Un­pack­ing house­hold fi­nance in an elec­tion year

HT Estates - - FRONT PAGE - Tarun Ra­mado­rai let­[email protected]­dus­tan­times.com The author is pro­fes­sor of fi­nan­cial economies, Im­pe­rial Col­lege Lon­don.

Wearenowayearor­less­fro­man elec­tion, ape­riod in which, in­evitably, short-runob­jec­tives dom­i­nate longer-run ini­tia­tives. That said, there are some longer-run pol­icy ini­tia­tives that are “dou­ble bot­tom line”, si­mul­ta­ne­ously eye-catch­ing, and im­por­tant for the In­dian econ­omy. Sev­eral poli­cies in the area of house­hold fi­nance have the at­trac­tive prop­erty of meet­ing po­lit­i­cal goals, while si­mul­ta­ne­ously im­prov­ing the qual­ity of peo­ple’s lives.

In­dian house­holds re­quire cus­tomised, rel­e­vant, and scal­able fi­nan­cial prod­ucts that ac­count for their unique eco­nomic con­di­tions and­long­stand­ing tra­di­tions. These must be avail­able and com­pre­hen­si­ble to house­holds re­gard­less of their level of ed­u­ca­tion, free from in­cen­tive prob­lems, and avail­able at a fair price.

Un­for­tu­nately, we are far from this ideal world. In­dian house­holds face nu­mer­ous im­ped­i­ments to us­ing fi­nan­cial in­stru­ments to ef­fi­ciently achieve their ob­jec­tives while min­i­miz­ing risks. This is true for house­holds at all lev­els of wealth and in­come. The first part of the re­port of the RBI (Re­serve Bank of In­dia) House­hold Fi­nance Com­mit­tee, re­leased last year, doc­u­ments many of these is­sues in de­tail.

To solve these is­sues, a com­bi­na­tion of old-fash­ioned and tech­no­log­i­cally ad­vanced reme­dies will be nec­es­sary. This col­umn fo­cuses on a few old-fash­ioned pol­icy reme­dies in the three im­por­tant ar­eas of gold, real es­tate, and in­sur­ance

For years, we’ve known that In­dian house­holds hold sub­stan­tial (and sub­op­ti­mal) quan­ti­ties of gold and real es­tate. As demon­strated in the RBI re­port, this has neg­a­tive con­se­quences for house­holds them­selves, as well as for the govern­ment ex­che­quer. There are many plau­si­ble rea­sons that house­holds hold gold. One dis­taste­ful pos­si­bil­ity is tax eva­sion.

All par­ties have an avowed in­ter­est in re­duc­ing black money and in­creas­ing tax com­pli­ance. This is top of mind for the elec­torate.

There are two poli­cies that can help here. First, the re­quire­ment to pro­vide a PAN card at the time of gold and jew­ellery pur­chases should be re­in­stated. Last year’s GST (goods and ser­vices tax) Coun­cil no­ti­fi­ca­tion that the PAN card is no longer manda­tory for pur­chases above ₹50,000 also ex­empts jewellers from re­port­ing such pur­chases to the fi­nan­cial in­tel­li­gence unit. This is a ret­ro­grade step and should be walked back.

A com­ple­men­tary pol­icy is to re­quire all gold and jew­ellery trans­ac­tions to be reg­is­tered elec­tron­i­cally and mon­i­tored, with non­u­mer­i­cal thresh­olds set for trans­ac­tion value—a step that only en­cour­ages mis­in­voic­ing. Be­ing se­ri­ous about re­duc­ing tax eva­sion re­quires bet­ter mon­i­tor­ing of gold—an easy sound­bite in an elec­tion year. It will help house­holds re­duce un­rea­son­ably high al­lo­ca­tions to this as­set.

Here’s an­other pol­icy: the statutes cur­rently al­low mort­gage in­ter­est tax to be de­ducted for any in­come from res­i­den­tial real es­tate. This is true whether the real es­tate is the in­di­vid­ual’s prin­ci­pal pri­vate res­i­dence, or if the prop­erty is let out to gen­er­ate rental in­come.

The tax ex­emp­tion for sec­ond and fur­ther homes should be re­moved. This will dis­cour­age the use of real es­tate as an in­vest­ment ve­hi­cle with­out touch­ing house­pur­chases for hous­ing ser­vice con­sump­tion.

What about the po­lit­i­cal con­straint? The over­whelm­ing ma­jor­ity of In­di­ans do not have sec­ond homes for rental pur­poses; only the wealthy do.

This is a pro­gres­sive tax pol­icy, which can play well with the elec­torate and will help re­duce the un­usu­ally high al­lo­ca­tion to real es­tate.

Back to tax eva­sion, it’s ob­vi­ous that elec­tronic land reg­is­tra­tion and cer­ti­fi­ca­tion is hugely im­por­tant, and should be a con­tin­u­ing fo­cus of ded­i­cated ef­fort. How­ever, that is an is­sue for a dif­fer­ent col­umn—a more tech­no­cratic, and less vis­i­ble, but none­the­less im­por­tant pol­icy.

The govern­ment’s re­cent an­nounce­ment on health in­sur­ance has been eye-catch­ing.

This is laud­able, but there are ques­tions about whether the pol­icy is well-funded rel­a­tive to the vast con­tin­gent li­a­bil­i­ties.

Many is­sues need to be care­fully solved for when de­sign­ing such pol­icy. One ex­am­ple: how does the pro­vi­sion of ap­par­ently free health in­sur­ance change the in­cen­tives of house­holds to make claims?

Sim­pler things can be done in the in­sur­ance space. For one, dis­tri­bu­tion in­cen­tives for life and other in­sur­ance poli­cies should be ra­tio­nal­ized to har­mo­nize com­mis­sions for ini­tial sale and pol­icy re­newals. Re­newals should be en­cour­aged, rather than de facto en­cour­ag­ing house­holds to lapse pay­ments— with the con­se­quence that they forego re­ceiv­ing ben­e­fits in the event of a sub­se­quent claim.

Po­lit­i­cal par­ties could prom­ise an al­ter­na­tive—a sim­ply ad­min­is­tered, trans­par­ent termlife in­sur­ance pol­icy that doesn’t suf­fer from in­cen­tive prob­lems. Clean up the dis­tri­bu­tion and in­crease trust in the prod­uct.

Trust also de­pends on house­holds eas­ily seek­ing re­dress when mis-sold prod­ucts. It is not cur­rently pos­si­ble to del­e­gate re­dress to rep­re­sen­ta­tives.

It is no sur­prise that fi­nan­cial prod­uct take-up is low when re­dress is com­pli­cated and forces ru­ral house­holds to sac­ri­fice in­come to travel long dis­tances for per­sonal rep­re­sen­ta­tions. A pol­icy that’s on the side of the poor has a pow­er­ful emo­tive qual­ity in an elec­tion year. And it’s the right thing to do.

These are a few steps on the road to bet­ter house­hold fi­nance in In­dia. Th­es­takes are high, and not just in an elec­tion year. Whether now or later, these and other is­sues must be ad­dressed.


The over­whelm­ing ma­jor­ity of In­di­ans do not have sec­ond homes for rental pur­poses

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