The RBI needs to remember that unless global crypto norms get established as suggested by the PM, several of its measures may have a negative impact on domestic jobs, revenue and economic growth.
In times of crises, people in India turn to gold, and this is what they did soon after the 1962 aggression by the PLA took place. The austere Finance Minister of India, Morarji Desai, came up in 1963 with what he thought would be a solution to the swelling imports of gold. Ban import of gold completely. For millennia, the people of the subcontinent had been purchasers and holders of gold, often for use as a last resort in case times turned sour. To expect them to stop buying gold was a leap too far of faith in the potency of government edicts in a sprawling country. Till Morarji’s ban, India had not just been an importer but an exporter of gold, often in the form of jewellery. More than two million citizens were directly or indirectly involved in the gold business. Overnight, they lost their occupations, and less scrupulous individuals took their place in the now illicit gold trade. It was from India’s 1963 Gold Ban that Dubai began its ascent as a major trading hub. Sending gold to India through a medley of ways became a lucrative business in the sheikhdom. Among the undesirable side effects of the banning of gold was the appearance of the mafia, in the shape of illegal importers of gold from Dubai to India. Smuggling of gold remained a profitable business in India until 1992, when Prime Minister Narasimha Rao once again legalised the trade by scrapping the ban. During the UPA period, Finance Minister Chidambaram imposed a 10% duty on imports of gold. After that, smuggling once again became viable, and illegal operators entered a boom period. Not surprisingly, recorded gold imports fell drastically and collections from the new tax were small. Business in gold flourished, but illegally and in cash, with the government getting no revenue out of such business. An import duty on gold in excess of 5% promotes not revenue but smuggling of the precious metal. Dubai’s rise as a trading power dates back to the banning of gold imports in 1963. Had Narasimha Rao’s policy of permitting the gold trade not been reversed by the UPA, by now India would have been the global hub of the gold trade, and would through its exchanges exert a powerful effect on not just supply but price of the precious metal. Unsustainable taxes and overzealous regulation only succeed in driving away legal activity to other shores and inflating the illegal economy.
More than a third of the GDP of the Irish Republic has its origin in a few high-rise buildings in Dublin that serve as corporate headquarters for companies selling their goods across the world. Rather than having headquarters in their home countries, they operate from Dublin because of the lower tax that needs to be paid. 10% of a million is 100,000, while 40% of 100,000 is just 40,000. A low tax and easy compliance system that promotes growth would generate far more revenue than a high tax regime and regulatory mechanisms that soak up much of the time of top and middle management in matters of compliance (rather than in market development and product upgradation). CCP General Secretary Xi has converted the business environment in China into a morass, thereby giving a chance for India to acquire a faster and faster growth rate. This has begun to happen during Modi 2.0, and needs to be in full bloom during the next five years.
There is need to be watchful that those with control freak mindsets, such as those behind such self-goals as those made by Morarji and Chidambaram on gold policy, are kept out of economic policymaking. Finance Minister Nirmala Sitharaman has subtly reminded the Reserve Bank of India that the central bank should not kill jobs in the belief that higher interest rates (rather than lowering supply constraints) would curb inflation. All that higher rates would do would be to reward those (mostly external players) who depend on arbitrage for their millions. Instead of cosying up to arbitrage vultures, central bankers need to give them a wide berth. In the US, Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen are slowly choking the status of the US dollar as the reserve currency of the world by the Fed’s high interest rates and Treasury’s Russia sanctions. However, in other fields the Biden administration is doing well, among which is the rapidly emerging market in crypto assets. Binance (a PRC-controlled crypto platform) exulted at the fall of FTX, but before long, it too was substantially taken down, together with Coinbase. The hand of US authorities was scarcely concealed in such takedowns. As a consequence, the US-based NYSE and CMX are emerging as the biggest crypto exchanges in the world. That honour could easily go to India. There was a time not long ago when India had over a hundred million crypto wallet traders. Since then, a crackdown supervised by the central bank has seen almost all such traders migrate to other platforms, none of which are based in India. Worryingly, several migrated to PRC-controlled platforms, and as a consequence, while authorities in India became unaware of crypto trades by Indian nationals, the CCP was in the know. When an asset is not tax deductible when it loses value, but pays a hefty tax when it gains value, few will hold that asset and make legal trades in the taxing country. Those behind the “crypto crackdown” in India had the effect of stifling a domestic industry that continues to grow worldwide. Central bankers need to pay attention to the words of Prime Minister Narendra Modi, who ignited the massive digital revolution that has been taking place in India over the past six years. The RBI needs to remember that unless global crypto norms get established as suggested by the PM, several of its measures may have a negative impact on domestic jobs, revenue and economic growth.
Prime Minister Narendra Modi has looked towards mainstreaming Blockchain technology and ensuring the creation of platforms based on that technology. Once this happens, exchanges and the transactions taking place in them will be transparent, and therefore tamper proof where operators skilled in rigging and manipulation of stocks and commodities are concerned. PM Modi is right, for Blockchain is the future. Crypto assets are inevitably going to be a part of that future. India could have been the global hub of the gold trade, but Morarji and Chidambaram made that possibility stillborn. Another example is Prohibition, which was once imposed in Haryana. All that Chief Minister Bansi Lal succeeded in doing was to ensure the proliferation of mafias in his state, not stop the consumption of alcohol. Bihar Chief Minister Nitish Kumar, by adopting Bansi Lal’s ways, has cost the Bihar exchequer as well as public health countless sums of money by imposing Prohibition. Unless political leaders understand the realities of the 21st century and adapt policies to them, they will harm the people who trusted them with power. The sooner policymakers in India accept the realities of the present, the faster will India be what it once was, the global hub of commerce. Policies are needed that benefit India, rather than have the effect of driving business away to other shores.
Whether it be e-commerce, gold or crypto, India can be the global leader in legal and well managed transactions. The foundations of policy need to reflect in full measure the 21st century mindset that Prime Minister Modi’s enthusiasm for digital solutions and support for the adoption of Blockchain reveals.
