Two Front Page News and their impact

Last Sunday, this was the front page news.

'No Extra Charge on Payments via RuPay, UPI from Jan 1'.

I can't help wondering why it took so long for the government to bring the transaction charges on these two to zero!

As a matter of fact, if this had happened before demonetisation (demon), the results of demon would have been substantially different. It was the transaction charges that made the digital shift, impracticable.

Just imagine, my earning is Rs.150/- a day and I will have to sell-out about Rs.5/- every day to get this money from someone! That is what is a digital transaction all about, as of today.

It would have made sense if the charges on these transactions had been brought to zero first and then we had gone for digital monetary system, I think, we would have been immensely successful.

Maybe, the government is just inverting the whole process. What should have happened first, is happening last!

Now, let us come over to today's front page news!

'Finance Minister unveils plans for Rs.102 lakh Crore infra projects'

I couldn't help getting that nauseating feeling that this money is going to go down the drain in the next six years! Again, aren't they doing things in the opposite direction?

At the outset, there are a few basic questions that even a layman like me could come up with. Leave out the experts.

Question number 1: This money goes into power sector, agricultural sector, roads and other infrastructure projects. Of course, all of these sectors are money starved today! There is so much of financial crisis that is plaguing these sectors that most of them have already either closed their business and checked out or in NCLT for their final review before winding down.

And every one of them will bring down a huge part of our country's corporate business. No doubt, they need help. But then, swimmers will know, if they are not careful when they are saving a drowning man, he will also pull the saviour with him and both would drown.

Now, let us come to the question.

All these sectors are already down. True! They are badly in need of money. True! But what is the change in scenario that has been effected to ensure that the money pumped into these sectors will make these sectors survive and run thereafter?

We need to remember that the status quo continues. The problems that plagued these sectors continue to plague them. Any amount of money pumped into these sectors will only get gulped down and not give us results.

Unless, of course, we have made some fundamental changes in the work environment. Without making the changes required, if we are to spend this money, irrespective of the volume, it will be a drain on the exchequer.

And what are these changes? There are many! But some fundamental changes should be done to ensure that there is a fair market practice in the country. The hoarders of onions sitting in the Central India should be stopped by this policy shift. The unethical practices of the power distribution companies should be belled and a level playing field should be created for power companies to survive. In almost every sector, there is a market related change that has to be done. If the GoI were to do these changes, there would be no need to invest this money. People will take care it, themselves.

Question number 2: Where is this money going to come from? Once, the 'all knowing' Winston Churchill famously remarked,"We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle". 

If you are going to tax people, collect that money and then promote these projects, I think, you should be crazy.

Imagine, a market place where all the money the country has is present. People go and spend money on things that they consider is important for them. Then, the taxation comes in and the government draws a part of the money from the market place. If that additional tax is 10% and if the market place loses 10% of the money, to that extent business in market place is lost.

The government will again invest the same money into the market place of the country on projects that are of its interest. As a matter of fact, part of the money will go to managing the government. Normally, this is about 40%, could be more in India. So out of what is drawn out from the market place as taxes, only 60% will come back into the projects! It is better to leave it as it was.

Of course, this additional investment is worth it, if the additional 102 lakh crores is going to come from outside the country and is going to get into the marketplace! Then, yes, we are pushing up the business to that extent. Else, remember the Churchill Quote, you cannot pull people up by taxing people!

Finally, question 3: Why are we not learning from other people's experience? 2007 onwards, China's economic growth stopped suddenly and started slowing down. Move two to three years earlier, you find a huge spend on infrastructure as the primary force behind Chinese growing GDP.

Well, that is one of the ways most countries resort to, to show a high GDP growth. Grow the infrastructure! But then, you should have a positive bank balance for that. Not a deficit budget. Second, that can also be only for a short time. Not, forever!

India adopted the infra growth based GDP growth model since 2014. It is a known fact that was the one, that has been pushing up our GDP growth even when industries floundered all around. Fair enough!

But a closer look at the Chinese progress will show us that beyond 2007, their growth rate fell despite infrastructure growth and it warranted strong measures to set right business ethos. They resorted to reducing capital expenditure and increasing credit, thereby encouraging 'consumer and industrial spend'. ( A Study by Wharton Business School, UPenn, https://knowledge.wharton.upenn.edu/article/chinas-gdp-falling/).

This is the time we need to reconsider the decision. No doubt, a number of eminent economists would have sat together to put this concept through. But then, there are some obvious errors that could ruin the economy further by withdrawing money out of the market.

Even before this investment is done, the first step would be to identify what is it that is the cause of fall of these sectors. Clear those issues first and then go for an investment. Investing first and then making the necessary alterations in law would be a faulty step.

Tiruvalluvar had said in Tamil long ago, 'துணிந்த பின் எண்ணுவம் என்பது இழுக்கு'. That would possibly translate to, think before you leap. Don't plan to think after you have jumped! We know how great an example, Demon and GST is! Should we do the same mistake again and with such a huge outlay?