it is incumbent on us to celebrate this wiki approach to policy formulation.

The jury, of course, is out as to the merits of the actual proposal. It certainly deserves minute scrutiny and my current inability to fathom its fine print is far too real to hazard judgement. Yet, it must be recorded that it heralds the resurrection of an eminently logical economic shibboleth, hitherto consigned to the dustbin. The premise of lower incidence promoting higher compliance had been anathema to North Block mandarins for years and finally seems to be coming of age. A second toast to the Finance Minister!

Unfortunately, not much of the succeeding discourse on the tax code may be available for ready view in the medium term. The promise in this citizen-friendly reform, however, gives one the confidence to ponder the fate of another far-reaching change — the GST. Similar streamlining of tax administration has already been accomplished by almost every self-respecting economy of benchmark size and scale. The Indian effort has, lamentably, fallen into a quasi-political quagmire. Given the federal nature of the country's revenue system, GST can only come by via legislation, including constitutional amendments, to junk existing laws as also the creation of a common dual (State and Central) framework it perforce requires.

Building universal consensus on the GST, though, has led to endless debate over its management mechanism, including creation of appropriate infrastructure, and on sharing of its spoils. Equally, it may be simplistic to expect that the fact of different political formations being in power in key States and the Centre, and the much-voiced 'loss' to the former (plus concomitant demands for compensation) is merely a coincidence. It is, more likely, a refined filibustering tactic.

It does appear therefore that the question of whether a nationwide GST is actually needed, is a moot one. Much like Direct Taxes, India's Indirect revenue regime is an elephantine and often conflict-prone labyrinth of state and federal levies that we berated when studying Economics in college fifteen years ago (it was not new then; it is not new now). The fact is that the framework carries the baggage of its roots in our colonial past, and is arguably anachronistic. Applying whatever little one remembers (not that it was ever entirely put to rote!) of economic theory, there are two clear wins in its reform. First, elimination of multiplicity simplifies tax structure and fosters compliance (similar to what Pranab da has already been commended on above). Second, creation of a common market and lower tax burden boosts production, directly and via increased investible surplus: the logic on which EU was born, or ASEAN thrives today.

While actual gains from the implementation of a reformed Direct or Indirect Taxes regime are either the subject of impassioned debate (my Commie friends anyway derive sustenance from chatter, especially of the idle kind) or entail expertise in macroeconomic theory more than is my métier, it is likely that xome April we may be raising ours for two and a half cheers to Mr Mukherjee!