#budget2015: what india wants by mr venkatesh

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#Budget 2015:

What India wants

By

MR Venkatesh

M R Venkatesh is a Chennai based Chartered Accountant.


Contents 1) Expectations from M.R. Venkatesh

2) Can it restore faith in Markets?

3) Will it provide pragmatic solutions?

4) Income-Tax laws need simplifying

5) Will it come with a master plan for water storage?

6) Education Outlays versus Outcomes

7) Micromanaging the Economy

8) Will it make India an attractive investment destination?

9) Will it ensure Make in India?

10) Will it address food shortage?

11) Will it Streamline Outbound FDI?

12) Will it fund Real Sector in India?

13) Will it design Minimum Government, Maximum Governance?

14) Will it improve ease of doing business?


Foreword

Budget 2015 is the Narendra Modi led NDA Government's first full budget since

assuming Office in May of 2014. Expectations have been high of Finance

Minister Arun Jaitley as he has set himself about the arduous task of crafting a

Budget Proposal for a Nation as diverse and complex as ours. On the one hand are

the growth pangs of the Economy after a decade of decay during the UPA era. On

the other hand is the challenge of Inflation. Budget 2015 comes at a pivotal

moment when Global Oil Prices are at an all time low and continue on a

downward spiral thanks in much to the Geo-Politics of Oil. The UPA left behind a

litany of populist schemes for the NDA to deal with. The UPA also left behind a

legacy of Laws that have thrown a spanner at both development and economic

growth. The list of long overdue reforms is lengthy. The political capital for the

NDA Government to get bold and visionary is ample. How must the Finance

Minister navigate his was through the challenges and what path must he chart for

India through his Budget 2015 ? It is this profound question that M.R. Venkatesh

has attempted to address through his scintillating series on the Budget 2015. It

must be said that MRV (as I would like to call him) was already thinking ahead on

the challenges of 2015, back in 2014 when the series started. Through this multi-

part series MRV has delved into a wide set of areas ranging from Taxation to Ease

of Doing Business, while getting into hard questions on Water, Food among

others. Budget 2015 Expectations is a quick read and a must read for everyone

who has a view on what this Budget ought to be like and what to take away from

the Budget once it is finally presented.

By

Shashi Shekhar

CEO Niti Digital


As the Finance Ministry gears up for the presentation of Budget 2015-2016 in

February, we would shortly begin witnessing a flurry of activity. The usual

suspects will crawl out of their kitchen sinks into the full glare of television

studios to begin their usual [and outdated] sermons. Anchors, highly

economical about economics, would “discuss and debate” the state of Indian

economy, its problems and possible solutions.

The print media, not to be left behind, would come with its share of editorials,

guest columns and opinions from such self-proclaimed experts. Lobbying will

begin right earnest. What cannot be lobbied in secret will be done through

advertorials.

“India requires more investment in this globalised world,” the first pundit

would say. After nodding in agreement, the next would seemingly counter

with: “It is the quality of investment that counts – the bang for the buck you

know.” The third one would nod his head sagely and offer his two-pence of

inane opinion: “Investments provided they propel the idea of India with

inclusive growth.”

An unsuspecting audience will be left none the wiser post the show. But who

cares? Anchors will play ball with such experts notwithstanding the occasional

theatrics keeping in mind TRP ratings. What would be interesting to know is

that some of these experts would demand more reforms when they as a part of

Government could well have been part of the de-forms process!

Budget 2015 – Expectations from M.R. Venkatesh


In the process, the debate on economics will recede to the background. In this

great game of self-delusion, cacophony would pass as serious discussion and

debates, if any, will oscillate between not so subtle titillation and meaningless

pontification.

Understanding the Budget Maths

Am I cynical? Am I being unduly pessimistic? Why this negativity even before

the budgetary process has commenced?

The answer to this question is not far to seek. At the core of the imbalance in

our Central Budget is the interest bill arising out of a gargantuan borrowing

program that has lasted well over three decades. Readers may be shocked to

note that for every Rupee spent by the Central Government, approximately

one-fourth is only on interest.

For instance, in the Budget for 2014-15 the Finance Minister [FM] has

projected an interest expenditure of Rs 4.27 lakh crore on a proposed Budget

size of Rs 17.94 lakh crore.

Further, the Budget estimates a receipt of a mere Rs 2.07 lakh crore from

Excise Duty and Rs 2. 16 lakh crore from Service tax aggregating to Rs 4.23

lakh crore. To put things in perspective, the entire collection of Excise Duty

and Service Tax goes on to fund our interest expenditure!

In the alternative, if there were no interest pay-outs, we could abolish the

Excise Duty and Service Taxes. Imagine the fillip that this could give to our

economy, notably our manufacturing sector and small business which would

thrive simply in the absence of a coercive tax machinery.

Whatever be it, the macro-economic impact of this imbalance on the Indian

economy is unimaginable. When someone borrows even to pay interest, it is

called a debt trap. Crucially, as our Government needs to borrow even pay its

interest, it tweaks policies [like mandating banks to invest substantial amount

of its deposits into Governmental Bonds] to suit the same.

In the process let growth of our economy be damned.

Apart from this, at the ground level, such borrowings by our Government leave

very little money for private investment. This is technically called crowding out

and stymies the growth of Indian economy.

Expectations from M.R. Venkatesh


Also it is elementary economics that persistent borrowings of this magnitude

increases interest rates making the Indian economy largely uncompetitive at a

global level.

What is galling is that the total taxes that accrue to the Central Government for

2014-2015 is budgeted to be a mere Rs 9.77 lakh crore [the difference between

the budget size of Rs 17.94 lakh crore and Rs 9.77 lakh crore is made by non-

tax revenues and borrowings]. This implies that out of every rupee accruing to

the Government as revenues, it proposes to spend half of it as interest!

All this is akin to a corporate paying 50 per cent of its total income as interest

and yet hoping to succeed commercially. Given this state of affairs, one is

certain that even Al-chemists would not succeed; to say nothing of

Government.

Obviously, the huge debt contracted by the Government of India and the

consequent interest payments arising out of such borrowings renders budgets

dysfunctional.

Put pithily, interest bill for the Government is an eight-hundred pound gorilla

in the room.

Yet, when did you last hear an FM expressing concern on this mother of all

issues? When was the last time an FM mentioned, even in passing, about

Governmental debt [and hence the resultant interest pay-outs] being

unsustainable? Crucially, is there any possible solution within North Block to

this convoluted issue?

In effect, given its size, interest pay-outs leaves very little elbow room for our

FM. It is often remarked that even Jesus Christ had more elbow room after

being crucified on the cross than our FMs. Yet, oblivious of this structural

imbalance that reduces their potency, successive FM behave as if they are the

Lord of all that they survey.

Ask the Right Question

That is not all. It may not be out of place to mention that the total debt of

Central Government expected as at March 31, 2015 is Rs 62.22 lakh crore.

Apart from the size one cannot complain provided the Government had

created appropriate assets out of the same. Therein lies the rub and conclusive

evidence of fiscal recklessness of successive Governments.



The Receipt Budget for 2014-2015 reveals that of this sum the Government

has assets aggregating to a mere Rs 24.12 lakh crore leaving a sum of Rs 38.10

lakh crore as liabilities unrepresented as assets. This means that the

Government would have to pay an interest without any – repeat any – assets

and hence concomitant income.

Now let us look further. The assets available with the Government as

mentioned above are not depreciated to reflect their current market value.

Once this exercise is carried out, the sum representing the difference between

liabilities and assets would necessarily balloon.

There is another dimension to this issue. Hidden in the total liability of Rs

62.22 lakh crore as mentioned above is a sum of Rs 1.88 lakh crore

representing borrowing in foreign currency. This represents a mere 3 per cent

of our total borrowings. But once again there is catch. This amount is

computed at historical currency rates i.e. at rates when the borrowings took

place and not the present exchange rates.

Given the depreciation of the Rupee this sum of Rs 1.88 lakh crore and the

total debt of Rs 62.22 lakh crore and consequently the aggregate of liabilities

not represented by assets [currently as pointed out above being Rs 38.10 lakh

crore] would increase significantly.

This in effect could well be in excess of Rs 40 lakh crore on which interest pay

out even at eight per cent rate of interest per annum works out to Rs 3.2 lakh

crore. What adds fat to the fire is that this amount circulates within the

economy without concomitant production, which in turn adds to inflation.

Where is the question of production when assets do not exist in the first place?

What should surprise readers is that for the past decade or so, no FM has ever

made any reference to this expenditure in their Budget speeches. Unable to

tackle this monster of debt and interest, FMs have invariably ducked the issue

and turned their attention to irrelevant ones.

Given the grave state of affairs, one can at best sympathise but surely not

commend their approach.

But such obfuscation on such a serious issue is necessarily not desirable

especially given the fact that there is no instant answer to this vexatious issue.

But does that justify successive FMs of not even mentioning the issue of

governmental debt in their Budget speeches and not taking the nation into

confidence?



Let us face it. The Union Government is on the verge of a debt trap; its

finances are precarious. Years of fiscal profligacy have taken their toll. Given

this paradigm, one hastens to admit that getting rid of the baggage of the past

in one stroke is next to impossible. But a beginning needs to be made

somewhere, sometime.

For starters, an honest approach would be to ask correct questions: what is the

state of the finances of the Union Government. What is the extent of its debt

and its impact on the Budget of Central Government? Is this model of

borrowing significant sums year after year sustainable?

Can government continue to borrow in excess of Rs 5 lakh crore every year –

and use that amount to pay interest? Crucially what is the debilitating impact

of all these on our economy?

Once the right questions are posed, the answers will definitely follow. Till then

we will continue our downward spiral.



In an unprecedented move, the global rating agency Standard & Poor

downgraded the US Government’s “AAA” sovereign credit rating to “AA+”

while keeping the outlook negative. That was in August 2011.

That in turn triggered massive convulsions in financial markets across

countries, including India. And pray why not? After all, the US Government

securities is the mother of all benchmarks for global financial markets.

Our Government’s reaction to this was on predictable lines. Remember the

propensity of the Indian establishment to commit sati for any negative

development in US. Terming the situation as “grave” the then Finance

Minister [FM] Pranab Mukherjee commented: “There are difficulties and

some sort of a crisis. But there is no need to press the panic button.”

Crucially he added: “I do not want to worry unnecessarily. Our growth story is

intact and our fundamentals are strong.”

The US downgrade is merely a context. Come any crisis, war or natural;

economic or political, Indian economy has been by and large insulated from

such negative developments. And at every turn men at the helm of national

affairs have been unanimous in their conclusion – Indian economy is largely

insulated from such crisis; the fundamentals of Indian economy are strong

and by and large the Indian growth story is intact.

Budget 2015 – Can it restore faith in Markets ?


Are all these empty rhetoric? Or do these reflect undebated aspects of Indian

economy? If the economic fundamentals of our economy are indeed strong

why then express concern in the first place?

Why national consternation when the stock markets gyrate on such negative

developments?

Importantly, why successive FMs express concern while simultaneously exude

confidence in Indian economy.

Economic liberalisation and conservative Indian

The answer to this paradox is not far to seek. It may be interesting to note that

liberalisation of the Indian economy since the early 1990’s has not liberalised

the purse of an average Indian. In fact, if the average national saving rate is

any indication, India has achieved a higher savings rate post liberalisation

than during the pre-liberalisation era.

If the average savings rate was a mere 17 per cent of the GDP in the eighties,

the savings rate has doubled to approximately 31 per cent of the GDP now.

Globally, barring China [where the savings rate is approximately 50 per cent]

no other country of significant size has a savings rate higher than that of India.

Notably, this domestic savings virtually funds our domestic investments.

It is in this connection that the Report of the “High Level Committee on

Estimation of Saving and Investment” set up by the Ministry of Statistics and

Program Implementation under the chairmanship of Dr. C Rangarajan

concludes: “More than 98.0 per cent of investment is funded by domestic

savings. As a result, the savings-investment gap has remained relatively in a

narrow range reflective of modest reliance on foreign savings.”

No wonder, it is this domestic savings that goes on to provide the necessary

confidence to successive FMs, whenever confronted with a “global” economic

crisis. But why then express concern?

It may be interesting for a reader to note that approximately three-fourths of

this gargantuan saving comes from Indian households – i.e. ordinary Indian

like you and me. Needless to say that the balance one-fourth of our national

savings comes from the private corporate sector and public sector put

together.

Can it restore faith in Markets?


Yet not many within the establishment cognise, much less recognise, the

fundamental role of savings in the economic development of the nation and

that too savings that arise from our household.

Importantly, what is forgotten in the melee is that contrary to popular belief

Indians have paradoxically begun to save more post liberalisation than before.

A liberalised economy and a conservative Indian? Has liberalisation offered

more avenues to save than spend to an Indian? Or is the entire liberalisation

program failing and hence causing convulsions in our saving pattern?

Answer to these questions is not far to seek. Alan Greenspan, the former US

Federal Reserve Chairman, in his celebrated book Age of Turbulence observes

that savings is a sign of underdevelopment and insecurity. He concludes that a

developed financial market and improved governance obliterates the necessity

for domestic savings, especially by households.

Does that imply the obvious? Is there a message for the incumbent FM? Is an

average Indian chary of liberalisation process? Has liberalisation failed to

deliver?

Predatory Government; Smarter Indian

There is entirely yet another dimension to this issue. A huge domestic yet

fragmented saving pattern offers a perfect hunting spot for the insatiable

appetite for [cheap] funds for our governments and avaricious corporates.

Professor R Vaidyanathan of IIM Bangalore terms the approach of our

government “predatory” in his celebrated work “India Uninc.” The approach of

our corporate sector is no less despicable. Surely, on this there is a

convergence between our governments and large corporates.

In the process, the correlation between benign interest rates and elevated

inflation is forgotten. Naturally, this disconnect between the two represents a

challenge to our household that is on a compulsive savings mode.

Ideally, lower interest rates should shift future consumption to the present

[where corporates benefit] and simultaneously moves savings from bank

deposits to stock markets [which once again benefits corporates] apart from

the fact that a benign interest rate regime favours governmental borrowing.

That explains the clamour for a lower interest rate regime.



Yet it is fascinating to note household savings dominate national savings. For

instance, household savings was estimated to be 21% even as the national

savings was 31% of the GDP for 2012-13. Further, approximately two-thirds of

the domestic household savings are in physical form and the balance in

financial form. [Source-Economic Survey 2013-14] thus rendering interest

rates irrelevant.

Savings in physical form includes mostly investment in houses and land.

Interestingly in macro-economic computations, gold is excluded from savings

and included along with consumption. And should gold be included as part of

domestic savings our domestic household savings will naturally increase,

albeit in physical form.

All these imply financial savings [where interest rates are relevant] of

household to be a mere 7 or 8 per cent of our GDP. Captivatingly, 90 per cent

of our household financial savings are held as bank deposits, insurance and

provident fund claims.

The balance 10 per cent of our household financial savings is held as cash on

hand and believe it or not – with virtually miniscule investment into stock and

debt markets.

This is notwithstanding the tax breaks to corporates and to individuals on

investments into stock markets along with exemption from capital gains tax.

Some experts opine that less than a percent of our GDP flows into our stock

markets. Yet the hoopla surrounding the stock markets. Inexplicable, isn’t it?

But what happens to our Bank deposits? Readers may be aware that our

Governments [both State and Central] run huge deficits. As per the RBI, their

combined deficit works out to 6.8 per cent for 2013-14. Simply put, we deposit

money into our banks who in turn lend to our Governments at ridiculously low

rate. Therefore, it is the prudence of the ordinary Indian that to a substantial

level funds deficits – read recklessness – of our Governments.

In the process, there is virtually not much lending left for businesses. And

whatever is left, thanks to its size and persuasive powers, large corporates have

bulldozed themselves into having the first right [again at lower interest rates]

leaving small and medium enterprises starved of funds.

And this is at the root of our economic problems and substantially if not

wholly explains our demand for foreign funds.



What adds to the consternation of the Indian economy is that as interest rates

are lowered, the smart Indian saver leans more towards physical savings,

including gold. Savings in gold has two major implications: One, it is a no-

confidence in Indian economy and two, it adds to our current account deficits

and therefore leaves an already vulnerable Balance of Payment position, more

vulnerable. Obviously, a lower interest rate regime makes the average Indian

shift towards gold. That means Indians are not investing in India but

indirectly abroad.

This raises an important question – why should foreigners invest in India

when Indians are not investing here. Is not investment in gold a great

barometer for confidence in Indian economy expressed by an average Indian?

In short, it is an unenviable situation for the FM. Domestically we save

significantly, but not in financial form. The financial intermediation or the

process of converting physical savings into financial savings is either too weak

or absent.

As corporates seek lower interest rates and in the process hope more money

will pour into stock markets or boost current sales, they are plainly wrong.

Given their unimpressive track record at a collective level, it is not too soon to

believe that Indians will invest into stock markers.

Likewise in the absence of social security Indians will continue to save. And in

the absence of financial intermediation savings will be only in physical form.

Short, savings, investment and intermediation between the two present a

complex conundrum for our FM. Will Budget 2015 provide answers to these

questions?



A Credit Suisse Report on top ten Indian corporate groups (Adani, Essar,

GMR, GVK, JSW, JPA, Lanco, Reliance ADA, Vedanta and Videocon) revealed

the extent of damage to the Indian Banking System, and by extension to

Indian economy, caused by the UPA Government. That was in 2012.

According to this Report of the global bank:

• Aggregate debt of these 10 select corporate groups has jumped 5 times in the past five years

• This equated to 13 per cent of total bank loans in India in 2012

• This approximated to 98 per cent of our banking system’s net worth

• Thanks to the economic slowdown four out of this 10 did not earn enough even as early as in

2012 to pay their interest

A repeat exercise conducted in 2013 by the same Bank revealed that the

financial position of these 10 corporate groups had in fact worsened as

compared to 2012 – overall debt of these groups increased in 2013; the debt

increase was far higher than the concomitant asset increase and finally

earnings of a majority of these 10 groups was not adequate to even pay interest

costs.

Importantly, 40-70 per cent of their collective debt was denominated in

foreign currency. Naturally, Rupee depreciation since then increased their

liabilities in Rupee terms. This in turn has made their already precarious state

of affairs, grave.

Budget 2015 – Will it provide pragmatic solutions?


The second Credit Suisse Report of 2013 had estimated that the aggregate debt

of these groups to be approximately Rs 6.31 lakh crore as on March 31, 2013.

And if you thought that only these groups are the victims of economic

mismanagement of UPA, hang on. At best, the financial position of these 10

groups is akin to the trailer of a horror movie; the main picture is yet to come.

It may be noted that the gross bank credit as at 30th September 2014 by

schedule bank aggregates to approximately Rs 60 lakh crore. [Source: RBI

Monthly Bulletin, November 2014]. Of this, it is estimated that approximately

a staggering amount of Rs 12-15 lakh crore are stressed, non-performing,

restructured or have slipped back even after being restructured.

And I could be conservative in my estimates.

The Mess left behind by UPA

Meanwhile, another Credit Suisse Report of November 2012 had brought

about the overall state of affairs of Indian corporates. According to a sample

survey of about 3700 companies [with an aggregate debt of approximately Rs

21 Lac Crores], earning of 28 per cent of the companies surveyed was

insufficient to cover their interest payment.

Interestingly, 54 per cent of the companies surveyed did not earn enough to

cover their interest costs in four past quarters of the previous eight. The report

further estimates that 12-25 per cent of the small and medium enterprises

were under enormous financial stress. Alarmingly, the report concludes that

the banks have been behind the curve on declaring such delinquent loans as

non-performing and providing for the same in their accounts. Remember all

this was in 2012.

This was the legacy inherited by the incumbent Government from the UPA.

But is there a debate on the issue within our media? And all of us want the

Finance Minister to come out with a magic pill in his Budget that instantly

revives our economy. It is this superfluous nature of economic debate – where

hype substitutes logic – that has prevented solutions to our economic

recovery.

If this was the position in 2011-2012 then let us examine the current position.

The RBI has in September 2014 brought out a fairly comprehensive analysis of

the performance of 2,854 listed non-government non-finance companies for

the year 2013-2014.

Will it provide pragmatic solutions?


Accordingly, aggregate sales growth of these corporates declined in 2013-2014

as did the net profit margins when compared to 2012-2013.

What is galling is that the net profit growth of these 2,854 companies was -

16.8 per cent for 2011-2012, -2 per cent for 2012-2013 and -5.1 per cent for

2013-2014. Resultantly, as compared to 2007-2008 when the net profit

margins of our corporates were 11 per cent, the corresponding figure for 2013-

2014 is a mere 5.8 per cent – a near 50 per cent drop in a span of six years.

What must be worrying the mandarins in North Block is that the financial

performance of small companies has significantly deteriorated as seen from

the contraction of sales and net profit in 2013-2014.

Quarterly results of some 2,291 companies shockingly demonstrated an overall

declining trend in sales growth during the previous eight quarters.

In short, the top line of our corporates are stagnating or at best moderating,

costs are disproportionately increasing while the bottom line is on a

consequential definite downward spiral. That in turn has dynamited the

Balance Sheet of our corporates. No wonder corporates find it difficult to pay

interest not to speak of repayments.

Interestingly, our stock markets are at an all-time high even as our corporate

financial performance is dismal.

All these raise some disturbing questions. Are Indian stock markets and

corporate performance inversely related? Is investment into our stock markets

solely dependent on future performance? If so, have investors discounted the

past? Or are investors betting on NDA to deliver something spectacular?

Whatever be it the mess behind by the UPA Government is indeed frightening.

Needed a pragmatic Solution

Mess or no mess, Budget 2015 has to provide solutions to this conundrum.

What is at stake is not merely fortunes of our corporates sector, but our banks

and economy. Importantly, when we are yet to identify the problem where is

the question of a solution? Seen in this context, the clamour for interest cuts is

akin to applying pain balm when chemotherapy is the need of the hour.

Hence, first the diagnosis. At the height of the global economic boom, Indian

economy too witnessed a spectacular surge. Foolishly those at the helm of

affairs then mistook it for their economic policy, which as we all realise now

was non-existent. That nevertheless gave a false sense of security to our

corporates to borrow heavily from banks.



Remember a liberalised economy since 1991 was awaiting this global boom for

over a decade. This in turn triggered an investment boom in India. Suddenly

corporates borrowed for setting ports, airports, roads, power plants water

treatments and others projects. And they borrowed gargantuan sums on a

simple hypothesis – the global boom of 2003-2008 will indefinitely continue.

But as we all know linearity is a concept alien to life, much less to economics.

As the economic crisis struck the US, economic activity shrunk across the

globe. And that had a debilitating impact on the Indian economy too. Exports

stalled even as imports moderated significantly.

However, global economic crisis was merely one of the several reasons. Several

corporates did not have the necessary managerial bandwidth to ensure timely

execution of these projects. A lax judiciary and an incompetent bureaucracy

ensured project delays and consequent cost overruns.

But there is another dimension to this issue – Corruption. Most of these

projects are mired in corruption. I had dealt with the effect of corruption on

infrastructure projects in my column titled Indian Economy Comes to a

fullstop [Niti Central July 2013]. Corruption – read extortion in many cases –

results in costs overruns and thereby overturning the basic economics of the

project.

While global economic recovery is beyond the scope of Budget 2015, providing

a rehabilitation programme to our corporates – especially those associated

with infrastructure projects – is an absolute necessity. Failure of a power

company, whatever be the reason, trips the economics of the port nearby as

much as a steel company set up on the basis of power generated from such

power plants.

In turn, the toll road set on the basis of steel production is bound to be hit as

much as a downstream manufacturing company dependent on the steel

manufactured. In effect, in macroeconomics everyone is interlinked to

everyone else. Failure of every large infrastructure project negatively impacts

the fortunes of the lender and economy, one way or the other.

Of late panicky bankers have begun to classify all such borrowers as “wilful

defaulters.” Ostensibly, this is done to save their back. And by labelling a large

section of our corporates criminals we are doing no good to our India growth

story.



But this is not to say that the guilty should go unpunished. Banks that played

ball with most [and continue to play ball with some even today] should not be

allowed to claim to have funded a “wilful defaulter” and pass their

responsibility. They too must be made accountable.

Naturally Budget 2015 has to come with a programme that differentiates the

chalk from cheese; the bad from the ugly. Projects that have failed purely on

economic reasons and judicial interventions must be differentiated from those

where promoters have been party to the loot [and that includes corruption]. If

Budget 2015 remains silent, things will drift further down, possibly to the

point of no return.

If it takes action on every defaulter and treats them as criminals it would

create mayhem and a systemic collapse. Surely, it needs to tread on a new,

balanced and pragmatic path.

The billion dollar question is, will it?



There are vested interests who would prevent simplification of Income-Tax

law. And even if simplified, given years of training, our lawman cannot

resist complicating matters all over again.

The overarching theme of Bollywood movies of sixties and seventies was

simple – the hero was a poor, educated, unemployed yet honest young man.

And the villain? Well it was an entrepreneur who invariably indulged in illegal

acts to make money.

This idea was repeated in several Hindi films [and also in every other Indian

language] till the nineties when the Indian economy underwent tentative

doses of liberalisation. And pray why not? After all, the dominant thinking

within the Indian establishment was that every businessman was a scoundrel

– a direct fallout of Nehruvian thinking.

This thinking was rooted in a colonial mindset where the British had a vested

interest in dynamiting Indian businesses even within India. If we had thought

things would improve dramatically post-independence, we were wrong.

In the name of socialist ideology every Indian businessman, ever after

independence, was held to be a suspect till proved otherwise. Importantly, for

a civilisation that venerated Goddess Lakshmi, celebrating poverty became the

way of life – all in the name of an alien ideology.

Budget 2015 – Income-Tax laws need simplifying


Never mind in neighbouring Communist China comrade Deng Xiaoping had

observed that it was glorious to be rich.

That in turn implied that if you are rich you must be a businessman. And if you

are a businessman you must be a law-breaker. In this paradigm, where is the

question of profits when laws were designed to ensure that an average Indian

businessman could never carry any business, not to speak of legitimate

profits? Reel life was merely imitating the real life.

India’s tryst with Income-Tax

Nothing exemplified this obnoxious idea better than the Income-Tax law.

Elders in the profession tell me that the rate of taxes in the sixties were

punishing – sometimes even 90 per cent or more of the income earned! Little

did we realise the consequence of taxing at such unacceptable rates. And when

we realised in the late eighties, most countries had overtaken us.

The Income-Tax Act is of 1961 vintage. In the past five decades, this enactment

has undergone close to 10,000 Amendments, of which 350 or so are reportedly

retrospective. That implies that one could have planned his affairs according

to the law of the land only to find rules of the game changed from a distant

past.

But that is not all. The very design of this legislation is extremely complicated

and offers enormous latitude as well as discretion for the assessment officers

which in turn breeds corruption. What is galling to note is that while post

liberalisation the rates of Income-Tax had indeed moderated to more

reasonable levels, the complexity of this legislation has increased manifold.

What may be “Income” or a “legitimate deduction” invariably depends on the

eye of the assessing officer. Of course, there are several layers of appeals and

finally justice may be delivered. But in most cases, than otherwise, it would be

a pyrrhic victory attained at extraordinary cost, mental trauma and loss of

reputation.

As a student in late eighties I had watched the late Nani Palkhiwala while

addressing a post Budget meeting tell his audience that this law was a

goldmine to practicing chartered accountants and lawyers. Three decades

later, nothing seems to have changed. If anything, things have become

extremely complex and corrupt.

Income-Tax laws need simplifying


Simply simplify it

In my considered opinion the greatest deterrent for investment [both domestic

and foreign] into India is our Income-Tax law and the manner in which it is

administered.

Most investors are also chary as this legislation is now rumoured to be used by

competitors to settle business scores. The net result is that over the past few

years all these complexities have converted our tax department into an

extortionist one.

One of the peculiarities of this enactment is the idea of “deeming fiction” – one

that deems [irrespective of the factual position] to hold that an event has

indeed happened when it might not have! Naturally for a “price” this could be

altered to suit conveniences.

One of the unchartered areas of liberalisation of the Indian economy is the

Income-Tax law and the manner in which it is to be administered. The UPA

regime had realised the magnitude of the problem and tried to bring in a new

law – popularly called as Direct Taxes Code. Unfortunately, even a cursory

reading would demonstrate that it is as disastrous as the sequel of a horrible

movie.

The central issue is not the Law but the manner in which the law is

administered. The Income-Tax law first defines income [which is all-

inclusive], then lays the scope of allowable expenditure [which is restrictive]

and taxes on the resultant profit. But this is where the complexity sets in.

What is profit as understood by a common man may not be profit under the

Income-Tax law.

This requires some explanation. Over and above the claim for expenditure, an

assesse can claim “deductions and allowances.” For instance, depreciation

claimed under the companies act is entirely different from that of Income-Tax

Act.

Further, there are several rates of depreciation depending on the “nature of

asset” and also when the “asset was actually put to use.”

Needless to emphasise, most of the provisions are loosely worded, convoluted

and hence lend themselves to needless litigation. But who cares?



Likewise, deductions from “profits” are available for companies engaged in

certain types of business, located in certain areas and on carrying out certain

types of expenditure. Added to this are assessment and re-assessment

procedures, law for deduction of taxes at source and cross-border transaction

involving international business which simply stuns ordinary minds.

The transfer pricing provisions that “presume” transfer of profits by an

enterprise doing business in India to a “related” enterprise abroad has given

enormous leeway to the tax authorities to fix any assesse.

Has the lawman converted the law into a complex affair or is it the other way

around?

I leave it to the readers. But what about rationalisation of this law? Remember,

there are vested interests who would prevent simplification of this law. And

even if simplified, given years of training, our lawman cannot resist

complicating matters all over again.

Therefore, the only way out is to do a grand simplification of this enactment. It

is in this connection “The Statement of Revenue Forgone” appended to Budget

documents of 2014 provides us some fascinating details of the manner in

which this law is administered.

Accordingly, based on 618,806 returns filed in 2013-14, 334,109 companies

reported a profit aggregating to Rs 10.87 lakh crores while 250,865 companies

reported a loss of Rs 3.59 lakh crore and the balance 33,832 companies

reported nil profits. The average effective tax rate [tax paid expressed as a

ratio to profit before taxes] of these companies worked out to 22.44 per cent.

As already pointed out there is a difference between profits under company

law and profits that can be subject to tax on account of deductions. For

instance, while the profits of 334,109 companies is Rs 10.87 lakh crore as

explained above, the taxable profits after deductions worked out to Rs 7.50

lakh crore.

Therefore legally one can avail of deductions legally and end up paying zero

tax. It is here there is yet another twist in the tale.

It is to be noted that these deductions are restricted up to a point as the law

mandates every company to pay a minimum tax of approximately 20 per cent

on profits – technically called as Minimum Alternate Tax [MAT].



Theoretically, it may be noted that the companies are liable to a maximum tax

rate of round 34 per cent but in reality as explained by the Budget documents

end up paying approximately 22.44 per cent as effective rate of taxes, thanks

to deductions and other allowances.

The tax foregone under each section is highlighted by this Tax Foregone

Statement. Accordingly, for 2013-14 the tax foregone [the difference between

maximum rate possible i.e. 34 per cent and actually levied i.e. 22.44 per cent]

is Rs 102,606 crore.

Nevertheless, thanks to MAT, Budget documents also estimate that corporate

sector ended up paying Rs 26,490 crores at 20 per cent MAT.

In short, the entire debate on tax is between paying taxes at a higher rate of 34

per cent [but subject to a complex deduction regime] and a mandatory [yet

simple regime without deductions] minimum rate of 20 per cent. Why not

choose the second one even as the effective tax rate of the first is only 22.44

per cent?

Put in marketing terms the entire market for tax litigation is a mere Rs 76,116

crores [Rs 102, 606 crores tax saved on deductions less Rs 26,490 crores

collected under MAT]. As tax administrators and tax payers play Tom and

Jerry, the resultant harm to India as an investment destination is incalculable.

Will the Budget have to do away with a plethora of discretionary deductions

and allowances and simply tax through MAT provisions? This means every

company would simply end up paying 20 per cent taxes on book profits and no

litigation on infructuous deductions. Do we realise the positive impact on

Brand India with a simple and effective tax regime?

Will a lawyer FM close the gold mine for his fellow lawyers and Chartered

Accountants?



Water is one crucial factor that sustains life on earth. The great Tamil saint

pithily captured the importance of water as only he can. Roughly translated his

couplet reads: “Rain produces food for all beings in the world and rain itself

serves as food indeed.”

India is estimated to have a mere 4 per cent of global water resources, while it

has to support one-sixth of the world’s population. Merely by that equation

India is water stressed if not water starved. It is pertinent to note that three-

fourth of its requirement gets precipitated during the monsoon season [June

to September].

Importantly, of the annual estimates of 4000 billion cubic meters [BCM] of

rainfall, it is estimated that approximately 1120 BCM are only utilisable. That

in turn adds to the stress.

Of course when monsoon fails, this situation gets compounded. For instance,

the rainfall in 2009 in India was a mere 78 percent of the long-term average

rainfall. A 22 per cent shortfall is disastrous in such a situation, given our

population and resultant water need. Similarly in 2012 we faced “drought like”

situations in several parts of India as rainfall was 92 per cent of the long-term

average.

But there is another dimension to this issue. When it rains, it pours in certain

places.

Budget 2015 – Will it come with a master plan for water storage?


For instance in 2012 nearly 58 per cent districts recorded excess rain causing

flood [the balance 42 per cent face moderate to severe shortfall]. And that can

be within the same state.

For instance, Tamil Nadu gets copious rains and lets approximately four-fifth

of the water into the sea. And for that reason it is seen as water starved state

when in fact it is not.

Moreover, precipitation is confined to only about three or four months in a

year and varies from 100 mm in the western parts of Rajasthan to over 10,000

mm at Cherrapunji in Meghalaya.

In short, India as a country alternates between excess rainfall in some places

and drought in others.

The challenge before the NDA government is to find mechanism to balance

between the two.

The UPA Disaster

That takes me to the Budget of 2004-05 when the then Finance Minister [FM]

P Chidambaram said, “I now turn to one of my big dreams. Water is the

lifeline of civilisation.

We have been warned that the biggest crisis that the world will face in the 21st

century will be the crisis of water.”

And his response to this “crisis?” “I therefore propose an ambitious scheme.

Through the ages, Indian agriculture has been sustained by natural and man-

made water bodies such as lakes, tanks, ponds and similar structures. It has

been estimated that there are more than a million such structures and about

500,000 are used for irrigation. Many of them have fallen into disuse. Many of

them have accumulated silt. Many require urgent repairs.”

Consequently he proposed to launch “a massive scheme to repair, renovate

and restore all the water bodies that are directly linked to agriculture” the FM

sought to begin “with pilot projects in at least five districts” – one district in

each of the five regions of the country.

And once the pilot projects were completed and validated, the government was

to “launch the National Water Resources Development Project and complete it

over a period of 7 to 10 years.”

Will it come with a master plan for water storage?


In conclusion, the FM added “It is my hope that by the beginning of the next

decade all water bodies in India will be restored to their original glory and that

the storage capacity of these water bodies will be augmented by at least 100

per cent.”

Once again in his Budget speech of 2005-06 in February 2005 the FM visited

the subject albeit briefly. The zest that was palpable the previous year was

missing. The grand announcement of July 2004 for a pilot project when the

Budget was presented was still on the drawing board and expected to be

“launched in the month of March 2005.”

That was the last time I heard of the UPA Government speak of his “big

dream.” The promise made almost a decade ago on the floor of the Parliament

on augmenting the storage capacity of water bodies “by at-least 100 per cent”

remains unfulfilled even to this day.

So much for UPA government’s concern for farmers, agriculture and creating

basic rural infrastructure!

What about Irrigation Facility?

Even here the then FM was spot on irrigation with his diagnosis. “The

Accelerated Irrigation Benefit Programme [AIBP] was introduced in 1996-97

and was allotted large funds year after year. Yet, out of 178 large and medium

irrigation projects that were identified, only 28 have been completed.”

Therefore the UPA government came with a practical proposal to “restructure”

AIBP by ensuring “truly last mile projects that can be completed by March

2005 will be given overriding priority, and other projects that can be

completed by March 2006 will also be taken up in the current year.”

Well did the government re-structure AIBP? The answer lies in the Budget

speech of Mr Pranab Mukherjee of 2012 where he adds, “To maximise the flow

of benefits from investments in irrigation projects, structural changes in AIBP

are being made.”

Readers may note the change in semantics: “restructure AIBP” of 2005 had

become “structural changes in AIBP” by 2012!

Either way nothing happened between 2005 and 2012 and since then.



Despite all the bluster of the UPA and their care for poor, farmers and

landless, the fact remains that the irrigated land as a percentage to total

agricultural land in India improved marginally between 31.6 per cent in 2004

to approximately 37 per cent in 2011.

This eloquently captures the neglect of irrigation in India by UPA.

It is in this connection the Economic Survey for 2013-14 tell us “Currently 63

million ha or 45 per cent of bet cropped area is irrigated. Under the

accelerated Benefit Programme [AIBP] Rs. 64, 228 crore of central loan

assistance [CLA]/ grant had been released up to 31 December 2013. An

irrigation potential of 8054.61 thousand ha is estimated to have been created

by states from major/ medium / minor irrigation projects under AIBP till

March 2012 [ Refer Para 8.31 of the Economic Survey]

Needless to emphasise, while the sums do indeed look massive the fact

remains the overall accretion to agriculture lands under irrigation has not

improved significantly. One reason for the same is that such irrigation

schemes with little or no outcome reports lend themselves to corruption.

It is in this connection the Comptroller and Auditor General of India (CAG) in

its Report No. 15 of 2004 (Civil) commented among other things, it noted that

over 35 of the expenditures under AIBP were “diverted, parked or mis-

utilised.”

That explains why states like Maharashtra despite having several such

irrigation schemes, funded both by the state and central government, is

perennially water starved. And that would include Rajasthan, Tamil Nadu,

Karnataka and Orissa amongst others.

This in turn leads to farm stress and resultant suicides which in turn trigger

another round of committees, reports, schemes, programs and once again loot.

Need for a Master Water Program

Changing weather pattern [alternating between drought and floods] make

India [with large sections of poor] extremely vulnerable. We need huge

quantities of food to feed our population. For that we require water. So would

our industry which is expected to grow exponentially.

Weather patterns show remarkable departure from the past – if it is drought

in one part of the country we will have floods. Either way it is a disaster.



Ideally we need a master plan to increase our water storage capacity, improve

irrigation facilities and create water networks across the country that links the

draught prone with those experiencing floods.

AIBP and other government sponsored programmes have exceeded their shelf

life.

No one is impressed with mere budgetary allocations to such outdated ideas.

The NDA Government must come out with a clear strategy of first having a

water storage mission.

We should have water bodies aggregating to 1 Sq KM as a target in every

district of the country. As noted in the 2004 Budget there are a million such

water bodies across the country of which most are in state of disuse and repair.

Ideally, it would not cost much to identify these, repair and rejuvenate them.

Crucially, the MNREGA program should be solely linked to effectuate this

plan.

Sounds simple but it would be out of favour of our ruling elite in Delhi. To

them what is attractive, for obvious reasons, is a proposal to bring water from

the Moon or Mars.

Notwithstanding such pulls and pressures will Budget 2015 bring about a

simple plan for water storage by identifying, repairing and rejuvenating

existing water bodies? Remember simplicity is a complex affair. It would not

cost much and would provide ocular demonstration of job opportunities to our

poor.

Will the FM do the needful? Or will he like his predecessor take a flight of

fancy?



A retired bureaucrat and a good friend of mine had a wonderful annecdote to

narrate. Having been served a notice from the Deputy Commissioner Income

Tax, my friend – at that time a Secretary to an unimportant department of the

Government of India – sent his personal secretary with all details [most of

which were innocous] on the appointed date to meet the Income Tax

authority. The personal secretary was surprised to see that his boss was not

the only person who had received notice from the said Deputy Commisoner as

quite a few personal secretaties representing their respective bosses were also

present there. Made to wait for a few hours, the personal secretary complained

to his boss who even as a Secretary, Government of India, could not do much

at that point in time.

But as luck would have it, the very next week, my friend was appointed as the

Revenue Secretary, Government of India. Naturally, all hell broke loose. The

Chairman of Central Board of Direct Taxes was summoned by my friend who

expressed as a “Revenue Secretary” his displeasure in the conduct of the

Deputy Commissioner “to a honest taxpayer” in no unertain terms. The

chairperson in turn summoned the Chief Commissioner who transferred his

ire on the entire hierarchy till it finally “message” reached the Deputy

Commissioner. Triumphantly my friend concluded this conversation by

saying, “I really put the Deputy Commissioner firmly in his place.” That raises

some pertinent question.

Budget 2015 – Education Outlays versus Outcomes


If a secretary of Government of India could be subjected to such harassment

what about ordinary tax payers? Importantly, my friend even as a secretary of

Government was oblivious of the harassment by IT Authorities [or for that

matter every revenue department] till he had a personal taste of the same.

That in my considered view is the crux of the issue. The disconnect between

the governed and those who are in charge of governance is phenomenal in

India; a bane of India. Most in our bureaucracy never have first hand

understanding or knowledge of the issues at the ground level. Yet, they are

mandated by our Constitution to provide a diagnosis, work out a solution and

effectuate the same at the ground level! Outlandish isn’t it?

Complete Disconnect

Standing outside the gate of a private school where my children study, I often

noticed with great dismay the number of Government vehicles that came to

drop children of Government officers. While it was blatant misuse of vehicles,

I wonder why should children of top Governmnet officers study in this private

school. Isn’t it appropriate that those children study in Government schools

only? While it is indeed a fact that the private school in question was one of

the well known schools in Chennai, the answer to this question is obvious.

Needless to emphasise, this private school offers better quality of education

than Government schools. That explains this clamour for private schools even

by Government officers.

But what about Government schools? Who would send their children to such

school knowing pretty well that the quality of education available in such

public school is abysmal? The answer to this question is not far to seek. Public

schools essentially are for those who are unable to pay for education in private

schools. Yet it is this class that is desperate for quality education. Naturally,

this clamour for private schools by children of Government officers

unnecessarily raises demand for private schools. Elementary economics would

tell us that excessive demand leads to increases in prices. And that is what is

happening in India on account of this skew in demand for private schools,

especially at the elementary level raises fees and thereby making such quality

education out of reach of most ordinary Indians.

In fact, India must be one of the few countries where cost of educating a child

at a primary level is several times more than educating him at the higher

levels.

Education Outlays versus Outcomes


This needs to change where quality education [especially at the primary level]

must not only be available to a select few but must be affordable to all Indians.

Whatever stated above is not something new. Neither is the establishment

unaware of this paradigm. In fact, we as a nation are conscious of the

challenges faced by having vast swaths of our population illiterate. Yet,

successive Government have been unable to come up with a comprehensive

solution to tackle this issue.

The UPA Government true to its ideology saw the problem as one of lack of

Governmental intervention, budgetary allocation and funding. Apart from

raising budgetary allocations to the education sector, the previous

Government also deemed it fit to levy a surchage of three per cent on all taxes.

But what about outcome?

Crucially, what is the result a decade later after identifying the problem and

even effectuating a solution through increased allocations? The answer once

again is obvious.

Reform the Delivery Process

A reference to an RTI application made by my friend in Chennai at this point

would be in order. The question on how many children study in the same

Government school in Tamil Nadu where their parents are employed as

teachers revealed startling results. In some of the schools in certain districts

not many children [in some places not even one student was enrolled] studied

in public schools where their parents were employed as teachers.

No wonder the quality of education in such schools is abysmal. Now spending

billions of rupees on such schools is naturally not transforming these public

schools. Where is the question of quality when my son or daughter is not

studying in the school where I am employed as a teacher? Who would address

this disconnect and how? More importantly, the infrastructure of these schools

are seen to be believed. Children especially girls are loath to go to such public

schools simply in the absence of clean toilets. But in New Delhi, we have

conference after conference on improving literacy for girl children without

addressing this fundamental issue of toilet for girl child in schools and its

effect on women illeteracy.

Arthur Lewit the author of a seminal work Freakonomics calls this the power

of small ideas that ultimately usher in big changes over a period of time. But

how could we bring in this change?



One way out to address this situation is to mandate that every employee of the

Government, both State and Central, [including Ministers] drawing salary

from the consolidated fund of India must necessarily send their children

ONLY to Government schools till 10th standard.

But I am sure that this simple idea would transform the education, especially

primary education, in India. A girl child of an education secretary studying in

public school is all that would take to solve the lack of toilets there. But this

will necessarily upset the Nehruvian consensus of our elites. How can a

daughter of an office of the Government of India go to the same school where

the son of an ordinary auto-driver goes?

Yet, our elites would lecture us on equality!

What should enthuse the Finance Minister is that this idea may not require

any Budgetary Allocation.

All that is required is a fiat followed by a determination to implement it.

Another area of such “reforms” is in public health. Mandate that public

servants [or their kin] must necessarily get treated in public hospitals. I am

sure all our 600-odd districts would some how contrive to get AIIMS like

institutes within the next five years. Else not even land will be identified in this

time period for such hospitals.

The core point that I am seeking to emphasise is that the there is a complete

disconnect between our bureacracy and the services they provide. This is why

services provided by the Government are inefficient and poor in quality.

Tragically, it is our poor who are the direct victims of such sloppy services

provided by the Government. And whenever the services are poor or

inefficient [telecommunications for instance] the Government has taken a

privatisation route. Education, public health and public transport in India are

incapable being completely privatised. On the contrary, there is crying need

for the Goverment to intervene and deliver effectively.

Obviously, it is here we need quick, efficient and incisive reforms. Sadly,

successive Government, probably because of vested interests, have ducked the

issue. Unfortunately, little do we realise that an ineffective delivery mechanism

makes such grandiose budgetary allocations irrelevant. After all anything

multiplied by zero is zero.



Naturally, given the deep freeze in reforms in services provided by the

Government, the only way out is to redefine the reforms process itself. Like

charity, reforms must begin at home.

It must compel the bureaucracy to taste its own medicine. How about

education and public health for starters? Will the Finance Minister mandate

that children of Government servants should necessarily send their children to

Public schools from academic year 2015-2016?

Will it mandate that the Government servant must necessaily seek medical

help only from Government hospitals? Will the reforms process be in effect

reformed?



Imagine for a moment a train from your town to Kochi and ending up in

distant Ahmedabad. Successive Union Budgets have been doing precisely

that; probably far worse. Government misses Revenue targets by a mile and

exceeds its expenditure by another.

The net result? The Fiscal Deficit – the indicator of the net borrowing by the

Government to fund its expenditure – exceeds the budget target. But who

cares? Definitely not the mandarins in Finance Ministry.

Fiscal Consolidation has been a narrative in successive Budgets. “In a

globalised world with its share of uncertainties and rapid changes, this year

brought us some opportunities and many challenges as we moved ahead with

steady steps on the chosen path of fiscal consolidation and high economic

growth.”

No, that is not Finance Minister Jaitley speaking. That was the then Finance

Minister Pranab Mukherjee referring to the issue of fiscal consolidation in his

Budget speech of 2011-2012 [Refer Para 1] which estimated a fiscal deficit of

4.6 per cent but finally ended up with 5.9 per cent for financial year 2011-2012.

So much for Fiscal Consolidation.

Crucially, no one in the Finance Ministry ever hauled over the coals for

missing any budgetary targets.

Budget 2015 – Micromanaging the Economy

http://indiabudget.nic.in/ub2011-12/bs/bs.pdf

http://indiabudget.nic.in/ub2011-12/bs/bs.pdf


Remember that 2011-12 was not an exception. In fact the golden rule is that

the Budget numbers are to be taken probably with a pinch of salt. Now let us

come to the current year. The mid-term review of the economy for the current

year was published by the Finance Ministry on December 19, 2014. It states

that the fiscal policy of 2014-2015 was fashioned with two objectives: one to

aid growth revival and two, to “continue” [emphasis mine] on the path of fiscal

consolidation – yes the very same path followed by Pranab Mukherjee and P

Chidambram.

I have two objections to the word continue. First, there was not much of fiscal

consolidation under UPA regime for the incumbent Government to “continue.”

Second, even assuming for a moment that UPA was indeed having a

programme for fiscal consolidation, let us not forget that mandate 2014 was

for a univocal change and not for maintaining status quo.

Be that as it may, the fact of the matter is that the mid-term review for 2014-

2015 points out that as against a budgeted estimates of Rs 5.31 lakh crores, the

fiscal deficit till September 30 was Rs 4.39 lakh crores. This works to

approximately 83 per cent of the budgeted deficit for the entire year.

In other words 83 per cent of the fiscal deficit has been exceeded in the first six

months! Definitely at half way the warning signs are on. Further, this

document brings about an explanation as to why the Budgeted numbers will

probably not achieved during the current year. Claiming that the revenue

projections were a by-product of overestimation, the review points out

probably revenues will be short by approximately Rs 105,000 crores. To this

extent, the Fiscal deficit will probably be higher.

Lack of Managerial Bandwidth

That brings me to the first objective of this year’s Budget – that of reviving

growth – which by its own admission has not yet happened. Surely, all this

must worry the Government. The Index of Industrial Production (IIP) for

October 2014 is a case in point which suggests that industrial growth has

witnessed a contraction of 4.2 per cent when compared to October 2013.

6In terms of industries, 16 out of the 22 industry groups in manufacturing

sector have shown negative growth during October 2014 as compared to

October 2013.

Micromanaging the Economy


Similarly, the Consumer durables and Consumer non-durables have recorded

a growth of (-) 35 per cent and (-) 4.3 per cent respectively during the same

period. October being the month of festivals, often witnesses a surge in sale of

such goods.

Yet, if we are witnessing such dramatic fall in numbers. Similarly, the capital

goods industry – the barometer of oncoming investments – is also in negative

territory. But why? Well most in the North Block are clueless.

Likewise, as I write this, one of the dramatic macro-economic developments in

recent months have been the decline in inflation numbers. The mid-term

review of the Government observes that these developments were

“unanticipated.” Put simply, it had no faith in its own policy that the inflation

numbers would go down!

If only the former Finance Minister P Chidambaram were in office, he would

have appropriated credit for this paradigm lock, stock and barrel.

Nevertheless, such innocence demonstrates that the NDA Government is still

on a learning curve.

It is in this connection the mid-term review of the economy states: “even as

recently as September 2014 the RBI’s projection for January 2015 was 7.4 per

cent, representing as over-estimate of nearly 200 basis points. The same was

true for most financial market assessments.”

One of the reasons attributed for this dramatic fall in inflation rates is the

decline in international commodity prices, especially that of crude.

Importantly, no one within the Government is clear as to why crude is falling

in first place.

That explains why the RBI as well as most within the Government have been

caught flat-footed on this dramatic decline in commodity prices, mostly oil.

Remember, if crude can fall from USD 110 to less than 60 per barrel in a

matter of weeks, it can rise too in a jiffy. And if Budget assumes international

prices of oil at 110 or 60, barring divine intervention, surely it is going to be

way of the mark.

Re-engineering Growth

There is another dimension to this problem. It is estimated that approximately

Rs 18 lakh crores are locked in stalled projects [aggregating to approximately

13 per cent of the GDP] of which an estimated 60 per cent are in

infrastructure.



According to the mid-term review of the economy, “this reflects low and

declining corporate profitability as more than one-third firms have an interest

coverage ratio of less than one.”

At an average of 70 per cent debt-equity ratio, Indian corporates are one of the

highly indebted in the entire world. As project after project gets stalled for one

reason or the other corporates find they are without incomes. Consequently,

losses mount and corporates are unable to repay to their loans.

This in turn is now affecting the banking sector. The mid-term review of the

economy estimates that 11-12 per cent of the total banking assets are

restructured.

Importantly, banks are becoming increasingly risk-averse and hence are

unwilling to lend afresh.

This in turn is affecting growth. But where is the question of fresh lending

when past lending are stuck? Whatever be it this is the legacy of the UPA

Government and continues to be a challenge for the incumbent Government.

Naturally, the first task for the NDA Government is to address the issues faced

by the staled projects referred to above. Remember, that there is no one size fit

all solution for all this. On the contrary, we need to approach on a case to case

basis. We need to customise solutions.

But to do so, do we have a managerial bandwidth? Does the bureaucracy have

the necessary gravitas to provide such solutions on a case to case basis? Do

they have the attention span to diagnose? Can they provide solutions? Can

they differentiate the wilful defaulter from one who is a victim of

circumstances?

My guess is as good as yours.

The reasons for such stalling range are as varied as judicial interference to

NGO activism. Some are due to bottlenecks in fuel supply which this

Government is surely addressing. But on most one feels that the rot is far

deeper than on superficial inspection.

Unless the FM himself gears to deal with the subject, the economy may well

continue to be on a downward spiral. And unless the stalled projects are de-

stalled fresh projects would not be undertaken. That would postpone the new

investment cycle. What is worrying analysts is that as such projects are caught

in a policy paralysis the Balance Sheet of our Banks continue to bleed.



For too long has the RBI along with some of the public sector banks been

guilty of window dressing their balance sheets.

Remember a meltdown of a public sector bank can have serious consequences

on the economy and our currency. For too long Analysts, Rating agency and

Auditors of these banks have been able to see the emperor’s cloths when none

exists. And should someone somewhere point out that the emperor is indeed

without cloths, all hell will break loose.

In short, the problems of our economy is that consumers are not consuming,

borrowers are not borrowing, lenders are not lending and investors are not

investing.

Surely, it is a huge mess out there.

North Block as a whole does not have solutions. At best it hopes that revival

will be “unanticipated” – not by its interventions or policies. Simultaneously,

the Government must realise India does not require big bang reforms.

Rather it requires simple micro-management of the economy.

But does the Government have managers to micro-manage the economy? For

starters, it must de-stall the projects stalled. To do so it must micro-manage.

But has it got managerial bandwidth for this exercise?



Theoretical economics tell us any reduction in interest rates has two-fold

impact on the economy – One, it shifts consumption from future to present

and two, shifts savings from deposits in banks to stock markets. In contra any

increase in interest rates shifts present consumption to future [antidote to

inflation] and from stock market into bank deposits.

As the clamour for reduction in interest rates gets shriller by the day, we need

to put this theory to greater scrutiny, more so from the Indian perspective.

But first some facts on the state of economy:

India’s gross fiscal deficit reached 99 per cent of the annual Budget estimates by end November 2014. This was primarily on account of revenue slippages accentuated by expenditures overshooting budgetary estimates.

On a year-on-year basis, non-food bank credit increased by 11 percent in November 2014 as compared with an increase of 14.7 percent in November 2013. That implied further slowdown in economy. Consequently, credit to industry increased by a mere 7.3 percent in November 2014 as compared with an increase of 13.7 percent in November 2013. Deceleration in credit growth to industry was observed in all major sub-sectors, barring construction, beverages, tobacco, mining & quarrying.

Budget 2015 – Will it make India an attractive

investment destination?


As at end of September 2014, India’s total external debt stood at USD 455.9 billion, recording an increase of USD 13.7 billion over the level recorded at end-March 2014. India’s foreign exchange reserves provided a cover of a mere 69 percent to the total external debt stock at end-September 2014.

A sharp rise ingold imports and a fall in export growth pushed India’s current account deficit [CAD] to approximately USD 10 billon [2.1 percent of GDP] in the second quarter of this financial year, ending September, compared to USD 5.2 billion (1.2 percent of GDP) for July-September 2013.

In short, there fiscal deficit is spiralling out of control, external debt is piling up while

there is pressure on the Rupee on account of widening CAD. All this, experts tell us can

be cured by simply reducing lending rates by half a percent! How puerile can we get?

A half-percent solution?

In my previous column [Budget 2015 – Micromanaging the economy], I had

dealt with issues raised by the mid-term review of the economy carried out by

the Finance Ministry.

Based on the said review I had pointed out that approximately Rs 18 Lac

Crores of project are stalled across the country for a variety of reasons.

One such project was that of my client. Naturally, his company was unable to

repay banks which had lent significant sums. Worried of the possibility of this

company going belly up and consequently paranoid of this account becoming

bad the bankers summoned my client only to give piece of their mind.

My client was bombarded with logical questions by his Bankers. And the most

pertinent of them being – when will he repay the entire amount back to

Banks? At-least when would he service the outstanding interest? My client was

unfazed. After all, to him, such meetings were “routine.”

According to my client all that the bankers spoke was filibuster! And the

threats [including designating him as a wilful defaulter and seizing his assets]

held out by Bankers were empty; impossible to be effectuated.

Gathering his wits instantly he retorted: “I have not diverted any money from

my project. Importantly, as Indian economy chocked during the UPA regime

my project could not achieve more than 30 percent capacity utilisation. And

that turned a wonderful landmark visionary project into a non-performing

one.”

Will it make India an attractive investment destination?

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http://www.business-standard.com/search?type=news&q=Current+Account+Deficit

http://www.niticentral.com/2014/12/29/budget-2015-micromanaging-economy-293498.html


Crucially, he put forth a profound question: “What is my fault? If I am guilty of

exaggerating revenue flows from my project, so were bankers who carried out

due-diligence on the same before lending to me.” What followed is not for

public consumption.

It was indeed an acrimonious war of words between the borrower and lender

banks. Yet there is something that strangely unites the two warring sides –

reduction in rates! My client, as well as his bankers unanimously concluded

the meeting that the only solution is in reduction of rates.

And this half percent rate cut is supposed to at-least double the capacity

utilisation of his project from present low levels, bring instant revenues and

lead to increased cash flows that would in turn facilitate paying of

[outstanding] interest as well as repayment of loans! How silly can we get?

It is in this connection the Midterm Review of the economy states, “For nearly

six years (2007 third quarter to 2013 third quarter), India lost monetary policy

credibility, reflected in the fact that real policy interest rates were consistently

negative at a time when inflation was persistently in the double-digit

territory.”

These policy distortions were caused by a fixation of the previous dispensation

to a lower rate regime and thereby sustain stock markets. And despite such

distortions Indians invested predominantly in Banks, not stock markets.

Nevertheless, this distortion paved way for easy-cheap money and built-up of

asset bubbles which in turn explain why my client and his banker recklessly

embarked on building huge capacities. These capacities were disproportionate

to the need of Indian economy, more so as it was hit by a downturn since

2010.

The economy, banker and my client are all attempting to pay now for sins

committed through a half percent rate reduction!

Missing woods for the trees

In one of my previous column Budget 2015 – Micromanaging the Economy I

had pointed out that the consumer durables and consumer non-durables have

recorded a growth of (-) 35 per cent and (-) 4.3 per cent respectively during

October 2014 when compared to October 2013. These are alarming indicators

of retail demand having completely dried up.

The dramatic collapse of demand in consumer durable indicates the loss of

confidence by consumers in India.


http://www.niticentral.com/2014/12/29/budget-2015-micromanaging-economy-293498.html


The reason for the same is not far to seek. Demand, especially at the retail

level, is a product of confidence. Remember that confidence at the retail level

is rooted to aggregate of all policy of Government.

Put pithily, benign interest rates of the past years ended up creating asset

bubbles, robbed consumer of their confidence and did not divert Indian

savings into stock markets – contrary to what the experts and economists had

predicted. Thus, there is a quintessential problem of both demand [as

exemplified by this data mentioned above] and supply [as my client story

demonstrates].

And both cannot be cured by a rate cut!

Unless consumer confidence is restored and demand picks up at retail level,

recovery is a far cry. The Government must realise that the only way to do so is

to quickly restore credibility of monetary policy.

Those championing reduction of interest rates are genuinely hoping to revive

investment – a non-starter. The reason for the same is not far to seek as most

corporates who probably could borrow are already in the red, like my client!

Moreover, several sectors are facing capacity overhang caused by a loose

monetary policy of yesteryears. Either way banks [having learnt the lesson the

hard way] have very less risk appetite.

But what about borrowings by retailers on account lower interest rates? Will it

not fuel demand? Will it not trigger growth? The answer to this question is

cultural and psychological and hence beyond theoretical economics – Indian

retail demand is not credit driven as it is in several other countries. Hence

triggering retail demand through rate cuts too is a non-starter.

Unless inflation is controlled and real interest rates turns positive ordinary

Indians will not have any faith in the Government. To restore confidence,

Government has to cut fiscal deficit and demonstrate that it can walk the

budget talk. Also it needs to remove through effective governance all supply

side constraints to address inflation spikes.

Moreover a positive deposit rate is an elixir for restoring retail demand as it

would ultimately result in more money in hands of consumer. Remember

India has in excess of Rs eighty lac crores as deposit in banks. These are not

only savers; they are also consumers. For the past six years this group – the

households – have been short charged on account of a lax monetary policy.



But pink papers and armchair economists, because of vested interests, fancy a

rate reduction without an economic rationale.

Crucially, the Foreign Investors who have invested in India’s stock markets too

want to offload. But in the absence of retail investors are finding it difficult to

exit from India. Cut or no cut, when it comes to investment in stock markets it

is a classical case of once bitten twice shy for Indians!

To conclude, lower interest rates have failed to persuade Indian to shift invest

their investment into stock markets. Neither has it shifted future consumption

to present. Indian households by their sheer doggedness and persistent

savings outwitted theoretical economists. Yet experts parrot the same rate

cut mantra!

Will Budget 2015 sidestep advice of experts to artificially reduce rates? Will it

slay the monster of inflation? Will it significantly lower fiscal deficit? Crucially,

will it make India an efficient economy and hence an attractive investment

destination?



Economics is a simple subject complicated by economists. Economics, as a

reader would know involves production of goods and services for

consumption. Nevertheless production must exceed consumption to allow

savings. Savings must in turn convert into investments. Again investments

must ensure production.

This cycle needs to flow unhindered. And whenever the flow of goods and

services [the aggregate of which is called GDP] gets derailed – and often it

does – we need intervention from Government. In turn, the Government has

to get its policy mix correct at the right time. Going by the historical evidence

one must hasten to add that Government often does too little, too late.

Theoretically, Government intervention is often through a range of economic

policies – monetary and fiscal. This manifests through investment, interest,

taxation, export, import and a range of other policies which are spelt out

during the annual Budget of the Government.

Notwithstanding this Indian economy faces shortage of goods and services in

some sectors while facing a glut in others. There is excess capacity in some

sector and none in others. To add to the confusion we import some products at

times which are already in excess supply and export those in short supply.

Budget 2015 – Will it ensure Make in India?


The Union Budget is thus expected to cognise all these and address the entire

range of economic distortions! And given the horrendous track record of the

UPA Government let me hasten to add that the Finance Minister has a huge

task of addressing the distortions that has crept in over the past decade.

Thus contrary to the popular belief, a Budget of the Government is not merely

a simple statement of its income and expenses. Rather it is much more. It is

the pithy expression of its overall economic policies of course laced with usual

dose of politics.

A Blast from the Past

One of the major policy initiatives of the NDA Government since assuming

office has been “Make in India.” At a philosophical level it is designed to

facilitate investment, foster innovation and enhance skill development.

While seeking to protect intellectual property it seeks to build best-in-class

manufacturing infrastructure.

Naturally it is expected the Budget will lay emphasis on this policy.

It may be recalled that the share of manufacturing has been stagnating at

approximately 16 percent of our GDP since 1980s. Everyone within the

Government is aware that inadequate infrastructure, complex regulatory

environment and inadequate availability of skilled manpower have been its

bugbear. Yet not much has been done.

It is in this connection the National Manufacturing Competitiveness Council

[NMCC] had come up with a “strategy” in February 2006 seeking to increase

the share of manufacturing to a minimum of 25-35 percent of the GDP. That

called for a growth rate of 14-16 percent annually in the manufacturing sector

alone.

“Though in the recent past, the growth of the manufacturing sector has

generally outpaced the overall growth rate of the economy, at just over 16

percent of GDP, the contribution of the manufacturing sector in India is much

below its potential.”

Now that was not the NMCC stating the obvious. Rather it was yet another

report of the Government of India – this time in November 2011.

“Inadequate growth in manufacturing has had its adverse impact on

employment generation.

Will it ensure Make in India?


The current mismatch between distribution of workforce and value added in

agriculture is one of the main reasons for the large number of poor. This needs

urgent correction.”

No. This is not from the 2011 report of the Government of India. Rather it was

the Foreword penned by the then Prime Minister Dr Manmohan Singh to the

NMCC strategy document in 2006.

“Over the next decade, India has to create gainful employment opportunities

for a large section of its population, with varying degrees of skills and

qualifications. This will entail creation of 220 million jobs by 2025 in order to

reap the demographic dividend.” Now this is not Dr Manmohan telling us in

2006. Rather this is from the 2011 Report of Government of India.

In short, between 2006 and 2011 [in fact during the entire period of UPA] not

much was done for manufacturing.

Consequently, the share of manufacturing has stagnated at 16 percent of the

GDP for the past several years. The world meanwhile, notably China, has

whizzed past us.

What needs to be done?

There are several challenges before Indian manufacturing emerges on top of

its global peer. And pundits both with the Government and outside have

proffered plethora of solutions. But there is a crucial catch – most of these

pundits have managed a factory for a day, much less, set it up? Is that why

manufacturing has been languishing at 16 percent of the GDP?

Whatever be it let us look into the net impact on Indian economy. The net

import of capital goods into the Indian economy between 2007-08 and 2013-

14 was approximately USD 568 billion. Likewise the aggregate trade deficit

[Exports less imports] was approximately USD 950 billion.

What adds fat to the fire is that the imports from China alone during the

corresponding period aggregates to USD 290 billion. It may be noted that we

do not have a Free Trade Agreement with China. Yet, Chinese imports account

for a significant portion of our imports.

But why? The answer for the same is not far to seek. Success of a nation in

[manufacturing] globally is a culmination of several factors. It depends on

skilled labour, low cost capital, access to technology, infrastructure, weak

currency and of course the availability of raw materials.



It is in this connection it is to be understood that several East-Asian countries

between 70’s and 90’s have witnessed a surge in their growth by increasing

share of manufacturing in national GDP by getting the above-mentioned

matrix right.

Chinese growth was basically adopting the South-East Asian growth model

adjusted for global scale. And the beginning was made by first significantly

devaluing Yuan – their Currency – in early 90’s but holding it steady for well

over a decade to a dollar. And believe me during this period Chinese did not

bother about global criticism of adopting mercantilist policies.

Now that China ends up with a trade surplus [Exports minus Imports] close to

USD 300 billion [while our annual exports are approximately USD 300

billions] and has emerged as the world’s largest exporter it has begun to allow

appreciation of its currency.

Put pithily Chinese did not bother about how the world perceives it till it

emerged as a global winner. Significantly, it charted a unique path for its

economic success and pursued it with missionary zeal.

The idea of Make in India has not come a day too soon. However, concerns

arise on account of several factors – notably power. And wherever power is

available it is uncertain and of questionable quality. Power is indicative of all

our infrastructure woes – port, railways, road, airports, effluent treatment,

pollution control et all are in shambles or simply non-existent.

Skill development is another area of concern. How do we make world class

products when most of our engineers are unemployable? How do we produce

world class engineers from universities that are not world class? And how do

we produce world class universities unless we overhaul the entire educational

system including primary education?

Importantly, even the best of companies in the organised sector end up paying

12 per cent interest on working capital when foreign companies pay far lesser

rates. Naturally, all this add to their competitiveness.

Added to all this is our archaic labour laws, extortionist tax enactments and

lethargic bureaucracy. Remember we are ranked 142nd in the ease of doing

business. The net result is for all to see – India manufacturing is defeated not

abroad but even within India.

The problem for the Finance Minister is that if he raises the import duties or

restricts imports of such products prices shoot up.



On the contrary if imports are allowed unrestricted, manufacturers in other

countries on account of an overwhelming competitive advantage will never

allow Made in India initiative to succeed.

Put pithily, the FM has a Hobson’s choice. To allow this initiative to succeed he

has to bite the bullet and the nation has to pay a price for this initiative.

Implicit in the argument is that the FM needs to prepare the nation for the

long haul.

For starters, he must spell out areas where India enjoys competitive advantage

and can succeed. Similarly, he must lay out a road map with appropriate check

points.

It is easy for the FM to say [as did the UPA] that the share of manufacturing in

national GDP in 2025 would be in excess of 25 per cent.

But as UPA realised it is easier said than done for what is required is a

comprehensive plan with great attention to details and implementation.

Crucially, he must revisit his targets once in three months and present a

progress report to the nation.

The Billion Dollar question – Will Budget 2015 provide us the comprehensive

plan to ensure Make in India initiative is a success?



Will Budget 2015 provide incentives, plans and programs for individual states to become self-sufficient in food production?

To understand the enormity of the challenge India faces on issue of food shortage, security and depravation, let me at the outset quote some statistics. The net per capita food availability in India in 1971 was 394 gm per day. This was just after the onset of Green Revolution in India.

Exactly 30 years later, in 2001, the net per capita of food grains availability was 396 gm per day: a princely rise of 2 gm! [Source: Economic Survey published by the Government of India]. And by 2015 things have not improved significantly.

Naturally, India ranks very high in the global Hunger Index published by the International Food Policy Research Institute even as several sub-Saharan and out neighbours in South Asia fare far better than us. Ranked 55 out of 76 countries, India for instance, ranks below Nepal [Ranked 44] and Sri Lanka [Ranked 39].

Needless to emphasise a comparison with other countries is central to understanding the extent of food shortage prevailing in India.

Budget 2015 – Will it address food shortage?


Advanced countries, on a per capita basis, consume anywhere between 600 gm to 700 gm per day. Such healthy consumption in these countries is supplementary to the substantial quantity of meat, fruits, vegetables and milk.

It is at this point a reference to China is unavoidable. China it may be noted, is a country with approximately 1.2 times our population, produces approximately 500 MT of food grain every year — more than double that of India. Does this comparison with China not blow the myth of food self-sufficiency in India?

On this score, our consumption on a per capita level is far below the world average and significantly below the average of the developed countries. It would seem that, we as a nation, seem to have declared food self-sufficiency on virtually half-empty stomachs.

What is appalling is the fact that even after the British took over the reins of India, they constituted a Commission to look into the quantity of food required in India, should India were to be hit by a famine. That was way back in late nineteenth century when British had succeeded in setting a Government in India.

For this purpose, the per capita food consumption was held to be 500 gm – yes 500 gm – per day by the said Commission. It has to be noted that the British fixed this norm for a subjugated population and during a famine! It would seem that our colonial oppressors had a more charitable view than our own democratically elected governments. No wonder we have declared food sufficiency at 400 gm per day per capita. [Source Annam Bahukurmita – Centre for Policy Studies]

It is in this connection it has to be noted the National Institute of Nutrition is reported to have prescribed a minimum of 2,400 calories per day per Indian. What is galling to note is that significant sections of our population do not have access to even this minimal nutritional requirement. By the way, the average calorie intake available to an inmate at the dreaded Guantanamo Bay daily is well in excess of 4,000 calories!

In effect, for over five decades our farm growth during the much celebrated Green Revolution has barely kept pace with our population growth.

Obviously, [given the statistics quoted above] we are not producing enough food grains or pulses on a per capita level. Yet, for the past four decades or so we have been under the mistaken belief that distribution, not production, to be the key to the issue on hand.

Will it address food shortage?


More to the point – economists within our establishment are ignorant of the massive levels of malnutrition and food deprivation. They presume that India has a distributional problem, not one of production.

In the process most policies laid out by the Government aim to set right the distribution angle when the challenge lies mostly at the production stage itself. That explains why we created a monstrous public distribution system in the first place.

Will Budget 2015 first acknowledge this distortion and remedy the same forthwith?

A callous approach

This issue is not merely of agriculture or hunger index; it is much more. It concerns food security, livelihood of farmers and of course food inflation. Agriculture is far too central to the Indian economy than can be imagined by many of us. It is our route to food security [access to food grains], economic well-being, poverty alleviation and crucially, national security.

But like all other things in India, the seriousness of the issue is inversely proportional to the attention it gets.

India produces approximately 250 MT of food grains annually. Of this, one-half i.e. 120 – 140 MT is estimated to be consumed by farmers and theoretically does not enter the national grain markets.

Of the balance 110-130 MT that enters the national grain markets, Government procures approximately half of this for public distribution. That makes the Government a dominant player. The balance – a small portion say 60 MT – enters our grain markets.

All these have profound implications on the policy formulations by the government of India. Thanks to our misunderstanding of the problem as one of distribution we have an open-ended purchase policy, we continue to endlessly purchase over and above our buffer stock requirements.

The Government, thanks to its inefficiency, is unable to distribute what it procures. In the process, little do we realise that endless food procurement by Food Corporation of India [FCI] turns out ultimately to be public hoarding by Government. This in turn robs the common man of stocks while artificially inflating grain prices. This hoarding by the State is at the root of the extant chronic food inflation and shortage in India.



Will Budget 2015 cognise and address this issue?

Interestingly, the economic cost of FCI for acquiring, storing and distributing food grains is about 40 per cent of the procurement price. FCI must be a unique organisation that suffers from diseconomies of scale! But who cares? The more it procures, stores or distributes, the more it leaks.

What is galling is the fact that the National Sample Survey [NSS] studies reveals massive leakage of food grains in the Targeted PDS mechanism that aims to deliver food grains for BPL families. This is simply because PDS has virtually collapsed in several states in India due to weak governance and lack of accountability.

In fact, this document by the Ministry of Agriculture demonstrates the dismal performance of this scheme for 2004-05 and 2009-10, the two years for which NSS data on consumption from PDS are available.

In 2004-05, compared to an off-take of 29 million tonnes of rice and wheat by States, only 13 million tonnes were actually lifted by households for consumption – suggesting a massive leakage of 54 per cent. In 2009-10, 25 million tonnes was received by the people under PDS while the off-take by states was 42 million tonnes — indicating a leakage in excess of 40 per cent.

Further, the FCI storage facilities are still primitive.

For instance, the FCI is facing an acute storage crisis with covered capacity estimated at around 45 million tonnes and covered and plinth storage of 17 million tonnes against the stocks crossing 80 million tonnes.

This once again adds to the wastage and consequently adds to inflation.

So what needs to be done?

Simply put, we need to produce food grains in excess of 350 MT. In such a scenario with massive production of food we do not require state intervention. Should we produce less than 350 MT and seek an intervention of the state, it will be a futile exercise.

Ideally Budget 2015 must fix an overall production target of 350 MT by 2018-19. Once that is fixed all that needs to be done is mere detailing by various departments or ministries – agricultural credit policy; fertilizer policy; government procurement policy; export-import policies; water policy et all are subsets of the larger agricultural policy of producing enough food grains for the country.



But there is yet another dimension to this problem. More than eighty percent of our grains [wheat and rice] procurement by FCI comes from Punjab, Haryana and Uttar Pradesh. This creates a logistic nightmare for distributing such grains to distant states like Kerala or TN. Given our archaic logistic systems, poor storage facilities and bad transport mechanisms, storage and transportation costs add significantly to procurement costs.

That in turn adds to food subsidy but is meaningless expenditure.

This too needs to be addressed. States like TN and Kerala have all but virtually given up on agriculture. This asymmetry in national farm production means we are burdening our already fragile logistics while depending on Punjab and Haryana for grain production.

That implies larger states have to necessarily address food self-sufficiency and in the least not burden the other states for feeding their population. Will Budget 2015 unleash competitiveness in farm sector amongst states? How about procuring 50 percent of the state requirement from within a state by 2020?

A country of a billion plus has been kept on a starvation mode for too long. At a global scale our food consumption is far too less. Will Budget 2015 provide incentives, plans and programs for individual states to become self-sufficient in food production? Will it have plans for producing 350 MT of food grains? Will it compel states to be competitive in farm production?



Showcasing India as an investment destination at the World Economic

Forum in the third week of January at Davos, Finance Minister Mr. Arun

Jaitley promised India has a “lot in the pipeline” for global investors. And

that implicitly meant further liberalising the Foreign Direct Investment [FDI]

rules.

It may be recalled that in one of my earlier article titled Budget 2015 – Can it restore faith in the markets I had quoted a Report of Government of India under the chairmanship of Dr. C Rangarajan which pointed out how more than 98 percent of domestic investment is funded by domestic savings.

That in turn implies Indian economy is not dependent on FDI. Not many within the establishment, media and probably within the polity realise that Indian economy is run by domestic savings that fuel domestic investments.

Be that as it may, I had pointed out in the very same article it was puerile on our part to expect foreigners would readily invest in India given the fact that even Indians are increasingly loath to invest in India.

Do we not realise that on ease of doing Business we are ranked far too below many of our competing peers? And should we forget our extortionist tax regime and creaky infrastructure?

Budget 2015 – Will it Streamline Outbound FDI?

http://www.niticentral.com/2014/11/17/budget-2015-can-restore-faith-markets-245302.html

http://www.niticentral.com/2014/11/17/budget-2015-can-restore-faith-markets-245302.html


Yet out clamour for FDI continues, even in Davos! Needless to emphasise FDI would be a function of our ease of doing business, improving investment climate and of course when domestic savings fund domestic investments. But all this need intense hard work, precise planning and managerial bandwidth – all of which are at a short supply with the Government.

Of course, the easy route is to cognise the need for improving India’s ease of doing business and also liberalise the rules for FDI. Such short cuts impress none.

But we also talk of Outbound FDI

Just as for over two decade or so since we adopted the new economic policies in 1991 we have been seeking FDI into India, simultaneously we have also liberalised the outbound direct investments from India – that is permit Indians to invest abroad. In short, our FMs go and seek FDI all over the world we also liberalise outbound investments.

To a layman this must be maddening. Why permit outbound FDI when we clamour FDI into India. Well, there is a method in the madness that must be evident to the discerning eye. The Master Circular issued by the Reserve Bank of India [Liberalised further in third week of January 2015 even as our FM was inviting global investors in invest in India!] explains this in greater detail.

The RBI goes on to explain the philosophy behind permitting outbound FDI. Accordingly “Overseas investments in Joint Ventures [JV] and Wholly Owned Subsidiaries [WOS] have been recognised as important avenues for promoting global business by Indian entrepreneurs. Joint Ventures are perceived as a medium of economic and business co-operation between India and other countries.”

Explaining the benefits arising from such outbound FDI, the RBI adds “Transfer of technology and skill, sharing of results of R&D, access to wider global market, promotion of brand image, generation of employment and utilisation of raw materials available in India and in the host country are other significant benefits arising out of such overseas investments.”

That is not on. RBI believes that outbound FDI would also be “important drivers of foreign trade through increased exports of plant and machinery and goods and services from India and also a source of foreign exchange earnings by way of dividend earnings, royalty, technical know-how fee and other entitlements on such investments.”

In short, outbound FDI are geo-strategic instruments in the hands of our government and designed for a specific need. But are we using it precisely for that purpose?

Will it Streamline Outbound FDI?


Or is India’s outbound FDI being misused? More to the point – Is India’s outbound FDI a huge policy loophole that facilitates routing of domestic savings abroad without the strategic intent?

Need to effectuate the strategic intent

At the core of the issue is one of using domestic savings especially precious foreign exchange to invest outside India; rather it is about getting bang for the buck. This is where the intent of the policy needs to be coterminous with the facts on the ground. But the crucial question – is it?

As pointed out earlier since 1991 outbound Indian FDI was successively liberalised over a period as part of our new economic policies. Yet, till 2004-05 India’s annual outbound FDI was negligible – a mere USD 2 billion was reported in that year.

However, since 2005-06 the position turns dramatically when USD 7.8 billion was invested by Indian businesses through this route.

Subsequently USD 13.30 billion was invested in 2006-07, 18.50 billion in 2007-08, 18.60 billion in 2008-09, 13.60 billion in 2009-10, 16.8 billion in 2010-11, and 8.9 billion in 2011-12.

In short, in the seven year between 2005-06 and 2011-12 India’s outbound FDI has been approximately a whopping USD 100 billion! This number by itself is scandalous for a country that struggles to get USD 10-15 billion annually as inward FDI into India.

In an article titled “Outbound FDI or a UPA-sponsored fraud” in 2013 I had pointed out “Rule of thumb indicates that at least India must be in a position to earn a minimum USD 4-6 billion annually as returns on these investments. The details pertaining to the returns from such investments are not available in the aggregate in public domain. Nor could these be gathered through RTI as the Reserve Bank of India refused to part with the information citing confidentiality provisions. Consequently, on this point your guess is as good as mine.”

Subsequently I could persuade the RBI to provide me details through repeated RTIs to provide me further information. The details are indeed shocking – the annual return from such investment from India aggregating to USD 100 billion was less than a mere billion dollars i.e. less than 1 percent. Obviously, there is a fatal flaw in our outbound FDI program.

Nevertheless questions remain: How much of the USD 100 billion are genuine investments yielding reasonable returns and how much are sunk and gone?


http://www.niticentral.com/2013/11/18/indias-outbound-fdi-or-a-upa-sponsored-fraud-158846.html


But there are larger unresolved questions. For instance, for the four years beginning 2008-09 to 2011-12 USD 23.31 billion was invested in manufacturing abroad, 17.03 billion in financial insurance, real estate and business services, 5.19 billion in wholesale and retail trade and 4.94 billion in agriculture and allied activities!

It may be fascinating to note that the most liberal estimates made by UPA spokesperson in the context of liberalising inward FDI in Indian retail is USD 5 billion within the next five years. And contrast it with the fact that Indian business in the four years between 2007-08 and 2011-12 has already invested USD 5.19 billion in wholesale and retail trade outside India!

Are Indian businesses so competent and competitive to invest in retail sector abroad? If so why liberalise retail and invite FDI in retail into India?

If the sectors invested surprise you, destination countries for such outbound FDI will shock you. In the four years between 2008-09 and 2011-12 we have allowed USD 14.11 billion into Singapore and 11.57 billion into Mauritius.

That is not all. Over the years we have allowed significant amount of investments into several tax havens like British Virginia Islands, Cyprus, Netherlands and of course Panama amongst others. What is galling is that some of these JVs and WoS have been used as a special pass through vehicle to route borrowings abroad to be invested into back into India, right under the nose of RBI?

Obviously, the modern version of the great Indian rope trick is India’s outbound FDI. The investment of USD 100 billion in a span of a mere seven years of which several billions have been invested into tax havens across continents is surely worrying.

Consequently, sums invested in such tax havens could vanish – especially if they are routed to other numbered accounts that define these very tax havens. Remember, this route is especially convenient to any Indian corporate that wants to pay kickbacks to powers that be in tax havens, where there are no audits, KYC norms and oversights.

Let us also not forget India’s outbound FDI allows significant sums to be invested into tax havens without any let, fear or significant oversight.

That is not all. Several of Indian banks are reported to have given loans to overseas subsidiaries of Indian corporate through their off-shore branches. Significant portion of these are reported to have been routed to India through the inbound FDI route or to the Indian Stock markets through the Participatory Notes route.



Some of these could have been used to fund pay-offs and kickbacks in the past. Some of these could be the well-planned loot of our corporate czars themselves. Some of these could be routed back into India and rig stock markets or for that matter, any other markets.

In short, significant portion of India’s out-bound foreign investment policy is dodgy.

Could Budget 2015 look into all this? Will Budget 2015 revisit outbound FDI and strengthen oversight rules? Will Budget 2015 align our outbound FDI with our policy?



At the outset some facts about Indian economy. Approximately two-thirds of

India’s GDP originates from what is loosely called informal sector.

Importantly, 90 per cent of our non-farm work force are employed here. This

is one of the highest in the world. Yet, this informal sector rarely gets policy

traction.

The reason for the same is not far to seek. By it very design informal sector always remains below the radar of Indian establishment. That probably explains why two-thirds of Indian economy are underfinanced by our formal financial sector including banks.

Of the balance one-third, at least 20 per cent is accounted for by both Central and State Governments with the residuary balance of 10 or 12 per cent of the GDP contributed by the corporate sector. And this residuary fraction is termed as formal sector – one that hogs policy attention.

What is worse is this residuary corporate sector that has over the years

become a benchmark when it comes to policy intervention for our

establishment. More to the point – despite less than two per cent of the GDP

contributed by an elite club of 30 companies who constitute the Bombay

Stock Exchange sensex, our fixation to Sensex is phenomenal.

Budget 2015 – Will it fund Real Sector in India?


Inexplicable, isn’t it? In this connection a report of global bank Credit Suisse

in 2013 on the Indian economy titled India’s better half – India’s informal

economy had made the following pertinent observations:

• The intuitive habit of drawing macroeconomic conclusions from the corporate feedback [and

vice versa] is fraught with risk.

• This makes GDP calculation as much an exercise in estimation as reporting.

• The high share of informal economy [among the highest globally] is a structural problem, as it

drives low tax revenues and deters individual risk-taking, given the lack of a safety net

• But we also believe the recent rapid productivity gains are mostly in this informal economy,

and do not fully appear in GDP growth data yet. When a new series starts next year, we

estimate GDP can rise by almost 15 per cent, implying 2005-2013 CAGR was 1.8 per cent higher,

at 9.8 per cent.

• By definition, informal economic activity does not pay taxes, has limited access to formal

credit [our interactions with CSO suggest only 18 per cent of credit to SMEs in India is formal],

and workers in these economies lack normal measures of labour protection.

Professor R Vaidyanathan of IIM, Banglore who has made signal service to the nation on this subject attributes the growth of Indian economy in past two decade to partnership and proprietorship [P&P] firms or the small and medium enterprises [MSME] in service activities and not due to reforms carried out by the Government.

Ironically, this remarkable contribution of MSME sector has not been documented by the Government, much less appreciated. The reason for the same is obvious – the MSME sector – read informal – is short on glamour quotient while corporate sector – read formal – has abundant of it.

For this reason and this reason alone successive Central Governments have been obsessed with the “glamourous” organised sector disregarding the “non-glamourous” yet significant unorganised sector.” And believe me it is a cosy club out there that disregards the informal sector and this includes the policy framers, bureaucracy, media, intelligentsia and of course our economists.

Do we realise its importance?

The Credit Suisse report clearly demonstrates that much of Indian economy is even beyond the formal survey of the Indian establishment.

Will it fund Real Sector in India?


While that indeed makes a case of under-reporting of our GDP the fact remains that large swathes of Indian economy are out of bounds for policy intervention by the Government. Surely that is disturbing!

Where is the question of intervention by the Government when this sector is not even recognised by it? Do we realise the chasm between the Government and the governed? Do we understand the gravity of the situation?

It is estimated that there are over 5.77 crores MSME enterprises all over India. As already pointed out they contribute approximately one-half of our GDP. Estimates also suggest that nearly 46 million people are employed in such units and as much as 24 million are self-employed. Put pithily informal sector is the real sector and the corporate the shadow.

What is interesting is that the 62 per cent of these units are owned by Scheduled Castes, Scheduled Tribes and Other Backward castes. Yet, less than 15 per cent of the credit requirement of the MSME sector is funded by State-run banks. [Source: Various Government websites].

The next obvious question – if Banks are not funding these units then who is funding them and at what cost?

The answer to the question is one of the most heartrending aspects of Indian economy. This absence of formal lending mechanism naturally lends itself to an exploitation by usurious money lenders, often with political patronage.

It may not be out of place the non-banking finance companies [NBFC] that traditionally financed this sector [barring exceptions] sadly has been forced to exit in the face of a hostile policy regime unleashed by RBI. As NBFC exited financing the MSMEs no other institutional mechanism has replaced it. That explains why the informal sector remains under financed and is exploited.

Experts like Prof Vaidyanathan point out at times these units borrow Rs 90 in the morning and return Rs 100 in the evening – i.e. they pay an effective interest rates in excess of 3650 per cent per year. Despite such stark realities economists believe that quarter percent interest reduction will all it take to revive the Indian economy!

Needed a finance mechanism At the core of our problem is that we tend to fix targets for our banks to fund this sector and simultaneously bring about international prudential norms. This is akin to mixing oil with water and if experiences of the past is anything to go by – banks are a poor delivery mechanism when it comes to address the needs of our MSME sector.



Simultaneously, non-banking sector is unable to fund this informal sector at efficient rates and has more often than not been found to lend at usurious rates. Naturally, we need to figure out something spectacularly new. Budget 2014 precisely promised a new financial mechanism only to keep it unfulfilled even at this point in time.

The time to effectuate the promise is just now.

How about a Sarvodaya Development Bank? How about a Bank exclusively aimed at funding MSME sector? The Union Government can float this institution with a capital of Rs 20,000 crores and fund a sum of Rs 10,000 crores to retain 51 percent control. The balance must be funded by players from within the MSME sector.

Importantly, to bring about a sense of ownership – shareholding must be widely disbursed – possibly 1 shares at Rs 1000 to over 10 crore people who own or work in such enterprises. These shares should not be transferable for the next ten or twenty years. That would raise a sum of Rs 10,000 crores and give a sense of ownership to these people. Ideally, this bank must be having one branch in every district of the country.

Also those who deposit into this bank could be entitled to an additional interest rate of 1 per cent. That would ensure copious flow of deposits to fund lending activities of this bank.

The idea is also to simultaneously inculcate the habit of savings to people who have remained outside the purview of banking sector.

Remember India needs to increase her savings rate to up her investment rate. Should this not be the ideal platform to do so?

Crucially, lending must be governed by principles of mutuality that govern our chit fund companies – where borrowers need to be scanned and approved by a pre-determined self-evaluating mechanism. The obvious idea is to ensure the interplay of social norms and traditional practices delivered through a formal lending process with the active participation of the Government.

Another dimension to this is that the bank should enter into a tripartite agreement with corporates and technical institutions that could impart further training to potential borrowers. The corporate social responsibility program must mandate India’s top corporates to run such skilled institutions across the country. The skill development programme of the Union Government must be integrated to this bank.



The skill development program needs to be tied to a funding mechanism as much as the later the former. This in my considered view is an ideal win-win situation.

It may not be out of place to mention that the Bank must ensure no laxity in repayment. Schemes that have been designed till date for weaker sections of our population have tended to encourage financial indiscipline. The Sarvodaya bank should not do so.

On the contrary this bank must usher in best global practices and ensure strict monitoring of all borrower accounts but with a local and personal touch.

Finance to MSME is one big yet unglamorous way to trigger our economy. A bank that specifically targets this MSME is the need of the hour. Simultaneously it must encourage savings amongst this section. Mandarins in North Block are well aware of all this and much more.

Will Budget 2015 do the needful?



The Ministry of Textiles, it may be noted, is “responsible” for policy

formulation, planning, development, export promotion and trade regulation

of the Textiles Industry. And this includes all natural and manmade fibres

that go into the making of textiles, clothing and handicrafts.

To effectuate this, the Ministry is headed by a Secretary, who is assisted by

four Joint Secretaries, the Development Commissioners for Handlooms and

Handicrafts, the Economic Advisor, the Textiles Commissioner and the Jute

Commissioner.

The Ministry has the “vision” to build state-of-the-art production capacities in

India and achieve a pre-eminent global standing in manufacture and export of

all types of textiles, jute, silk, cotton and wool and develop handlooms and

handicrafts sector.

The Ministry further claims that it “strives to make available adequate raw

material to all sectors, to augment the production of fabrics at reasonable

prices, to lay down guidelines for a planned and harmonious growth of various

sectors, and to monitor the techno-economic status of the industry.”

Budget 2015 – Will it design Minimum Government,

Maximum Governance?


Planning, determining input costs and monitoring the functioning of the

industry in these days of liberalisation and globalisation? With such cluttered

thinking, archaic vision and muddled thinking can it deliver? No wonder

India’s total export is approximately USD 300 billion when China exports

approximately USD 300 bn of textiles alone!

Forget China for a moment. Bangladesh and Vietnam are two countries that

had much lower apparel exports than India in 2006-07 and have whizzed past

us by 2013-14. Industry experts tell me that not a gram of cotton is grown in

these two countries. Yet, they export more than India in apparels is a telling

commentary on the governance in India.

Why then a separate Textile Ministry? Why have a Secretary? Why a platoon of

officers than cannot ensure we compete even with lowly Bangladesh and

Vietnam, especially given the fact that they grow no cotton? For its sheer

incompetency, lack of vision and failed mission should it not be closed?

But if you thought Textile Ministry was solely responsible for the stunted

growth of our textile industry, hang on.

Mission Impossible?

The Textile Committee is an establishment created by an act of Parliament in

early sixties. By virtue of Section 3 of the Act, the Textiles Committee is a

statutory body. Now pray what are its functions?

The Textiles Committee’s main objective is to ensure the quality of textiles and

textile machinery both for internal consumption and export purposes. Now

isn’t it familiar to the avowed aims and objectives of the Textiles Ministry

itself? If so, why a separate Textile Committee?

Needless to emphasise this Committee is under administrative control of

Ministry of Textiles and comprises 29 members [representing various Textile

Federations, Export Promotion Councils etc, which are as is their wont at war

with each and collectively working at cross-purposes with Textiles Ministry]

with absolute power to mar but no responsibility to the progress of textile

industry.

Given this organisational set-up can we ever hope to succeed textiles globally?

With such multitude of organisations and in the absence of unity of command

can we ever hope to be a global power?

Will it design Minimum Government, Maximum Governance?


Now if you thought that this was all over, let me hasten to add that there is yet

another organisation – the office of Textiles Commissioner. Established in

1943 during the Second World War [Yes this office is of WWII vintage!] the

Office of Textile Commissioner is mandated to arrange the supply of cloth to

the defence forces as well as civilian population! Hilarious isn’t it?

Post World War II, the Textile Commissioner was given the regulatory

function of administering the prices, distribution and control of certain

varieties of cloth meant for civilian consumption in the post-war conditions of

scarcity. Now where is the scarcity? Administered Prices? Need to control

distribution?

Yet this office continues with all regalia – fully funded out of taxes paid by you

and me.

Nevertheless the Textile Commissioner’s office over a period of time claims to

have “assumed a developmental role and has contributed towards

modernization and holistic all round growth of diversified and broad based

textile industry.” Further it adds “this office formulates and implements

various schemes of the Govt. in an industry friendly manner.”

Friendly manner? No one industrialist has gone to this office and come with

his dignity intact or wisdom enhanced. Developmental role? Is that why

Bangladesh and Vietnam are ahead of us in apparel exports? But what

differentiates this office from Textile Ministry and Textiles Committee?

Importantly, what ails Indian Textile industry? In short the answer would be –

Textile Ministry, Office of the Textile commissioner and of course, the Textile

Committee or all of them. But does the Central Government realise this and

the costs associated with running these establishments? Do we realise the

structural inefficiency in such multiplicity of organisations?

Needed real reforms

Nothing exemplifies the lethargy and inefficiency of this entire set up than the

imbroglio contained in the Technological Up-gradation Fund [TUF] launched

by Government of India for Textile and Jute Industries w.e.f. 1.4.1999 for a

period of 5 years.

The scheme was subsequently extended up to 31.3.2007. The Scheme was

further extended from 01.04.2007 to 28.06.2010 in the modified form which

is known as Modified Technology Up-gradation Fund Scheme (MTUFS).



Accordingly, it was required that the “subsidy claim” should be submitted by

the lending agency within one year from the date of sanction of term loan.

However, in certain cases the subsidy claims were not submitted by the

lending agencies within the specified time limit. These cases are “categorized

as “Left out Cases” under MTUFS.

Interestingly, the period from 29.06.2010 to 27.04.2011 is known as black out

period, as there was no TUFS. Consequently, the loan sanctioned by the

specified lending agencies during this period was not entitled for getting the

benefits of the scheme. So we have a set of “Left out case” and a different set of

“black out period cases.”

The scheme was re-launched in restructured form for the period from

28.04.2011 to 31.03.2012, which was extended upto 31.03.2013 and is known

as Restructured Technology Up-gradation Fund Scheme (RTUFS).

This scheme was implemented in open ended mode up to 28.06.2010, due to

which the government was not having any control on expenditures as well as

fund requirements for future payment, hence the Government had decided to

implement the scheme in closed ended mode and accordingly converted it into

RTUFS w.e.f. 28-04-2011.

Under RTUFS to become eligible for subsidy it was mandatory to pre-

authorise the subsidy by obtaining Unique ID [UID] from the lending agency

after sanction of the term loan and establishing the eligibility under TUFS.

Bewildering? Stunned by attention to details?

Simultaneously, the RTUFS was rolled over to the first year of the 12th Five

Year Plan i.e. 31.03.2013 within the subsidy cap available to avoid “hiatus.”

Also the Government has “permitted” for pending cases sanctioned upto

31.03.2012 to apply for UID up to 16.07.2012.

What adds to the complexity is that the sectoral subsidy cap as specified under

RTUFS, was exhausted in respect of spinning and other sectors before

16.07.2012 hence in certain cases UID was not issued. These cases are also

categorised as “Left out Cases” under RTUFS. So there is a RTUFS and a

MTUFS. There are Left out cases as much as Black Out cases and

combinations thereof. But how many cases and how much is the subsidy

payable by the Government?



The Textile Ministry does not know it. Neither does the Office of the Textile

Commissioner or the Textiles Committee. Industry insiders estimate this to be

anywhere between Rs 3,000 crores to Rs 10,000 crores.

And unless backed by authentic records the Finance Ministry cannot allot

funds. Where is the question of allotting this money in the Budget when the

Textile Ministry does not recommend with precise numbers?

Interestingly, the Office of the Textile Commissioner has called for an

expression of interest [after two failed attempts] from consultants to

determine the amount due as this subsidy in the first week of February. It may

be noted that Budget 2015 -2016 would have gone to print by then! So much

for being serious about an industry that employs the largest number of people.

Obviously, textiles industry losses one more year on account of bureaucratic

inefficiency, paperwork and systemic lethargy. Remember Textiles and TUFS

are merely a context. The lack of governance is the mother of all malaise

afflicting the Indian industry, textiles, steel or cement.

Meanwhile, the industry will continue to fell being short charged by the

Government as it reneges on its own promise. As we argue who is right and

who is wrong, attempt to fix responsibility and determine the subsidy,

Bangladesh and Vietnam continue to capture Global Markets.

That being the case, why have a Textiles Ministry, Office of Textile

Commissioner and Textile Committee at taxpayer’s cost? Will Budget 2015

close such irrelevant institutions and save tax-payer’s money? In the process,

will it not usher in the Prime Minister’s idea of Minimum Government,

Maximum Governance?



Doing Business 2015: Going Beyond Efficiency is a World Bank flagship

publication. It measures on a global basis the regulations that enhance

business activity and those that constrain it. This report presents quantitative

indicators on business regulations and the protection of property rights that

can be compared across 189 economies-from Afghanistan to Zimbabwe.

Doing Business measures regulations affecting 11 areas of the life of a

business. Ten of these areas included in this year’s ranking on the ease of

doing business are starting a business, dealing with construction permits,

getting electricity, registering property, getting credit, protecting minority

investors, paying taxes, trading across borders, enforcing contracts and

resolving insolvency [the 11th area – labour market regulation is not included

in this year’s ranking].

In its latest Report released in 2015 India is ranked 142 amongst 189

countries.

Interestingly, this Report catalogues entrepreneurs having seen improvement

in 123 economies in local regulatory framework last year. Between June 2013

and June 2014, the report documented Sub-Saharan Africa accounting for the

largest number of such reforms. Sadly, India does not figure in this list.

Sub-Saharan Africa accounts for 5 of the 10 top improvers in 2013-2014. The

region also accounts for the largest number of regulatory reforms making it

easier to do business in the past year.

Budget 2015 – Will it improve ease of doing business?


More than 70 per cent of its economies carried out at least one such reform.

Tajikistan, Benin, Togo, Côte d’Ivoire, Senegal, Trinidad and Tobago, the

Democratic Republic of Congo, Azerbaijan, Ireland and the United Arab

Emirates are among the economies that showed significant improvement in

2013-2014. India, in the same period slid two ranks – from 140th in 2013 to

142nd rank in 2014.

On further analysis India is ranked 158 in starting a business, 184

in getting construction permits, 137 in getting electricity, 121 in

registering property, 36 in getting credit, 156 in paying taxes, 126 in

trading across borders, 186 in enforcing contracts and 137 in

resolving insolvency.

The only area where India scores a high rank of seven is when it involves

“protecting minority investors!”

Core of the Issue

At the core of the issue is that when it involves enforcing a contract only

Angola [Ranked 187], Bangladesh [Ranked 188], and Timor-Leste [Ranked

189] are ranked below India. Obviously courts, legislations and our legal

processes are certainly an impediment to doing business.

Remember, we are a Republic with a sublime Constitution where the majesty

of law supposedly prevails! As a professional advising on investing in India I

often find that this inability to enforce a contract quickly and effectively

through our courts as a single largest deterrent in inviting [foreign]

investment.

Do we realise how badly we are wedged between archaic laws and outdated

judicial processes? But when did we last hear about judicial reforms from the

NDA Government? Crucially, is there some realisation within the

establishment to tackle the extant situation?

That in more ways than one explains why contracts pertaining to India contain

clauses of carrying arbitration out of India, either in Singapore or London.

Why can’t we develop Mumbai, Goa or Delhi as an international arbitration

hub? Why can’t we simplify laws that make people accountable for their

contractual obligations? Why can’t we make out courts to be more pro-active

on this?

Will it improve ease of doing business?


Another area where we rank poorly is when it involves even setting up a

business. The Companies Act, 2013 [a parting gift from UPA to the country] is

a draconian piece of legislation that needs to be repealed forthwith. Despite

enormous protests by the Indian corporate sector – the NDA Government

turned a deaf year to the well-intended suggestions from all concerned.

The problem with Companies Act 2013 is that it is genetically flawed. Designed

post-Satyam scam, this legislation presumes every businessman to be a rogue

and mandates a visit to the nearest prison for even minor infractions of law.

Needless to emphasise, such poorly drafted legislations will increase

corruption or in the alternative, spoil business sentiments.

Either way such legislations are not intended for improving ease of doing

business in India.

It is indeed strange to note that the BJP leaders who sympathised with the

Indian industry when the law was introduced in Parliament in 2013 quickly

changes track and began to bat for the legislation post 2014 when they

themselves assumed office.

Were they house-trained by the bureaucracy? Or were their concerns

expressed when in Opposition simply filibuster? Do they view every single

businessman who does business here – a potential rogue who needs to be kept

on a tight leash through Companies Act 2013?

If so, why then talk of Ease of Doing Business?

Lack of Trust

Central to the discussion on Ease of Doing Business is the idea of trust

between business and Government. If the Government refuses to trust its own

people and legislates assuming every citizen to be a scoundrel surely there can

be at best unease of doing business; note ease of doing Business. This trust

[and lack of it] is a two way street.

When the Government trusts its own people, people begin to trust the

Government. And when Government trusts it people it simplifies laws. That in

turn improves the ease of doing business. On the other hand, if Government

refuses to trust its own people it will usher in complex laws. Naturally that

cannot improve the ease of doing business.

Either way, trust is at the core of the philosophy that drives reforms process.

Of course, there will be errant players who need to be dealt with severely.



But our legislations are aimed at mistrusting the honest while allowing the

corrupt to loot and scoot. That in turn feeds on corruption which also

dynamites the overall business sentiments.

The Companies Act 2013 is a context to the overall issue of improving the Ease

of Doing Business. Likewise several of Labour and Revenue Laws are designed

for rent seeking by Government officials.

For instance, a study by some small-and-medium business demonstrated that

even for operating their business they required seven approvals and 54 filings

with 15 departments – some of which were monthly, some quarterly, some

half-yearly and others on an annual basis.

Adherence to such legal requirement meant increased costs. Non-adherence

meant fines, penalty or even prosecution. Of course, the later invariably meant

settlement through payment of speed money.

Either way, none of these improves competitiveness of our domestic industry.

Similarly, can a country that perennially runs Revenue Deficits be ranked so

low even on ease of paying taxes? Can we not, in the least, simply this? Can a

country that ranks so poorly on infrastructure be ranked 184 out of 189

countries afford such antiquated rules when it comes to granting building

permits? No wonder, it is easy to construct illegally than legally in our cities. A

good friend of mine working as a clearing house agent tells me that every

consignment of exports or imports when moved through the customs frontier

is by itself a huge business risk. Anyone anywhere connected with

international trade, especially imports, runs the risk of being detained and

harassed by Customs officials. When will this tax terrorism end?

But there is yet another dimension to all this. Recently a group of

entrepreneurs met a Government officer and explained how certain

regulations were strangulating our industry. Simultaneously, they pointed out

how some of our neighbours prospered in the absence of such corrosive rules.

The response of the officer stunned the audience – the officer simply asked

these entrepreneurs to move their entire production to those countries which

offered better facilities. Bureaucratic lethargy remains to be the bane of Indian

economy. Crucially, what happens to “Make in India” campaign of the Prime

Minister? Is a lethargic bureaucracy short circuiting “Make In India?”



In short, the lack of trust between Government and the governed, archaic laws

and outdated judicial processes is responsible for this abysmal state of affairs.

Surely, what adds fat to the fire is the indolent attitude of our bureaucracy that

refuses to believe in India, Indians or Indian industry.

The net result: Forget acquiring global competitiveness – we are losing

competitiveness even within India. That explains why we have begun to

depend on imports [mostly from China] for goods that could otherwise be

made in India.

Made in India campaign must first improve ease of doing business through

deregulation. Obviously, we need to identify and do away with archaic laws.

Secondly, we need to improve our judicial process including speeding up our

arbitration mechanism. Business will invariably encounter disputes. We need

to have easy, flexible but precise dispute resolution mechanisms.

Third, the Government has to trust its people but with stringent punishment

to those who are wilful defaulters.

This necessitates change in mind set and the manner of drafting our

legislations. The Companies Act 2013 is a good starting point. Can we begin

with by doing the needful?

Finally, Prime Minister Narendra Modi’s noble intention of Make in India is

running aground on account of an irresponsible bureaucracy. This needs

immediate intervention at the highest level. Will Budget 2015 address these

concerns?

MR Venkatesh is a Chartered Accountant

Comments can be sent to [email protected]


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