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Commentary

Why not another black money amnesty scheme?

There’s a liquidity crisis out there, and if I may suggest something: Why not another one of those “declare your black money, pay 20% of it as tax” schemes? It’s stupid but so are bailouts, and isn’t this even better than bailouts? It’s moral hazard – yes.

The amount of black money in the country is obscene – and once we get it back mainstream, it will result in a huge cash cushion for an economy that will struggle through a recession. The tax revenue can offset the costs of a slowing economy – in part, at least – and the extra money coming in can stem a liquidity crisis of gargantuan proportions.

To ensure people don’t think such schemes will happen ever so often, the thing to do is to tighten enforcement so much that people will hesitate to have black money after this. By this I mean serious investigation into all real estate transactions, a tax-push by hiring more agents and consolidating the tracking information they have been collecting. It’s amnesty but there must be a penalty for not taking part.

This won’t help the likes of me – I have no black money because I have entirely been paid by cheque, I don’t own land or property etc. But it will take money from the mattresses back into the economy. And it will definitely help politicians 🙂

  • TempleTree says:

    >I guess majority of black money lies in real estate and gold, luxury cars, … which are all illiquid except gold.

    In bad times like this, will black money really help? I do not think so.

  • Anonymous says:

    >Indian banks might escape the crisis due to black money involved,, When one buys a house he pays 25% black and 75%white, Out of the 75% white, he gets 80-90% bank loan, so a bank exposure is not more than 70%, which means banks are safe even if he defaults, unlike in US. Black money actually helps the economy to sustain at micro level…

  • Anonymous says:

    >Ok,, here is an article in Indian Express

    Mumbai, October 16 : Foreign investors will now have investment freedom in Indian markets. With foreign institutional investors (FIIs) engaged in a ‘quit India’ movement, the Securities and Exchange Board of India (Sebi) has decided to do away with the 70:30 ratio of FII investment in equity and debt respectively with immediate effect. This is expected to give the overseas investors more flexibility in taking investment decisions depending on the market situation. This move, along with the lifting of the curbs on participatory notes (PNs), is expected to result in more inflows in the long term.
    The Sebi move has come after total FIIs’ total investment in listed Indian companies fell by 16.72 per cent from a high of $66.32 billion on December 31, 2007 to $ 55.23 billion on October 16, 2008. FIIs have pulled out $11.09 billion in 2008 as Indian markets joined the global meltdown triggered by the subprime and credit crises. A major reason for the 50 per cent fall in the Sensex this year is FII withdrawals.

    The investment flexibility for FIIs follows the announcement by the Government and the Sebi on Wednesday to increase in ceiling in FII investments in corporate debt from $3 billion to $6 billion. “In order to accord flexibility to the FIIs to allocate the investments across equity and debt, it has been decided to do away with the conditions provided in regulation 15(2) of Sebi FII regulations pertaining to restrictions of 70:30 ratio of investment in equity and debt respectively, with immediate effect. Necessary amendments to the FII Regulations will be carried out in due course,” Sebi said. The FIIs have already shown interest in the debt market and put $1.9 billion in 2008 while they pulled out $11 billion from equities. “In order to maintain the 70:30 ratio, FIIs are forced to sell debt whenever they sell equity. Now they will have flexibility and put their money wherever they want. Many FIIs had complained about this restriction earlier,” said a market source.

    According to the Sebi, the relaxation is aimed at according “greater flexibility to the FIIs to allocate investments across equity and debt”. Henceforth, FIIs would not be required to follow the 70:30 equity-debt ratio.

    The Sebi move has come after total FIIs’ total investment in listed Indian companies fell by 16.72 per cent from a high of $66.32 billion on December 31, 2007 to $ 55.23 billion on October 16, 2008. – Now if by removing $11 billion from 66 billion, our sensex crashes from 21k to 10k. Crazy ! Of course they will sell and re-enter at lower levels once liquidity issues are resolved, but it shows our markets lack depth.

  • Anonymous says:

    >According to recent report in Eco. Times, Indians hold more than One trillion Dollars in Swiss Accounts. (seems one of the highest in the world). Mind Blogging but not in conceivable.

    Some of this money should enter India thro’ P. Notes soon.

  • Anonymous says:

    >It seems in markets like India where there is no depth, buy and hold strategy will not work. The better strategy will be to get in and get out depending on the parameters like market P/E or Dividend Yields etc.

  • Max Dama says:

    >Deepak and anonymous,

    Thanks for the idea about the black market and the news about FIIs. These ideas are totally foreign and fresh to someone like me living in the US.

    Regards,
    Max

  • Bill aka NO DooDahs! says:

    >Changing the currency forces much of this money to be laundered and therefore taxed, through sales and VAT. It also forces the attention of large purchases.

    The E.U. experienced this with the conversion to the Euro. This is a primary reason why the U.S. is now constantly changing the design of their bills. It’s really not about preventing counterfeiting, since the Russians have been able to make counterfeits within very short timeframes of the new releases. It’s about forcing holders of the “old” currency to either change it over, launder it through purchase, or attract undo attention when spending it.

    I don’t know if India is in the habit of changing their currency design frequently, but I suspect if they start doing so, it’ll get some of that money laundered and taxed.

  • Vetri Pandit says:

    >Time to start buying again!

    Searching for direction in the market? This article is for you!

    The fall in the Indian Equity Market is due to systemic global risk that is common to entire market and not specific to Indian Market. This has happened due to financial system instability caused or exacerbated by idiosyncratic events or conditions in financial intermediaries elsewhere (read US and Europe). Now that the growth in these developed economies have tappered greatly, the Emerging Markets will feel only ripple effects, which will however be compensated by domestic demand. Therefore, if both developed and emerging markets have fallen propotionately, the emerging markets, with their relatively higher growth rate, should send buy signals much sooner.

    Out of these Emerging Markets India has reached the point where one can press BUY button and GO LONG. Now, I will elucidate the reasons. Indian GDP rate “may” fall marginally, but it will still remain the second fastest growing major economy. The dollar rise will make exports competitive once again. The negative effects of dollar rise will be adjusted by the falling crude price. As I mentioned earlier, the fall globally has been initiated by the over ambitious finacial players. The Indian finacial system is one of the most robust in the world. The government and RBI have shown commendable speed and sense of responsibility by taking timely monetary and fiscal measures like CRR cut etc. (If sources are to be believed, more are on cards – something like a mini budget). The pay commisssion and loan waiver will further fuel demand.

    I would say, for India, it has been a bear market within a long term bull run (extending till 2040) caused by external factors beyond its control. This is definitely reason for Indian investor to be cheerful and look for buying opportunities, whenever they apear.

    I consider that Indian market is at its bottom or very close to it. At this point I would like to bring in a fact which bring out that India is already over sold. We all know that the US market is close to recession. But legendary investor Warren Buffet has called BUY in the US equities. These are some of his famous words which he uttered on 17th october 2008. "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.But fears regarding the long-term prosperity of the nation's many sound companies make no sense," he said. Buffett said major companies would suffer earnings hiccups, but added they "will be setting new profit records five, 10 and 20 years from now."

    If it is so for the US economy how much more true for an economy which is the emerging growth engine of the world?

    It is time for us to stop looking at global indices for cues and start picking up equities from Indian bourses. The universe of stocks has become large. But I would recommend investors to buy large cap stocks with strong fundamentals. The following are my recommendations:-

    Reliance Industries
    ONGC
    SBI
    Infosys Tech
    L&T
    Reliance Com
    Sail

    Short term investors can look for 20% return (7-15 days). If you can hold it till December, expect close to 40% returns. This level I believe is close to true value. If you hold for 8-12 months, then you are likely to get returns close to 100%

    True value of sensex is close to 14000. I used to talk about growth premium, which India truly deserves. If you consider this then the value is 17000. This level may be achieved in 8-12 months. But I strongly feel that sensex will very soon revert to 12000 levels. There will be very strong resistance at 10000 in downside(similar to the one we had on the upside).

    It is rumored that a US based billionaire investor has heavily initiated long postions. If you (Indian Retail Investors) have not sold your stocks so far, please do not make the mistake of selling them now. If you have cash, start accumulating and building your portfolio in a gradual manner. 3-4 years down the line we may see levels of 30,000.

    Happy Investing Folks! Cheers, finally bottom is in sight!!

  • Yogesh Kulkarni says:

    >why not cancel 1000 and 500 rupee notes, money will come out from secret places