A year back, the industry was blooming like anything unaware of the sleeping giant. Market was up and individuals living happy and luxurious lives. With the reminisce of a recession just seven years back, no one was expecting or prepared for yet another turmoil in near future. And adding to the induced price hikes in the market, banks started lending more and more money with very little guaranty and many times at floating interests. Mortgaging appeared like an easy options for banks and they go on to lend as much as personnel loans just looking at the jobs in hand alone. With a chunk of money flowing into individuals’ hand, they never bothered to indulge in safe investments. Instead they believed in speculative market and borrowed short term, lump amounts on very high interest rates and deposited in the market. As the land prices started shooting up, instead of speculating the sudden price hike, a majority population started investing in real estate, and finance companies were making their profit of the life time. Unnoticed, a lot of black money was also under transaction which added to reducing the money value. The chain spending went on till the liquid cash with the financing agencies reduced to bare minimum.
With more money in market, value of money gradually decreased, and inflation started griping the pace. As the inflation rate was expected to touch 13.2%, government undertook various measures to bring it under control.
Inflation
If we consider the food inflation, it will be unnoticed by the upper class people since they can easily afford double, triple prices on edible goods. On the other hand, the increased food price severely affects the daily waged, low earning people. My first memory with inflation was sometimes back in my school days, when the onion price shoot up so high that it disappeared almost completely from our household for sometime. It was an example for demand driven/reduced product volume inflation. If the price of a single commodity shoots up we can easily adapt to live without that item. Even then the supply chain is somewhat balanced since the low volume production was still giving same income to the producers owing to price hikes. So it can be easily seen that food inflation is reaching up to each and every individual, sometimes noticed and sometimes unnoticed.
And some of the best ways government could adopt to help those below poverty line is to provide essential commodities at reduced prices. And this can also be done up to some extent only.
If we take inflation as a general term, it is not only food inflation, but, the price hike present in all sectors - food, oil, wages, land, essential commodities etc. And it takes up the cyclic steps. As food price shoots up, food import will become a major burden for countries those import food and food products. On the other hand, it will earn more revenue to countries those export food items. On the contrary, the food importing countries may be the major oil exporters and they will compensate for food import losses on oil export profits. Also there will be a lot of dependent business models in these countries like construction, infrastructure development, tourism etc. With an idea of earning some increased profits, some industries gradually induced price hikes, and so their related industries also. As a result, the prices went beyond the base values manifolds. As the wages was also shooting up, people neglected the hikes and thereby promoting them. A recent survey noted out that the average income with the middle class people in India was pretty high compared with many other developing countries. This was not prevalent in India alone, but observed in many others, and the average expenditure went above safe limits also. Share market and short term investments were hitting gold for a long time. Companies listed higher margins counting the total assets rather than liquid money in hand and go on lending till the liquid cash necessary for daily business reduced to nothing so that they were forced file bankruptcy even though they could saved the situation with proper planning.
Tuesday, April 28, 2009
Impacts of black money
Tax that we pay can be broadly classified into direct and indirect taxes. Indirect taxes like VAT are introduced to limit/reduce consumption within acceptable limits. For example by imposing taxes on health injurious products, it enables to discourage their consumption too. These indirect taxes have nothing to do with the consumers’ earnings/assets. All are liable to pay the indirect taxes on the goods and services that they use. Where as direct taxes are imposed to introduce accountability to one’s earnings. Also the money gathered from tax collection can be used for various social developments like education, security, health programs etc. This in turn is inevitable for the smooth functioning of the government.
From the narrow one side view of an employee or any earning man, giving taxes looks like just taking a huge amount from his earnings unnecessarily rather than the amount required for the social security and benefits he enjoys. As one’s earnings shoots up, the direct taxes he supposed to file also increases proportionally. Here he starts thinking of forging some of his assets so that he will have to pay less tax to the government. As the people with this same mentality are not few in number, taxes misdirected will grow exponentially.
All those unreported and thereby untaxed earnings contribute to the black money. As we all know, there are hawala channels through which large chunks of money been transferred across nations, hand carried, to hide from governments’ notice. There has been reports of huge deposits in many banks and been withdrawn the same amount soon after. As banks fail to trace the source of such large wealth, they will soon enter markets washed clean or transferred into safe deposits like jewelry, real estate, stock markets etc.
Even when I was a small child, I used to hear that there are ‘so many’ jewelry shops in Koduvally, a rather small market in Calicut district. On a trip back home, as part of our games we counted the jewelry shops in Koduvally and to my surprise it came around 48. I used to wonder why the need for that much shops there or will it bring business to jewelers considering the competition. Later on, as hawala channels revealed there were strong links to this small town which was playing a major role in handling the black money.
Also a lot of safe havens are present across the world where anyone can happily deposit their black money. According to Swiss banking report, the total deposits by Indians in Swiss banks is around $1.4 trillion and tops the list. Contributors of this black money are our politicians, businessmen, criminals etc. Black money in India is around 20% of the GDP. So by shutting out the possible tax revenue of the government, this in short is developing a parallel/illegal economy, which hinders the economic growth of the country.
From a rather interesting analysis report, it has been seen that this parallel economy turned as a partial savior to India in the real estate sector, during recession. I.e. majority of the black money is flowing into the real estate, where, mostly half of the total investments will be declared by the consumers while taking full loan from banks. So even when banks started crumpling down in other countries owing to improbable mortgage options, customers in India hadn’t restrained from repaying the loans in order to cover up their tax frauds. This in turn helped the banks in their testing time.
This black money is not having the single impact of cutting out a major portion of the government’s possible revenue. Instead recently it’s been noted that this amount is been wired into individuals for terror strikes in India. So they have been used for buying arms and ammunition for anti social groups and thereby posing a serious security threat to the country. So this will have to be treated with required intensity so as not to hamper the growth of our mother India.
From the narrow one side view of an employee or any earning man, giving taxes looks like just taking a huge amount from his earnings unnecessarily rather than the amount required for the social security and benefits he enjoys. As one’s earnings shoots up, the direct taxes he supposed to file also increases proportionally. Here he starts thinking of forging some of his assets so that he will have to pay less tax to the government. As the people with this same mentality are not few in number, taxes misdirected will grow exponentially.
All those unreported and thereby untaxed earnings contribute to the black money. As we all know, there are hawala channels through which large chunks of money been transferred across nations, hand carried, to hide from governments’ notice. There has been reports of huge deposits in many banks and been withdrawn the same amount soon after. As banks fail to trace the source of such large wealth, they will soon enter markets washed clean or transferred into safe deposits like jewelry, real estate, stock markets etc.
Even when I was a small child, I used to hear that there are ‘so many’ jewelry shops in Koduvally, a rather small market in Calicut district. On a trip back home, as part of our games we counted the jewelry shops in Koduvally and to my surprise it came around 48. I used to wonder why the need for that much shops there or will it bring business to jewelers considering the competition. Later on, as hawala channels revealed there were strong links to this small town which was playing a major role in handling the black money.
Also a lot of safe havens are present across the world where anyone can happily deposit their black money. According to Swiss banking report, the total deposits by Indians in Swiss banks is around $1.4 trillion and tops the list. Contributors of this black money are our politicians, businessmen, criminals etc. Black money in India is around 20% of the GDP. So by shutting out the possible tax revenue of the government, this in short is developing a parallel/illegal economy, which hinders the economic growth of the country.
From a rather interesting analysis report, it has been seen that this parallel economy turned as a partial savior to India in the real estate sector, during recession. I.e. majority of the black money is flowing into the real estate, where, mostly half of the total investments will be declared by the consumers while taking full loan from banks. So even when banks started crumpling down in other countries owing to improbable mortgage options, customers in India hadn’t restrained from repaying the loans in order to cover up their tax frauds. This in turn helped the banks in their testing time.
This black money is not having the single impact of cutting out a major portion of the government’s possible revenue. Instead recently it’s been noted that this amount is been wired into individuals for terror strikes in India. So they have been used for buying arms and ammunition for anti social groups and thereby posing a serious security threat to the country. So this will have to be treated with required intensity so as not to hamper the growth of our mother India.
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