“If at first you don’t succeed, try again. Then quit. No sense being a damn fool about it.” That quote should be inscribed in lurid 56-inch letters above the hallowed portals of North and South Block and 7 Race Course Road. After implementing a monetary policy that has dragged India back into the era of barter, it is rumoured that the government is contemplating a new “Gold Control Act”, a higher income tax rate of 60 per cent, and some law that mandates the confiscation of benami real estate.
These could all be rumours. But in themselves, these ideas are no weirder than the demonetisation itself. These policies (using the word loosely as a synonym for idiocies) have all been tried before. Each was enthusiastically embraced by the bureaucracy when it was mooted, because such laws have a positive impact on the net worth of government servants empowered to enforce them.
The average Indian family’s attitude to gold is akin to the American National Rifle Association (NRA)’s attitude to weapons. The NRA concedes that you can take guns away from Americans, if you can prise them out of their cold, dead hands. The Indian family feels much the same way about its jewellery.
Morarji Desai authored the gold control Act of 1968 in a misguided attempt to get his hands on the family gold. That legislation only resulted in driving precious metal underground. People kept on buying gold. It created a thriving industry of smugglers who did the Dubai-to-Dongri run, carrying gold biscuits in their dhows. Bollywood turned the bigger gang leaders into folk heroes. When the Act was repealed in 1990, it was actually the first step in a long process of liberalisation.
This government has already tried to reduce the passion for gold. A gold deposit scheme in 2015 did not have much impact. The import duty (10 per cent) imposed in April 2016 encouraged smuggling all over again. It gives smugglers a benchmark: If total smuggling costs, including seizures and overheads, are lower than 10 per cent, it’s profitable.
A higher income tax rate of 60 per cent is still very much in the realms of rumour. Supposedly, deposits beyond a “threshold” in low-balance accounts will attract the attention of the income tax department and a penal tax of 60 per cent. That’s less steep than the 97.5 per cent top rate during the 1970s.
But it is pretty steep. Doing back of the envelope calculations, the household savings rate is about 30 per cent and per capita income for the “average India” is about Rs 96,000. Hence, the “average Indian” saves Rs 32,000 per year. If there is one Jan Dhan Yojana account per household and several “average” earning members, that “threshold” whatever it is, may be breached. A penal tax rate of 60 per cent versus a “normal” maximum 30 per cent gives the assessing officer, a generous margin to be “understanding”.
Finally we come to the minefield of real estate. Indira Gandhi removed the Fundamental Right to Own Property. However, no person can be deprived of property except by authority of law (Article 300A).
This government has tried to change land acquisition laws through multiple ordinances. It has failed. However, it may be able to acquire land, if it can add a confiscation clause to grab real estate held benami. Again this would be a variation, or follow through on the land ceiling Acts, which empowered the government to acquire and redistribute land surplus to ceilings.
India is a resilient country. It will survive these rinse and repeat schemes. But it will probably revert to the fabled Hindu rate of growth (around 2-3 per cent of GDP), which prevailed through the lost decades when all such schemes were considered clever.
Take a deep breath. Go and look at that quote. Such schemes and variations on such schemes have been tried, and those were in force, for periods lasting several decades. They did not ever work. There is no reason why they would ever work. They should not be tried again.
Twitter: @devangshudatta
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