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Arthakranti v/s Mass Capitalism …Which one is a better proposal for revival of financial sector of economy

As a Preface, This is not a blog meant to criticize the Pune, India based think tank “Arthakranti Pratisthan“. But, Since we are living in interesting times of global economic and political uncertainty, I take this opportunity to show a comparison of the proposals made by “Arthakranti Pratisthan” for getting rid of Black money from India and what MASS CAPITALISM proposes. It will be up to the educated and literate to make a choice which proposal is better. Again, I do not have anything against any of the people from “Arthakranti Pratisthan”. In fact, In August 2015…I have met and interacted with Mr. Deepak Karanjikar in Mumbai, India and he had appreciated the ideas that I had presented in my volume MASS CAPITALISM: A BLUEPRINT FOR ECONOMIC REVIVAL. I also attended his presentation on proposal of Arthakranti at residence of a well known social activist based in Mumbai – Anjali Damania. I shall here give you a side by side comparison of our proposals for elimination of black money and improving domestic prosperity in India.

While Arthakranti wants to change the tax code to bring millions of muslims in India into banking system as there will not be any interest payments on mortgages under their proposal, this would enable muslims in India follow their islamic law of not charging any interest on loans and mortgages by having banking transaction tax.

I beg to differ as I believe INDIA cannot become one country if all religions are allowed to follow their own laws. The law of land should be same for all citizens and it should not change as per religion. Also, In order to procure something for the future, loans and mortgages are needed and without any interest on the borrowed money, there will be no incentive to lend. Mass Capitalism offers holistic proposals to improve consumer purchasing power for all in an economy thereby enabling citizens to pay back their borrowed money in a timely manner. It also has proposals to stop predatory lending of banks which is cause of huge economic disparity in an economy.

Though the demonetization of the 500- and 1,000-rupee notes is widely credited to the Pune-based Arthakranti Prathishthan, the think-tank seems to be distancing itself now from the Prime Minister Narendra Modi’s move. Although the same think-tank had praised Prime Minister Modi for his bold move and admired his style of doing things. ( Please note that I had strongly criticized the actions of Indian Prime Minister Narendra Modi in my blog calling such a move to be poorly planned and executed ). A ticker on the think-tank’s website later said what I had previously stated in my blog that banning notes will not help curb black money and, in an interview to The Economic Times, its founder Anil Bokil has said ‘this is not what we had proposed’—and while saying the government has ‘lost the transition plot completely’, Bokil makes a pitch for his big plan, to scrap all taxes and to replace them with a banking transaction tax.

Whether or not the Prime Minister Modi’s decision to perform operation without Anesthesia was purely to gain some political advantage in front of upcoming elections, I personally believe that MAKE IN INDIA is headed for a disastrous failure (which I had correctly forecasted back in 2015) and Prime Minister Modi might be wanting to distract the attention of common man to show that the government is doing great job for common man. I personally believe that such a Political Stunt by Prime Minister Modi is not only pushing Indian economy into a severe recession but it is nothing less than a Political Suicide as Black Money is certainly NOT going to disappear with his move and as I said in my blog, Black Money would in fact increase in India due to regressive taxation and introduction of Rs 2000 currency denomination. Please read my blogthoroughly and understand it before commenting as I do not write things without a deep thought behind it.

Hence, Now that economic doldrums are on horizon, it is timely to have good ideas for India’s economic revival and given below is a comparison of proposals of Arthakranti Pratisthan and my proposals in Mass Capitalism.

A. Arthakranti proposes Complete abolition of taxes, direct and indirect by the Central or state governments and also the local bodies.

Mass Capitalism proposed to move all taxes towards production of goods. Everything will be taxed at source including raw materials used for production in factories. By doing so, Mass Capitalism gives an incentive to the manufacturer to make use of technology to mass produce and make their goods affordable to the consumer. When all taxes are moved towards production, the finished goods would naturally become expensive but this would be balanced by having no taxes on consumption. Hence, Consumers will have a lot more purchasing power when there are no taxes on consumption of goods.

The tax collection could be higher on corporations under Mass Capitalism but with smaller government due to wholesome economic decentralization, eventually income taxes could be eliminated. Sales taxes would be there on luxury goods as they are generally bought by only the wealthy but all essential commodities would be tax free. There would be an increase in excise duty on tobacco and other hazardous products to curb their usage. However, Any tax breaks have to be balanced so that it does not result in any budget deficits.

In order to avoid the accumulation of black money in domestic economy because of evasion on income taxes, Mass Capitalism proposes that the existing tax structure should undergo following common sense reforms. All taxes should be levied at starting point of production instead of giving tax cuts to the corporations. This would increase collection of tax revenue from corporations and reduce tax burden on consumers. These taxes on corporations should be levied such that all essential commodities should be tax free and by means of levying 10% excise taxes on luxury goods and other excisable commodities, there would be no net loss in revenue collected by government.

B. Arthakranti proposes that the taxes were to be replaced with Bank Transaction Tax (BTT), wherein every inward bank transaction would attract a levy (say about two per cent). It would be a single point tax deducted at the source — the deducted amount would go into the government kitties at various levels (Centre, state and local, broken up in perhaps a ratio of 0.7 per cent, 0.6 per cent and 0.35 per cent, respectively). The bank concerned will also get a share of, say, another 0.35 per cent. Of course, the BTT rate would be decided by the finance ministry and Reserve Bank of India.

Firstly, The percentage of banking transactions of 2% is not fixed and it is bound to vary from year to year. For example, If 2% were to be considered a BTT, then if average monthly banking transactions is Rs. 120 lakh crore then this percentage comes to Rs.28.8 lakh crore. If average combined tax revenues of all branches of the government added up to around R21 lakh crore in FY16, it means that for FY16 the percentage would have to be less than 2%. Now, Even if there is a surplus, it is not guaranteed that for FY17 there would not be a deficit if the BTT is less than 2%. Hence, this BTT percentage cannot be precisely calculated and forecasted, which makes any kind of economic forecasting and planning extremely difficult. One this is certain that if BTT is same on the banking transactions for the rich as well as poor, it would become a regressive tax on the poor than rich as explained in below example.

A poor person puts an amount of Rs 50 into his or her bank account and pays say 2% BTT…then the poor has a balance amount of Rs 49 and pays Re 1 for putting into his or her money. However, A rich person when he puts Rs 2000 pays an amount Rs 40. Given the fact that Arthakranti believes that average daily wage of the poor is Rs 2 per day, for them paying Re 1 as BTT is just too much as compared to paying 2% for a middle class or rich person. This proposal of having a uniform tax across the board becomes regressive for the poor. This is because there is huge income inequality in the economy. Now without fixing the income inequality, Arthakranti calls for enrolling everyone into the banking system and where banks cannot be constructed in rural areas, government is encouraging mobile banking. This in itself is absolutely unsustainable because for mobile banking, consumer needs a smartphone. Not a single smartphone is manufactured in India and trade deficits from imported digital devices is totally out of equation. How does Arthakranti proposes that the poor person who survives on Rs. 2 per day pay fees for the maintenance of his or her bank account.

Mass Capitalism proposes a monetary policy, fiscal policy, trade policy, business models and supply chains that addresses the pressing issue of huge economic disparity across the world. Although it does call for a revamp of present financial industry, it considers financial reforms as much necessary as other reforms in the overall economy. While Arthakranti only focuses on financial sector reforms, Mass Capitalism believes that holistic reforms in other sectors of the economy are equally mandatory.

C. Cash transactions (withdrawals) would not attract tax.

Mass Capitalism has no kind of indirect taxes when all the taxes are levied at the source of production. This way Mass Capitalism also believes in tax deduction but only at the source of production and no taxes on consumption of product. By increasing purchasing power of consumers, Mass Capitalism believes in empowering the consumers to make decisions. It does not believe in giving any doles unless it is a natural disaster. In fact, By wholesome decentralization of the economy, the size of government and business is kept in check ensuring a true free market enterprise. As the size of government keeps getting smaller and smaller as the economy undergoes further decentralization, the income taxes on people can be eventually eliminated under Mass Capitalism. In this way, Once this new free market economic system has been established, government’s intervention into the economy would be and should be MINIMAL.

D. All high denomination currency (anything above Rs 50) should be withdrawn.

Mass Capitalism does believe in increasing purchasing power of consumers. In order to increase the domestic consumer purchasing capacity, Mass Capitalism believes that taxes should be lower on consumers of goods. In today’s economy, huge tax cuts are given to the producers of goods in anticipation that producer would hire more workers and result in better economic growth when these workers spend their wages. However, the revenue lost as a result of huge tax cuts given to wealthy corporations results into budget deficits. Instead if tax cuts are given to consumers, consumers would have higher purchasing capacity and they would invest their wages in buying goods which would generate economic demand. This would force the manufacturer to increase their supply of goods to meet the ever growing demands of consumers.

The role of higher incomes taxes in creation of black money has been explained in my blog. Mass Capitalism believes that by means of minimizing the income taxes on citizens, it is possible to boost their consumer purchasing power. When there are low income taxes on all, nobody would try to accumulate black money to evade income taxes. In this way as black money would be eliminated from domestic economy, all money would be white money. White money would result in less hoarding and increased circulation of money in domestic economy which would result in rise in value of domestic currency as a result of its circulation. This would further drive economic growth and have a multiplier effect on domestic economy.

In order to further this multiplier effect, Mass Capitalism believes that the currency of higher denomination should be gradually withdrawn from the economy. By understanding the root cause of creation of black money to be evasion of income taxes, Mass Capitalism fixes the root cause of the problem. The accumulation of black money in Indian economy in form of Rs 500 and Rs 1000 currency denominations is a result of more and more creation of black money and hence the rising inflation. Hence, It is essentially a symptom and not the root cause. The rising inflation in economy is hidden by means of printing currency notes with a higher denomination. This has been explained in my blog.

E. Government should create legal provision to restrict cash transactions to Rs 2,000.  

Arthakranti does not specify how the government would make a legal provision to restrict cash transactions to Rs 2000. Because, If the government is to intervene in every such transaction then Arthakranti proposal does not fit well into a free market enterprise and hence the proposed size of government would be bigger and its intervention into the economy would be greater.

Since Mass Capitalism believes that the size of government should be small and its intervention into the economy should be minimal. Mass Capitalism does not have any such restrictions on amount of cash transactions as all money that is generated and circulated under Mass Capitalism is white money. In fact, the multiplier effect that is achieved with Mass Capitalism results in appreciation of value of currency and thereby raising the standard of living of all citizens. The appreciation in value of currency would make it possible for government to introduce more currency of lower denominations which could circulate into the economy rather than introducing higher denomination notes which do not broadly circulate into the economy.

Arthakranti believes that just by taking the higher denomination notes above Rs 50 out of the economy would increase circulation of currency in an economy. Such a move is creating nothing but a chaos and slowing down the Indian economy. However, If the government costs of printing the currency itself is Rs 100 then introducing currency notes below Rs 50 will be loss to the government. Hence, First thing is to ensure that financial industry circulates the currency that would reduce inflation and improve standard of living and eventually Rs 500 and Rs 1000 can be removed out of circulation. There is no concrete solution like Mass Capitalism that has been offered by Arthakranti to increase circulation of currency in an economy and as proven previously BTT proposed is regressive in nature.

Mass Capitalism also has other plans to eliminate formation of Too Big To Fail (TBTF) banks to instill confidence in the banking system. Arthakranti has offered no proposal on dealing with TBTF banks.To instill confidence in the banking system, Mass Capitalism recommends that the big banks of any country should be broken down into smaller banks which are co-operatively managed and have exchange relationships amongst themselves in form of a decentralized supply chain. The Central Bank (RBI) should always be controlled by democratically elected government and should enforce a monetary policy so that wages of citizens catch up with their productivity. In order to minimize valueless hoarding of money in Bank vaults and also to minimize price speculation with huge capital by a few, the local government should put a ceiling on bank balances so that sufficient money circulates in domestic economy. This way valueless hoarding would be converted into valuable investments.

Arthakranti does not realize that it would discourage trade because when money is received by trading with a foreign government, not only does Arthakranti propose an import duty on goods but in addition to the import duty the receiving party from India will have to shell out an additional 2% as BTT. This would discourage International Trade and reduce FOREX revenues for INDIA. On the other hand, Mass Capitalism believes in fair trade with a balanced economic growth and eliminate trade deficits. The Mass Capitalism’s approach to increasing trade and thereby boosting FOREX reserves by working with Reserve Bank of India (RBI) have been explained in detail in my blog.

In addition to all above, there would be an increased dependence of finance ministry and RBI to fix the BTT rate. As government will decide the BTT, it will ensure that BTT rate would be high to support bigger government. The tax payers will not have any say in what BTT rate should be. However, In Mass Capitalism, the focus in on local economic development. Hence, local money will be used to sponsor local elections and economic decentralization will keep control on size of government and businesses. Hence, taxes will always be low. Besides, Since economic democracy will enable tax payers to have a say on most decisions and if the government is not working in best interest of citizens the citizens will be empowered to change the government.

The most important feature of MASS CAPITALISM from Arthakranti is that if offers a transition to GOLD backed currency so that Politicians will be out of the financial system forever. Please do watch the 10 minute book trailer of MASS CAPITALISM

GIVEN THE COMPARISON OF TWO PROPOSALS, IT IS FINALLY YOU WHO WILL MAKE A CALL WHICH PROPOSAL IS THE BEST.

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Author biography:

Apek Mulay is a Business and Technology Consultant at Mulay’s Consultancy Services. He has authored a trilogy in three consecutive years viz. Mass Capitalism: A Blueprint for Economic Revival (2014), Sustaining Moore’s Law: Uncertainty Leading to a Certainty of IoT Revolution (2015) and How the Information Revolution remade Business, and the Economy: A Roadmap for Progress of the Semiconductor Industry (2016). His monograph on technology is entitled Improving Reliability of Tungsten Plug Via on an Integrated Circuitry: Process Flow in BiCMOS and CMOS technology with Failure Analysis, Design of Experiments, Statistical Analysis & Wafer Maps (2016). Mulay is author of patent Surface Imaging with Materials Identified by Colors. USCIS honored him with US permanent residency under the category of foreign nationals with extraordinary abilities in science and technologies. He engineer, economist, author, blogger and entrepreneur in an e-commerce business http://Calcuttahandicraft.in . His blog is www.ApekMulay.com

 

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