‘India headed for economic doom’, prominent US think tank says

India is heading straight for economic failure post-Chidambaram's budget as a direct result of the lack of meaningful economic reform, says Heritage Foundation, an important conservative thinktank in the US. Assessing finance minister, P Chidambaram's budget, Derek Scissors of the Washington-based organization said that it "leaves India on the same, failing course it's been on of undisciplined spending and unrealistic expectations".

The Indian economy is in dire health, he said, not only because Indians' incomes have stagnated, income growth slowed and consumer inflation is high, but because manufacturing that should lead the Indian economy that would create jobs for the swelling ranks of young Indians is refusing to take off.

"Services lead in large part because the labour market is more flexible in services industries than in manufacturing. Rather than labour market reform, the Indian government offers a state-led infrastructure program. But the infrastructure program has no chance to succeed while property rights to land remain so ill-defined," he explained.

Mr. Gerard Colaco: Financial journalism these days appears revel in alternating between unjustified euphoria of the “India Shining” variety we had a few years back, and the gloom, doom and ruin variety we have in the Times of India article referred to by you. Generally, in a country as large and diverse as India, neither scenario comes true. I am not saying that the US think tank called the Heritage Foundation is not comprised of extremely intelligent individuals. I am sure it is.

But it is not the only think tank in the US. I will not be surprised if I find other think tanks that state the opposite. We must understand the mindset of citizens of the US, Western Europe and other advanced countries versus the Indian mindset, where relations with the government are concerned. In the advanced countries, to a very large extent, their citizens have enjoyed an environment of very low corruption, encouragement to free enterprise and generally liberal, good governance.

As a result, most people of these countries, including individuals, tend to veer round to the belief that their governments are everything. The end result is that citizens start depending upon the government for a variety of services and aid, including medical services, retirement benefits, old age pension, unemployment doles and the like. That is why, when recession strikes and the government introduces austerity, there is a shocked response. Human misery reaches an all-time high and people just cannot cope with the new situation when their governments fail them.

Now contrast this with India, where we are born, live and perish secure in the knowledge that our government will fail us. We know that the government mainly exists not to develop the country but to feather the nests of politicians and bureaucrats. We do not depend upon the government for help. In fact, most of the time we are thrilled if the government gets out of the way and does not interfere.

Even our much vaunted liberalisation which was kick-started in 1991, was not because either politicians or bureaucrats wanted to develop the country. It was to extricate itself from a huge balance of payments problem, which would have resulted in India defaulting on payment for its international purchases, especially crude oil. So, economic activity in this country does not have a high dependence on government policies. That is why the country keeps ticking, regardless of whether the budget is good or bad and regardless of the size of scams that occur with a regularity that is almost monotonous.

Of course, the right policies of decontrol, downsizing of government, reforms including labour reforms, privatisation, cutting of red tape, greater integration with world markets, etc., can result in the Indian economy growing at a much faster rate. But there are interests that are too deeply entrenched in the present third-rate system to allow this. So, there is a lack of will at various levels to implement swingeing reforms.

On the other hand, if politicians think that fiscal and monetary recklessness will help them win the next election, they will not hesitate to venture down this path of profligacy, without giving a damn about the either the country or its finances. We are in an election year, but Mr Chidambaram has refrained from this kind of irresponsible behaviour in the 2013 budget. For this, we must be grateful.

The Indian economy will certainly not turn in any outstanding performance in the near future. But neither will the doomsday predictions of the Heritage Foundation come true. We will continue to cheerfully muddle along, with bad laws, myopic vision and mediocre performance. Indian citizens and businesses will of course be driven by the profit motive to constantly improve their performance. If our businesses think that they cannot achieve satisfactory performance in this country, they will take their capital abroad and do business there. To that extent, Indian shareholder will be benefited.

There is an old saying about the four 'V's of a vibrant economy, which are Volume, Velocity, Variety and Versatility. We have variety and versatility, no matter how poor or illiterate our citizens are. We can also produce the necessary volumes whether in India or abroad, as our software services industry has shown. What we lack is the velocity needed to propel the economy forward, which must come from the government, which we unfortunately do not have.

To conclude, the dire forecasts Heritage may have been made without a proper foundation. They will not frighten me, just as the old predictions of India Shining in 2007 and early 2008 did not excite me. India appears to be a country where, with apologies to Shakespeare, if you are not born a stoic you will either achieve stoicism or have it thrust upon you!

 

THE UNION BUDGET 2013 - A BRIEF ANALYSIS

 Mr. Gerard Colaco: The problem with Indian finance ministers is that they are tinkers, not leaders, much less visionaries. If a man of Mr. P Chidambaram’s learning, knowledge, experience and ability could present a budget as insipid as the one tabled on 28^th February 2013, then there is not much hope for this country.

There has been needless tinkering with surcharges both at the individual and corporate income-tax levels. These are short-sighted methods to raise revenues. The best way to shore up government revenues and the country’s economy is by bold economic reforms aimed at stimulating growth. Revenues will automatically rise in a resurgent economy.

On the other hand, if revenues are sought to be increased by tinkering with surcharges, the only result will be that the affected individuals and entities will employ avoidance strategies. For example, if the surcharge on dividend distribution tax is raised, companies may either lower dividends or withhold dividends or resort to methods such as share buyback to neutralise the increased surcharge.

As for the surcharge on high income individuals earning more than Rs 1 crore per annum, the finance minister appears to have overlooked one simple and obvious fact. These individuals have the wherewithal to hire the best consultants to advise them on tax avoidance and tax reduction strategies. In short, revenue-raising by tweaking existing tax provisions is short-sighted to say the least.

The relief in the form of a tax rebate of Rs 2,000/- for tax payers with taxable income up to Rs 5 lakhs, though small, is welcome. I would not take the finance minister’s assurance that all additional surcharges on income-tax are only for a period of one year. Such promises have been made in the past and what was supposed to be temporary has been made more or less permanent. A classic case is the education cess of 3% on income-tax that has been in force for several years now. The old licence-permit-quota raj has now well and truly been replaced with a cess-and-surcharge raj.

On the positive side, the finance minister has ensured that sufficient funds have been provided for all existing flagship welfare schemes, particularly those designed to benefit the weaker sections of society, women, children, the disabled, health, education, providing of drinking water, rural development, infrastructure and agriculture. The government cannot be faulted on intent in these areas.

The difficulty is in implementation and in ensuring that the funds spent actually result in the desired outcomes. The bane of this country with its high levels of corruption is that there is a huge difference between funds sanctioned and funds utilised. Funds ultimately utilised tend to be only a fraction of funds sanctioned thanks to a depressingly alarming quantum of leakages along the way. No budget can plug this.

On the other hand, technology can be harnessed to eradicate corruption. But bureaucrats will always attempt to scuttle speed and transparency in the delivery of government services through technology, given their love of rent seeking at all levels.

Despite the rampant rise of materialism, there is still an appreciable amount of thrift left in Indians. This should be harnessed and exploited by the government. Meaningful, attractive and substantial incentives must be given for savings. Some good, some bad and some mad measures in this area are visible in the budget.

The proposal to issue inflation index bonds is laudable. But I can finally comment on these bonds only after their terms and conditions are known. The income-tax provisions applicable to these bonds will be of vital importance in judging whether they are of real value to investors. If the said bonds are heavily taxed, the very idea of protection against inflation will be defeated. It will also be interesting to see against which inflation measure the bonds are benchmarked, given that rates of inflation put out by the Indian government are largely a work of fiction, as every prudent Indian housewife knows.

The additional deduction of Rs 1 lakh on interest for a person taking a housing loan to finance the purchase of a house for the first time is undoubtedly good.

But the Rajiv Gandhi Equity Savings Scheme (RGESS) has been and will continue to be a dismal failure. The tax saving is insignificant and the target investor group is pathetically small, because it is only for first time savers in equity and equity mutual funds. When a much more attractive provision like total exemption on long-term capital gains on investments in equity and equity mutual funds has been in existence for years, but failed to bring investors into the stock market, I wonder by which flight of fancy the government imagines that an unattractive scheme like the RGESS will suddenly and magically cause an investor stampede into the equity market.

Neither the government nor SEBI has realized that the stifling documentation in the form of KYC and KYC updating procedures are what are driving investors away from equity and mutual fund investments. Similarly, in financial services firms, the main activity is compliance with needlessly complex bureaucratic procedures, rather than business and client service.

Unfortunately, when analysing modern Indian budgets, we consider a budget good not if it is full of vision, leadership and reform, but merely if it does no harm. From that point of view at least, we must be thankful that the union budget of 2013 has not
done any serious damage.

On one front, the budget proposals must be appreciated. The finance minister has resisted the temptation to announce a slew of populist measures in an election year. Had this been done, it would have weighed heavily on the exchequer and exacerbated an already unenviable fiscal position. The commitment of finance minister to give some priority to fiscal discipline and consolidation, thereby attempting to control inflation, has to be admired and appreciated.

In the ultimate analysis, the union budget 2013 is like the curate’s egg – good in parts. Writing in The Economic Times, veteran journalist Swaminathan S Anklesaria Aiyar put things in lucid perspective: “A budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth. Much more is needed outside the budget to cut red tape, expedite clearances and improve governance.”

In the one year that he has left, if Mr. P Chidambaram can get his act together on the reforms, decontrol and clear and speedy decisions fronts, he may yet redeem himself.

 

 

New Pension Scheme

Investor’s Query: What is your suggestion about investing in NPS for Retirement Corpus?

http://economictimes.indiatimes.com/personal/finance/savings/centre/analysis/ET-Wealth-Why-NPS-is-the-best-way-to-plan-for-your-retirement/articleshow/18086398.cms

Mr. Gerard Colaco: The article reveals the dismally poor quality of financial journalism in India today. Let us subject the New Pension Scheme (NPS) now called the National Pension Scheme, to pitiless analysis. NPS is available to citizens of India from 1^st May 2009. It is one of the worst choices for retirement investment, more so when there is a long time horizon of two decades or greater. The one advantage of the NPS is that there is no maximum limit to the contributions. The maximum tax benefit of course is limited to Rs 1 lakh by Section 80C.

There are two types of accounts, TIER-I accounts, where the contributions cannot be withdrawn until the stipulated age of 60. The second is TIER-II accounts. Here, the savings can be withdrawn at any time. However, in order to have a TIER-II account you must also have a TIER-I account. Thus the backbone of the NPS is the TIER-I account. It is this account which will be analyzed here. My first argument against the NPS is that it militates badly against the basic investment principle of liquidity. If an individual starts saving in the NPS at say 23 and at 43 he is diagnosed with a terminal disease with only perhaps a year to live, how does the NPS benefit him if the funds therein are to be locked until he reaches the age of 60? ELSS, tax saving bank deposits and even the PPF have much better premature liquidity provisions.

Second, the NPS is open to persons between the age of 18 & 60. There are a lot of people who live two or three decades beyond the age of 60. Such people cannot join the NPS even if their financial resources permit and they need tax saving.

Third, when an NPS account holder reaches the age of 60, she can withdraw the balance in the NPS. But only 60 percent of the amount withdrawn can be utilised by her freely. The remaining 40 percent must be used compulsorily to purchase annuities from insurance companies. In case of premature withdrawal before the age of 60, only 20 percent of the amount withdrawn can be utilised freely and annuities must be compulsorily purchased with the remaining 80 percent. This is my main argument against the NPS. Let us say an individual invests in the NPS for 40 years between the ages of 20 and 60. A huge sum may be accumulated. Even such a disciplined investor will now see 40% of his corpus going into high-cost, poor-investment and low-return products such as life annuities.

Fourth, the maximum amount allowed for equity investment in the NPS is 50 percent. This is crazy. If a youngster aged 20 lands a reasonably good job and wants to put by something for retirement every month, I would advise 100 percent in equity through an SIP into either an index fund or direct equity portfolio for at least the first 20 or 25 years. Even if the NPS had an option by which an investor could choose equity to the extent of 75 percent up to say the age of 40, that would be infinitely better than foolishly limiting the equity component to 50 percent regardless of the age and time horizon of the investor.

My fifth argument against the NPS is the multi-layered charge structure involved. Much has been made of the fund management charge of 0.0009% per annum, which is indubitably low. But there are other charges about which, surprisingly, no one speaks. The account opening charge is Rs 50/-. The annual maintenance charge per account is Rs 280/-. The charge per transaction is Rs 6/-. The initial charge for subscriber registration is Rs 40/-. The charge for any subsequent change in subscriber registration is Rs 20/-. The custodian charge is 0.0075% per annum for the electronic segment and 0.05% per annum for the physical segment. Finally, there is the fund management charge of 0.0009% p.a.

For the reasons mentioned above, I would neither touch the NPS nor recommend it to anyone. I will not waste my time commenting about the article itself, which does not address the important issues of liquidity, asset allocation and the compulsory dumping of annuities on investors. I will just criticise one point in the article as an example of just how poor financial journalists are in sound investment knowledge.

According to the writer, one of the “most outstanding features” is the “life cycle fund”. It is the default option for someone who has not indicated the desired asset allocation and those who are not financially aware and can’t manage asset allocation themselves. Those who are not financially aware must find and consult a competent adviser or better still acquire sound knowledge themselves before venturing into an avenue of investment they know nothing about.

The life cycle fund is simply a strategy by which 50 percent of the NPS corpus is in equity and 50 percent in bonds up to the age of 35 years, after which the percentage allocated to equity decreases by 2 percent per annum until at the age of 55, there is only 10 percent in equity and 90 percent in bonds. I shudder to think of a 55 year old who is going to live to 90 on this asset allocation.

As Prof Burton Malkiel puts it to so well, “No asset allocation will fit all 30-year-olds, 50-year-olds or 80-year-olds. Even an 80-year-old might want an asset allocation more suitable for a 30-year-old, if she plans to leave most of her estate to her children or grandchildren. The appropriate allocation of those planning bequests should be geared to the age of recipient, not the age of the donor, for that part of their total investment."

When I went through the article, I was reminded of this old saying, which appears to be getting more relevant by the day: “There are four types of persons involved with the market. Those who do not understand the market, but have money to invest, are called investors. Those who understand the market but do not have the money to invest are called brokers. Those who understand the market and have the money to invest are called tycoons. And those who neither understand the market nor have the money to invest are called financial journalists."

 

 

Investing in Forests

Investment Query: I came across an interesting article. It unfolded a new path of investments to me. Now I understand that this is not a practical idea, but is it possible in the future that people will start investing in forests?

http://www.businessesforsale.com/search/articles/The-benefits-of-investing-in-real-assets

Mr. Gerard Colaco: Throughout the history of investment, various individuals and institutions have come out with, what on paper at least, appear to be attractive alternative investment avenues. The only problem with these avenues is that their long-term track record and many times even their intermediate track records are dismal.

The very sentence of the article sent by you is faulty. It states that unlike stocks and shares, timber growth is not affected by economic circumstances. Nonsense. Timber growth can be affected by disease, climate change, forest fires, storms, amendments to government regulations relating to forestry, acquisition or sudden declaration of certain areas as ‘protected’ with a ban on felling trees, etc. Companies offering schemes based on forestry are often poorly regulated and there can be any amount of mismanagement and fraud in these outfits.

In fact in India, there have been numerous investment schemes based on agriculture, teak plantations, etc., all of which have failed, creating huge losses for their investors in the process. There are some false statements made in the article. Values of all real estate properties, including timber plantations can fluctuate and have fluctuated in the past. The mere fact that the trees grow is not sufficient to insure against the possibility of a downturn in timber prices in the event of a global recession or real estate market fall. Timber growth and timber property prices are two entirely different things.

The statement that physical assets are safer than financial assets is also false and indicates a flawed understanding of investment. It is true that a physical asset can be seen to exist and continue existing. But so can almost all companies in a diversified portfolio of blue chip stocks. Equity has also proved itself to be a very safe investment over the long term. We have 410 years of stock market history testifying to this.

The argument of growing population in developing countries providing demand for timber can be applied to other asset classes as well. For example, the growing Indian population, has added to the demand for gold, medicine, healthcare facilities, food, banking services, automobiles, telecom services, etc., etc., and not just the demand for timber.

Returns on timber are also region-specific. You need not get the same returns in all countries. In fact, timber returns in developing countries are higher than in developed countries. When you invest across geographies and countries, there is also the foreign exchange risk to be taken into account. Costs of registration fees on the acquisition of timber properties and agents' fees on the sale of timber can also eat into returns. If the forestry investment is packaged through a collective investment scheme, the managers of this scheme would charge their fees and expenses, thereby affecting returns.

Demand for timber can also be affected by wood substitutes. There is a great variety of timber products. Some may be in demand at a particular time. Others may not. The case of softwood in the US is illuminating. During the global financial crisis, when housing construction reduced drastically, the demand for softwood plummeted. Several sawmills turned sick and even closed down. Timber, like all other investments, is not magically exempt from risk.

One point on which I fully agree with is that an investment in forestry is non-correlated to other types of growth investments and offers an opportunity for diversification. But only people with a very high net worth can indulge in the luxury of an investment in forestry, and that too, if this kind of investment is well regulated. Most other investors would do well to stick to a sensible programme of investment and allocation to normal avenues of debt, equity and real estate.

New Pension Scheme (NPS)

Investor’s Query: Can I have your advice on NPS? Is it worth investing?

Mr. Gerard Colaco: In my opinion, the New Pension Scheme (NPS) is not worth investing in, for the following reasons:

1. Even for a very long time horizon, a maximum of only 50% allocation to equity is permitted, even if the investor wants a higher equity allocation.

2. While much is made of the very low fund management charge, there are multi-level charges at various offices and levels of the NPS system, the cumulative effect of which is that the NPS is a far more expensive system than appears at first glance.

3. Liquidity is a cardinal principle of any investment. In the NPS you will not be able to withdraw until the age of 60 except if you contract a critical illness or you are buying or constructing a house.

4. The worst clause is that even if you have invested for decades and built up a big corpus, when you withdraw, 40% of that corpus has to be compulsorily used to purchase an annuity from a life insurance company, when withdrawal is done after the age of 60. But, if withdrawal is done before that, then a staggering 80% of the accumulated capital is to be used to buy a life annuity and the balance of 20% can be utilised by the account holder for any purpose. Annuities are high-cost, low-return products of life insurance companies, excellent for the agents and companies that sell them, and terrible for the poor wretches who buy them.

5. The entire income stream from the NPS - the lump sum and the pension - is fully taxable, except the portion actually used to purchase the annuity. Contrast this to investments in equity and equity mutual funds which at least at present are exempt from long-term capital gains tax. The PPF also does not suffer any tax on withdrawals.

A N Shanbhag, one of India's finest writers on personal investment, has this opinion of NPS in the 31st edition of his book "In the Wonderland of Investment": "The disadvantage of taxability on withdrawals and annuity receipts, or on death, is so overwhelmingly large that it is difficult to accept that the advantage of low cost will counterbalance this."

I will not touch the NPS in its current form or recommend it to anyone.

A word about Award!

Issue: Dear Mr. Gerard Colaco, congratulations on winning an award in the Karnataka Association of Mutual Fund Advisors (KAMFA) Convention. You fully deserved it and wished you were present to collect it.

Mr. Gerard Colaco: Sorry to disappoint, but I do not believe in awards at all! I was also not informed in advance that I had won any KAMFA award. Had I been, I would have politely declined it and the next Individual Financial Advisor (IFA) would probably have been given the award in our place, with our good wishes.

My allergy to awards is shared by the venerable Mr. Reginald Aranha, my cousin and partner of Colaco & Aaranha for the last 27 years. We prefer to be low-profile and publicity-shy. Let me tell you about one particular kind of award that I accept.

Some years back, an NRI client of ours had come down to Mangalore on his annual holiday. He was immediately assaulted by various salespeople from the insurance, mutual fund and stock brokerage outfits. During one call from a mindless tele-caller from a stock brokerage casino, he was asked whether he was dealing with any stock broker. He replied: "Colaco & Aranha."

The salesperson then asked him, "Do you know what brokerage they are charging you?" The client replied: "No." The tele-caller told him: "One percent." The client replied: "So?" The tele-caller said: "Do you know that this is perhaps the highest in India?" The client's reply was: "Even if Colaco & Aranha charges me two percent, I would still go to them."

Now that I consider to be an award from the only category of 'judges' rightfully authorised to give my firm any awards. During our career, we have been privileged to receive these awards with undeserved and slightly unnerving regularity!

RAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS)

The new tax saving scheme called "Rajiv Gandhi Equity Saving Scheme" (RGESS), exclusively for the first time retail investors in Securities Market. This Scheme would give tax benefits to new investors who invest up to Rs. 50,000 and whose annual income is below Rs. 10 lakh.

The Scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an 'equity culture' in India. This is also expected to widen the retail investor base in the Indian securities markets.

Salient features of the Scheme are as under:

1. Scheme is open to new retail investors, identified on the basis of their PAN numbers. This includes those who have opened the Demat Account but have not made any transaction in equity and /or in derivatives till the date of notification of this Scheme and all those account holders other than the first account holder who wish to open a fresh account.
2.  Those investors whose annual taxable income is ≤ Rs. 10 lakhs are eligible under the Scheme.
3. The maximum Investment permissible under the Scheme is Rs. 50,000 and the investor would get a 50% deduction of the amount invested from the taxable income for that year.
4. Under the Scheme, those stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings which are Navratnas, Maharatnas and Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the above companies would also be eligible under the Scheme. IPOs of PSUs, which are getting listed in the relevant financial year and whose annual turnover is not less than Rs. 4000 Crore for each of the immediate past three years, would also be eligible.
5. In addition, considering the requests from various stakeholders, Exchange Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible securities as their underlying and are listed and traded in the stock exchanges and settled through a depository mechanism have also been brought under RGESS.
6. To benefit the small investors, the investments are allowed to be made in instalments in the year in which tax claims are made.
7. The total lock-in period for investments under the Scheme would be three years including an initial blanket lock-in period of one year, commencing from the date of last purchase of securities under RGESS.
8. After the first year, investors would be allowed to trade in the securities in furtherance of the goal of promoting an equity culture and as a provision to protect them from adverse market movements or stock specific risks as well as to give them avenues to realize profits.
9. Investors would, however, be required to maintain their level of investment during these two years at the amount for which they have claimed income tax benefit or at the value of the portfolio before initiating a sale transaction, whichever is less, for at least 270 days in a year. The calculation of 270 days includes those days pursuant to the day on which the market value of the residual shares /units has automatically touched the stipulated value after the date of debit.
10. The general principle under which trading is allowed is that whatever is the value of stocks/units sold by the investor from the RGESS portfolio, RGESS compliant securities of at least the same value are credited back into the account subsequently. However, the investor is allowed to take benefits of the appreciation of his RGESS portfolio, provided its value, as on the previous day of trading, remains above the investment for which they have claimed income tax benefit.
11. For the purpose of valuation of shares, the closing price as on the previous day of the date of trading will be considered so that new investors are certain about their debits and credits into the account.
12. In case the investor fails to meet the conditions stipulated, the tax benefit will be withdrawn.

Like all financial products which have reached out substantially to the retail investors (post office savings, life insurance policies etc) through tax benefits, this tax break for direct investment in equity is expected to substantially encourage the retail participation in securities market as well as to enhance their participation in the growth of Indian industry.
Entry of more retail investors are expected to further deepen the securities markets as they bring in long-term stable funds, which can counteract the volatility created by the liquidity providers of the market. The Scheme, thus, also furthers the goal of financial stability and promotes financial inclusion. Since Exchange Traded Funds and Mutual Funds have also been brought under the Scheme, the Scheme should provide encouragement and re-assurance to the first time investors.

The broad provisions of the Scheme and the income tax benefits under it have already been incorporated as a new section 80CCG of the Income Tax Act, 1961, as amended by the Finance Act, 2012.

Department of Revenue will notify the Scheme and SEBI will issue the relevant circulars to operationalize the Scheme in the next two weeks.

Mr. Gerard Colaco: The donkey who conceived of the Rajiv Gandhi Equity Savings Scheme must have obtained his post-graduation degree from the Indian Institute of Idiots.

Query: The BSE Brokers Forum (BBF) informed the Finance Ministry that it would be a non starter. However any suggestions on how and what has to be done for Financial Inclusion. Your inputs and suggestions would be really helpful?

Mr. Gerard Colaco: Crap like ‘Financial Inclusion’ is for the politicians and babus in the government. I do not bother myself with this nonsense. I am concerned with simple, sound investment, which everyone can practise. Of course I believe in incentives to nudge people into building up savings for the long term.

When incentives are given across the board and are simple and straightforward, you will be surprised at how many people make use of them, regardless of whether they are from urban areas or rural areas, wealthy, middle class or poor, financial literate or not.

I would put all tax-advantaged investments under one section of the income-tax law. Let us take the present section 80C. I would give incentives for investment in 3 broad areas – debt, equity and real estate. I would have an attractive limit of say Rs. 3,00,000/- per year in the present context.

For debt, I would choose the Public Provident Fund (PPF).

For equity, I would choose Index Funds that track either the NSE or BSE 100 indices, or purchases of stocks that are in the said indices at the time the purchases are made.

For Real Estate, I would include the repayment of principal and payment of interest on housing loans as well as amounts directly invested in real estate by the purchaser of an apartment or houses, whether constructed or to be constructed. I would not include the purchase and holding on to vacant plots of land.

I would permit no withdrawals from tax-advantaged for a period of 5 years for any reason whatsoever. After that I would impose a penalty of 10 percent on the amount withdrawn in the 6^th year, 9% on the amount withdrawn in the 7^th year and 8% on the amount withdrawn in the 8^th year and so on. In short, as a reward for substantial tax saving, an individual would have to remain invested for a minimum of approximately 15 years in order to be able to withdraw without any penalty whatsoever. There would be no penalty for withdrawals by senior citizens, even though the minimum lock-in period of 5 years would apply to all.

These are my quick reactions. I am sure I can come out with much better ideas for tax-advantaged long term investment. But since I have immense faith in the Indian government‘s penchant of rejecting anything good, I am not going to waste further time on this.