Indian industry to PM: Build giants at home (Sunday Guardian)
MADHAV NALAPAT New Delhi | 25th Apr 2015
How that his year of On the Job Training (OJT) on an "India Model" designed to replicate the success of the Gujarat Model across the nation is getting over, domestic industry is looking forward to Prime Minister Narendra Modi and his economic team reversing Prime Minister Manmohan Singh's policy of "killing" domestic industry and shedding jobs. What they seek are measures that would instead ensure the "skilling" of companies and the recruitment of more personnel. Within a couple of years of the UPA coming to power, the momentum achieved during the period since 1992 was lost, as the focus of the government shifted exclusively to the mechanical collection of revenue, that too through methods which inhibited rather than boosted growth in domestic industry. A combination of punitive taxation, extensive and unproductive regulation, broken-down administration and high interest rates led to a reversal of domestic business mood during the latter two-thirds of the UPA period from confidence to despair. From 2009 to 2013, there have been 13 interest rate increases by RBI, which under its present leadership has supervised a monetary regimen that has made much of industry financially unviable, especially in the small and medium scale sector, where the bulk of jobs are located. Added to that is the constant harassment by bribe-seeking officers from multiple departments and agencies of the state, with the number of regulations and the severity of penalties sharply increased since 2004.
India is the only country (with the possible exception of North Korea) that reflexively taxes a producer of goods and services even before any income has been realised. Should service tax, for example, not be paid within seven days of a bill being raised, jail could be the result, while the actual payment for the service may come after months, and in some cases never get made at all. In the case of another P. Chidambaram monstrosity (which still continues), the levy on employee stock options, tax gets collected in advance of any income accruing from the shares, and at a valuation which may soon have zero relevance to reality. Of course, any fall in share value will not result in a refund, just as the absence of payments for a service will not result in a return of the tax collected. Even in the case of refunds, the Chidambaram era saw the rate of interest paid to the taxpayer get halved to 6%. Overall, little seems to have changed in the attitude of those manning the administration to the people they rule over since 1915, the year when Edwin Lutyens completed his master plan for the colonial capital into which the successors of the British moved with alacrity after 1947.
Will Prime Minister Modi ensure that taxes get paid only when income gets generated and not before? Otherwise, in the forthcoming GST regimen taxpayers are bracing for the 25% of expected income to be paid as tax in advance of getting payment for goods and services. Banks will be called upon to fund the gap between service and payment, and in case the latter gets delayed or is blocked, loans will go bad, as several have during the RBI's high interest rate regimen. Some independent estimates place the value of bad loans of the organised banking sector in India at nearly Rs 600,000 crore, a direct consequence of the "Killing Industry" policies prevalent during the decade under Manmohan Singh. A host of assessments and audits have been mandated, such as both audit and assessment of income-tax, service tax and VAT. In a computer-filled world, why such duplication of returns is demanded remains a mystery except to those who believe that it is simply a part of the "harass the citizen" approach of the tax bureaucracy. Industry expects that Prime Minister Modi will ensure that experts from academics as well as industry will get embedded into the functioning of financial institutions and economic ministries, to ensure a familiarity with the real world in the framing of policies, so that absurd measures such as the Fringe Benefits Tax or the recent proposal to itemise every expense while travelling abroad are avoided.
In this context, they applaud the sensitivity of Prime Minister Modi and his ministerial colleagues to public opinion, as reflected in their reconsideration of specific measures midwifed by the bureaucracy after public uproar at their insensitivity and damage potential.
The Manmohan Singh decade also saw the proliferation of specific NGOs funded from outside that had an agenda of blocking development in key sectors such as irrigation, power and industry. Industry is looking forward to Prime Minister Modi cutting through the Gordian Knot faced by domestic corporates by listing the "No Go" (without prior approval) areas and giving automatic permission to other fields of activity, rather than applications having to be made before any project gets started. Also, the expectation is that more powers of sanctioning projects will get devolved on the states, which in turn will be encouraged to transfer power lower down, to the district level. Key sectors such as infrastructure and telecom are anticipating a clear "mergers & acquisitions" policy, combined with freedom to trade in assets such as spectrum, the quantity of which needs to be increased in order to ensure that the present level of 900 million citizens without proper access to the internet gets reduced substantially. Overall, the scam-ridden UPA decade gave rise to a perception of guilt in the functioning of businesses, as well as to investigations eating away much of the time of top management in several enterprises: the expectation is that procedures in such situations will be rationalised and shortened, so that a wait of decades, which is the normal in litigation in India, becomes a nightmare of the past.
Thus far, the bias against domestic industry continues, as recently evidenced in the efforts to derail an Indian company, Flipkart, from emerging as a global competitor to foreign entities such as Amazon. Incidentally, the $1 billion of investment promised by Jeff Bezos in September 2014 has yet to materialise. What were the influences that made so many agencies swing into action against Flipkart when they have been silent against much bigger foreign entities who are seeking to monopolise the market in India? Another example was the campaign against Naukri, which was competing with Monster for the market in India and nearby regions. The silent reach of the influence of international brands within officialdom has led to a situation where foreign entities dominate the internet space in India, a country with immense growth potential for the coming five years. Hidden operators ensure that domestic entities get harassed and hounded, thereby incapacitating them from taking on much bigger international brands despite offering far better quality of services.
The contrast between the neglect of the Manmohan Singh government to domestic industry as contrasted with the backing given to local entities by China can be seen from the toy industry, with 40% of Indian toy companies shutting down because of competition from China, which has led to the closure, for example, of 60% of the industrial units in once-flourishing centres such as Bhiwandi and Thane in Maharashtra. Pharma is another example of domestic industry losing ground, with fully 3,079 (out of 3,488) product patents issued from 2005 to 2010 going to MNCs. Within officialdom, lobbies operate to favour MNCs at the expense of domestic corporates, as they do in other fields, and there is anticipation that Prime Minister Modi will put India First in matters of policy rather than the Foreigner First firman of the previous government. Thus far, for domestic industry at least, it has been "Break in India". The hope is that this will change in the second half of 2015 to not only encourage "Make in India", but equally importantly, "Made by India".