It’s a familiar cacophony. Cut taxes. Invert the inverted duty structure. Control the fiscal deficit. Be honest about your arithmetic. Abolish equity taxes. Step up government expenditure, the fisc be damned. Bring back investment allowance. Slap inheritance taxes... And on it goes, a laundry list of standard policy tactics which could revive India’s economy.
But you know what, this time the funk is deeper, elemental, sub-cutaneous. It’s in the soul. Frankly, the time for budget quick-fixes is over. If Prime Minister Modi genuinely wants to rejuvenate, he’s got to create TRUST for India’s private enterprise which accounts for 90 percent of the economy. Why is TRUST in all caps? Because it’s an acronym (something our popular PM loves to coin).
- Frankly, the time for budget quick-fixes is over. If PM Modi genuinely wants to rejuvenate, he’s got to create ‘TRUST’ for India’s private enterprise which accounts for 90% of the economy.
- India’s bureaucracy has always been deeply suspicious of well-regulated markets. Which is why they love to micro-manage outcomes. But this time, their quest has become maniacal.
- If you create truly competitive markets, ‘super profits’ will vanish on their own — when will our policy-makers understand that?
- We should have learned from Ben Bernanke, who authored TARP (Troubled Assets Reconstruction Program) and saved America’s economy in 2008.
- The ‘criminalisation’ of business has now become quite outrageous. Therefore, it has also had the most harmful impact on India’s economy.
‘T’ For ‘Trusting Market Forces’
India’s bureaucracy has always been deeply suspicious of well-regulated markets. Which is why they love to micro-manage outcomes; except this time, their quest has become maniacal. Sample these ‘beauties’:
- There is a monstrosity called the Anti-Profiteering Authority (no, I am not kidding, it exists and is called exactly that, in a free enterprise economy!). Its mandate is to ensure that ‘super profits’ created by the new GST regime are ‘disgorged’ from corporations. Can you believe that? Can government inspectors really calculate the ‘super profits’ made by companies operating in free markets? What’s the interest rate to be charged on consumer credit? How do you account for surplus employees on the bench? How much of brand advertising is for current sales (an expense), and how much to create future customers (strictly, an investment). A million such questions are irresolvable, ab initio. But the consequences are predictable: strange penalties, exorbitant legal fees, extortion, and corruption. On the other hand, if you create truly competitive markets, ‘super profits’ will vanish on their own; so, when will our policy-makers understand that?
- Now see the mess they’ve created in our e-commerce policy. Our bureaucrats have invented a fiction that only they are naive enough to believe in. It’s grandly called the ‘market place model’. Under that, foreign players like Amazon and Walmart can’t sell directly to consumers, but only provide a trading platform for ‘third parties’ in which they are allowed a maximum equity stake of 26 percent. This is being done to curb the foreigners’ ‘evil’ intentions. Yet these giants offer massive freebies and discounts, in front of our credulous eyes. And we threaten to take ‘coercive’ action every day, all in the name of protecting small/local kirana stores. But in the same breath, we create ‘favourable’ policies for big Indian capital to annihilate the foreigners and locals, alike. Somehow, that is ‘noble’!
- This one is my favourite – we’ve allowed free pricing of energy, including oil, but we control entertainment tariffs (believe it or not, but TRAI mandates how entertainment television will be priced and bundled!). And we can’t make up our minds on whether pharma prices should be free, controlled, capped or some mish-mash, even as critical drugs are held back by global producers.
- Also, we love to zig-zag between banning, re-banning, and re-re-banning. In the 1990s, unlisted Indian companies could not float overseas; in the early 2000s, they were allowed; then in the mid-2000s, they were banned again; now I understand they are going to be allowed again! Likewise with put/call options for overseas investors. And with dividend distribution taxes. And with long-term capital gains taxes on listed equity shares.
A million more examples could prove how consistently ludicrous our policy-makers are.
‘R’ For ‘Recapitalising — Not Destroying — Assets’
Our beleaguered economy had barely begun to recover from the demonetisation shock when we delivered the kayo (aka knockout) punch – we allowed one systemically important asset after another to go bankrupt when we should have rescued each one of them. It began with ILFS, but then spiraled into DHFL, other real estate companies, Jet Airways, PMC and what not. I’ve been writing and shouting until I’ve gone blue in the face. Reclaim the asset, clobber the wrong-doer.
We should have learned from Ben Bernanke, who authored TARP (Troubled Assets Reconstruction Program) and saved America’s economy from melting down in 2008. If only we too had injected a critical amount of cash — perhaps no more than one lakh crore rupees — via a superior/protected debt instrument, we could have avoided almost twenty lakh crore rupees of asset destruction.
We also should have aggressively recapitalised our banks via an innovative, deeply discounted rights issue, rather than cloned the outdated ‘recapitalisation bonds’ from the crisis-ridden 1990s. That alone would have doubled the impact of each recapitalising rupee infused by the Modi government.
Unfortunately, we stuck to the coat-tails of an unimaginative bureaucracy.
‘U’ For ‘Un-Criminalising Business’
The ‘criminalisation’ of business has now become quite outrageous. Therefore, it has also had the most harmful impact on India’s economy. Here are just a tiny number of illustrative examples from within an embarrassment of riches:
- Rashesh Shah, a much-celebrated first-generation entrepreneur, former President of FICCI, is publicly hauled in an Enforcement Directorate summons which could be entirely misconstrued. Should not a discreet enquiry have happened before tarring his fair name?
- Ravi Narain and Chitra Ramakrishna – pedigreed professionals who’ve virtually created the National Stock Exchange – are treated like common criminals in a highly technical case regarding alleged market manipulation.
- Jagdish Khattar, an ex-IAS officer, the much-feted former CEO of Maruti, encounters a business failure in his post-retirement venture. Instead of being given the benefit of the doubt, he is thrown before the CBI in a corruption case.
- Two auditors of an E&Y-affiliated firm are arrested in a 6-year-old case, after their firm has made nearly fifty appearances before the police recording evidence.
‘S’ For the ‘Sovereign, Not Supreme Court, Making Economic Policy’
The incredibly sorry spectacle spawned by the Supreme Court’s order on the AGR (Adjusted Gross Revenue) penalties on telecom licensees makes the perfect case here. First, the government frames an inherently ambiguous rule, which could include such non-operating income like rent and foreign exchange gains, in calculating the shareable operating revenue of a telco. When the Supreme Court upholds it, inflicting a Rs 1.50 lakh crore levy and threatening the viability of critical telcos, the government, instead of exercising its Sovereign duty to ‘clean up’ policy mistakes, goes quiet.
Worse, when an unintended impact of nearly Rs 3 lakh crore on non-telcos, like oil/gas companies and cable operators holding telecom licenses is revealed, the government, instead of quickly dousing this egregious error, fiddles while New Delhi (not Rome) burns.
There are numerous examples of similar abdication by the Sovereign before devastating court orders which have crippled India’s economy. The Modi government now needs to buckle up and take ownership of its policy mistakes — correcting them, rather than watching unmoved from the sidelines.
‘T’, Finally, for ‘Tax Terrorism’
This has been so copiously documented that I need not give any evidence in support. It’s perhaps the single most important reason why India’s economy is staggering, lurching like a boxer who has been battered to a pulp.
To conclude then, at least I will not be watching for the odd tax cut in Finance Minister Nirmala Sitharaman’s budget on the first day of February 2020. Instead, I will remain solely focused on what her government does in creating ‘TRUST’:
- T for trusting market forces
- R for recapitalising and saving assets, rather than destroying them
- U for ‘un-criminalising’ business
- S for the Sovereign — pro-actively correcting its policy mistakes rather than leaning on the Supreme Court
- T for tax terrorism, killing it
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