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Mining Mafia & Maoism, two sides of the same coin.

July 25, 2011 1 comment

Karnataka exemplifies how an illegal mining mafia can overwhelm, capture and suborn a State to its purpose given a suitable opportunity for a large enough profit.  Karnataka is not a backward state. It is reasonably well developed, home to India’s Silicon Valley in Bangalore. It boasts of premier Public Sector names in the high technology defence industries such as aeronautics and power equipment.  Yet, in the Iron Ore mining district of Bellary, a combination of lax governance, dysfunctional regulation and corrupt politicians have come together to capture the entire government. Even the Chief Minister is a nominee of the illegal mining mafia.  The entire state administrative structure, including the revenue department, district administration, police, and central customs has been suborned to the mafia’s interests. Exposure after exposure of the mafia & its nexus with the state, in the media and the legislative assembly, has failed to curb or dislodge it. How can this happen in a democracy with a free press? The rise of the mining mafia and the techniques it has used to gain and retain control of the State apparatus is worth a serious study.  There is reason to believe that the same mechanisms may be in use in such states as Chattisgarh, Jharkhand and Orissa.

 

Over the last 5 to 10 years, the mining mafia has moved millions of Tons of high grade Iron Ore from Bellary to port towns like Goa for export to world markets, especially China and Japan.  The exports run into billion of dollars.  How could such a vast enterprise function if the state did not covertly support the activity? The ore was openly mined with industrial machinery and a huge labour force. It was transported by road over the state highways with multiple check points. Barges were used at ports to take it for loading onto ships at high seas. Payment mechanisms for these exports were fashioned through a variety of stratagems, legal and illegal. And once state connivance was indeed established, how was it possible to continue such illegal activity without Central Govt intervention? Why did the Central Govt not intervene to protect its interests in the mines? Most of all, how was all this possible over such a long period of time in a democracy with its inbuilt checks and balances?

 

Property rights in India are still colonial era based. The British delinked mining rights from landownership.  All mining rights vest in the Govt. In practice, unless the Govt moves to exploit a mineral, or parcel out the mining rights through a lease, the mines belong to nobody and thus everybody. The State does not physically control the lands in far flung areas. Nor does it make timely leases upon discovery.  When world commodity prices boomed, the opportunity for profit was sufficiently high for the mining mafias to move in unchecked. Starting small scale, these illegal enterprises grew on easy profits to huge giants muscling out weaker players. They had the resources to corrupt everybody who stood in their way – revenue & police officials, politicians & ministers.  Perhaps they even captured the local ruling party.  Certainly the Chief Minister has been found in their pay. What more can you ask by way of State capture?  Once established in their hold on power, they have proved impossible to dislodge.  The complete failure of the state could not be starker.

 

The mining Mafiosi in Karnataka are urban based “entrepreneurs”.  They exploited a weak state with dysfunctional laws and corrupt politicians.  Quite like them are another class of similar “entrepreneurs” but who operate deep in the rural & forested areas.  They are after mines too.  But they lack the capital and the capacity to capture the state through bribery. Nor do they have the wherewithal to develop and exploit mines.  Their method consists of organising villagers into insurrectionists and arming a selected cadre among them. Their main demand is a share of the mining profits & political power that comes through control of access to the mines.  As in Bellary, a slothful and corrupt local govt, dysfunctional laws & past history of exploitation enables these “entrepreneurs” to accumulate power. A following among tribals allows local capture of government.  In effect they are lesser brethren of the mining Mafiosi.  Their methods may be different but the objective and the strategy is very much similar. Maoism and mining Mafiosi are then two sides of the same coin.  One justifies and boosts the other.

 

The intriguing question here is the nature of politics that obtains in such resource rich states where Government is weak.  These include states such as Karnataka, Chattisgarh, Jharakhand, and Orissa.  Are the illegal mining mafias in direct competition with the Maoists for control of mines & other resources?  Are we really seeing a sort of competition, indeed “class war”, between these two groups, both using a false discourse to justify their capture of a hapless State?  Maoists would have us believe that they are fighting the State for the rights of the tribals and others people who have been cheated out of their rights by capture of the state by “vested interests”.  That this discourse is plausible, but nevertheless false, is obvious from history.  Maoists have been co-opted into the system at first opportunity if given power and a share of the booty.  Likewise the mining mafia constructs a jingoist discourse of nationalism and false religiosity seeking to don the mantle of true entrepreneurs who is unfairly thwarted by a State. They justify breaking the law by alleging state capture by leftists.  Examples of both the competing discourses are before us & may be driving the politics of resource rich states at the margin.  Both the discourses are not only false but also ruinous of true national interest.

 

The idea behind drawing a parallel between the competing discourse of the Maoists and the illegal mining mafia is not to paint a misleading equivalence. Instead it is emphasize that any true discourse to counter the Maoists must incorporate curbs that end illegal mining and return true ownership of resources to local communities.  The state has to be discriminating enough to be on the side of the tribals while neutralizing the Maoists armed cadres that challenge its writ.  The state has little chance of winning and carrying the tribals with it if it is perceived as furthering the interests of illegal miners.

 

Govt has made a beginning with a new mining law that recognizes tribal & local community’s equity in mines.  It stipulates giving them a 26% share.  This is welcome but not enough. The fact is the mines would belong to tribals in toto if we had strong property laws.  So the 26% figure is rather arbitrary.  Secondly awarding equity stakes to tribals who don’t understand money fully is questionable.  The payout should be fixed and easy to quantify.  The money so raised should go to schooling, communication and health care in local communities besides some income support.   All this presupposes Govt ability to construct a narrative for the tribals where it is squarely on their side and against illegal mining.  The fact that it is unable to control illegal miners even in a relatively well developed state like Karnataka shows how far the Govt has to traverse in constructing such a discourse.

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Where have India’s Adivasis disappeared?

July 18, 2011 3 comments

“The strategic adversary is fascism… the fascism in us all, in our heads and in our everyday behaviour, the fascism that causes us to love power, to desire the very thing that dominates and exploits us.”
— Michel Foucault

 

Where have our Adivasis disappeared?

 

At Independence we started out with 24 million Adivasis constituting 7.5% of our population.  They would number 82 million by now, about half the size of Pakistan.  Where are these people?  Why don’t they show up in our discourse? Scan the headlines of our main newspapers.  The word Adivasi is conspicuous by its absence.  Their place has been usurped by Maoists, extremists who threaten to overthrow our Government through armed insurrection.  How did the Adivasis morph into Maoists in our discourse? How was this masterful rhetorical transformation of tribal adivasis foisted on us?  Is it justified by reality on the ground?  Why are we so willing to accept such a perverted discourse? What aspects of its reality does it conceal from us in order to accomplish its objectives?  That is a story worth exploring.

 

Scheduled Castes and Scheduled Tribes constituted 7.5% each of our population. In a unique act of affirmative action, the founding fathers reserved 15% of all seats in educational institutions and Govt jobs for these under-privileged people. The idea was to bring these neglected and  socially disadvantaged sections of our population on par with the rest.  Education was deemed the best way to achieve this objective. The reservations were for 20 years but have continued.   Between these two groups, Scheduled Cates lived mostly in the settled urban and rural areas while scheduled tribes lived predominantly in the forested areas.  Over time, the Scheduled Castes benefited from development, learnt to play the democratic game and have done relatively well.  Their brethren in forests have suffered grievously at the hands of the State. Why is there such a pronounced divergence in the integration of these two similarly disadvantaged groups in our society?

 

The State simply failed to take governance to the tribes in the forests. There was never any Patwari or Police Patil, let alone a Block Development Officer or a collector. There has never been any census. Rudimentary services like recording of births & deaths, maintenance of land records, issuance of ration cards etc was never done and remains impossible.  No banks, no post offices, no roads, no drinking water, no sanitation, or health care ever reached these people.  Adivasis do not exist as individuals in official records. Their land holdings are not recorded.  They have no identity.  They are faceless non-people.  They have no voter identity cards.  They cannot vote.  They are simply and effectively locked out of our system.  Government chose not to go into the forests.  Its officers were averse to rural postings that had no schools. The problems of tribals were buried in Govt files. This was not just benign neglect. It was criminal.

 

The State first came into contact with Tribes when it set out to build some 3500 dams across the country.  For the nation this was imperative, but for the tribals, an unmitigated disaster. The dams submerged their valleys and villages, dried up rivers, destroyed fishing grounds, disrupted  the ecology that sustained them.  Tribals were uprooted from their natural habitat and violently thrust into slums on the periphery of small towns. Unfamiliar with money, modern medicine, market economy, and with no skills or education, they simply perished.  First their kids died.  Sans traditional medicine every small infection became life threatening.  Later time & toil took its toll on the adults.  The State maintains no record of how many were so displaced from their habitat. There are no records of what happened to these hapless souls afterwards. The State did not want to burden itself with the guilt of such gory records.  Most vanished without a trace. They just fell off the earth through the cracks in our discourse while we celebrated our dams and development.  That history should haunt us as much as it haunts the tribals. The difference of this institutional memory blinds us to the tribal narrative. They remember while we wilfully forget.

 

The second round of intensive contact with the tribals was caused by the unprecedented boom in world commodity prices. Overnight cheap bulk minerals such as iron ore, coke, bauxite, chrome turned into gold. It set off a frenetic rush to exploit them in the forested areas that had never been opened up by the State.  This time it was private enterprise rather than the State that spearheaded the move. Much before independence, the British had virtually nationalised mining by divesting mining rights from landownership. Elsewhere in the world, if you own a piece of land under which gold or oil exists, it is yours by law.  But the Indian state continued with the colonial system.  Land, rich in minerals, that was worth billions on the world markets, was sought to be handed over for a song to private miners.  Note there is nothing socialistic about demanding a fair price for something you own. But because the owners were non-people, and the miners rich & powerful, tribals facing expropriation of their assets were painted as anti-development.  Nobody cared to point to the confluence of a commodity boom, tribal lands and first time private miners. Mining the world over is socially and economically disruptive of local communities. But we paid no heed in our greed.

 

Nature abhors a vacuum. The absence of Government in tribal area was one such.  The commodity boom provided a stupendous profit opportunity to whosoever controlled the tribals and access to their land. It was natural that the two would combine to attract the attention of politicians of all kinds.  Maoists are just one such class of predatory politicians who stepped in to fill the vacuum. Maoists are educated, suave, smart, talented and urban based “social entrepreneurs”. They are not local tribals. They stepped in to organize an insurrection to strike an opportune bargain.  They do so through persuasion and intimidation.  Mining costs are but a small fraction of the value of minerals. The rest, as much 90% of sale value, is pure profit.  Even an equitable settlement between miners and owner-tribals would make both filthy rich.  So there is enough money in it for everybody who buys a stake in the game.  The urban Maoists leadership understands this. They have organized a militia along professional lines. Their strategy and tactics are immensely sophisticated.  Meanwhile our crass discourse fails to distinguish between the Maoists leadership, their cadres, and the poor tribals. We don’t know who the enemy is.

 

It is imperative to correct our discourse.  Tribal grievances are genuine and need addressing. There can and will be no military solution to the problem.  Each of these problems is locally grounded and will need to be addressed by a local political leadership of tribals themselves.  A one size fits all approach that characterizes the present centrally lead effort is bound to fail. This approach doesn’t give tribals the ownership of any solution. It fails to reassure them of an equitable deal. We need to create and nurture local tribal political leadership. Rahul Gandhi has been making half-hearted efforts at finding a solution to the tribal problem.  Can he buckle down, put in the intellectual homework required, and pull together the party & Govt resources to give local tribals leadership another chance?  If so he will have found himself a pan Indian constituency that is fiercely loyal for years to come.

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Does the BJP oppose pseudo secularism, secularism or both?

July 11, 2011 9 comments

What does the Sangh Parivar oppose, secularism as enshrined in our constitution or pseudo secularism as defined by Advani in the 90s or both? Somewhere along the road from the 90s, the shrill brigade’s rhetoric in the Parivar has shifted its attack from aberrations in secularism as practiced by the Congress to an attack on the concept itself. What alternate does the Parivar have in mind?  Surely it can’t be a Hindu theocracy? Twenty years after Ayodhya, not one votary from the Parivar has cared to define what Ram Rajya is or how it might be worked in praxis. Is the Parivar pulling down a central pillar of our constitution without having an alternative in mind?

 

As early as antiquity men realized that Gods could not always tell the truth. Or they chose to do so in an ambiguous fashion. When Gods do not tell the truth, Man must not only find his truth from his own discourse but in doing so also tell it. The secular idea of the Greco-Roman culture was swept aside by the advent of revealed religions of Christianity, and later Islam, when once again only God, or his priesthood, told the truth. Slowly, the rationality of the Greco Roman culture was smothered and snuffed out as the bureaucracy of the priesthood extended its hold on public discourse.  The unspeakable dark ages followed and the light of creativity was banished from human discourse for centuries.

 

Renaissance is wrongly credited with the birth of the secular idea. That is true only if we forget the 800 years in antiquity when the secular idea was practiced in everyday life of the Greco-Roman pagan culture. Our own civilization insists that  each individual experience his or her own personal God in an empirical fashion. This ideal did not in any way detract from the faith of those who still chose to consult God. Secularism then is at least as old as the concept of God in recorded history.

 

Much intellectual effort has gone into distorting secularism. In particular, it has been conflated with the notion of all religions being equal. This conflation is particularly dangerous because it leads to the notion that the State must treat all religions equally. That appears deceptively plausible until one realizes that the primary contract of equality before the State is between the Citizen and the State. No interloper, such as the religious clergy or a cultural organization, speaking for a religious denomination, can intermediate the primary contract and claim “equal” treatment from the State on behalf of citizens. Such an act legitimatizes groups such as the Mullahs and the Sangh cultural organizations that have no political role to play in our polity.

 

There is also a need to avoid over-working the secular concept and endowing it with all sorts of magical cures which detract from its utility. It should be reduced to its minimalist configuration which is that our laws are made by consensus amongst us as equal citizens without reference to any particular religion. And they are enforced equally for all citizens irrespective of their religion. It is worth emphasizing that just the fundamental rights in our constitution taken together guarantee a secular state for any other notion would be inherently incompatible with them. So a separate affirmation of our secular credentials is wholly unnecessary and redundant. Separate personal laws for Muslims and Hindus should ideally converge into a uniform civil code. However, their existence doesn’t negate the secular ideal because laws need to be made by consensus and need to be informed by the governability of the issue under consideration.

 

Just as Gods cannot be relied on to tell the truth at all times neither can secular laws. Not all aspects of real life are either known or governable. Laws address but a small sub-set of issues of community life where a consensus exists and where the issue itself is governable. There are vast areas of our community, personal and private lives that are beyond governability where we may choose to be guided by religion, culture, tradition, family or friends. We cannot govern the unknown in a pre-determined fashion. We must also actively avoid doing so because such regulation chokes off creativity which is the life blood of progress and development. A minimalist configuration of secularism affords the maximum freedom to citizens to pursue their way of seeking the truth and this freedom includes the freedom to seek truth through religion itself. Secularism neither denies God nor interferes with his work.

 

We aren’t born hardwired for secularism. Early upbringing gives us a notion of our identity and separateness from the other that is neither wrong nor inappropriate. This stays with most of us for a life time. The secular idea comes much later in life and is a matter of education and acculturation. Therefore, if education and experience don’t reinforce the secular discourse, it diminishes. The alternate political discourse based on religious identities gains ascendancy. This can only accentuate religious differences rather than stress commonalities and consensus. It is therefore high time that both the main political parties sort out their difference on this crucial issue. To let it go by default, or to politicize the issue as is their wont, is rather dangerous and disingenuous.

 

Hinduism as a pagan religion is intrinsically open to the secular ideal. Unlike revealed religions it is not doctrinaire. Furthermore, despite the pernicious caste system it has never developed a priesthood that wielded political power as an organized clergy. [RSS is in many ways an attempt to overcome this hurdle to political power but hasn’t really succeeded.] Therefore the best way to fight resurgent Mullah obscurantism is to emphasize the secular ideal that comes naturally to Hindus and put it up as model for others. The jarring discourse of the shrill brigade in the Sangh Parivar vitiates this struggle against obscurantism. In fact it lends legitimacy to a reactionary clergy. Nothing could be more self-defeating for our polity. The Sangh must clarify its position on secularism precisely. While it must opposes appeasement of obscurantist forces and exposes vote bank politics, it must not throw out the baby with the bath water.

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Piggy Banks and Political Pork – II

July 5, 2011 2 comments

An honest currency, positive real interest rates and liberalization of import of gold were at the heart of reforms unleashed by Dr Manmohan Singh in the 1990s. Under his very watch as PM, first two elements of reforms have reversed by his current Finance Minister and it is moot how long it will be before gold imports too screech to a halt. On the currency front India’s economic reforms are firmly in the reverse gear.

 

When an economy runs with negative real rates of interest it basically transfers wealth from savers, who are mainly middle class households, to large borrowers who comprise the Government, businesses & large farmers. As we saw in Part I of this article, the total value lost by households through negative real rates was as much as 40% of the total direct taxes collected by the Govt. On the other hand, for a typical household, the concealed tax so paid by it on savings can rage from 9% to 36% of annual income even in the 0 tax bracket, depending on the level of savings of the household. These are humongous amounts of taxation that really should be made obvious and transparent.

 

Three things should be noted about this hidden taxation. Firstly, it is grossly invidious as it taxes accumulated savings and not income. The more you save, the more tax you pay; annually but also over time. The inequity of this is unbelievable. If you save money you are taxed on it over & over again, year after year, until you die! What can be possibly be more cruel?  You are punishing thrift and rewarding profligacy; punishing virtue and rewarding vice. On this ground alone this evil practice needs to be proscribed.

 

Secondly, if you profile people who save in bank deposits, these turn out to be lower middle class, financially unsophisticated savers who save for a rainy day or to meet bulk expenses like college or marriages etc. What they are looking for is simplicity, safety, convenience and no hassles. These are voiceless people, the sort who unknowingly pay the bills for others. So the tax falls disproportionately on precisely those households least able to pay such onerous taxes which makes the tax highly regressive. This is socially disruptive as well.

 

Thirdly, there is a huge element of repeated taxation of the same income simply because it is saved. Consider some money you saved in year one say R1000. If you hold on to the saving, you pay 3% hidden tax every year on the saving. By year 33 when you retire it is all gone! You saved nothing of the R1000 you had 33 years ago. How much more ridiculous can taxation get.  The point to note is that your average household may not be able to articulate what we have analyzed here but its real impact on their savings is not lost on them! They actively seek to offset this taxation and that leads to further complications in our system.

 

Why is this taxation by stealth important from public policy point of view? Prolonged negative real interest rates drive people away from holding wealth in financial assets into other assets such as land, housing, gold, silver, not for use, but as a store of wealth. Paradoxically, over time, negative real interest rates drive up cost of finance for legitimate business activity by reducing total savings in financial assets. Negative real returns over time kill off the bond markets choking off finance to infrastructure projects and industry. Practically no market for bonds existed in India prior to the reforms precisely for this reason. So negative real interest rates are inherently harmful to economic growth.

 

In India, negative real interest rates have traditionally driven households to gold. From a personal point of view, it is absolutely rational to switch from fixed deposits that yield negative real returns to gold. Gold is basically a hedge against malfeasance  imbedded in a fiat currency issued by an unreliable Government. But from the point of view of the economy as a whole, investment in gold is a wholly wasteful activity. It takes away money from creation of real assets such as infrastructure, plant and machinery, schools and colleges, hospitals that better the lives of people.

 

Indian households currently buy about 800 MT of gold annually valued at $40 billion.  That is a mind boggling figure. What would be India’s total stock of gold? A conservative estimate would put that figure at 50 times the annual consumption – about $2 trillion. That wealth is lying idle in our country with households because of the politician’s propensity to cheat us out of our honest money. Why not think of using this horde productively?  And why not stop adding to it through positive real interest rates? Note $40 billion is 2 times the value of all FII and FDI investment in India in any given year. But our politician’s penchant for dishonest currency, we would not need any external funding at all to sustain growth.

 

Cleverly masked from public view is the fact that India runs a huge current account deficit that averages about 3% of GDP. We just don’t export enough to pay for all the oil, gold and other imports. Gold is the largest component of our imports after oil and the two together make up nearly half of our total annual imports. This current account deficit, roughly $40 billion, is met by selling shares in our businesses to foreigners, through borrowings and FDI. So at the margin what are we doing? Here is the vicious circle. Negative real interest rates drive households away from saving in financial assets into gold. Government is forced to import gold because we hardly produce any. To pay for the import of gold Government sells or induces others to sell shares in profitable businesses to foreigners. So people here is the deal – you sell productive assets to buy jewelry and trinkets.  Would you ever to do that in real life?  Yet as a nation we are doing precisely that because the Government cheats us out of our savings if we don’t.

 

This reversal of currency reforms, very pronounced since the beginning of 2008, is now slowing down economic growth, adversely impacting fresh flows of FDI and portfolio inflows and in fact encouraging capital flight out of the country. A return to the bad old days of dishonest currency will quickly undo the remainder of the reforms. It is therefore high time to pressure the Government & RBI to return to a regime of positive real rates of interest.  This is not difficult to achieve if the Government cuts off its entitlements bonanza to modest proportions that can be sustained by honestly collected taxes. If not individuals acting privately to prevent erosion of their hard earned savings will force us back to stagnation and eventual bankruptcy once again.

 

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Piggy Banks and Political Pork – I

July 4, 2011 5 comments

One rough estimate shows households paid R180,000 crores in hidden taxes to the Government in 2009-10. That is a whopping 40% of R435,000 in explicit direct taxes collected by Government in that year.

 

This sleight of hand is accomplished through negative real rates of interest. If “negative real rates of interest” appear forbidding think of them as the interest that you earn on your savings after taking out inflation. Bankers fudge on the interest they offer us while the Government is keen to hide the true rate of inflation. The real rate of return to us is the actual difference between these two nebulous numbers. This return can actually be negative!

 

Consider saving money in 1 year fixed deposit as an example to analyze. You have given away your money today while it will be returned to you one year hence with interest, say 8% pa. If you saved R1000 , one year from now you would get back R1080.  The key thing to understand, is that the R you receive one year hence are not the same R that you invested.  The value of the R will have diminished depending on whether there was inflation, and if so, by what amount. Assume that inflation in the year was 5%.  Then after one year, while you get back a nominal sum of R1080, it is worth only R1030 because the value of the R in the interim period has diminished by R50. The real return to you is only R30 or 3% pa.

 

Consider the same deposit when interest rate offered is 5% and the inflation rate is 8%. In this scenario you gave away R1000 for one year and at the end of it you get back R1050 in nominal terms. While your money was sitting in the bank for one year, the Government was busy surreptitiously increasing the price of all goods and services by 8%. One year later when the banker returns you R1050 you find you can only buy stuff worth R970 in terms of R you had given to the bank 1 year earlier. Hence, while your nominal return stays 5%, in real terms your return is a negative 3% because the value of the R has meanwhile diminished by 8%. The banker and the Government will disclaim responsibility for your loss. But the loss is real.

 

Your loss is not just “notion” but real. It is not obvious by design, not accident. The powers that be in our system have a vested interest in not telling you of your loss. In the normal course, if banking was in the private sector and not so tightly regulated, your loss would go directly to the bank’s bottom line. However, in India that doesn’t happen. RBI’s regulation of interest rates and things like Cash Reserve Ration [CRR] and Statutory Liquidity Ratio [SLR] are levers that are used to funnel your R 30 loss into the pockets of large bank borrowers of which the Government is the largest.

 

Actually, when you put R1000 of your saving in the fixed deposit for 1 year, about R350 of it went as direct loan to the Government. Of the balance 65% about R600 goes to making loans to commercial borrowers which includes R200 lent to farmers who almost never repay their loans. The balance 5% is cash with the bank and CRR.  So broadly speaking, 35% of your money went to Government, 40% to private borrowers and consumer loans and 20% to privileged farmers who know from experience that their loans don’t have to be repaid. All these powerful people gang up to keep loan interest rates as low as possible in the name of development of the economy. Unable to charge a sufficiently high interest on loans, the bank compensates itself by keeping the return on your deposit as low as possible with active connivance of the Government.

 

Why is this state of affairs so dishonest and problematical? Let us look at it from the taxation angle. The total banking systems deposits amount to 6,000,000 crores in 2009-2010. These deposits would have yielded between 6 to 8% nominal. Let us take the upper end 8%.  What was inflation during the period?  The Government makes that very hard to figure out but here the relevant rate is NOT the WPI nor the so called core inflation. What matters is the real prices you pay for the goods and services you buy, and the best proxy for that is the headline CPI number.  That number was something between 11 to 14% pa. Let us assume 11%.  The negative real interest rate that you faced was about 3%.  A simple calculation shows that you lost 3% of 6,000,000 crores, amounting to 180,000 crores. This amounts to 40% of the total direct taxes collected by Government. Note all of this 180,000 crores of taxation falls on the households and not the corporate sector.

 

Let us assume that your annual income is 600,000 so you pay no Income Tax. Further let us assume you are around 30 to 35 years and that you are basically saving money to buy a house with the help of a bank loan. Roughly, you would need to save about 3 years’ income to buy a house about 10 times your annual salary.  That puts your savings in the range of 1,800,000. Assume you put this away in a 1 year fixed deposit as before where you get 5% while inflation rages at 8%. The real loss per year amounts to R54,000.  In short, even with 0 income tax bracket, the magic of negative real interest rates ensures that you cough up roughly 9% of your gross income as hidden taxes to the Government. And this analysis assumes you hold just 3 years of your annual income in savings.  The more your savings, the more the hidden tax you pay. Closer to retirement, your savings could be 10 times your annual income in which case you would pay 36% of it in hidden taxes to the Government. Remember the tax base for Income Tax is your annual income while the tax base for this hidden tax is your total wealth held in bank deposits.

 

The hidden tax on bank deposits is a gigantic rip off of middle class households who should be rewarded for saving rather than punished for them. The sheer inequity of it is astounding but never revealed to the mugs who are caught and mulcted by the system. We shall see how this burden of hidden taxes can be avoided by households by a number of strategies in an another article.

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