Sunday, April 8, 2012

India: The Land of 'Lawlessness'

I am writing this blog this morning to let my fellow readers know that the country in which they are living - India - is a land of total lawlessness. I know that many of you already know this fact; only a person who is out of his mind would deny it because when people are being ruled by some rulers, whether that be Kings or some democratic State, chaos and lawlessness is the only logical outcome. But many of you who still could not see this fact, because your reason has betrayed you, will demand an evidence of this fact. Below I am presenting an evidence of one such recent event which will illustrate the fact that India indeed is a land of total lawlessness; It is a country which is ruled by barbarians, people who are having no respect for the rule of law and justice.

Recently I am reading the book of John Maxcy Zane: The Story of Law. Last night while reading the chapter on ancient Greek Law, I came across couple of paragraphs, where Zane discusses what justice is not, which reminded me of the recent event of Indian Finance Minister Pranab Mukherjee proposing to retrospectively change the tax laws so that he can tax (mulct) Vodafone company's past foreign deal with Hutchison Whampoa Ltd (for details see here, here, and here). This move has created a big stir and many foreign businesses have expressed their worries of doing business in India. When you will compare what Zane has to say about justice with this Vodafone v/s Pranab Mukherjee and the Indian government tax raw, it will become clear why I am branding India as a lawless country. Here's what Zane said in those paragraphs, and I quote:

In an age incapable of thoroughly sound legal analysis—and this is true of the Greeks because the race had not yet the experience necessary to find a basis for such reasoning—men had not analyzed far enough to deduce that the legislative function consists in announcing a rule of law to govern future happenings, that the judicial function, on the other hand, consists in applying to a happening that becomes the subject of litigation a rule of law existing when the happening took place. If a new rule is announced by legislative power to govern a completed transaction, the power exerted is not a legislative power, but an arbitrary edict abrogating the applicable rule of law as to a past transaction and withdrawing from the party whose conduct is in question the equal application of the laws. For his particular case the party has been made an outlaw. As we have seen, the idea and concept of justice demand as the very essence of justice, preĆ«xisting rules of law applicable to all alike and impartially applied. If this is not the situation, justice does not exist, nor do laws exist.
“Law is something more than mere will exerted as an act of power.” Such is the weighty language of the Supreme Court of the United States. Hence, when the legal system is so instituted that the legislative body can decide a lawsuit by an edict for a particular case, it is neither legislating nor adjudicating, but is simply exerting arbitrary and uncontrolled power, than which nothing is more contrary to the fundamental basis of justice...

And the more relevant para:

If a man cannot to-day see that it is in reason impossible to govern a completed transaction by a rule of law invented after the transaction happened, he is not a reasonable human being. Even in trivial matters like a game of cards, the none too intellectual devotees of that pursuit recognize at once the nonsense of inventing a rule to govern a play after the play has been made. To card players it is an axiom that the rule existing when the play was made must govern the play, and that has been the actual demand of justice as to important matters in all the ages since the idea of justice was first comprehended by men. 

We can see above that whatever Zane said in those couple of paragraphs perfectly fits the case of Vodafone v/s India government tax raw. Indian government, especially the inept finance minister, is trying to invent a rule to govern a play after the play has been made! This is sheer nonsense coming from the mouth of the finance minister. Although there is no relation between the State and the law - because the State is an unlawful entity to being with - but still, when the government starts to change the rules retrospectively, it is a sign that the country has degenerated into total lawlessness.

Indian government is financially broke and in its attempt to survive it is now resorting to such mad means of retrospectively changing the legislative rules. The economic impact of such measures will be devastating for the economy as more and more foreign firms become reluctant to come to India. Ultimately the common man will suffer, as usual. 

Thursday, April 5, 2012

Jewelers' On Going Strike and the Gold Import Duty Question

In the recent Union Budget, Finance Minister Pranab Mukherjee doubled the import duty on Gold as well as imposed a 0.3% excise duty on unbranded Gold products (see here for major issues involved in the on-going strike of jewelers and other Gold market troubles). The reason he cited for this policy move is the unfavorable impact of rising  Gold's import on the trade deficit. The real reason - which the government is hiding from the common man - is the troubles with their own budgetary deficit, which has already breached the limits (this always happens; government hardly runs  a surplus budget). The socialist welfare-warfare state is meddling in every imagined aspects of our lives and that is bound to increase government's all kinds of deficits. To fill the void in their revenue - i.e., loot - they want to mulct the jewelers now.

The problem of trade deficit actually is government's own making. Without government's intervention in the economy, imports will be paid for by the exports and, thus, there will be no question of any trade deficit. What will be bought from abroad will be paid for by foreign earnings. For example, suppose there is one Indian named Raju who is producing goods and services worth 1000 rupees and using that income for consumption of domestic goods. In present the rupee dollar exchange rate is 50:1, and all foreign transactions are taking place through the central banks of respective countries, which is essentially the case presently. Also, the Indian central bank RBI originally has 150 dollars in its Forex reserves. Now, if Raju wants to purchase Gold worth US$50, then, it won't be possible in the present production conditions because he doesn't have any dollars to pay for that Gold import. All his rupee income is for domestic use only. To import Gold he will have to first produce goods or services worth US$50 - i.e., rupee 2500 at the said exchange rate - and sell it (export it) to some American or any other foreign national who is paying him in dollars. The whole process will take place like this. Suppose one American named Marco wants to buy Indian spices. To fulfill his demand, Raju will produce spices worth 50 dollars and sell it (export it) to Marco. Marco will pay Raju 50 dollars check, which Raju will deposit in his RBI account. After this exchange RBI's Forex reserve has gone up to US$200. Now, once having 50 dollars in his account, Raju will purchase Gold from Switzerland making the payment of 50 dollars to Nick in Switzerland by writing a 50 dollar check on his RBI account. RBI will pay 50 dollars to Nick's Swiss central bank where Nick deposited Raju's check. After this transaction, RBI's Forex reserve has come down to its original 150 dollars. As we can see, there is no deficit in RBI's (current) account in this whole trade. Raju's import of Gold is paid for by his export of spices.

The trade deficit can only emerge when Raju is having rupees in his hands which he has not earned by producing and exporting something. And this is only possible in an economy where government and its central bank is printing and creating rupees out of thin air. Suppose RBI prints and loan 2500 rupee to Raju. Raju wants to buy Gold and so he makes a 50 dollar payment through his RBI account to Nick in Switzerland and imports Gold. Now RBI will have to make a 50 dollar payment to Nick's Swiss bank account from his original reserve of 150 dollars! After paying Swiss bank, RBI's Forex reserve has gone down to 100 dollars. Now there is a deficit in the trade account! Not only there is a deficit, this extra demand for dollars and higher supply of rupee will also have an adverse impact on the rupee dollar exchange rate. Dollar will become strong and rupee will become weak! Although my example is highly simplistic to bring the problem in focus, but this is what is exactly happening right now in India.

As we can see above, the deficit would have never emerged if RBI didn't print and loan that extra 2500 rupee out of thin air in the first place. The government is blaming and punishing innocent jewelers for their own shenanigans. They are printing and spending crores of rupees out of thin air, which is eroding the purchasing power of rupee i.e., inflation. To protect their nominal income from this inflation, people are buying more and more Gold converting useless paper rupees in Gold in this process. And this in turn is creating that deficit. On one side inflation is making Indian exports costlier in the international market, which coupled with lethargic western export markets is reducing Forex earnings and on other side people are purchasing Gold imports. This twin factors are creating the deficit. For both these phenomena the government and its central bank RBI is entirely responsible, as usual.  

The only solution of this problem is total removal of government intervention from the Indian economy. RBI should immediately stop creating rupee out of thin air. They should stop all their stimulus packages; stop meddling in the market and stop manipulating the market rate of interest  and money supply. Once there is no free rupee available, no one can buy gold without first earning dollars in the market. If RBI stops eroding purchasing power of rupee by stopping inflation, then, no Indians will rush to buy Gold for protection. After taking this initial steps, we must dismantle RBI and bring India back on the pure 100% reserve Gold standard. In foreign trade, Indians should stop accepting paper dollars for their exports. There is no need to give valuable goods and services to Americans in return of paper dollars which are now becoming worthless because of Federal Reserve's highly inflationary monetary policy. Americans must work hard and produce and export goods and services to pay for their imports. Once the Indian economy is free from the stranglehold of government, it will become stronger attracting more and more foreign investment in India. That will make Indian rupee - which now will be just a name for underlying unit weight of Gold - stronger too. 

Increasing import and excise duties is not going to solve any problems. It will only make the life of people more difficult; it will impose higher opportunity cost and waste resources.  No matter how hard the government will try to stop people from buying Gold, the free market forces will find its own way in the form of thriving so-called black-market in Gold. The underground economy will take over the work of delivering Gold to its customers i.e., the old phenomena of smuggling will come back to life again, and for better.