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Thursday, July 17, 2014

Fortune Favours





Fortune Favours

It was Napoleon Bonaparte who first put in an Income Tax. It was also Napoleon who valued luck in a general on par with competence. The most hard-working Narendra Modi probably does not depend on luck, but if the Gods decree he must have some, he can hardly refuse to benefit from it. And the Chinese, as ancient in civilisation as the Indians, don’t think luck is luck unless it is financial.

The Modi Government’s first 60 days in office has already seen the appearance of green-shoots across the board, representing a turn-around in the economy. The acid tests down the road will be to transform food distribution to kick out the scourge of high prices. And to generate millions of new jobs for our young population.

Some of the work towards the latter has indeed been done, but the results are showing up only now. The all-important market-sentiment, that aura of optimism, has also revived considerably. This is evident in the buoyant stock market, the high indices, the over $20 billion inflow from FIIs, the revival of the high profit small and midcap space and the return of the retail investor. FDI too is the highest it’s been in 8 months at $3.6 billion in May 2014. Direct investment being anchored, tends to only come in with a rise in business confidence and faith in future governance.

Business and Industry is also speaking of growth afresh after much rationalisation and cost-cutting to survive.  But the first quarter results for April-June 2014 will show a 20% growth in profit year-on-year after tax (PAT), in the Sensex set of 30 leading companies. This is the best in nine consecutive quarters! The 50 company Nifty, will also post a  fair to good 20.9% year-on-year in gross earnings; that is before deducting taxes, interest, depreciation and amortisation (ebitda).

The IIP  Industrial production numbers at 4.7% for May 2014, are the best in 19 months. Exports are growing at over 10%. Inflation, including retail inflation, is edging lower, but permanent structural solutions have to be found for food - beyond cracking down on hoarders, leaning on middle-men, possibly banning onion exports etc.

Imports of trade goods and manufacturing inputs are up some 8.3%. So are oil imports, along with the great Indian hedge of gold, up 65% now that restrictions have been lifted. Foreign exchange reserves are growing. The rupee is stable. The monsoon is reviving and the threat of rain deficits and drought is receding. Oil prices are coming down as the Iraq situation stabilises. Diesel subsidies are almost wiped out because of a $10 fall in crude prices, and should be eliminated by November. Stuck projects, particularly in the road-building sector, are being resurrected.  Civil Construction is perking up, with budget incentives, and regulatory easing moves from the RBI.

Nomura of Japan thinks the economy could grow at 7% and real investments grow at 10% if Modi’s policy announcements are implemented.

But, there are problems too.  Bibek Debroy does not think there will be a 20% growth in tax collection without the ‘tax terrorism’ that the Government has promised to do without. But will even that work?
If revenue targets are to be met and bettered, the country needs deep systemic changes. These are badly required if Modi’s NDA is not to be just a more efficient, less corrupt version of UPA. It will certainly be underwhelming to fix what is broken and tune up the rest. This first term of the first majority Government in 30 years could go the Rajiv Gandhi way if that is all that happens.

The transformation of India in very many, if not in every way, need not be completed in these five years till 2019. But there needs to be a robust beginning, that gains considerable traction soon. Narendra Modi knows this, and hence his sense of urgency.

Amongst the many priorities this Government has already highlighted, tax policy and administration, the centre-piece of our budgets, albeit along with inadequate allocations for lack of sufficient Government revenue, needs thorough overhaul. It is now antiquated, inefficient, corrupt, unwieldy, and far from cost-effective.

The ideas that came during the BJP election campaign need a good hard look afresh. Do we need a universal expenditure tax after all? Right now the projections and collections have little hope of tallying. Even without large masses of the poor outside the banking universe, the eighty twenty principle certainly applies, and an expenditure tax could bring in much more than the present amounts from all tax sources.

Income Tax both corporate and individual, takes more money to collect than what it yields. There are also lakhs of crores in demands disputed and under litigation, and no amount of stream-lining the back-log can help the front end deluge that keeps coming.

The whole rigmarole is an inheritance from the British who were the second, after Napoleon to adopt Income Tax. But  it does not yield enough revenue for the Government.. Today in India, Income Tax is paid in full only by the captive middle-class salary earner in the organised and semi-organised sectors, with nowhere to run, nowhere to hide.

Every kind of independent operator, service provider, consultant, has more elbow room, with expenses and so forth to deduct and balance sheets to prepare. Small and big business too manages to navigate through the thicket of vague laws, precedents, exemptions, incentives, and Chartered Accountant spawned interpretations. Big business pays an effective maximum rate of just 23%! 

Besides, we simply need more tax payers. This cannot really happen without creating many more jobs. The need is for a 100 million new jobs. And this, at a time, when IT now manages to create $ 1 billion in new revenue from just an additional 13,000 people using better technology. The same thing applies to manufacturing and all other sectors as well.

The task therefore is not to retard progress with the same kind of labour intensiveness that has paralysed our bureaucracy with over-staffing, but to go in for quantum growth in every field to create a sum aggregate that meets our employment objectives.

Will some of it come from the new BRICS , APEC and Shanghai Group initiatives? It no doubt will.  There will be many other opportunities, emanating from other countries, and we must make our  transformative fortune through seizing them.

(1,055 words)
July 17th, 2014

Gautam Mukherjee

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