Archive for February 21st, 2017

Evolution of currency denominations in India – From Rupee 1 to Rupees 10000

February 21, 2017

I came across this wonderful book – The Indian Financial System (1985) by RK Sheshadri, former Deputy Gvernor of RBI (1973-76). It is perhaps one of the most useful books to understand how Indian monetary and fiscal system has evolved over a period. It has amazing amount of information and facts which helps one know many aspects of Indian macroeconomic system and not just financial system.

From the book and other data available with RBI, I tried to draw a timeline of the various currency denominations in India. I have also updated it as his analysis ends in 1985.

This is how the timeline looks:

  • 1861       Paper Currency Act allowed denominations of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1000.
  • 1871       Allowed Rs 5 and Rs 10,000 which were issued in 1872.
  • 1910       Rs 20 discontinued as not much in demand. Reintroduced in 1972.
  • 1917       Re 1 introduced due to shortage of silver; discontinued in 1926.
  • 1918       Rs 2.5 issued for the same reason; discontinued in 1926.
  • 1935       Issue of Rs 50 discontinued due to lack of demand, reintroduced on 17-May- 1975.
  • 1940       Re 1 reintroduced.
  • 1943       Rs 2 introduced.
  • 1946       Demonetisation of Rs 500 and upwards.
  • 1954       Reintroduction of Rs 1000 and 10000 along with a new Rs 5000 denomination.
  • 1978       Demonetisation of Rs 1000 and upwards.
  • 1987       Reintroduction of Rs 500.
  • 2000       Reintroduction of Rs 1000.
  • 2016       Demonetisation of old series of Rs 500 and Rs 1000. Reintroduction of new Rs 500 and a new denomination Rs 2000.

Interesting to note that we had Rs 2.5 albeit for a short time as well.

Of all the denominations, Re 1 is the most interesting. It was first planned to introduce the note in 1893 but did not happen. It was finally issued in 1917 due to shortge of silver. As silver prices declined in 1920, these notes withdrawn in 1926. The notes were again printed in 1933 (in England) as silver prices rose dur to Silver Purchase Act 1934. However, the crisis receded and notes were not issued.

Though they were issued on 1940 due to again – shortage of silver. The issuance was done under the Currency Ordinance (1940). AS the ordinance was made during World War II, India and Burma Emergency Provisions Act 1940 amended the the 9th schedule of Government of India Act (1935). This allowed continuance of all the ordinances issued during World War II. Thus, it continues to provide the authority to Government to issue Re 1 note.

So much so, the Government stopped printing Re 1 notes a while ago, the ordinance remained much to surprise for lawmakers:

Remember the Re1 note, or the last time you saw it?

It may well have gone out of print, but an ordinance promulgated to facilitate its birth in 1940 is still in force, despite the fact that the Constitution grants no more than six months of life to an ordinance.

Notably, the currency ordinance issued by the colonial British government to print the Re1 note is going to survive, as it did two bids earlier when a finance ministry panel in 1997 and then the law commission in 1998 recommended its repeal on the ground that the note is no longer printed.

The parliamentary standing committee on finance stumbled upon the currency ordinance, 1940, recently while examining the coinage bill, 2009, aimed at replacing four existing laws on metal coins and tokens.

Flummoxed by its queer longevity, the committee headed by former finance minister Yashwant Sinha asked the ministry if the ordinance promulgated in 1940 was ever enacted as a law.

“No. The currency ordinance, 1940, was promulgated after passing of the India and Burma (Emergency provisions) Act, 1940, which provided that ordinances made during the period of the Emergency beginning June 27, 1940, (imposed to meet the exigencies of World War II) would not lapse within six months,” the ministry told the lawmakers’ panel.

“This made the currency ordinance, 1940 of permanent nature,” it said, adding that after Independence, the Indian government adopted it thorough a presidential order in 1950 to adopt various British laws.

An ordinance is a special piece of legislation made by the executive to meet an emergency when Parliament is not in session. But Article 123 of the Constitution stipulates that the ordinance will lapse unless it is ratified and made into a full-fledged law by Parliament within six months of its promulgation.

Asked by the panel as to why the ministry was not repealing it when it has stopped printing Re1 note, the ministry replied: “The 1940 ordinance may not be repealed as yet as one rupee notes continue to be in circulation though not being printed any more.”

The coinage bill, 2009, seeks to amalgamate four laws — Metal Tokens Act, 1889, Coinage Act, 1906, Bronze Coin (Legal Tender) Act, 1918, and the Small Coins (Offences) Act, 1971, into one comprehensive act.

So Coinage Act 2011 Section 28 says:

28. Continuance of existing coins

Notwithstanding the repeal of the enactments and the Ordinance specified in sub-section (1) of section 27,–

(a) all coins issued under the said enactments; and

(b) Government of India one rupee note issued under the Currency Ordinance, 1940 (Ord. IV of 1940), which are legal tender immediately before the commencement of the Coinage Act, 2011 shall be deemed to be the coin and continue to be legal tender in payment or on account under the corresponding provisions of this Act.

All this is so so fascinating.

History, law, currency, wars…there is a bit of everything in this. It is a pity we have not paid any attention to currency denominations in studying monetary economics. With the war on cash, much of this will be lost as well.

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How exports from China are leading to rise in economic nationalism in Europe..

February 21, 2017

Interesting paper by Italo Colantone and Piero Stanig:

Yes, the planet got destroyed. But we created a lot of value for shareholders…

February 21, 2017

The title of the post comes from this depressing cartoon.

There is a related article by Yves Smith who writes the popular blog nakedcapitalism.

Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power of ideology and constant repetition in the business press, Pearlstein, drawing on the research of Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:

Let’s start with the history. The earliest corporations, in fact, were generally chartered not for private but for public purposes, such as building canals or transit systems. Well into the 1960s, corporations were broadly viewed as owing something in return to the community that provided them with special legal protections and the economic ecosystem in which they could grow and thrive.

Legally, no statutes require that companies be run to maximize profits or share prices. In most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor, has been looking for years for a corporate charter that even mentions maximizing profits or share price. So far, she hasn’t found one. Companies that put shareholders at the top of their hierarchy do so by choice, Stout writes, not by law…

For many years, much of the jurisprudence coming out of the Delaware courts—where most big corporations have their legal home—was based around the “business judgment” rule, which held that corporate directors have wide discretion in determining a firm’s goals and strategies, even if their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled that directors of the cosmetics company Revlon had to put the interests of shareholders first and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment rule that only applies once a company has decided to put itself up for sale. But it has been widely—and mistakenly—used ever since as a legal rationale for the primacy of shareholder interests and the legitimacy of share-price maximization.

Greed over everything else..

The price India paid as a part of British empire…

February 21, 2017

Dr Shashi Tharoor who hit headlines with his speech pointing to evils of British empire has another piece.

He says Indians have not held a grudge against the empire which is a puzzle.

Given India’s longstanding attitudes about colonialism, I did not expect such a reception. But perhaps I should have. After all, the British seized one of the richest countries in the world – accounting for 27% of global GDP in 1700 – and, over 200 years of colonial rule, reduced it to one of the world’s poorest.

Britain destroyed India through looting, expropriation, and outright theft – all conducted in a spirit of deep racism and amoral cynicism. The British justified their actions, carried out by brute force, with staggering hypocrisy and cant.

The American historian Will Durant called Britain’s colonial subjugation of India “the greatest crime in all history.” Whether or not one agrees, one thing is clear: imperialism was not, as some disingenuous British apologists have claimed, an altruistic enterprise.

Britain has been suffering from a kind of historical amnesia about colonialism. As Moni Mohsin, a Pakistani writer, recently pointed out, British colonialism is conspicuously absent from the United Kingdom’s school curricula. Mohsin’s own two children, despite attending the best schools in London, never had a single lesson on colonial history.

Londoners marvel at their magnificent city, knowing little of the rapacity and plunder that paid for it. Many British are genuinely unaware of the atrocities their ancestors committed, and some live in the blissful illusion that the British Empire was some sort of civilizing mission to uplift the ignorant natives.

This opens the way for the manipulation of historical narratives. Television soap operas, with their gauzy romanticization of the “Raj,” provide a rose-tinted picture of the colonial era. Several British historians have written hugely successful books extolling the supposed virtues of empire.

In the last decade or two, in particular, popular histories of the British Empire, written by the likes of Niall Ferguson and Lawrence James, have described it in glowing terms. Such accounts fail to acknowledge the atrocities, exploitation, plunder, and racism that underpinned the imperial enterprise.

All of this explains – but does not excuse – Britons’ ignorance. The present cannot be understood in terms of simple historical analogies, but the lessons of history must not be ignored. If you don’t know where you’ve come from, how will you appreciate where you’re going?

This goes not just for the British, but also for my fellow Indians, who have shown an extraordinary capacity to forgive and forget. But, while we should forgive, we should not forget. In that sense, the powerful response to my 2015 speech at the Oxford Union is encouraging.

Well, am not sure about this. May be in elite circles things have been forgotten as nothing much changed for them. However, for an average Indian this bit of colonialism is pretty deep rooted and anger filled. The British schools may not be teaching about colonialism but most of us learn about it mostly from a negative angle. The huge response to Dr Tharoor’s speech proves this deep rooted anguish against colonialism.  Though, there is little doubt  that Raj has been painted pleasantly quite often than needed.

But then laws of karma are catching up?

The modern relationship between Britain and India – two sovereign and equal countries – is clearly very different from the colonial relationship of the past. When my book hit bookstores in Delhi, British Prime Minister Theresa May was just days away from a visit to seek Indian investment. As I’ve often argued, you don’t need to seek revenge upon history. History is its own revenge.

Is India’s tax base low?

February 21, 2017

Praveen Chakravarty of IDFC Institute adds to the debate with interesting data to ponder about.

His basic point is the threshold for exempting income tax is much higher than other countries. The ratio of per capita GDP to income tax exemption threshold is five times higher than world average.

Why is it then a big surprise that a mere 3 percent of Indians file income tax returns?

On the ratio of per capita GDP to income tax exemption threshold, India is a complete outlier in the world. The average ratio across 20 developed and developing countries is 0.5, i.e. the income tax exemption threshold in a country is only half its per capita GDP. For example, the average person in China earns 50,000 yuan but anyone earning more than 18,000 yuan will fall under the tax bracket. Similarly, the ratio of income tax exemption threshold to per capita GDP in Brazil is 0.8. It is 0.2 in the United States and 0.9 in Mexico. India’s ratio is 5 times greater than the world average. As the chart below shows, only Bangladesh has a greater ratio than India.

So, when the Economic Survey suggests that India has among the fewest taxpayers per 100 voters, it is equally important to consider this fact that India has one of the highest exemption thresholds for paying income tax.

So it is not fully fair to say India does not pay taxes. Lower the exemption limit and you have more people part of the tax fold.

In the Union Budget of 2017-18 presented by the Finance Minister recently, the income tax rate for the first income tax slab was lowered from 10 percent to 5 percent. So, India not only has a high income tax exemption threshold but also a very low rate for the first income tax slab.
Again, India stands out in this aspect compared to the rest of the countries in the world. The chart below plots the ratio of income tax exemption threshold to per capita GDP on the X axis and the rate of income tax for the first slab on the Y axis. As evident in the chart, India is a complete outlier yet again, even more of an outlier than Bangladesh, whose income tax rate for the first slab is higher.

Data source: Praveen Chakravarty
Data source: Praveen Chakravarty

In the last two decades, the income tax exemption threshold has increased six-fold from Rs 40,000 to Rs 2.5 lakh. In contrast, the average annual nominal incomes of Indians have multiplied only three-fold in this period.

It is thus premature to conclude automatically that India’s inordinately low tax base is entirely a function of massive tax evasion by Indians. While lowering the income tax rates, had the Finance Minister also lowered the income tax exemption threshold to say Rs 1.5 lakh, 1.1 crore more Indians would have automatically qualified to pay income tax. This would have brought India more in-line with the rest of the world in terms of exemption threshold to per capita GDP ratio.

Hmm..

One needs to dice and slice data to get more ideas..

Actually for a very long time we have been obsessed with taxes and who is paying them. We have not looked at expenditure side at all barring when it comes to subsidies. How efficient has Indian Government’s spending been all these years? One would hypothesise that the record has been a really poor one so far (would like to be proved wrong here).

The Indian government over the years has also nicely spinned the story saying more taxes will enable State to deliver more and help India develop. Well the intention is welcome, but the history of development via taxes more so income tax needs to be understood from a historical perspective.

 


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