India's democracy = Black money + Corruption - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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India's democracy = Black money + Corruption 

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In this issue:
» Will Berkshire Hathaway be the same after Warren Buffett?
» Takeaways from the Yellen speech
» China doubts its own growth figures!
» US regulators' employees indulge in insider trading
» ...and more!


00:00
 
The election schedule is out. There are nine phases starting from 7th April. Roughly, 814.5 m voters will be eligible to cast their franchise. And the verdict will be out on 16th May. Considering the widespread dissatisfaction against the incumbent government, the 16th Lok Sabha election could well be a polarizing event as far as the voter turnout is concerned. As such, political parties are leaving no stone unturned to bring people to the polling booth.

As per an article in First Biz, the poll expenses for the upcoming general elections may well be Rs 180 bn! Poll expenses, in general, relate to the administrative cost plus security cost incurred during the elections. However, there are other costs relating to campaigning as well. It includes advertising, banner costs etc. While the former costs are unavoidable in nature the latter create a direct impact in the mind of electorates. Hence, most political parties have loosened their purse strings for election campaigning.

But the question is how do political parties get access to funds? Corporate donations are one source of income. However, such donations are petty in nature and insufficient to fund their extravaganza. This opens the doors for black money funding. Quite often, politicians receive kick backs for extending favours. And this money is used to fund their electoral expenditure in some or the other way. In corporate nomenclature, MPs are investment bankers of their political parties! They help their parties raise money. And this fund raising exercise isn't subject to recession either.

What further increases the importance of black money in India's democracy is the regional political culture of India. While India may be a bi-polar country at the national level there are many small regional parties that determine the fate of the ruling government. Higher the number of political parties, higher the competition to garner votes. Higher competition means even a small vote share swing can change the fortune of any party. In other words, one can win by thin margins. This opens the turf for bribing and getting votes. In short, parties with strong financial clout can easily turn the results in their favour by illegal means.

So, basically it is clear that there are two problems facing the Indian democracy. One is widespread corruption and second is prevalence of black money. So, how does one get rid of them?

One way is to increase the spending limits of parliamentary candidates. Spending limit, in simple words, is the funding allocated to a person to carry out campaigns in his constituency. Increasing spending limits means more funds would be allotted and less would be the reliance on other external means. While this may not completely eliminate the black money menace it may at least reduce it to a certain extent.

As far as elimination of corruption is concerned we need proper checks and balances to ensure that MPs spend the money allocated to them for the betterment of the society and do not indulge in wasteful expenditure. As an example, each MP receives Rs 50 m each year from the union government to spend in his constituency. And there are 543 Lok Sabha seats. This means effectively Rs 135 bn is given to Lok Sabha MPs over five years. If there is no proper vigil on how this money is spent, corruption is bound to thrive. And this can have cascading effects on the Indian economy.

Do you think corruption and black money can be eradicated from politics? If yes, what are the means through which it can be done? Share your views in the in the Equitymaster Club. Or post your comments below.

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01:50  Chart of the day
 
Period from 2008 to 2012 stood robust for sugar production. But start 2013 the sugar production has lost the plot. After four years of steady growth, the sugar output has declined in the fifth year. Data from the Indian Sugar Mills Association indicates that the sugar production has declined by 6% YoY during 2012-13. And 2013-14 offers no respite too. As the slump in sugar output continues in the current fiscal too! Note this. During October 2013 to February 2014, the sugar output was recorded at 16.9 metric tonnes (MT) as against 18.8 MT same period a year ago. Also the first four months of the current crushing season has reported 11.7% fall. The current cane crushing season is the period from October 2013 to September 2014.

The downfall in production can be largely attributed to the delay in commencement of the crushing season. Continued farmers' agitations over fixation of cane prices added to the commotion. And that these issues emerged from the largest sugar producing states of Uttar Pradesh and Maharashtra threw up further challenges. Karnataka state was also not spared. The crushing season delayed there too as the state government announced higher cane prices. So the scuffle over cane pricing and the resultant delay has played the spoilsport. Therefore, sugar output has been lower so far this year.

Sugarcane production falls after 4 years


02:25
 
One of the investment maxims Warren buffet has lived by is about choosing a good business over a good management. The irony is that investors are being forced to rely on the same principle while evaluating Buffett's investment vehicle Berkshire Hathaway. Buffet is 83 now and therefore the clamour for who after Buffett or perhaps what after Buffet is getting louder by the day. And Buffet hasn't particularly come to their rescue by being somewhat silent on the issue What is clear though is that his current responsibilities will be split into three separate roles, the CEO, the Chairman and the chief investment officer. But beyond that there is no clarity as of now. A good degree of comfort can be had from the fundamentals of the business however. Under Buffet, Berkshire has managed to put together businesses that are perpetual cash generating machines. Plus the float generating ability of the insurance business is also going to remain intact we reckon. And this gives us confidence that maybe as not good as under Buffet but Berkshire Hathaway will continue to remain a great business model to invest in.

03:05
 
One of the biggest malaises in the investment world is that of insider trading. Insider trading is the trading of listed company's stock by individuals who have access to sensitive non-public information. It is obviously unjust to other investors who do not have access to the same information yet.

Now let us ask: who are the insiders? Insiders can be the company's employees. Journalists covering a particular stock and in possession of information that is not public can also be termed as insiders. In the same vein, even market regulators could be termed as insiders as they may have sensitive information about a company that may not be public.

But shockingly, the insider trading rules for journalists and Securities and Exchange Board employees do not seem to be the same in the US. A per an article in Business Insider, news organization Reuters has very stringent rules against insider trading by its journalists. However, when it comes to SEC the rules are very lax. As per some research, it has been found that SEC employees have managed to avoid bad news that tends to push stock prices lower. According to the research paper, stocks sold by SEC employees underperform the market by about 8%. Is this because of insider trading? It seems quite likely. Isn't it ironical then that an institution that is meant to protect the interests of shareholders takes advantage of its access to sensitive information?

03:35
 
The current Fed chief Janet Yellen has stated that the US economy is falling short of the objectives set out by the central bank. And she believes that more will have to be done to ensure full employment and maintain stable prices. Interestingly, the US Fed began trimming its bond purchase program recently on the claim that the US economy is beginning to witness signs of a recovery. But it is looking more and more apparent that this recovery could be a false alarm considering that growth has remained sluggish and unemployment has not come within acceptable levels. That the job scenario is not too good is something that even Janet Yellen acknowledges. So future strategies with respect to the bond purchase program will depend a lot on the how the outlook pans out. If this turns out weak, it will hardly be surprising if the Fed reverses its policy and goes in for bond buying again. Ms Yellen is also keen on strengthening the financial system through the Dodd-Frank Act. So far, clamping regulations on the financial system post the crisis has been a murky affair. So it will be interesting to see whether the Fed chief will be able to make significant progress on this front.

04:10
 
Numbers hardly ever tell the full and true story. This seems to be the case at least for China. Apparently, the pressure to meet random GDP targets is so much that policymakers there themselves doubt the accuracy of the data. The rumor has it that China's Premier Le Keying had admitted privately in 2007 that the GDP figures were unreliable. Recently, Mr. Keqiang has announced a GDP target of 7.5% for 2014. Even if the number is achieved officially, one can hardly be blamed for doubting if it was for real. Le's own doubt regarding the target is evident from the fact that he is using selective indicators - electricity consumption and freight transport; parameters that suggest growth. At the same time, he has avoided loan data indicator while painting the GDP picture. That might suit him well at a time when Government is trying to control credit supply and growth of bad bank loans. However, the apparent GDP worship and manipulations makes us doubt the veracity of all statistics coming from China.

04:30
 
In the meanwhile, share markets in India have firmed up further. At the time of writing, the benchmark BSE Sensex was up by 124 points (+0.6%). Realty and power stocks were the biggest gainers. All the Asian stock markets were trading higher led by Japan and Taiwan. Majority of the European markets have opened on a positive note.

04:50  Today's investing mantra
"Don't be fooled by the Cinderella feeling you get from great returns"- Warren Buffet
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21 Responses to "India's democracy = Black money + Corruption"

Pristine India

Jan 29, 2015

Corruption and Black money can not be eradicated in India because it is the politicians created it and not the people. A Small man stands in front of the govt office and charges "chai paani" to allow some one access to the office. That is not corruption it is way of life in India. The real corruption starts when the Big industrialists pay big money to the politicians before and after the election to win favours and projects. It is the key money. Now when the time of election comes politicians have to win the imagination of the voters, so they choose which is the main issues " corruption" and "black money". The politician appeals to the people to vote him to power so that he can fight corruption.The big industrialists pay the politicians money which they have indirectly taken out of the society so that the politician can win. Therefore corrupt politician receives corrupt money and gets the vote from voters with a promise to fight corruption. After each election everybody forgets the whole thing within a short time and life goes on as usual. Black money is the other side of the same coin. One side is corruption and the other side of coin is black money. Politicians use the election slogan that they will bring the black money back and the people start dreaming and vote for them. Therefore, I conclude saying politician tosses that coin before the game starts/before the election starts " heads you lose, Tails you don't win". People like Anna Hazare are dreamers and they are dream sellers.Politicians support Anna Hazare because he is also indirectly dragged into strengthening their own cause. Actually Anna Hazare also helps politicians. If you cannot see the end of it why raise it.

Like (2)

Prakash Madnani

Jun 25, 2014

Respected Prime Minister , all Indians look up to you to change tracks for betterment of the Nation .Indians are not dishonest , we have been made to do so due to harsh and unpractical laws of the past . Let us live with honesty as good Indians . Give practical exemption limit keeping in mind the cost of living , savings for retirement . Apply practical tax like Singapore . Once the black money stops getting generated , it will streamline inflation on its own . The biggest cost factor is Housing and this has broken the back of Indian Citizens , who can not hope for a roof on their head . Practical and affordable Housing will bring up the Happy Index to future .You have to do it and we know you will do it.

Like (4)

Venkiteswaran RV

Mar 23, 2014

Dear Sir/Madam

We have been talking about black money for decades! The source of this word itself is that. in other words putting too much income tax rules and giving tough time for tax payers are one of the motivation to keep black money. Another problem is inflation. First we need to eliminate income tax completely and allow every citizen to keep all his earnings within the country itself. Look at Gulf countries...whereas the government can collect tax/income through the services they are offering only through computerized systems. All political parties must declare their income and expenses through newspapers just like any limited liability company on quarterly basis. All political spend must be done only through banks. Business men to be protected for not giving funds to political parties. like wise endless suggestions can come forward...but who is their to implement good suggestions. i have no hope that a corruption free india will be born because it is a basic need to keep up the life in India.

Like (2)

KD

Mar 11, 2014

It is more about extortion of money from business houses than corruption. Since Mukesh Ambani is in news, let’s talk about Reliance. Eight years back oil marketing PSUs have monopoly over selling of petrol. Therefore, most (NOT ALL) of the petrol pumps were owned by politicians and many (NOT ALL) petrol pump owners indulge in adulteration of fuel by mixing kerosene. Even the quantity of fuel you get is less than what you pay for. Therefore, Reliance opened their own petrol pumps and gave excellent service. Therefore, all the PSUs started losing huge amount of customers. Therefore, politicians passed a law that made Reliance unviable to run petrol pumps. Now those pumps are decaying for last 7-8 years and billions of dollars of investment is lost. Do you think Reliance will do corruption if they gave money to some political party to restart their petrol pumps?

Like (2)

Prakash

Mar 10, 2014

Na ! Corruption has gone into our genes and cannot be eradicated though its scale may be reduced by enforcing stricter laws against it ! Black money within India could be tackled by demonetizing Rs.1000 , Rs.500 and Rs.100 currency notes every 10 years ! Difficult but possible if at all there is a will to salvage the nation from the abyss ! For better Law & Order I would suggest handing over the governance & administration of our country to a contractual team of British or Germans on a yearly payment for the next 50 years ! This would be similar to appointing "management consultants" to improve upon a "sick industry" ! It would be a much bigger exercise of improving a "sick nation" altogether ! This is being done , though indirectly , by every petro-dollar Middle-Eastern country since last 50 years , e.g. the British in Oman , The Americans in Saudi Arabia , British/Americans/French in Qatar and so on !

Like (3)

DR.D.C.SHARMA

Mar 8, 2014

all govt expenses to be made compulsory in digital accounting form controlled by some agencies like (tcs) from release of funds to the remote agencies consuming for public interest & welfare

when reliance can mantain accounts at multibillions level than why not our govt?

all sale and purchage in india should be in computerised accounting records under a body made by govt

Like (4)

Dipak Mehta

Mar 8, 2014

march 8, 2014

On jan 16, 2014 i had written a letter addressed to mr Narendra Mody and had handed over personally to mr ravi
shankar prasad of BJP im Mumbai on out of box solution to eradicate black money and to stop its generation . As per his suggestion i also sent copy to mr murlai manohar joshi in delhi

i also met mr yogendra yadav in mumbai and addressed the same letter to him and handed over to him.

i take this opportunity to publish this letter in your forum for public information and to generate opinions and suggestion on the same and to start a national debate

the letter is produced below for igniting a debate, opinion for betterment of our future generations

Dipak Mehta 181-182/Hassa Mahal Dalamal Park CHS Ltd
89,Cuffe Parade
Mumbai : 400005
Cell # 9820098712
Email:dipakmehta@gmail.com
Jan 16, 2014

Respected Shri Narendra Modyji

Please find below a few suggestions for improving India’s fiscal health while at the same time helping change the psyche of Indians.

QUICK FIX FOR INDIA’S HEALTH AND FUTURE:

a) Flat Tax structure: India should consider adopting a flat Income tax structure like HK or Singapore, with a flat rate of 20%, of which half, i.e. 10%, is returned to the tax payer at the end of 10 years, without accrual of any interest.

This 10 year interest free component should be termed as a scheme to ‘HELP REBUILD INDIA – PLAY YOUR PART!’

The change in tax structure should be preceded by a ‘one-time’ amnesty scheme where Indians are allowed to declare any previously undeclared income at a flat rate of 20%, with no reprisals or questions. Out of this 20 % half to be returned to the tax payer without interest after 10 years as an encouragement to become honest.

This will create huge inflows of money to the government coffers immediately. People today are realizing the value of having ‘white’ money and also the encumbrances involved in storing/maintaining ‘black money’. We should take advantage of this and give them a mentally acceptable way of converting black to white.

b) Tax Havens: Similarly Indians who have money in tax havens overseas, should be allowed to transfer undeclared income in US Dollars to RBI’s a/c, against which RBI would transfer equivalent INR after applying a 20% haircut. Again 50% of this haircut (i.e. 10%) should be returned to them after 10 years, without accruing any interest. Also if they chose to, they can retain upto 20% of the inward remittance in USD, in an FCNR a/c at public sector banks

Prior to this scheme, the FEMA Act should be made more draconian, so that any future violators would face disaster if they continue to keep unaccounted assets overseas.

c) Currency Notes: Recently RBI Gov, Shri Raghuram Rajan took the bold initiative to take currency notes issued prior to 2005 out of circulation.

I think this is a very good start in an attempt to rout out black money, but I feel that this will not be sufficient. IF we really wish to put a dent in the creation and use of black money, the only way forward is to do away with high denomination notes, i.e. 500, and 1000 INR notes should be completely taken out of circulation. This will have a twofold effect, firstly this will make storage and transportation of black money risky and cumbersome, and secondly it will push citizens towards use of electronic mediums of payment, which in turn can be tracked and monitored for misuse. It should be noted that even in US/UK or other European countries, one seldom sees any currency notes with a denomination higher than 100, and considering that India’s ‘black money’ problems are so pervasive, only drastic measures will help alleviate this menace. I think we should consider removing even the 100 denomination notes for a period of few years, as this will lay a crippling blow on ‘hawala’ and other illicit activities.
The benefit of the above policies are numerous and long lasting. I enumerate a few of them below:

a) If one has to only pay a 10% income tax, I feel a lot more people will be amenable to report their income and the tax base will widen substantially, making it revenue neutral for the government in the long run and also help change the Indian psyche of ‘jugad’ and pervasive culture of evasion. This will also get many more people in the tax net making future compliance and tracking easier

b) Revenue from the 20% tax in the amnesty scheme will help reduce India’s deficit

c) The Indian Rupee will benefit tremendously from the influx of foreign assets held by Indians overseas and will reduce our reliance on FDI and will help us focus on FDI that is beneficial to our nation rather than foreign special interests . And said policy will help change character of the people making them more tax compliant in future

d) An appreciating currency will again make foreign portfolio investments in India more attractive once again thus increasing our reserves and help lower interest rates

e) Whatever efforts our government makes to bring back black money will always be road blocked by various agencies and we will never get it back. The suggested policy will not only neutralise such efforts of foreign agencies and govts but will also affect their own economy flourishing with our money and at our cost reducing their clout

It is my humble opinion that the nexus between black money and politicians is the single most destructive road block for our country, and in my 40 years of adult life, yours is the only Political Party I have seen with the will, the ability and hopefully the right position to break this nexus once and for all, for the long term good of the nation.

The nation needs to stand up as one and say ‘Enough! This is our time’.

If there is any way in which I can help you achieve your stated goals, please do give me the opportunity and privilege.

Regards

Dipak Mehta
dipakmehta@gmail.com
Cell # 9820098712

Like (4)

Harshadrai

Mar 7, 2014

1. All election exps. of MP,MLA candidates are through Election Commission.After election No need to give statement of exps. by candidated. 2. Liquor shop must closed for one week,3 day prior/after of election because candidate gives colour token to voters & Shop handover liquor as per colour free of cost. 3. CCTV instal near buth transportaion of voter by particular vehicle can be identify. Other activities also identify.

Like (2)

s23

Mar 7, 2014

The root cause of corruption is government and the bigger the govt bigger the corruption. Let’s remember Thomas Jefferson’s golden words 'least governance is best governance'. Corruption in appointment, spares, bids, contracts are inevitable in BSNL, OGNC, Indian railways, Air India – why? Because it’s run by government and this will not change even if death penalty is introduced. If there is no BSNL, ONGC, SAIL, etc then there is no worry about corruption. So the best and only way to reduce corruption is privatization of BSNL, Railways, Air India, NDMC, ONGC and all govt companies which interfere in the economy which is illegal, immoral and evil. The duty of govt is to protect the lives of its citizens and not to run businesses. It’s high time to put a full stop to all these illegitimate activities of the government under the garb or democracy. The other immediate action is removing 10% of existing laws every year. Each law just fattens the wallets of the police and other regulatory officials.

Like (3)

vijay kumar

Mar 7, 2014

Hi,

1. Take out 1000 and 500 notes with immediate effect. The US economy which is 15 times larger than Indian economy, has the maximum denominator of 100$.

2. One Account number based on PAN and Adhaar irrespective of number of accounts one holds.

3. Cash spending should be limited to Rs.10000 (you can vary this figure). It has to be either plastic or cheque beyond this limit.

4. All the elections of the country (state and national) have to be fought in ONE single month say Jauary.

5. There should be maximum 4 parties through out India. Either the regional parties have to merge with the national parties or dismiss them.

6. The election campaign will be run on only TV. All the parties will be given time to address the public through TV only.Cost will be reduced 100 times.

By the way ! Who will listen to ME ? Do you think the Corporate and Political parties do not have the answers ?

They do have. BUT DO THEY WANT THE CHANGE?

Like (3)
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