Shocking! 5% of India's growth drained every year - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Shocking! 5% of India's growth drained every year 

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In this issue:
» These companies could land in trade-for-trade share basket
» What's common between Reliance Petroleum & Rajat Gupta?
» Poverty in South Asia worse that sub-Saharan Africa
» Should governments make provisions for natural disasters?
» ...and more!

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    In his latest expose yesterday, India Against Corruption activist Mr Arvind Kejriwal targeted some big corporates for allegedly stashing away black money in Swiss bank accounts. Whether his allegations are probed into, proved or disproved is a different matter. But the truth remains that the problem of black money exists.

    A few basic questions before we go further in our discussion. Do we as a country really think black money is a serious problem? This question may seem outrageous to some. But the fact is that a majority of Indians see no harm in finding ways to understate their incomes to save taxes. The most common justification is why give away the hard-earned money to a government that is embroiled head to toe in corruption. Moreover, what big difference would it make if an average middle class income earner doesn't pay full taxes? The problem is that almost everyone thinks the same. And when that happens, we have a black economy whose estimated size is about 50% of the country's GDP. As per Prof. Arun Kumar, professor of economics at Jawaharlal Nehru University, the size of the black economy is estimated to be about Rs 32-35 trillion. Mr Kumar, who has also authored the book 'Black Money in India' points out some more startling facts.

    In his words, "At least $70-80 billion goes out every year. The cost of India's black economy is 5 percent of GDP growth sacrificed every year since the mid-70s. But for this, India's size of the economy would have been US$ 9 trillion."

    These numbers are shocking! Of course, it would be close to impossible to pin-point the exact size of the black economy. But it is beyond doubt that had there not been a parallel economy driven by black money, India's economy would have grown much faster with less income inequality.

    Let us explain what black money really does. One of the major consequences of black money is a high fiscal deficit. This in turn reduces resources which could have been channeled towards building better physical and social infrastructure. It also hinders the effectiveness of fiscal and monetary policies. The worst fallout of tax evasion is that a lot of resources get diverted into wasteful and unproductive assets such as gold, real estate and Swiss bank accounts. In other words, investments that could create employment and facilitate economic growth in the economy are curtailed to that extent.

    Essentially, black money is one of the root causes why our country is still poor. It is responsible for the high inflation, for the hysterical rise in real estate costs, for poor state of education, healthcare, water and sanitation. The list is long. Much longer than the alleged list of 700 Indians with Swiss bank accounts!

    Do you think India's government will take any steps to bring back black money stashed away in Swiss bank accounts? Let us know your views or post them on our Facebook page / Google+ page

    01:35  Chart of the day
    The problem of poor liquidity and price manipulation by big investors may soon be a thing of the past. In 2010 itself, the Securities and Exchange Board of India (SEBI) had directed listed companies to have at least 25% shareholding. The deadline was later deferred to June 2013. Public sector entities need to have minimum 10% public holding by August 2013. At the end of quarter ended June 2012, just 16 listed PSUs and 200 private sector companies had public shareholding less than 10% and 25%, respectively. Today's chart of the day shows five major listed entities that are still non-compliant with the minimum public shareholding guideline. In order to prohibit companies from evading the law, the SEBI has planned to shift non-compliant stocks to 'trade-for-trade' basket of scrips. Stocks in this segment have to be backed by compulsory delivery of shares. Besides, these shares are not part of the futures & options segment. Hence, investors tend to avoid them. Not wanting to meet such a fate, promoters, including the government may approach markets soon for diluting their shareholding. Thus, by mid of next year, the primary and secondary markets may see a flurry of activity. Investors though must be very careful and selective about the stocks they wish to invest in.

    Data source: The Economic Times

    Instances of insider trading are not new in Indian stock markets. In several instances even the promoters of companies have been found to be colluding with big brokerage houses. But no implications on the lines of the Rajat Gupta case have so far been witnessed in India. While in some cases the defaulters went scot-free. In others, the guilty were subject to sentences that were not formidable enough. Once again a Right to Information application has brought this legal shortcoming to the fore.

    The Central Information Commission has directed the Securities and Exchange Board of India (SEBI) to name those allegedly involved in the insider trading of Reliance Petroleum shares. This instance dates back to 2007 just after the company debuted on the bourses in 2006. While SEBI has been investigating the issue, little information has been made public. We believe investors especially retail ones have the right to such information. Only then will companies refrain from indulging in practices that tarnish their image.

    Growth in itself should ideally mean an increase in income levels. But if this were true, it should also mean that the number of poor must come down as growth increases. Unfortunately this does not seem to be the case with South Asia. The region has been a growth powerhouse in the crisis-stricken world. At a time when developed countries have shown all signs of recession, the region has dished out spectacular growth numbers. India and China in particular have been the major drivers of this growth. But the growth has not resulted in alleviating its people out of poverty. A shocking statistic printed by the Mint shows that the number of people in extreme poverty in South Asia is more than that in sub-Saharan Africa. One wonders as to what could be the possible reason for this

    One reason is the growing income divide. The poor are just becoming poorer while the rich are becoming richer. This is on account of the skewed policies in the countries. Another reason behind this is the lack of gender participation. At the same time, social progress in these countries which comes out of secondary education and acquiring skill sets has severely lagged behind. Combine these factors and it dishes the perfect recipe for this horrible income divide. The only way to overcome this is for the policy makers to realise that the problem lies in their policies. Policy reform is something that has been screamed ad-inifintum in countries like India and China. Though they have undertaken some reforms on the industrial side, it is equally necessary for the reforms to be made on the social side as well. Otherwise the number of poor is just going to keep going up.

    Provisioning is an interesting concept. It involves setting aside a small sum of money each year so that the impact of any big financial loss in the future can be minimised. The super storm Sandy that lashed US shores early this month has underlined the importance of the need of a certain another kind of provisioning. The provisioning against natural disasters that is. There is a theory doing the rounds that natural catastrophes will happen with even greater frequency going forward. Thus, finance ministries in their respective countries should review their budgets taking into consideration the issue of climate change as well. This means finding funds to strengthen the infrastructure today so that future losses from climate change could be prevented.

    There is certainly no doubt about merit of this argument. But it all rests on the assumption that weather patterns have indeed gotten unpredictable. This may or may not be the case though. It has not been proven with 100% accuracy that weather patterns are indeed changing.

    Yes, human greed has certainly caused damage to ecological balance of our environment. And we will be better off tackling this menace rather than preparing for something that has not been fully proven.

    The past week was a poor one for global markets as all the key markets witnessed declines on a weekly basis. The negative sentiments surrounding the global markets had a lot to do with the fiscal cliff concerns that are looming in the US. Concerns over Europe's debt levels also continued. However, the rebounding economic data released in China gave some relief to investors towards the end of the week.

    The Indian share markets were the top performers amongst their global peers. The benchmark equity index - the BSE-Sensex - declined by 0.4% only. Hong Kong and Japan were amongst the top underperformers this week with declines of over 3% each. The US and China reported weekly declines of over 2%. Singapore and France dropped by about 1% each.

    Data Source: Yahoo Finance

    Coming to the performance of sectoral indices, stocks forming part of the realty sector led the pack of gainers. Stocks from the defensive sectors - FMCG and Healthcare - followed suit. Capital goods and oil and gas sectors were amongst the top underperformers with their respective benchmark indices down by about 2.2% each.

    04:50  Weekend Investing Mantra
    "A company will be successful if it offers good products and services at a fair price while being run by honest, capable managers. Over the long run, such companies tend to appreciate and go up in value." - Warren Buffett

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    16 Responses to "Shocking! 5% of India's growth drained every year"


    Nov 20, 2012

    @Jayanth, Congress history is replete with power thirst and deception - used Mahatma Gandhi's skills to gain power as INC didnt have public support, stole his name for vote politics, brought several influential educated groups like muslims, christians, tamil brahmins and sikhs to a state of abject beggary till they deserted the country, that one can only marvel at our collective lethargy in not realizing this for 6 decades!!!

    In a democracy, people get the government they deserve, and it's a sad home truth that we have repeatedly chosen to be enslaved by worse exploitation than even colonial powers could be??

    The bigger question is, can we change together, and do something constructive about this horrible state of affairs. Our children will not forgive us if we dont.



    Nov 18, 2012

    very fine



    Nov 17, 2012

    The govt will simply find new ways of wasting money on some ill conceived so-called "social program" that neither build infrastructure nor generates stable long-term employment. The only real solution is to drastically cut the govt size and its involvement in private enterprise. Imagine the amount of extra funds flowing into the economy if our taxes were being used judiciously instead of being squandered on programs that are put in place only to "bribe" the public to garner votes.

    Like (2)


    Nov 12, 2012

    The chick came first or the egg came first. This is the case with Black Money. Black Money created the corrupt political system which in turn generates more black money or the corrupt politicians started the creation and the further generation of black money. Ultimately the corrupt political system, corrupt judiciary and corrupt bureaucracy makes the common man to think whether my taxes are put to right use. Especially when one see the number of scams. Therefore we are now in a vicious cycle phase of black money. One need a drastic step taken by absolutely uncorrupted group of people who will lead the nation. Which is just impossible. Therefore we learn to live this evil along with other evils like corruption, exploitation and what not. We Indians are now like zombies and it do not shock him/her that 5% growth draining.

    Like (1)

    Sanjeet Ghosh Moulic

    Nov 12, 2012

    Merely blaming the Govt for the steps not initiated to bring back the money stashed in the Swiss bank accounts will not be proper.
    The Govt agencies, dealing with public money, like the RBI must put in place, measures to track and stop money-laundering, which also results in siphoning of illegitimate funds.
    These kind of "Firewall"s will ensure that those citizens who are involved in the activity are disallowed such transactions, at least on an interbank /wire transfer basis.
    People who continue to do all this despite such tracking mechanism should be booked under the National Security Act as money-laundering leads to movement of money across borders, and such monies are made to appear legitimate even though the majority of them are not. Most of the terrorist activites are funded through such funds and in the event of any terrorist attack, it is very difficult to ascertain the source of such funds, which mostly are done through money-laundering !!!

    Like (1)

    Govindaswamy Dhayalamurthy

    Nov 12, 2012

    As brought out the corruption in India is from head to nail.
    There wont be a better jock than hopping that Govt will take action against black money. Unless we educate our people and avoid electing corrupt people to run the Govt there is no chance.

    Like (1)


    Nov 11, 2012

    Black money is generated from two sources a)Corruption by those enjoying power and b) by the individual earners.While the B) source can only be curtailed through realization of ethical values in life and soul searching and dispensation of unnecessary greed of the individuals,which is hard to achieve in today,s life style.It is the a) category which can be curbed through transparent governance and harsher punishments.In this regard Anna Hazare and Arvind Kejriwal needs to be strongly backed and I perceive that required changes are around the corner with relentless efforts of these individuals.

    Like (1)

    sharad sharda

    Nov 11, 2012

    It is altogether futile to expect that Govt. of India will ever take steps to reduce black money. It is rather not possible in India, till a provision of summary trial and severe punishment including life time imprisonment is made in law applicable equally to political leaders, employers, employees, industrialists, Govt. officials and so on so forth like in Singapore for violation of law or non-compliance of Govt. orders. If Singapore can digest provision of heavy penalty, for example, on parking of a vehicle in a No Parking zone or spitting on roads, why not it can be applicable in India, but for that political will is needed, which is very hard to create for vested interests of most of the political leaders. In India, it is rightly said nobody fears of law. Till it is done, nothing can be expected.

    Like (1)


    Nov 11, 2012

    It is impossible that any govt, irrespective of combination of different parties at the centre, will take even the slightest initiative to bring back black money in the national stream. Thousands of Kejrivals will also not be in a position to force any govt to do it. It is only the people coming on the street and forcing violently for change in the system, that a part of black money many be brought back. This is impossible for the next few centuries as we indians are a bunch of stupids.

    Like (1)


    Nov 10, 2012

    It is unrealistic to expect guys who have stashed away loot to voluntarily bring the black money back. In other democracies of West there is semblance of accountability and the bureaucracy is independent. Alas in India political parties, media, bureaucracy are in cahoots and so the Government brazenly says they cannot even reveal names on the list supplied by foreign governments let alone trying bring the money back

    Like (2)
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