Friday, April 10, 2015

Devaluation of Rupee and uncontrolled taxation

A few days back our honorable Governor of RBI had hinted about this topic but it appears to me that his hinting has gone unattended as usual. I however, felt that his point is correct and so began to observe and study relation between these two seemingly unconcerned subjects. As I began to study it, I could see the need for proper check on this uncontrolled taxation we are practicing while preparing budgets of almost all institutions, central, state, local bodies, municipalities and such. We should realize that while these taxes are levied so freely that the economist never becomes conscious of the effects of their taxing on purchasing power of our currency. For each tax, prices elevate and as that occur, purchasing power of rupee drops. This phenomenon goes unnoticed. That means, at every new tax applied we unwittingly as though, devalue our currency. It has effects in home economics as well as in international economics. Taxing authority is bothered about garnering extra rupee for their treasury and there the concern ends for them.

Before I go further on this argument let me discuss different reasons for devaluation of any currency. Unless it is properly understood, we cannot go further in this topic. First, we should know that a currency is devalued or up-valued on two platforms. Internal economics and external economics are those two platforms. Taxation, arbitrarily made, causes devaluation of the currency internally. It has no effect on its performance in international transactions. Presently, I want to discuss this issue but to be clearer about other platform (external economics), I would like to mention it also. The second platform of international value is influenced by again three prime factors. One is borrowings by the country, second is GDP and third is Forex market. Forex market is developed by modern time economists when Dollar became vulnerable and valuation among different currencies became an issue. That market is situated in London but it works mostly on INTERNET. There is enough opportunity for smart players to manipulate values of currencies by playing smartly. Even if GDP of a country is not very promising by playing well the currency of that country can be maintained at a reasonable position. At present Dollar is holding its position because of this advantage in this market. Moreover, our rupee is dropping because our boys at gambling dens are not doing what they should do at Forex market. Old concept of GDP has been already surpassed by this Forex index and we are still very much bothered about our GDP. I do not want to write on that in this post on this very tricky subject, as I am presently more worried about devaluation of rupee in home market.

Now let me say why currency devalues in home market. Prime cause for devaluation of currency is arbitrarily made taxation. We see some people suggest that printing currency and dumping it in money market causes devaluation but let me tell my readers that it is not, any cause for devaluation if it is properly manned by concerned banks. Luckily, our banking institutes have been good at that, and therefore, that is not the cause for devaluation of rupee. Usually such printed currency is given to Standard Bank for safe keeping, it is used to help other bank. It never enters home market and so that should not cause devaluation. Proper method is to pass on printed currency to Banks as reserve fund and so the fear expressed is not plausible. Second most important cause is price escalations in local market. This is caused by real or unreal shortage of commodities in the market. We often see political parties encourage unreal shortages of essential commodities so that prices will rise and people pay exorbitant prices to buy it. Reason for such artificial escalation of prices is very clear. Politicians and their parties want funds from the market traders. By creating this artificial increase in price more money traders earn which they eventually pass on to these political parties and many a times to their leaders. Value of currency is its purchasing value. By creating artificial shortages value of commodity they increase and increase in prices means decrease in purchasing power of the currency. Here we should note that in the event of real shortages, devaluation does not happen since as soon as that situation improves prices come back to normal and the value is restored for that currency.

Second cause for devaluation is more dangerous; it is due to taxation. Devaluation due to this reason is more permanent. Therefore, it is more hazardous for healthy growth of any economy. Here I would like to remind my readers about what our RBI governor said about these arbitrarily levied taxes. Presently we do not have any monitoring authority to control taxations by various institutes and other bodies who, rightly or wrongly, are authorized by government to put taxes, including such as toll on roads.

RBI governor wanted some type of control on these taxes. The Bank has a right to object to this irresponsible way of levying because the Bank is by convention considered to monitor value of the currency in markets, home and world. How it can do it if it does not have authority to control factors those cause devaluation. It is a case of having responsibility but no power to execute its needs. Responsibility without authority does not make any sense. I appeal to all those who could be interested in this very vital issue to bring this matter in public view and help our governor Mr. Raghuram Rajan in acquiring the necessary authority to control taxation policy. By that, any authority who wants to apply any tax or levy (such as toll on roads) must get prior approval of RBI and only after RBI approves of it that tax, levy, toll etc., will be applicable. By this arrangement, irresponsible taxation will cease. Taxing authority will have to convince thoroughly RBI about the necessity of such taxes and on failing to convince RBI that tax, levy will not be applicable. There are many examples of criminal use of this by taxing authorities. I want to sight one to show how taxation is misused to loot people. This will not be possible if such a control is brought about. There is nexus among bureaucrats, politicians and contractors. On failing to do, some work, the contractor incurred some loss. To recover it bureaucrats and politicians jointly decided to put tax on people and they recovered the loss by that money. Here we see the public had to pay for irresponsible work of the bureaucrat and the contractor. For no fault of taxpayer, they have to pay it. Recently we saw how BEST of BMC wanted to add additional tax in property tax of Municipality because BEST has made losses in their undertaking. That loss is due to corrupt management of BEST, otherwise, there is no reason to incur that loss and every body knows it. All these and many more such examples can be given to show that RBI governor's concern is valid. Some check on arbitrary taxation is essential and RBI is the right authority to do it; since it is responsible for maintaining purchase power of rupee. I wish somebody from public should rise for that and bring this malpractice to notice of people. Media should take initiative in that. I am doing my small contribution towards that in this post.
Types of taxes – seven categories are found and they are given below.

  1. Revenue tax to earn money to manage (running) government,
  2. Tax to collect money for plans for development.
  3. Tax to control or discourage consumption of certain things government increases prices by increasing tax so that the material becomes costly.
  4. To cover up for loses due to bad management or decisions.
  5. To protect and encourage parasitic economics.
  6. To discourage bona fide beneficiaries.
  7. To help vested interest against others.

RBI will find out to what category tax under scrutiny falls. After that proper investigation will help it avoid tax proposals, those are not to the interest of country's economy but proposed to help other ends. The last four are taxes to be checked particularly. I have noticed that many tax proposal falling in category 4 to 7 are promoted with false pretense of category 1 and 3, RBI skill will place them in the proper category before scrutiny. All taxes coming under 4 to 7 category will be rejected. All taxing authorities will have to explain to RBI need for that tax and if convinced RBI may accept it with necessary corrections. This will reduce measure burden on our rupee and will help get the appropriate purchase power to rupee.

There is a hitch in this proposal of RBI to control taxation by monitoring it. The hitch is RBI does not have all non-corrupt officers. If an officer like the one Kurupasami is appointed to do the monitoring, this aim to stop arbitrary taxation will fail utterly. Raghuram Rajan should see that a truly honest person is appointed to do it. He must also see that the committee will be guided by him in person, to avoid any misuse of that authority so that the very purpose is lost. I also hope that Modi administration should honor Rajan's plea in the interest of people for whom he has given many promises.

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