Drumming Strong Fundamentals with 'Missing Fundamentals'
JULY 04, 2018
By Naresh Minocha, Consulting Editor
"India's macro fundamentals strong, asserts Modi at AIIB meet". "India's macroeconomic fundamentals remain strong: Arun Jaitley".
SHOULD such headlines be accepted at face value? No. Put chest-thumping claims through prism of multi-dimensionalism. And one would see patches of opacity and blur for want of clarity on fundamentals.
This jarring image is due to the fact that definitions, that form basis of flaunted statistics, are either missing or are outdated/nebulous.It is a fundamental problem with Government's fundamental claims.
It exists in several domains extending from lack of definition of black money to shell companies. 'Poverty' and 'out of school children' (OOSC) also suffer from want of functional/standard definitions. Similar is the case with certain other aspects of economy such as varying definitions of formal worker followed by official agencies.
Add to this limitation the fact that Government does not collect statistics on certain aspects of economy such as how citizens' use time. This is important indicator for unemployment, underemployment and ease of living in certain countries notably the United States.
Reckon also the fact that certain data are mere calculations/estimates made on paper work with certain assumptions.
Start with the black money whose size can't be gauzed without defining black money.
The Prime Minister, Narendra Modi, reels of Black money data with aplomb. In his Independence Day speech last year, Mr. Modi, for instance, claimed that his Government "confiscated black money worth Rs. 1.25 lakh crores, the culprits would be brought to book and forced to surrender".
Trumpeting demonetization as a success story, Mr claimed: "The hidden black money has been brought into the formal economy". He added: "More than Rs. 1.75 lakh crores deposited in the banks is under the scanner. Black money worth Rs. 2 lakh crore had to be deposited in the banks and this system has forced them to be accountable. It has also stopped the flow of black money".
Judge these claims against the Government's admission that there is neither statutory definition of black money nor an official estimate of the size of black money. In parliament, Finance Ministry last stated: "It is commonly understood to mean the income and assets not reported to the tax authorities". In February, the Government also admitted that Reserve Bank of India has no data on black money extinguished due to demonetization.
Even the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (Black Money Act) does not define black money. This law, however, does define "undisclosed asset located outside India" and "undisclosed foreign income and asset".
The total quantum of black money within and outside the country would grow manifold if Government statutorily defines black money. The definition should factor in certain recommendations of Special Investigation Team (SIT) on Black Money.
Constituted in May 2014 in keeping with Supreme Court's directive, SIT recommended: "for holding of cash / currency notes also, there should be a limit, by prescribing a reasonable threshold, may be Rs.10 lacs or Rs.15 lacs. Law should provide that if any cash amount more than the prescribed limit is found, the same shall vest in the Union of India".
SIT also recommended amendment of Black Money Act to enlarge the definition of black money stashed abroad. It stated: "All money/moveable & Immovable property owned by or under the control of every Indian National which ought to have been disclosed under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, shall, after 01st October, 2015, vest in the Union of India."
Without delineating black money, Modi Government has ended with very small collection of taxes on voluntary disclosures under two schemes. Similarly, the quantum of seizures of allegedly undisclosed assets and cash during the income tax raids is hardly worth crowing about.
Similarly, lack of "performance specific definition" of the term 'charitable' in
the Income-tax Act, 1961, (ITA) creates ground for tax avoidance and evasion. Data on revenue foregone due to tax exemption to entities set up for "charitable purpose" as listed in the Act can't be accepted as face value.
This issue was last year discussed at length by Comptroller and Auditor General in its report on private hospitals, medical colleges, & other entities in healthcare sector.
CAG recommended: "The CBDT may consider prescribing measurable parameters for assessment of charitable activities undertaken by private hospital trusts as a pre-condition for granting exemptions under the Income Tax Act, and amend the Act for this purpose if necessary".
CAG also drew Government's attention to risk of misuse of two overlapping but different provisions of ITA -Section 10(23C) and Section 11.
It observed: "Though, the contours of both the sections are more or less the same, absence of clear definitions and boundaries, besides existence of overlapping provisions covering the same purposes (philanthropy or charity) in both sections leave scope for confusion and varying interpretations, allowing the assesses to take unfair advantage of excluding the income or claiming exemption utilising one of these two provisions that suits them. The statute renders itself amenable to misuse by permitting an assessee to claim similar benefits under both the sections".
As in the case of Black Money, Mr. Modi's claims about shell companies is more rhetoric and less ground reality. This is because the Companies Act 2013 has not defined the term "shell company ."
On 15th August, 2017, he told the citizens: "You will be surprised to know that black marketers used to own shell companies. Post demonetization, the reports from data mining astonishingly revealed that there are 3 lakh shell companies dealing in Hawala transactions. Can anyone imagine? Out of these 3 lakh shell companies, registration of 1.75 lakh companies were cancelled".
Compare this claim with Government's reply to a Parliament question in March 2018.
As put in reply, "Section 248(1)(c) of the Companies Act, 2013 provides for removal of name of company from the register of companies if it is not carrying on any business or operation for a period of 2 (Two) immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under Section 455".
Invoking this provision, the Government identified 2.97 Lakhs companies under this category as on 31 st March 2017. After following due process of law, names of 2,26,166 companies were struck off from the register of companies by 31 st December 2017.
According to the Reply, the Government ordered investigation into the true ownership of 68 companies that deposited and withdrew money in an exceptional manner from the bank accounts during demonetization.
Take now the case of poverty where Modi Government drew comfort by clinging to deficient poverty line (PL) defined by an expert group (EG) that submitted its report in 2009 under chairmanship of Prof. Suresh Tendulkar.
When UPA faced brickbats over the poverty line, it constituted an EG under the chairmanship of Dr. C. Rangarajan. In its report submitted during June 2014, this EG redefined poverty line, thereby increasing by millions number of people below poverty line.
The Report says: "Compared to the poverty lines based on the methodology of the Expert Group (Tendulkar), the poverty lines estimated by the Expert Group (Rangarajan) are 19% and 41% higher in rural and urban areas, respectively".
It has estimated poverty ratio at all India level for 2011-12 at 29.5%, as compared to 21.9% estimated by Planning Commission for the same year with Tendulkar methodology.
The Report says: "Poverty lines estimated using the methodology provided by the Expert Group (Tendulkar) did not reflect the changing times and aspirations of the people of India. There was a need to re-examine the poverty line and its composition".
It added: "The poverty line should be based on certain normative levels of adequate nourishment, clothing, house rent, conveyance and education, and a behaviourally determined level of other non-food expenses".
Modi Government has not disclosed why it did not accept Dr. Rangarajan's definition of PL - a monthly consumption expenditure of Rs. 4860 in rural areas or Rs. 7035 in urban areas for a family of five at 2011-12 prices.
In March 2015, the Government constituted a Task Force (TF) on Elimination of Poverty in India under the then Chairmanship of Niti Aayog Vice-Chairman, Dr. Arvind Panagariya. TF's mandate included developing a functional definition of PL& a roadmap for poverty elimination.
In its report submitted during July 2016, TF stated: "a consensus in favour of either the Tendulkar or a higher poverty line did not emerge. Therefore,the Task Force has concluded that the matter be considered in greater depth by the country's top experts on poverty before a final decision is made. Accordingly, it is recommended that an expert committee be set up to arrive at an informed decision on the level at which the poverty line should be set."
Two years have passed and yet there is no official announcement on formation of expert committee or any decision on Government's stance of definition of PL.
Whenever a question is raised on poverty estimates, it merely flaunts the one computed during UPA regime as outdated PL suits its resolve to fight poverty.
The Government, for instance, gave the following reply to a question put during March 2018: "At present the official poverty estimates are based on data of Large Sample Surveys on Household Consumer Expenditure carried out by the National Sample Survey Office (NSSO) of the Ministry of Statistics and Programme Implementation. The latest data of Large Sample Survey on Household Consumer Expenditure has been collected by NSSO in its 68th round conducted in 2011-12. The poverty estimates for 2011-12 have been computed following the extant Tendulkar methodology and these have been released through a Press Note issued on 22nd July 2013"
It adds: "According to this Press Note, the number of persons living below poverty line in India has been estimated as 27 crore (21.9%) in 2011-12 as compared to 40.76 crore (37.2%) in 2004-05. The rate of decline of poverty ratio during 2004-05 to 2011-12 was 2.18 % per year".
It is amusing to find that a Government, whose political narrative daily starts with cursing UPA, banks on UPA-era Press note. Why? To abdicate its responsibility to develop a humane definition of PL & accordingly true picture of population living below PL. Instead of doing so, the Government has been making all sort of claims about its anti-poverty schemes and their impact.
Without any realistic data on persons living below PL at present, Mr. Modi last year resolved to make India free of poverty by 2022 under his pet theme New India.
Consider now OOSC, the Government informed Parliament during March 2018 that a Sub-Committee of Central Advisory Board of Education (CABE) has "recommended several measures to alleviate the problem of out of school children (OoSC) including the need to have a standard definition of out of school children".
What impact definitional problem of OOSC, has been elaborated by Centre For Policy Research's working paper (WP) titled' Out of School Children in India- Some Insights on what we Know and what we don't '.
Noting that OOSC data released by official agencies show wide variations,WP says: "The Ministry of Human Resource Development (MHRD) survey (IMRB-SRI, 2014) estimate of this figure is 6 million, while for the same year, the National Sample Survey (NSS) figure is 20 million. Each figure is based on an estimate of 'never enrolled' and 'dropped out' children. A closer look reveals that problems exist not just in the definitions, especially of drop out used by each source, but also in the methods of estimating 'never enrolled'. In addition, discrepancies and inefficiencies in the overall system of collecting and collating data compound the problems".
One can cite how definitional problems results in bewildering sets of data. Political Executive is least bothered about these fundamental problems as long as they get away with data on macro-indicators such as GDP and inflation.
They use definitional ambiguity to their advantage by citing data that suits their purpose. Some don't even mind manufacturing data as pointed out last year in this column (Modi Govt shouldn't thump chest with conjured or dubious data)