SOME SUGGESTIONS TOWARDS GIVING A KICK START and TO BOOST India’s ECONOMIC GROWTH
By……. Mr. Amal Dhru (FCA,MBA(IIMA) , amaldhruv@amaldatt.com (M) 9825015534
1.. The Union BUDGET
a…. It is round the corner. Many suggestions are already made towards reduction in Personal as well as Corporate Income Tax. However it has to be noted that Tax to GDP Ratio in our economy is very low .
So we have to look at corporate rates separately. As far as lowering the Income Tax on Corporate are concerned, lower taxation rate will certainly attract not only Indian but also international investments. A recent clamp down on Tax Heavens by many countries including developed countries have directed the funds towards countries with lower tax rate, since relaxed (nearly nonexistent) compliance based locations will be scarce and very vulnerable .It is an opportunity for India to tab these openings particularly when there is an increasing realization about difficulties in the exit route for investments from China.
On the other hand, the highest income Group needs to be taxed heavily, as it is . They can be given a relief if they invest in Infrastructure Bonds of large ticket size
Similarly one sector of economy vis. Agriculture Income is not taxed at all. It would be worth considering to expand the net of Corporate Farming and bring the corporate farming along with large farmers (by deeming them as corporate farmers) into the Income Tax net. This aspect, though touches the Constitutional provisions narrowly, but is critical enough to be thought of seriously, since the need to mobilize Revenue is alarming
b… The recent thoughts of doing away (reducing, at least) the exemptions is a positive thought. The exemptions lead more towards litigation and mere paper compliances. Though there is a need to give special incentives for employment generation. Most of the exemptions are based upon capital investments in desired sectors etc . India is a country where Labour is ample and capital is scarce. We need to generate more employment. Employment generation should be focused while providing incentives. May be, that an incentive based upon the Employer PF Contribution (say a weighted deduction on employer contribution to PF, like R & D ).
c… Surprisingly, what the economy wants is employment generation, but the labour laws play a huge role in providing disincentive (if not a fear ) towards providing employment . Not only that the Minimum Wage Structure is too high for an average employer, to reduce employee strength is a herculean task. A simple principal of economics is to create more attraction towards the product that a producer wants to sell. But what we see here in India is quite a reverse trend. Why not to create a layer where minimum wages are lower than the unskilled level, call that layer a support level. Please reduce the cost of employing a person, in other words. MSMEs and start ups can benefit immensely and more jobs will be created for otherwise unemployed youth.
Similarly, the employers should be allowed more flexibility to adapt a practice of reducing manpower, in case of genuine difficulties like adverse business conditions. Currently it is a tough task to reduce the manpower strength even in case of genuine necessity to reduce unproductive expenditure. Such an atmosphere creates a disincentive towards generating more employment.
d… Giving direct cash or free bees to poor people is a charitable, noble act, but I feel that the same should be given against some work. Providing free money to people will form a very dangerous trend and will keep increasing expectation and will encourage laziness. Greece etc economies tumbled due to excessive freebees!!
Why not to create more jobs, say towards internal security (in semi police force ) , or swachchata mission, or construction etc like MANREGA scheme) , instead ? Why not to include Agricultural employment under a special scheme which is similar to NAREGA?
e… Dwelling further on employment generating proposal, I am surprised that under the GST Act, Supply of Manpower attracts full 18% GST. That too is on the entire amount of billing, without any abatement of gross salary, which includes PF and ESI . In other words if Mr X pays Rs 100 as Salary ( including PF, ESI etc ) and adds Rs 10 towards his services, he will be called upon to pay GST of Rs 19.80 ! This certainly increases to ultimate cost of his services. This is a clear disincentive towards generating employment. I sincerely plead that an abatement of salary component has to be provided while taxing the Manpower Supply Services.
f… While on the GST, it is to be painfully noted that the instances of claiming wrong input credits are not only rampant but are also huge. This has to be curbed. The recent amendment by the council of restricting the input credit is a welcome step but not sufficient and effective. I would suggest that the input credit claimed has to be populated within 180 days from claiming. If not populated, it should not only be reversed, with interest but should also attract huge penalty in case it is established that the same was recklessly or fraudulently claimed.
g.. Coming to the Macro aspect of budgeting, I think the economists are overly obsessed with control over deficits . So long as the deficits are generating more output, employment and spending power in the hands of the masses and idle, uneconomic expenditures are curtailed to minimum; there is no need to panic if the deficit number is high. In any case, in economy like ours, where there are huge uncovered services (domestic services of housewives etc) , the GDP number is always likely to be understated, an additional reason not to panic with deficit .
h… What is stated above raises an important point towards controlling and managing the Expenditure side. Most of the thoughts from the economists and public particularly, in a budget are guided towards the revenue side . But the need to have control over expenditure by strictly following the OUTMOME BUDGETING (a lot is talked about it, without much headway) and setting and ensuring physical Targets should Not be lost sight of .
2… BANKING, MSME AND NPAs
a… A lot is also talked about the huge quantum and frankly a continuing inflows of NPAs in the banking sector . The economy is not doing so badly. The cause of such rise in NPAs should be investigated . I would also see a big role of improper sanctioning, lax documentation and careless monitoring the Bankers. The promoters are not the only culprits. I doubt whether adequate actions to book such instances except in a few cases where the quantum was embarrassingly large. In other words, smaller NPAs do add up to large numbers and they can be addressed quickly and effectively. More attention on this line may yield good results.
b… The recent Insolvency Code has really been a promising step in a right direction. It has opened up the vistas for a quick resolution of NPAs and ailing assets. What is now needed is a strong framework of TURN AROUND SPECIALISTS, who can quickly and effectively help in restarting productive activities. A separate, illustrative organization for the same can be initially set up in public sector
c… The sanctioning authority, the documentation machinery, the monitoring authority and the recovery authorities are concentrated , I believe within a bank itself .This is against the basics of Control Mechanism. A plan has to be implemented where more than one set of people/ agencies are involved in carrying out different functions of the total activity load of a loan or advance .
d… MSMEs and Start Ups play a crucial role in the economy like ours . They need timely and adequate financial support for their progress which can generate huge employment. Realizing this, there are various schemes that are already being implemented by State Governments, banks, Union Governments etc. This has created a flood of schemes, making it more and more difficult for the entrepreneurs to even get to know about existence of various programs, schemes, exemptions and support. I think a time has come to properly codify these schemes and make adequate awareness about the same.
e… As we understand the bankers are in tremendous pressure to reduce the NPAs and improve their profitability. The MSME and Start Up financing, for them is time consuming and does not show quick results. In fact same, if not more time is taken in financing an MSME than the larger advances .As a result, there are many paper schemes for these sectors, without pushing the schemes, they remain in dormant mode .I would suggest a separate Bank ( can be a subsidiary of a bank) can be set up for large advances alone, so that due focus is available on each separate entity .
f.. Monitoring of an advance or a loan is a crucial part of banking activity . This requires a pool of officers, who have an expertise in different industries, who can understand the nuances of the business of the borrower. The current system of placing Nominee Directors has not yielded the desired results. The Banking and Corporate Governance efforts of the Government badly needs a pool of qualified, experienced and reliable professionals who can act as effective Nominee or Independent Directors .
g. Our economy and our products have to remain competitive in the world market. But if we see the cost structure of our products, one finds that the indirect taxes and interest costs are nearly half of the total costs. Special care has to be taken to provide more waivers /exemptions for reducing the costs of export products for increasing exports and also for reducing the costs of essential items for the ultimate domestic consumers.
3… Other Areas :
a. Agriculture Sector offers a huge scope towards employment generation as well as in pushing the GDP. Corporate Farming needs to be encouraged by allotting at least the UN Cultivated Land blocks. Similarly Agriculture Co operatives and Producer Companies need very special encouragement and monitoring.
Distribution channels with inbuilt competition and margin controls are badly required to ensure that a reasonable portion of the market price is available to the farmers. Waiving of loans is a temporary, one time solution. It Can Not and should not be a Norm.
Agro Industries, with modern facilities should be improved along with better storage and transportation network .
b.. Corporate Sector no doubt is a backbone of our economy . The tightening compliance requirements and computerization has added to the cost of compliance, not only to the corporate sector but also on the entire business sector. Lapses, of course should be punished, but providing a power of taking criminal action to the law enforcing authorities to come down heavily on non compliance should be used only sparingly. There are numerous instances where Non Operating and Independent Directors are dragged into Criminal Proceedings, even when they had No role to play in the wrong doings of the promoters or Non Payments of the dues or in bouncing of cheques . Such avoidable actions taken out of zealous and high handed bankers and Officers have created a fear psychology amongst the business community. There needs to be some screening mechanism, when criminal actions are initiated particularly against Non Operating or nominee or independent Directors. Criminal cases should be initiated only against the persons directly involved in the wrong doings. They should be initiated more as an exception under extreme violations rather than as a routine. In addition to creating a fear, it has made it more difficult to attract good talents to act as Independent or nominee or non operating directors, which goes against the very purpose of creating the cadre of Nominee and Independent Directors.
c.. Education Sector has, if said plainly, has let us down, barring of course the IIMs, IITs and some few more shining examples . The Research initiative has nearly vanished and some sparks of students have to cross the shore to seek opportunities.
What we need is a quality School Education and purposeful Education .The British rule has successfully implemented a system of education and curriculum which produces clerks and obedient mass, by restricting imagination and creativity. A sea change in moral based atmosphere needs to be built up through revamping the curriculum and method of teaching.
d.. On Health Care side AYUSH initiative needs greater push along with creating a cadre of skilled manpower who can work at village levels also to at least provide first aid type of Basic Healthcare and spread awareness about good public health . The initiative to popularize Generic Drugs has been showing a very slow progress. A sincere push is really required particularly since the Generic Drugs have to compete with large corporate when it comes to reaching the ultimate consumers
e.. At Judiciary Level , a relook at the procedural aspect of Law and Litigation needs a relook . This is a Must, if we want to reduce the pendency of litigation and transparent justice delivery system.
At the Administrative Level also a relook at the procedural aspect is necessary for efficient and effective implementation of various schemes and programs initiated by the Government.
A robust and Strong MIS system needs to be introduced along with Administrative reforms both in Judiciary and Administrative network, which has remained untouched, perhaps since the British Raj.
Prepared by … Mr Amal Dhru .
amaldhruv@gmail.com (m) 9825015534
