Artha kranti presentation-with-description

Vision: Given a choice, who would not want to live prosperous and peaceful life, in principled way !! If we have a system, where there is abundance of capital (money) with easy access to the same, everyone will have opportunity to focus on more valuable goals, the real prosperity. People will act out of a “sense of abundance” rather than fighting out of a “perspective of scarcity”. If, benefits of “following the system” are much higher than - the earnings and risks associated in escaping the system - more people will “follow the system” & enjoy the benefits of honesty rather than taking ethical & legal burden of escaping it. With an abundance of opportunities and inherent benefits for living in a principled way, harmonious way of life will be but natural. We believe that Arthakranti is a key and a leveraging step towards a system, where ‘Principled, Prosperous & Peaceful Living’ will be enabled. Then, we as citizens and as a nation will not only get strengthened internally, but will also get our deserved position on the world map. And then we can really walk further on path of progress, crossing all the boundaries and constraints, to realize our deeply held core values in the form of ‘Vasudhaiva Kutumbakam – The Global Family hood’. Mission: India’s Economic Rejuvenation Arthakranti (‘Artha’- Economic; ‘Kranti’ - Revolution) proposal, which consists of technical corrections in our current economic system, is aimed at India’s economic rejuvenation. By economic rejuvenation we mean a transformation leading to an abundant capital formation with credibility for all. Thus moving from “current state of scarce & costly credit with accessibility for only a few favored” - to - “increased and wide spread banking system, facilitating credit registration for all in the mainstream economic system, providing them an easy access to credit at a low cost”. One strong economy – Merging the parallel economy (based on black money) into the mainstream legal economy, resulting in removal of hidden and sudden obstacles not only for citizens but also for the government; thereby offering an effective steering to the government. Adequate revenue for effective governance at all government levels – Eradicating complex, uncertain, inequitable taxation to bring in a wide spread net of simple yet productive, efficient and a certain taxation. Twofold effect: Empowering government at all levels (local, state and central) on one side and relieving people from heavy tax burden on the other side. Arthakranti Proposal will complement, strengthen & synergize the efforts in specific areas by individuals, NGOs etc., resulting in a holistic approach to think and act beyond the current social & economic issues.

Social Reality: Our nation is like a huge ship sailing in the middle of the sea. Just when it looked like sailing smooth, it hits a hidden rock suffering damage causing water to rush into the compartments from the bottom. All of us, irrespective of the class to which we belong, have boarded the ship with a valid and bought ticket. The bottommost Unorganized Class is in panic, running around, screaming for survival. The only way is to move upwards. The Organized Class sleeps behind closed doors, feeling secured with pensions, insurance and provident funds. They do hear an odd scream but pretend not. The Rich and the Elite Class – the blessed few are up enjoying the view. They don’t even know that the ship is taking water in. But this ignorance, real or fake, will not stop any of us from sinking in the worst scenario.

Economic Reality: Let us see our economy as a multi-storied building. The overhead water tank represents the Government Treasury. The floors from top to bottom are the various government expenditure heads in order of priority. There are pipes carrying water down from the overhead tank to each floor – on many floors, their taps run dry. On investigating, we realize that more than half the overhead tank is empty – and the lower levels will not get any water unless the tank fills completely. This gap in the overhead tank is the Fiscal Deficit . We check the reservoir on the ground and find that it does contain a lot of water. The pump is also running at full speed. The pipes, carrying water up into the overhead tank – representing the taxation system - are so impossibly twisted, choked and corroded and are holed at many places. As a result, a lot of water is leaking out of these pipes and that is why the overhead tank is not getting completely filled. And all this water flowing out of the pipes - meaning - evading the taxation system is the Black Money . It is accumulating outside the building. Though it started out as a small muddy pond, today it has assumed the massive proportions of an ocean. This is what is the Parallel Economy . At some point, a common man gets too thirsty to wait any longer and has no other option but to pick up his bucket and go to the muddy ocean outside. This ocean water is dirty and swarming with all kinds of dangerous germs – but we have no choice, do we? An outdated taxation system encouraging evasion and fuelling the parallel economy, a perpetually cash-strapped government, reduced social expenditure causing suffering for the impoverished millions and unfavorable conditions for business and industry… That then is the Economic Reality of our beloved nation…

Effect of Fiscal Deficit on Local Industry: The fiscal deficit leads to restricted government spending on infrastructure e.g. power and water shortages, bad roads, inadequate railway network, grossly underdeveloped ports and so on. This, in turn leads to an uncompetitive local industry. On the other hand, the fiscal deficit restricts subsidies to be given for agriculture, on which most of our rural economy is based. As the Agriculture Sector fails, rural purchasing power is directly affected and as a result, from our large rural economy, there is very little demand for goods and services. This also hits the local industry. The government seeks to fill the fund gap with foreign investments – but these come at a price. As borrowers, we are obliged to accept the investor’s interests as paramount, and that is usually at the direct or indirect cost of the local industry and trade. Finally, the combined effect of all these three factors causes a lot of local businesses to fail, causing high unemployment. And high unemployment leads to social insecurity.

Effect of Fiscal Deficit on Credit Cycle & Government Revenue: We are now so used to the fiscal deficit, that we have accepted it as a fact of life. Our budget is a deficit budget. Some common measures taken to bridge the deficit have an inflationary effect. The natural response to inflation is hardening of the credit policy. As credit gets scarce, lending becomes tighter. Instead of aiding credit creation and expansion, banks tend to conserve their funds and become very selective in their lending. As a result, the economy starves for capital. The direct impact is on business growth and the GDP growth slows down. As the business environment worsens and cash flows dry up, a lot of businesses fail and many loans become non-performing assets – that is, they become ‘bad loans’ and have to be written off. This is a direct loss for the banks, so they tighten lending norms even more – and the cycle goes on... Failed businesses mean unemployment and social insecurity. The overall poor economic activity results in reduced purchasing power and therefore low demand, further slowing down the GDP growth. Reduced growth means less revenue, which means the fiscal deficit continues.

Effect of Internal Borrowings on Fiscal Deficit: The shortage of funds leads to internal borrowings. With the given shortage of tax revenue, these funds borrowed internally are used for non-developmental expenditure – such as repayment of debt and interest on debt. And the fiscal deficit continues…

Effect of Fiscal Policy & External Borrowings on Credit Policy & Banking System: When the Government enters the market with an eye on mobilizing and attracting people’s savings, it has advantages which no bank can ever hope to match. For instance, Government can offer: tax rebates and exemptions along with high interest rates. Banks can compete in this struggle only by offering even higher interest rates on the deposits. Result? Obviously, bank lending rates go higher – since the bank’s survival is linked to the difference between borrowing and lending rates. Finally, the Indian citizen is stuck with some of the most expensive capital in the world. On the other hand, external borrowings directly eat into the business potential of the local banks. High interest rates are rendering our banks uncompetitive globally.

Effect of Fiscal Deficit on Disinvestment Policies & Reduced Social Spending: When all means of borrowing and revenue generation still prove inadequate to wipe out the fiscal deficit, there is no option left but to disinvest - sell valuable assets, such as Public Sector Units. Vast industrial assets created out of hard earned money of three generations of taxpayers are sold to the Private Sector. As a result, Government Control is lost on the pricing of several essential commodities such as oil, medicines etc. This has a direct impact on the purchasing power of the weaker sections of society. Another aspect of disinvestment is the inevitable downsizing of manpower, which is actually a threat to organized employment. Finally, the combination of fiscal deficit and the pressing need for investment in infrastructure has led to the birth of the ‘Public-Private-Partnership’ concept. In simple words, it is nothing but the government using its powers to allow private companies to build infrastructure and then recover their investment with profits from the general public for the next two or three decades. Adverse impact of such ‘Public-Private-Partnership’ is also felt greatly by the weaker sections of society.

Effect of Fiscal Deficit on Anti-Social Industries: This is difficult to believe, but it is an unfortunate fact that in its desperation to raise funds, the Government actually promotes many anti-social businesses! For instance, the sale of Gutkha and such other harmful products have a direct ill effect on public health and destroy families, but it is overlooked because it is a major source of revenue. Then, the government actually runs lottery schemes and encourages gambling – purely for the revenue that it generates. As a result, millions of able-bodied youth are addicted to this state-run gambling. Lastly, the government gets huge revenues from the indirect taxes levied on petroleum products such as petrol and diesel. Therefore, instead of investing in and promoting large mass transportation systems, the government encourages the automobile industry and cheap cars. Every litre of petrol sold means more revenue for the government. Unfortunately it also means increased dependence on imports and more losses to subsidize, and that defeats the whole purpose of stimulating the sale of petrol in the first place…

Effect of Fiscal Deficit on Credit Cycle & Farmers’ Suicides: On one hand, the hard credit policy and shortage of funds is strangling all economic activity. On the other hand, because of the negligible use of the banking system in rural India, farmers have almost no credit registration and therefore credit history. As a result, most of them are simply not in the reckoning for disbursal of loans through the formal banking system. So what options does a farmer have? The local moneylender, of course. At exorbitant and unfair interest rates - but at least it is available. Unfortunately, such borrowing is usually impossible to repay, and usually ends in a tragedy. Farmer’s suicide… Is it so difficult to understand now, why more than one hundred and sixty rural districts are in the grip of the Naxal movement today?

Effect of Taxation System & High Denomination Currency: Every year, the fiscal deficit triggers a fresh bout of tinkering of the taxation system. Rather than any real analysis and corrective action, incremental and superficial changes are tried on the same old failed system. Years of such tinkering has resulted in a completely flawed taxation system, which naturally encourages evasion. High denomination currency of face value 100 Rs. and above, is introduced to bridge the deficit. Let us take a look at the effects of this currency. The basic advantage of high denomination currency is that it makes high value cash transactions easy, since a large amount can be carried with great ease. In addition to this ease, cash transactions are by definition, non traceable, since unlike in the bank, they leave no footprint. These properties of high denomination currency make it the preferred currency for storing black money created out of tax evasion. It also enables corruption and serves as the life blood of the parallel economy. The other terrible consequence of high denomination currency is grossly reduced use of the banking system in vast tracts of our country. The direct result of this is the poor credit formation and inadequate capital supply to the economy. Corruption and the breakdown of formal systems of governance together fuel further social insecurity. The prevailing high cost of capital and the flawed taxation system, together lead to high input costs, rendering our local industry uncompetitive and leading to more unemployment.

Highest three denominations account for 91 % of the total currency money while 78% of our population earns Rs. 20 or less a day.

Current Taxation System: Characteristics of the Current Taxation System in India: Narrow base and limited coverage of direct taxation Direct to indirect ration is 40:60 Inequitable and hence regressive Non-Productive & irrational nature Uncertain Inelastic Uneconomical Complex nature of taxes Tax laws open for interpretation

Direct Taxes [e.g. Income Tax]: A Few in Number, Visible and Proportional to Income while, Indirect Taxes [e.g. Excise Duty, VAT]: Plenty, Heavy, Invisible and Same Irrespective of the Income. For example, Cost of Petrol is same for a Mercedes Benz Owner and an Auto Rickshaw Owner, meaning, Indirect Taxes Burden the Poor, making their life difficult. Because the whole tax is collected from only a few, they get heavily burdened while others, though able to carry a portion of the tax burden, actually carry NO tax burden

Deficit Budgets, Year after Year at all Government Levels [Central, State and Local] Tax Policies Changed Every Year, So also the Exemptions, All Such Changes Oft and Unpredictable Therefore, Long Term Planning of the Businesses and Industries Impossible

Quarterly/Half-Yearly/Yearly Tax Collections Sheer Variety of Taxes and their inherent nature of being Open for Interpretation leaves NO Scope for Elasticity Where is the scope for changing the taxes for a small amount of time to see immediate effects in the tax collection? Large Number of Taxes, Corresponding Huge Machinery of Tax Collection and therefore associated Huge Cost of Tax Collection

Both the Government and the Administration are literally Injecting the [Tax Collecting] Needles anywhere and everywhere possible even in a willing Tax Payer Yet the Collection is Inadequate and the Leakage a Lot! This is what is Black Money! Even the Best of CA’s would not dare to claim that they have understood a particular Tax Law Fully! Ambiguity sort of Inherent in the Tax Laws Subjective Nature of Tax Laws Discretionary Nature

Weak Banking System: The role of a banking system can be compared to the blood circulatory system within the human body. Just like the blood vessels carry the essential nutrients to all the parts of the human body, the banking system is expected to supply the " money capital" to all the individuals and the institutions. Role of Capital in the economy is like that of the blood in the human body. As blood carries required nutrients to the individual cell, capital promotes productivity in an economic system. Any disorder in the circulatory system leads to a disease in the entire body. In the same way, a flawed capital creation and distribution system has an equally debilitating effect on the economic system. The key causes for the current state of the banking system are: • Ease of cash transactions due to the availability of high denomination currency notes. A related fact : Highest three denominations account for 91 % of the total currency money. • A flawed taxation system compounding the situation by encouraging tax evasion and thereby leading to generation of more black money • Out of the total transactions happening in the economy only a small percentage is routed through the banking system • The number of customers having credit history is very small • Ever shifting economic and banking policies of the government lead to everyone preferring cash transactions rather than banking transactions

Withdrawal of high denomination currency and a cap on cash transaction amount render high value cash transactions impractical. This will direct most [high-valued] transactions through the banking system. As the Bank Transaction Tax will be collected on each bank transaction while the total banking transactions grow, there will be a consequent multifold rise in government revenue at all levels.

Money used for all day-to-day transactions is termed M1 or Narrow Money . This is nothing but the sum of total Currency Money in circulation and all the derivative deposits, that is, the total Bank Money created through credit expansion. We have an M1 of Rs. 11,00,000 Crores in 2008-09. Now look at the left hand column in the chart. It shows the total revenue of the Centre and all the States taken together for 2008-09, and we see its composition as a sum of revenue receipts and capital receipts, amounting to Rs. 16,46,000 Crores. Out of this, revenue receipts are about Rs. 10,17, 000 Crores. After implementation of the ArthaKranti Proposal, all high denomination currency which makes up 91 % of the total currency money would be deposited into banks as primary deposits. Thereafter, this money would be ‘white’ in every sense of the word. Moreover, the old taxation system would have been replaced by the simple and almost negligible Bank Transaction Tax. Since there would be no reason or incentive to evade, the money would start moving freely within the system – for consumption, investment or into savings. Whatever the purpose, every transaction would generate a Bank Transaction Tax. Assuming that only 20 percent of the Narrow Money moves through banking system once every day, the tax revenue generated over a year for the Centre and all the States together would be Rs. 10,44,000 Crores plus Import Duties, as against the Rs. 10,17, 000 Crores all inclusive yielded by the existing taxation system. By the same logic, the revenue yield for a transaction ratio of 40% would be Rs.20,88, 000 Crores, for a ratio of 60% it would be Rs. 31,32, 000 Crores And for 80% it would be Rs. 41,76,000 Crores! These estimates of revenue are extremely conservative as well, since they have been made using the M1 as a fixed number, whereas M1 is essentially a dynamically changing number. As the primary deposits start moving, they will start creating derivative deposits and this will send total M1 upwards with every transaction! What this means is that the notional tax rate of 2% will not be required – the actual tax rate to fulfill our needs can be less than 1% !

The actual cheque clearances in Mumbai region in 2007-08 amounted to Rs. 36,85,400 Crores. Share of the local government at the rate of 0.35% as proposed, would generate a revenue for Mumbai Municipal Corporation to the tune of Rs.13,000 Crores, as compared to Rs. 8,550 Crores collected by the present system through dozens of taxes, duties and octroi. It is therefore obvious that by shifting the tax base from entities and goods and services to bank transactions, it is possible to generate a tremendous amount of revenue, without stressing out the tax payer . This is not a miracle – it is sheer arithmetic. All we are doing is shifting and increasing the tax base exponentially - thereby reducing overall incidence of tax on the citizen. The government will have abundant funds and the leaking taxation system will be repaired, rather, inexistent. Government debts will be repaid on priority. The Fiscal Deficit will become a history. These two factors will empower the Government dramatically and we shall see massive changes coming in. Overhaul of the taxation system will simplify collection of revenue beyond imagination . This is already a proven fact – in the last financial year, the Government collected almost Rs. 9,000 Crores without any paper work and hassles through the Securities Transaction Tax alone. Collecting that much money through the other taxes would entail back-breaking paperwork, wouldn’t it?

This mode and associated ease of collecting the revenue will practically finish all opportunities for corruption. There will be no incentive for generation of Black Money thereafter. Rather, it is technically impossible to generate Black Money in the Proposed New System. This will have a direct and immediate impact on all anti-social and anti-national elements. Their purchasing power will be destroyed forever and all subsequent movements will become traceable through the banking system. The menace of fake currency will be brought to an end once and for all. All this will effectively paralyze enemies of society and the nation and the process of restoration of social security will begin.

As a part of the Bank Transaction Tax goes to the bank itself as a fee, banks will have an independent revenue stream. As a matter of fact, their revenue model would change completely and the abnormal importance of interest rates would come down. As a result, interest rates would come down to globally comparable rates, and the Indian Banking System would prosper in the global arena. Low interest rates would mean cheap and easily available capital. The resulting increase in purchasing power of society would result in a direct increase in the market demand. This in turn would stimulate industry and trade and generate employment opportunities in large numbers. This would be a very important factor to reduce unemployment and restore social stability and security.

The abolition of indirect taxes would bring down prices of all goods and services to unimaginable levels – take a look! This would directly liberate a huge amount of purchasing power and further boost the market demand. The abolition of taxes on income per se, would remove the need to manipulate books and show losses or small profits. The focus of every business would shift to quality excellence and creative innovation, which in turn would greatly increase the competitiveness of Indian goods in the global markets.

Abundant revenues would finally enable the government to support and revive Agriculture with direct subsidies. Major investments in infrastructure projects will ensure that these measures become effective and sustainable. The process of restoring social security will truly take root only when the Agriculture Sector comes alive and millions of citizens depending on it become self sufficient. When massive amounts of money come into the system and start moving around without any inhibiting factors, the possibility of runaway inflation is a genuine concern. However, since all these transactions will be conducted through the banking system, tools of control such as SLR will be truly effective and can be used to regulate money supply. Other measures like diverting large amounts of this money to infrastructure bonds can also be considered. This would in turn kick-start many long overdue projects and further boost the economy. Another important head for expenditure would be State funding of elections and Political System at all levels. This is extremely essential to cleanse the Political System and will help attract more and more qualified and upright young citizens towards electoral politics. The process will lead us towards a firm and effective governance and finally social security will be truly restored in India.

The Strategy for ‘Artha Kranti’ implementation The sheer simplicity and clarity of the ArthaKranti Proposal enables us to have an equally clear view of the path to its implementation. It is obvious that: This proposal can only be implemented by the Central Government It does not need any Constitutional Amendment It can be passed as a Finance Bill, as per established practice, by a majority of Members of both houses of the Parliament and finally approved by the Hon. President of India This understanding helps us in clearly seeing the challenges ahead. “ The Artha Kranti Economic Reform Bill” So how do we, the citizens, get our parliamentary representatives to take this up? This is the most commonly asked question. The challenge can be cracked with a two-pronged strategy. Vertical Thrust: An ‘upward’ effort which involves reaching out to politicians, business leaders, people’s representatives, bureaucrats, economics / policy experts and all such influential people or institutions with the sole objective of ‘sharing’ – ‘educating’. We have started acting in this direction and made presentations before - some MPs, some influential & respected people - by now and we are getting a good reception and response, may be because hardly few people approach them with solutions. However we are not finished on this way, we all need to ensure that our respective MP is aware of the ArthaKranti Proposal and its importance.

Horizontal Thrust: When MPs and experts become aware of this, even then, why will they take it up? When a product is to be sold, what is necessary is the demand for the same. Similarly for Arthakranti Proposal – many people should demand it. Its need is very evident looking at the so many prevailing social and economic issues around us. Since the Arthakranti Proposal provides a concrete, time-bound, assuring solution, such a demand alone would make it happen. We can raise the demand in various ways as A nationwide mass awareness campaign run in at least all major languages, using tools such as books, CDs, films, website, internet and so on A nationwide advertising campaign run professionally, harnessing Tele Vision and all other powerful media to generate awareness about our problems and the solution By spreading the message to as many people as possible, by conveying them the subject and its importance and also conveying what they can do about it Sending your respective MP the “Citizen’s Charter of Demands” This simple one page document [Citizen’s Charter of Demands] will convey the citizen’s needs to the political class in the most legal, peaceful and lucid manner. All one has to do is to sign it and send it or hand it over to the local MP. Even if 1% of people raise demand, the representatives cannot disregard it. So the sure-fire way to generate public pressure is to shower our political leaders with the ‘Citizen’s Charter of Demands’ – which emphasizes our needs. The Vertical Thrust will educate them about the solution (ArthaKranti). Thank You ! www.arthakranti.org

Artha kranti presentation-with-description

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