Jun 18, 2014

Four Tough Steps Modi Govt Should Take

Prime Minister Narendra Modi’s comment on the need for a ‘bitter medicine’ to revive the Indian economy and restore its flagging fiscal health has triggered off a national debate. Coming ahead of the Union Budget, the talk of tough measures is being mistakenly perceived by Capital Markets as an effort to postpone the Acche Din.  Repairing the economy will need some unpopular decisions for which the aam aadmi should be willing to make sacrifices.

When it comes to making sacrifices, it is always the man on the street. So to tell him to once again tighten his belts for the sake of country’s slogging economy is nothing new. They have silently borne the brunt of some of the so called popular economic decisions all these years. Even if they don’t pay taxes, every time inflation shows its ugly head they are the ones who gets heavily taxed indirectly. With the real estate booming, and with property prices going out of the roof, they can’t even think of finding a suitable shelter. They have little choice but to make sacrifices.

I am talking of the 95 per cent of India’s 125 crore people who are unable to spend more than Rs 2,886 per month in the rural areas, and Rs 6,383 in the urban areas. According to the National Sample Survey Organisation (NSSO) consumer expenditure data for 2011-12, only 5 per cent live above this fictitiously drawn prosperity line, which puts you and me in the same category as Mukesh Ambani, Ratan Tata, Nandan Nilekani et al. For the rest 95 per cent, roughly 118-crore people, life in any case remains tough. With or without the growth trajectory, their life hasn’t changed. They have been in any case swallowing the bitter pill every day.

But the wish list of the tough measures that a section of the media is wanting Narendra Modi to adopt are very cleverly shifting the focus from the real issues confronting the country, and is in reality seeking more freebies for the rich and wealthy. In the name of controlling fiscal deficit and the current account deficit all out efforts are being made to divert the resources meant for the poor and needy. Let me therefore present five tough steps that the Prime Minister must take to repair the economy in a way the shine reflects on everyone’s face, and not only the top 1 per cent.

Fiscal deficit: The bitter pill that the country needs desperately is to remove the tax concessions for corporate India, clubbed in the category of ‘Revenue Foregone’ in Budget documents. In 2014-15 interim Budget, Rs 5.73 lakh crore was doled out as tax concessions to India Inc. India’s fiscal deficit is in the range of Rs 5.25 lakh crore. Just by doing away with these additional tax sops for the industry, which is basically income transfer, the entire fiscal deficit can be wiped out. This will mean that the Prime Minister will not have to reduce subsidy on LPG, diesel, food and fertilizer and raise rail fares.

Since 2004-05, Indian industry has been given Rs 31-lakh crore as tax concessions. This largesse did not help in creating more employment, and raising industrial and manufacturing output. If Rs 48,000-crore LPG subsidy can remove poverty for one year as some economists have calculated, Rs 31-lakh crore can wipe out poverty from India for 62 years, which means for all times to come.

Economic stimulus: With monsoon expected to be below-normal, and with prediction of a drought staring the horizon, it is high time to provide an economic stimulus package for drought-affected farmers. Reeling under economic distress reflected through the never ending spate of farm suicides, agriculture needs an economic booster. Considering that agriculture is the largest employer, directly and indirectly employing 70 per cent of the population, I suggest an economic stimulus package of at least Rs 1 lakh crore. At the time of the economic meltdown in 2008-09, India had provided an economic stimulus of Rs 3-lakh crore to the industry, which was stretched for at least three years.

In addition, it is time to put an end to the scandalous misuse of farm credit. In 2014-15 interim Budget, Rs 8-lakh crore at a subsidized interest of 4 per cent was provided in the name of agriculture credit, which primarily goes to agribusiness industry. With hardly Rs 60,000-crore going to farmers, the remaining Rs 7.4 lakh crore is gobbled by the agribusiness industry. Hyderabad for instance gets a higher farm credit than the entire Telengana region. The farm credit subsidy therefore is being used by the industry. It should also be included under ‘revenue foregone’ category.

Investment climate: I agree there is a need to build investor confidence. There is no denying that investments have dried up in recent years. But I fail to understand why are the Indian companies, which are sitting over a huge pile of cash surplus, are not investing within the country. According to a recent report, 126 companies are hoarding cash. In 2012, the Reserve Bank of India had estimated the cash surplus to be in the range of Rs 9.3 lakh crore. It is therefore high time the Indian industry is made to invest within the country.

To say Indian companies have no avenues to invest is not true. If foreign companies can make a beeline to invest in India, waiting for FDI clearances, how come the Indian industry does not find the domestic investment climate appropriate? It therefore needs a little bit of tough talk on the part of the government to make Indian industry invest. RBI also needs to revisit the rules that allows for the companies to make heavy investments abroad. 

New taxes or Higher taxes: In addition to striking out tax concessions under the category ‘revenue foregone’, the government should consider imposing income tax on IT companies. Infosys and Wipro have a huge cash surplus but do not pay taxes. The IT companies have also shifted to SEZs to seek a further extension to tax holidays.  While the sops and freebies are being paid by tax payers, personal wealth is being generated for the high and mighty in the IT industry.

Higher corporate tax and introducing a 20 per cent tax on sugary drinks like colas/fruit juices can mop up additional revenue so as to enable further tax relief to ordinary tax payers. # 

7 comments:

Mahesh said...

Soda tax is over-due. Non-reusable (plastic) bottles should be taxed too, with a possible exemption for bottled water. Commercial exploitation of ground water should also taxed. Another area of revenue is the advertisement space in newspapers and magazines.

Here are some green solutions for our nation.

1. Installing solar-preheaters in thermal power plants can reduce coal usage (25% or more) and reduce emissions drastically. Less fly-ash, less load on Railways to transport the coal. This is also a cost-effective way to increase power generation. This also works in other industries that employ steam turbines.

2. Following European model of encouraging bicycles can reduce oil import bill by over 10%. This is good for the Rupee's stability. And more importantly, we can reverse the rapid decline in air quality we saw during "liberalization" era. We should invest the savings on bicycle and pedestrian infrastructure like bridges.

3. Ban export of mineral ores. Also impose duties on export of energy-intensive products like Aluminum.

Anonymous said...

So true... need to be implemented but in our country it is very difficult to take tough actions against corporates. Sad but true...

R S Reddy said...

A very well thought and an indeed true masterpiece of advise to the PM Sri Narendra Modi. Please do this, for the interest of the country as India first is your slogan and not industry first.

Mahesh said...

Sir, my comment did not make it.. did it go to your spam folder?

Devinder Sharma said...

It didn't reach me. Please send again.

Devinder Sharma

Anonymous said...

Brilliant! Today in the train I was talking to a lady working in the income tax office. She was also saying this. They will send letters 3 or 4 times to ordinary people who has to pay , may be 700 or 7000 rupees as tax, but not one letter to industrialists who has to pay 700 crore.

Usha
Kerala

Anonymous said...

Also tax on all those living in cities earning disposable incomes and not having rainwater harvesting pits in their houses(esp. own) should be levied. And those spending substantial sums on goseva and goshalas should be exempt from taxes as the same collected otherwise are likely to end up bankrolling populist schemes or worse as subsidies for "secular" industries like beef/meat producers and exporters.