Is this India's trillion dollar money laundering plan? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is this India's trillion dollar money laundering plan? 

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In this issue:
» The truth behind repayment of TARP money
» Air India's desperate attempts to stay airborne
» China's planning for forex reserves
» Yet another bailout for SEBs?
» ...and more!


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00:00
 
Let us put you a question first. What do you think goes into making of plans that account for nearly 60% of an economy's GDP? The obvious answers would be thorough study, sufficient analysis and reasonable foresight. India's trillion dollar infrastructure investment plan for the next 5 years (2012-17) is supposed to be the brain child of such serious cerebral effort. But it seems inefficiency and lack of political will has reduced it to a gamble of sorts! So much so, that the government is now banking on laundering of black money to white to reduce its cash crunch.

Plan of disinvestment in PSUs has been the government's biggest failure in the 2011-12 fiscal. To top that oil prices have caused subsidy payouts to go through the roof. Funding needs for banks and failing PSUs are pertinent agenda. But raising taxes substantially could mean losing every chance of a comeback for the incumbent government. Hence the novel option that it is looking at is tapping black money stashed abroad. If news reports are to be believed, the Finance Ministry aims to achieve dual goals with the black money. One, bring it back to India. Two, invest it in long term infrastructure projects that are in dire shortage of funds. This certainly sounds better than offering amnesty schemes to those who have stashed black money abroad. But does it not amount to legal money laundering scheme for those who are guilty of parking illegal funds abroad? Moreover, should the government rely on such schemes to bail it out of poor fiscal planning and execution?

Bringing back black money stashed overseas is certainly important. But curbing the generation of the same through an efficient tax structure is even more urgent. The government has been pushing the ball of infra funding in and out of its court to suit its political motives. Private participation through PPP (public private partnership) plans has also been dismal due to project delays and poor returns. In such a scenario the policy makers can least afford to be myopic in their planning. Instead of focusing on long term sustainable funding routes, betting on windfall inflows such as black money can be frivolous.

What do you think of the government's plan to encourage those with black money abroad to invest in infrastructure projects? Let us know your comments or post them on our Facebook page / Google+ page.

01:30  Chart of the day
 
The government has been making the case for additional sops to power producers citing the sector's importance for growth of GDP. The investments dedicated to this sector have also been the largest in the last two five year plans. However, if the recent data on growth in power production, manufacturing growth and GDP growth is to go by there seems to be no correlation amongst the three. However, we believe that is a wrong conclusion to deduce. For power tends to have a lagged effect on economic vitality.

Data source: Mint

02:04
 
Do you think you've added to the long term prosperity of your family if you took loan from your mom to pay back your dad? We don't think so. The consolidated balance sheet of the family will still show pretty much the same picture, isn't it? Well, a similar trick is being used by financial institutions in the US. And guess what? They also seem to be demanding a pat on their back for this financial jugglery of theirs. Money news reports that the famous TARP money that the US banks borrowed during the peak of the subprime crisis is being repaid to the Government with funds from the Government itself! "Forty percent of the 341 institutions that have exited TARP's biggest single initiative - the $205 billion Capital Purchase Program - simply refinanced their loans through a separate, $30 billion government program known as the Small Business Loan Fund," the article is believed to have said. This certainly makes the whole repayment thing a big mockery.

02:38
 
The beleaguered state carrier, Air India, is making desperate attempts to stay airborne. Even as its huge mountain of debt threatens to sink it. The company now plans to milk all its worth from its profitable routes. At the same time to bring down its cost of operations, the carrier plans to import air turbine fuel. The reason given for the latter is that the higher costs of jet fuel have hurt the company's performance by nearly Rs 20 bn. The real reason could be that the state owned oil marketing companies had refused to supply jet fuel to Air India as the latter had failed to honor payments. Though the Government did intervene, but still the credit history of Air India with the oil companies is not too heartening. As a result, Air India is forced to look at alternatives. And importing could just be one other way to try and bring down its costs.

But is it right for the company to enjoy these benefits just because it is a government owned entity? The truth is Air India made wrong business decisions by buying additional aircrafts which have seriously increased their debt burden and dented their operations. And now the government is giving them all the leeway possible just to prevent it from going under. But is that right? Should the government be allowed to bailout bad performing companies just to save its own reputation? If you feel the same way as we do, then raise your voice to Ban Bailouts. Remember, every vote counts!

03:13
 
China is sitting on massive reserves of around US$ 3.2 trillion but is struggling to generate adequate returns on the same. That is why the People's Bank of China is looking to reduce state control over China's interest rates and currency markets to allow market forces to have a bigger play. With respect to the yuan especially, the government wants to make it convertible by 2015. Its aim is to make China the global financial hub by 2020. Whether this is actually implemented remains to be seen. China still needs to free its interest rates. Plus, there has to be the much needed political will to push reforms on the rate front given that these could hurt its state owned banks. To China's credit, it did free up the yuan from the dollar in 2005. Since then, the currency has appreciated around 30%. Besides removing restrictions on the yuan, there are other plans on the anvil to generate adequate returns on its cash pile. That said, the exact nature of the same is not clear yet. Given that the dragon nations' importance is only increasing in the global economy, any policy move will certainly be avidly tracked in the financial world.

03:45
 
When it comes to electricity consumption, India is amongst the top power hungry nations globally. However, at the same time, the country also ranks high when it comes to transmission and distribution losses. Clearly, the latter is one area that needs improvement.

Saddled with losses due to theft, inefficient transmission and billing systems, state electricity boards (SEBs), which bridge the gap between consumers and suppliers, have been in dire need of financial support for a while now. Come March 16 and they may have something to cheer about. This year's Union Budget is likely to announce a provision of Rs 90 bn for the National Electricity Fund. These funds will be used to subsidize the interest on loans taken by SEBs. What makes it more interesting is that these subsidies will be performance linked - the higher the efficiency, the higher the subsidy rate. Given that the current financial health of the SEBs makes it difficult for them to raise money in the first place, (plus, on very high interest rates), this definitely comes in as a positive for the sector. However, it does raise a few questions as well. SEBs have been provided with financial support in the form of restructured funds from the government and banks in the past. Despite that, they have been unable to improve their performance. The key question is whether it makes sense to fund them again with taxpayer money.

04:20
 
As the fiscal year 2011 comes to a close, the government is desperate to cover the fiscal deficit fiasco. We all know that its plan to cover it up with disinvestment has not gone well. It has now turned to the defence sector for an amount of Rs 40 bn to balance its books. The latter has been asked not to sign any new contracts till end of FY12. The trend is not new. The last decade has already seen defence surrendering cash worth Rs 450 bn to make up for the poor fiscal performance of the Government. And in the process, its procurement plans with long gestation periods have gone for a toss.

The Government's tendency to look for such quick fix solutions makes a mockery of the entire planning process. As we are close to budget announcement for the coming year, we hope the policy makers give due importance to the need of fiscal consolidation. This needs to be done in a way that the priorities set out initially don't get disturbed thus affecting the functioning of critical sectors. This will need taking some tough steps like rationalizing subsidies and framing policies that promote domestic and foreign investment.

04:35
 
The Reserve Bank Of India (RBI)'s weekend move to cut cash reserve ratio by 0.75% has had a benign impact on the indices in Indian stock markets today. The indices were amongst the few gainers in Asia in today's trade. At the time of writing, the BSE Sensex was trading 89 points above the dotted line. Those in Europe have opened a mixed bag.

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    12 Responses to "Is this India's trillion dollar money laundering plan?"

    DK Sharma

    Mar 14, 2012

    This UPA Govt is not at all interested in bringing back Black money stashed in Foreign Banks.This is because many of its ministers are involved in this nefarious activity and have put there ill gotten wealth in Foreign Banks.
    The names include very Powerful family of UPA Govt
    Some time back, big business houses had asked the Govt to declare one time amnesty and let them bring back this money after deducting tax but the Govt is mum.
    It is very unfortunate that on one hand Govt is imposing taxes on its people and on the other the corrupts are being shielded.

    Like (1)

    Kalki

    Mar 13, 2012

    Blackmoney has alreeady been allowed to come thro so many PPP projects that have already been set up.So many of these PPP projects have thier promoter companies in Mauritius and other tax havens!
    Now they will do openly. What a shame !

    Like (1)

    Sherryl

    Mar 13, 2012

    To call it a plan would actually be a mistake. The government seems to be in a desperate reactive mode. Their current political standing has only worsened matters. God save the country ... cos it is only going downwards !!!

    Like (1)

    anil

    Mar 12, 2012

    Govt' plan to bring bllack money back in India by way of investment infra has 3 objectives in my view
    1) Generation of funds which is a SOS need
    2) More importantly - reduction of pressure for bringing back illegal money being mountd by Supreme Court and other quarters
    3) Most important is to save all those guilty of slashing black and illegal money in foreign banks as most of the people guilty are politicians and bureaucrats who are either in power or are connected to people in power, large part of them being part of rulling party. This step will be a rewards and an incentive for all those people who generate massive black money without paying taxes.

    To me, we should bring back such money in country by way of strict actions against all those who have their money in foreign banks and imposing tax and penalties. This would be big disincentive for people to slash black money on foreign countries

    Like (1)

    S.K.Damani

    Mar 12, 2012

    Though it is wrong to allow such funds to be brought in, without any heavy fines to the culprits,, BUT still the idea will not be bad. In order to ausage the feelings of the nation, these moneis should be returned back ONLY AFTER 10 /15 yrs. AND WITHOUT ANY INTEREST or any sort of appericiation to the amounts so brought in.
    Thanks Damani

    Like (1)

    nrhk

    Mar 12, 2012

    Talking about swiss bank accounts is a fools hobby. There cannot be another easy method to identify the fools. As far as I understand, there is nothing such swiss banks do to hid e others money. They are nameless number denoted public accounts. We insist on alphabets as name, they use number for denoting names. Show them good interest rate and safety for money earned by them from the loopholes of legislation and business opportunities opened to them. Even in INdia also there are accounts in benami names. why isolate switzerland.

    Like (1)

    Nutan Tawakley

    Mar 12, 2012

    The present fiasco is not a problem which has come up in a short time period. It is a built up of non governance over the entire period of India's independence that is 64 years. If one digs out figures from the records it would be clear that Indian governance is LEAST interested in making India prosperous. Not to talk of removing poverty and such high thinking fancy goals which in reality are not on the agenda of the Indian governance at all. The results are there for all of us to see.
    While even small nations around the world have made big strides in their economies, have given decent life to their citizens Indian governance is still groping in the dark and is unable to find solutions to such grave problems as inflation. While the solutions are straight forward the governance keeps fooling the people with beating around the bush and not hitting the problems on their head.
    Their is not one measure but a series of long term measures which need to be taken. But as India is perpetually engaged in elections after elections there is no time for the governance to govern.

    Like (1)

    Naval Anklesaria

    Mar 12, 2012

    Any Money, Black or White which has gone out of this country illegally without paying tax should be consfiscated and brought back and should be put to best use for the upliftment of various government schemes. Also put all those people involved including Ministers & others under severe survelliance and all their income should be monitered by IT Commissioners themselves. Their names should be disclosed in all prominent newspapers so people also can punish them. Wish our wise Prime Minister and the President of India has the guts to do all this?

    Like (1)

    R. NAGARAJAN

    Mar 12, 2012

    Knowingly or otherwise, we have allowed - nay! abetted - in the past stashing of our wealth away from the national kitty. Even when we seemed to address the malady with Amnesty Schemes in the past, it was an half-hearted attempt inasmuch as no serious follow-up measre was taken to punish those who still remained obdurate with their ill-gootten wealth.

    Having that thought in mind, I feel that in the larger interest of the Country at this juncture when for economic growth we need to put in place an efficient multipotent infrastructure encompassing all economic growth drivers, IT IS EXPEDIENT, HOWEVER ABNOXIOUS, TO DEVICE METHODS TO BRING THE HUGE ILLEGALLY HIDDEN WEALTH BACK INTO THE SYSTEM. AT THE SAME TIME MEASURES MUST - REPEAT MUST - BE EFFECTIVELY INTRODUCED AND ENFORCED - REPEAT ENFORCED - TO ELIMINATE THE REPETITION OF PERMITTING HOARDING OF BLACK MONEY.
    THIS REQUIRES POLITICAL COURAGE AND UNEQIVOCAL COMMITMENT BY LEADERS TO ENSURE WHAT IS MOST DESIRABLE.
    DO WE HAVE SUCH LEADERSHIP IN SIGHT IS THE MILLION DOLLAR QUESTION. WOULD THE INTELLIGENTIA RISE UP TO THE OCCASION?

    Like (2)

    Kranthi Mark

    Mar 12, 2012

    Media & speakers talk a lot about getting back Black Money to India from overseas !! Its a foolish thing to talk and discuss ?? Yes the money which is there in the swiss accounts is a highly confidential jurisdictions and laws of local soil is stringent and European banks at the present stage won't amend their laws to release the money or atlest the info !!!. What Indian government was doing when this money was flown to overseas jurisdictions , they were sleeping ??. its a futile discussion or for some self satisfaction you can promote this discussion . Atleast Authorities and Federal bodies shuold focus to areas and loop holes to curtail illegal money from now . If we can control black money for 10 years starting fom now . Will make lot of progress . Every one is discussing about bringing back the money ! which is not possible , they need to discuss how to eradicate black money which is very much possible !!. Without proper controlling and stingent structure if they bring back the black money to India also ... it will definately lead to one more BIG scandle...

    Like (2)
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