India is Thrivvving in the Interiors; forget the snooty and skeptical city dwellers

 

As i went thru the streets of this town of 70K population and drove thru the interiors, i could see the festive spirit of the independence day. Each of the 28 wards in this township had a flag hoisting ceremony, most govt establishments, hospitals, schools and some shops had their own. There were others at the street corners. People exchanging greetings, young children coming and pinning flags on your shirt, people greeting each other, loud speakers blaring speeches, national anthem, etc. On the roads one could see school children returning after assemblies, some serious holding small flags high, someone thrusting sweet into his friends mouth, making merry, greeting passersby ‘Vande Mataram’ or ‘Happy I Day’, enjoying the spirit. For the first time since mid-1960s i was seeing this kind of festive spirit about our national independence.

It was almost like the famous Tamil Song ‘ஆடுவோமே பள்ளு பாடுவோமே ஆனந்த சுதந்திரம் அடைந்துவிட்டோம்…’ kind of spirit and fervour (Lets dance; lets sing now that we have attained joyous freedom). This was on my way to the Government funded hostel /school for tribal girls in Kumaran Bheem district Telangana.

when our own ceremony was over the patron of the school asked me if i would be interested in visiting the school. We had less than 3 hours to catch the train and school is about 25 kms away. But these days most parts of India – rural or small towns – seem to promise one KM/Minute speeds and so we dared.

1 Kumaran Bheem district was part of Adilabad district and recently bifurcated and is a reserved constituency. Not so long ago – about 10 years back- the district was Naxal infested. The MLA had been gunned down right in his house inside town. and as we were driving the patron (man right of SI) pointed to other areas where there had been skirmishes and cases of vehicle burning, arson etc. But the Govt of C Naidu seem to have had some 75 encounters and gunned down many. and both his Govt and the succussor govt seem to have done a great lot of developmental work to showcase the benefits of belonging to formal systems over staying alienated. The place still has tigers roaming in the jungles and occasionally seen on the roads in summer.

2 Kumaran Bheem has the status of God in this area. He was a warrior and tribal chieftain. About 600 years ago the area was ruled by Shahs of Ballarshah (who was the maha chief), and there were several smaller kings and chieftains under his protection. These poeple belonged to the Gond tribal sect – a god fearing, hard working, and honest group. In later years the Lombardas (south indians use Lomabardi to denote a certain sense of dressing). Lombarda are Naiks who migrated from nearby Maharashtra and supposedly more intelligent and smarter and said to have climbed the social ladder faster than the original occupants. There are frequent clashes between the two. When the Shah kingdom fell there were wars with the others, then the British, then the Nizam whose army gunned down Kumaran Bheem in 1940s. Thus he attained martyredom and Godly status. (when we were getting out of school we garlanded his bust with all the temple fervour, agarbathi, garlands and camphor and no footwear allowed). (see clipping)

It appears that Naxalism is of 2 kinds – one of people who get disillusioned with the formal systems and take to arms and the other of the descent variety. People in this region who have always had to fight someone or the other right thru history protecting their land and livelihood. they fought other tribal chiefs, then British, then the Nizam and when we attained independence, the Nation took the place of the list of tormentors and they continued their ‘war’.

3 Farmer Suicides: we saw some crazy youth dancing and posing for selfies and group photos on the railway track not aware of the risks. I asked the patron about farmers suicides and the agrarian distress esp given the fact that there was an acrimonious debate on the subject a few days back in the state assembly. ‘What former suicides. Just an attempt to milk the situation. Once something happens like that, the others will make a hue and cry to take maximum advantage and get their loans written off. The fact is the govt is giving Rs 20000 loan to each farmer for each acre per crop thru Grameen Banks. I also write legal opinions and the format is so standard. If you have repaid all your previous loans it hardly takes 10 minutes.

Its those who have over-reached that fall into difficulties. there is widespread absent landlord cultivation. People who can manage 7-10 acres of lease cultivation take 50-100 acres and fail to manage or their crops fail due to want of care and unable to manage some commit suicides.

Each villager/village house unlike you and me has 3 cellphones these days. One for songs playing – usually a chinese phone it will be, one a smart phone for whatspp, social media and facebook etc. and a basic phone for talking whose battery will last for 2-3 days. and most homes have a vehicle to move around – 2 wheeler and cars in some houses. every 50 households may have a tractor and and auto per every 20-30 homes to ferry people.

4 School. The school has over 400 girl children studying upto 10 th std. Has 18 teachers. The school is well funded by the State government and is one of several such schools in the district. The government gives them 4 pair of uniforms, 2 blankets, towels, and books and stationery, sumptuous breakfast (4 different items each day), besides lunch and dinner. They are all hostellers since their parents are too poor to afford any education.

When my turn came to speak, i said something by way of reiterating sacrifices made by our forefathers and elders and asked them to be mindful that freedom comes with responsibility. But when it ended, i asked permission from the chairman and the headmaster to speak to the students (if there is something like Public Listener as opposed to Public Speaker, i would like to be a member of the club) and enquired as to what each ones ambitions are. Many Doctors, some teachers, a solitary Collector, a dancer, and a singer. You can look at the video. Each of them gave a crisp, clear and onthe spot answers – no prevarication, whataboutry or may be … this or that kind. Very clear on their goals. When i asked the ‘singer’ to sing a song, no hesitation .. sang a telugu (i presume) song  and then one more volunteered and sang Honge Kaamyaab, ek din, man me hai vishwas. I asked her to lead the chorus and she did it unhesitatingly. .

I wished i had been as clear and bold and unapologetic about myself in my younger years. I remember an older cousin of mine asking me on my future plans when i was in my final year B Com. I gave such a shameful wishy washy, gooey diffident answer like ‘ if i pass my exams may be i will try for M com in such diffident halting manner that the questioner would have wondered ‘why is this worm even existing on this earth’.

5 Pace of public works. The state has done wonders in linking up water supplies. from being a dry and draught prone area, over the last 10 years thruough a network of irrigation canals and dams water is being provided to almost all areas now. about 5-6 months ago when we were traversing the same route, we saw some planning for an irrigation canal – some markers although the road bridge had more or less been completed. But on 15th August when we went, the canal had been completed and the CM announced water connection to some 26,000 villages virtually covering all the remianing villages.

6 Hemandroff Pattas. An englishman lived and worked amongst the tribal way before Independence. he had determined that each tribal family would require about 30 acres to survive. accordingly many pattas were issued and these are even today called by his name. (not sure of spelling). Even his successor /son worked in this area and are buried here.

The confidence, bounce and the optimism and confidence of the school children was radiating. So was the festive spirit of independence day. India is thriving and will gallop along speedily and see great heights. I was taken there to enthuse and inspire them. On the contrary it was i who got inspired by them and got my faith on our democracy and development renewed on the independence day.

While on the way back i offered a decent sum to start a scholarship for the school. My patron almost instantly refused saying ‘tension math leejiye. The school is well funded by the government. there is no dearth of resource. I called you only to inspire them. all of them will remember today for a life time.’ I only wished you had spent more time and eaten with them. I (the patron) donated a block and all these were arranged in a matter of 30 minutes by the local SI, chairman of school, and headmaster’.

It seems infinitely more enthusing to belong to a colony of hopefuls however lowly (in income stakes) placed than to a colony of cynical cribbers,even if they are reservoirs of wisdom. Many city dwellers behave as if they are superior to the nation and that the nation needs them more than they need the nation. Not so the interior.

Image may contain: 8 people, including Ram Chandran, people standing, people sitting, child and outdoor
Image may contain: 7 people, including Kamal Lakhotia, people smiling, people standing

A Contrarian Monetary Policy

Indian industry has been sluggish for a fairly long time, and all our orthodox monetary policies have not been able to make it come alive, grow and deliver employment of any great proportion. Democracy does not seem to be the villain, as much as unimaginative policies. Opportunity costs for experimenting with an alternative policy are very low now, as never before.
The key cornerstones of such a policy would be as follows:

  •  No FDI/FPI or FII targets: Just maintain the rupee within -4%/+1% of REER values. This will be pre-fixed with a one-time readjustment to correct the current overvaluation.
  • No inflation targeting: Target industry/economic activity-specific interest rates based on supply gaps or potential. Debunk general purpose credit measures.
  • Switch from price-based (repo and bank rate) money volumes to volumes-based price (interest rate) discovery.
  • These monetary measures have to be garnished with two fiscal actions—bringing petroleum under the ambit of GST (28%), and aligning all export incentives with the ‘best of ASEAN’ incentive package.

Let’s see how these contrarian measures are better suited to kick-start industrial revival and help in the creation of employment. First, a recapture of changes in business behaviour especially with respect to the main policy tool, i.e. interest rates.

Interest on working capital should count as variable cash costs (marginal cost to economists). An increase across the board for all players would only push up the supply curve and result in inflated prices—quite contrary to the effect desired. In any case, due to advances in communication, payment systems, ‘as and when needed door delivered’ systems, optimisation algorithms in stock keeping, etc, businesses are working with a lot less working capital and some enterprises even on negative working capital.

The ability of long-term interest rates to influence investment decisions is fast dwindling over time. Most of the new economy is funded by equity capital and sweat equity. In conventional manufacturing, gone are the days of 4 or 3:1 debt equity structures. Credit rating agencies frown at 1.5X debt levels now. Investments in new economy areas like Google, Ola, Paytm, IPL, casinos, Reliance Jio and space travel are more an outcome of guts and vision, rather than RoI and IRR-based like automotive sector, consumer products and street corner restaurants. And the new economy’s share in investments is overshadowing that of the traditional economy’s. These have reduced the potency of some of the monetary tools. More savings are also finding their bypass route to investments than through conventional banks and financial institutions, i.e. through private equity, VC, HNI, PMS systems, etc. Interest can affect consumer demand and have some effect on savers conduct, and this could be used for maximum impact.

The Indian context
The general capacity utilisation in industries is stuck at less than 75%—a level that will hardly inspire any investments. A great proportion of consumption growth has been met through imports from more cost-competitive nations. A few relatively better cost-competitive players have seen their capacity utilisation grow to fuller levels.

There are some industries (such as telecom) that have seen investment, but these are largely in the nature of ‘overtaking’ investments, i.e. fresh investments with superior offerings, driving customers away from existing players, thus rendering already standing investments to lower capacity utilisation levels. Some such industries (such as modern retail and banking) have also destroyed jobs through the use of technology.

A contrarian approach
Working capital interest rates for manufacturers with fuller utilisation should discourage stocking. Credit flow for downstream distribution and trade for such industries may be either curtailed using physical norms or prohibitive interest rates. But long-term interest rates should be kept lower to encourage quick capacity additions. Industries which see low capacity utilisation need lower working capital and export-facilitating interest rates, but long-term loan rates should ideally dissuade fresh capacity additions.

Overtaking investments should be mandated to raise a greater proportion of funds through own or equity funds. Besides being risky themselves, they also create systemic risks for all the existing players and their financing banks, and hence the whole industry should be charged risk premiums and far tighter debt/equity targets (<0.5 maybe), which would slow down such investments.

The above clearly indicates a need to junk the current general purpose credit policies and adoption of a sector-specific approach, with working capital and capacity addition loans being priced differently—risk premiums on one end and incentives on the other.

The 2008 meltdown could, in large measure, have been avoided by controlling just one industry—construction and mortgage-backed securitisation. Industry-focused approach produces results faster, is focused on the causes, and avoids unnecessary spillages and unintended harmful side-effects on other industries.

Sticking to the REER corridor of -4%/+1% on a yearly basis will help in competitive (to the rest of the world) inflation anchoring (of traded/tradable goods and services and thus overall), unless, of course, we import a large portion from the Venezuelas of the world. A 4% undervaluation will somewhat neutralise the loss/lack of competitiveness due to our infrastructural bottlenecks, substandard scales and bureaucratic bottlenecks. Such REER targeting will also determine levels of FPI/FII targets and portfolio investments.

Even if we want to anchor inflation, 6% makes sense, but giving the same width on the underside at 2% does not make sense. Any growing economy needs higher inflation and the corridor for an anchor of 4% may even be 4-6%, instead of 2-6%. Or even just 6% maximum, like highway speed limits.

Inflation, interest rates and volume of credit all have their influence on economic activity with varying degrees, with inflation being the least direct and perhaps most loose, and the volume of credit most direct and perhaps more immediate. Moderating through a more direct tool can be more effective. Interest rates can be the resultant, than being a determinant.
Fuel oil has the largest influence for a single item and should perhaps be under the central control of the GST Council, rather than be a matter of political Centre-state slugfest. Proper control of a few such items could moderate inflation to the desired levels. Indian incentives as well infrastructure are way too uncompetitive, and even as physical infrastructure takes time, one can work with export incentives.

Monetary policies increasingly look like wet blankets to suppress high fever. Without redressing the causes, we will only reap the harmful side-effects. Monetary policies do not seem to have rediscovered themselves in the last several decades with advances in behavioural economics, not even business behaviour.

GST surpluses should be used more purposefully

https://www.financialexpress.com/opinion/gst-put-surplus-to-more-purposeful-use/1248647/

GST collections have been buoyant. The implementation seems to have gone off smoothly after initial fears, making one international indirect tax practitioner to grant that India’s experiment has been a source of positive learning for the rest and ‘no other country has implemented tax changes as fast as India’. As per reports, collections have been gathering pace and June 2019 collections are Rs 6,000 crore more than the average of last year. The GST Council has reduced the rates for 178 items from 28% to 18% in most cases and, in some cases, to 12%.

While the items seem carefully chosen, one does not know what are the alternatives the government considered before coming to the conclusion that such a step would benefit the country most optimally. The unexpected buoyancy should have been used in the best possible way to serve the greatest common good. Instead, the government and/or the GST Council seem to have settled for what looks fashionable. The government/GST Council seem to have erred for the following reasons.
First, almost all tax rates on products and services have come down under GST compared to the earlier regime of excise + CST + VAT and several other local levies cumulated. Yet, the tax collections have gone up. It is only reasonable to conclude that the enhanced tax collections have come from reduced levels of tax evasion, reduced cash transaction levels and more informal sector units getting formalised and thus getting into the tax net, besides some uptick in economic activity. The neo-converts to the formal sector are mostly small and medium enterprises and rural and semi-urban entities.

The government should have kept in mind the sources of ‘excess’ collections and its employment-generating and other distributional effects while deciding how and whom to ‘refund’ it to. There is no need to reward erstwhile tax evaders in the formal sector who have become compliant now. Since a substantial additional GST collections have come from the rural and informal sector, it would have had an impact on the employment levels there or at least reduced their net disposable income. It would be a mistake, if not sheer travesty, to sponge resources from this poorer section and pass it on to items mainly consumed by richer segments.

Second, the lost opportunity to create much-needed employment. Let us assume the government wanted to use the entire excess and it deployed this in employment-intensive and wage-intensive sectors. Let us say wages would account for half, and the other half would be used for non-wage overheads. It would leave Rs 3,000 crore in wages per month. At Rs 5,000 per month per worker, this works out to 60 lakh jobs.

Here are some areas which could have absorbed such a vast army of people. Traffic regulation to bring back discipline on our roads. Against just the belief that CCTVs and cameras would bring about discipline and maintain order on our roads, the presence of uniformed staff at every street corner would have had a far more pronounced impact.

We could have created a plastic/pollution police or litter collectors. The police force alone is short of 5 lakh personnel, compared even with a standard fixed years ago.

Third, it is not that India is a highly taxed country. Its tax-GDP ratio is one of the lowest, considering the number of things it supplies free of cost or at subsidised rates. Most of the government services are in an awful state in terms of delivery delays, due to lack of staff or ill-trained staff. Ensuring safety and security, fast and timely justice, adequate education should all be considered fundamental rights, much more so than six-lane highways and high-speed lanes. For achieving basic standards on these, it is necessary to garner greater resources. It is ironic that we have shrank from collecting resources to ensure basic minimum services.

Distributional efforts may not have the same effect on Keynesian income multipliers as fresh ‘autonomous’ investments and hence indirect job creation may not be much. But, it is likely to be far more advantageous than mere tax-cuts that are being planned now, tax cuts for people with higher than average propensity to save might even shrink employment.

Even from a political angle, it makes more sense to use it for funding low-wage employment. An increase of low-wage employment is more certain to translate into positive votes. One is not sure if the tax reduction—largely in the consumption basket of upper- and middle-class— would induce the beneficiaries to vote positively. This educated class would decide on voting preferences based on a more informed and educated choice than just tax reduction. Several such beneficiaries may not even take the trouble of voting.

Employment generation of the scale talked about here could have alleviated urban poverty in most of our major cities quite fast. Or, if the employment was focussed in rural villages, it would have meant 10 jobs in each of our 6 lakh villages, each with 200-300 households—small yet significant. That would have been the most impactful advertisement for our employment-starved reforms agenda.

For the Poor Interest Rates are more a function of Culture; not arithmatics

https://www.financialexpress.com/opinion/a-poor-understanding-of-monetary-policy/1234554/

For much of poor – rural or urban – in many parts of the world, interest rates are not a monolithic price point balancing demand and supply of credit with variations mainly (if not solely) for credit risks and time duration.

Poor people have been observed to keep currencies for safe custody without any compensation with the same wealthy lender from whom they have borrowed money at  usuary rates of interest. This seems irrational but is compelling to the poor to ensure cashflows for upcoming events like marriage, funeral, school admission, or sowing. This perhaps addresses their ‘fear’ against an irresponsible husband or ‘lack of self control’ over competing short term spending itches.

Nothing can explain so many irrational practices (as formal system sees them) in South Africa surrounding funeral finances. A decent funeral is a matter of prestige and social standing (ranks perhaps number 1 in their Maslows hierarchy) and consumes about half/full years income. Years of zero interest (or even paying safe keeping fees), deposits with funeral societies defeats arithmatic rationality but addresses anxieties on maintaning social prestige.

As the book Portfolios of the Poor reports, moneylenders to the poor almost always collect interest rates in advance and don’t refund proportionate portion for unutilized period on any prepayment. Yet just to feel relieved from the burden/shame of indebtedness the poor pay up most loans ahead of time thus increasing the ex post interest rates by several % points – irrational arithmatic wise but rational mental relief wise. The book also observes practices where people borrow expensive monies leaving savings accounts intact due to a silo (usewise) mentality.

Just no commentator or official have understood the ‘Rs 10.50 in the evening for Rs 10 in the morning’ small trade finances. Simple arithmatic tells us it is more than 1800% per annum even without compounding. But the money lender apart from running counter party risks also knows the purpose and can get into such business himself or set up someone else who can. So why should he not get to share the spoils with the trader. In that sense it is more a share in the joint venture profits not interest. Its just dividends with a Cap in treasury managers parlance.

Surely in the ladder of social shame, borrowing ranks somewhere sub-ordinate to other social compulsions (gifts and donations in marriages, funerals, festivals, religious functions, etc), medical emergencies etc. Otherwise they wont be borrowing. Borrowing for economic purposes like for sowing, cattle buying, houses etc. may be justified on rational grounds. If Governments want the poor to become rational, they may have to invest a lot in social education and training to move up indebtedness and make other non economic needs less shameful than borrowing.

In fact this sense of indebtedness and shame from failures to meet obligations and social policing have induced repayment discipline amongst the poor. This is a great social collateral which the formal systems refuse to recognise or promote.

Most poor cannot count; even if they can, most don’t

Many studies indicate that in their decision on when to borrow, from whom (for some loans from next door neighbour is preferred, for some relatives but some other purposes it is considered shameful to borrow from them), and when to repay or prepay, the arithmatic of interest rates weighs far lower as compared to a rational person. Culture, social customs, peer pressure, shame and fear, family pressures decisively overshadow the arithmatic.

Thus when the RBI’s appointed committee put caps on the interest rates charged by MFIs as the main weapon to deal with some events in the erstwhile combined Andhra Pradesh, it only betrayed its lack of understanding of the financial culture of the poor. The arithmatics of interest rate may work better for formal systems, between banks and financial markets, in cities and amongst the rich and heavily banked but not amongst the poor.

The poor levels of financial integration and inclusion in india is the result of this lack or refusal to understand the culture. RBI (or its equivalent monetary authorities) should stop their colonising mindset: they should not  supplant the financial culture by dictating the price, acceptable instruments and institutions. Formal form over substance KYC’s can never match the KYC of the local moneylender whose self interest is locked in with his customers fortunes.

Establish the role of money first before seeking policy effectiveness

Before trying to establish the suzerinity of its policies over the rural and poor India, RBI should first establish the hold of our currency (Rupee) on the poor. For some of more important functions of money the poor trust its surrogates more. Gold (cows in Swaziland or cattle in many parts of Africa) has much more dominance in store of value function of money and to a limited extent even in liquidity and transaction demand. Policies and schemes about Gold over the years have been rather unimaginative. The high levels of informal economy does not help either.

Some aspects of the financial culture of the poor described above also come out of fear and anxieties, cashflow uncertainties, ill timed arrival of cultural exigencies, etc. These can be overcome to a large degree by appropriate insurance whose penetration is very poor now. Proper insurances on various cashflow risks that the poor face, will release a lot of gold and make the poor adopt a more ‘rational’ and self-optimal practices.

Indian authorities should subsume the existing system into its network by refinancing money lenders and accepting social collaterals, finance Nidhis and Chit funds, etc.; instead they erect barriers against such practices on institutions which seek to use the available conducive social infrastructure.

We should of course continue to educate the poor communities about the arithmatics so that wherever possible the poor could act rationally, including proper search of alternatives in their own ‘irrational’ markets.

A regulator who fails to have a grip of the market culture, market practices or interact with its participants continuously to gather market intelligence and spot any significant trends and shifts, is bound to falter. East Asian societies like Indonesia (as spread out), Malaysia, Vietnam (as dense as India) have not tried to supplant the local systems but have sensibly allowed them to co-exist and serve their societies.

 

A case for CSR and MAT levies on imports.

A case for MAT and CSR levies on imports

V Kumaraswamy

Sec 135 of the Companies Act 2013, enjoins companies meeting some criteria to spend at least 2 % of their average (of preceding 3 years) PAT on social projects. These thresholds are quite low, less than a $ million in PAT or $ 150 million in Sales or less than half that in Networth. As the table shows the PAT of just the listed firms would have had to spend an estimated Rs 4000 cr on CSR using 2016-17 as surrogate for the base PAT. The actual spends reported on CSR by all firms (listed or otherwise) are about Rs 8500 Crores in 2016 as per MCA website.

Sec 115JB of the Income tax act specifies a Minimum Alternate Tax (which now comes to an effective 21.55% of PAT) The objective of introduction of MAT is to bring into the tax net “zero tax companies” which in spite of having earned substantial book profits and having paid handsome dividends, do not pay any tax due to various tax concessions and incentives provided under the Income-tax Law. MAT is in its 3rd avatar: after 2 attempts in 1980s (both American style of deeming certain % as minimum income to be offered for income tax, irrespective of tax shields) it was reintroduced in 1996-97 and has steadily grown in its significance nullifying several other incentives offered.

It should be noted that of the relevant competing countries for our markets – ASEAN, Japan, S Korea and China – very few have an equivalent tax. None of the ASEAN has anything as draconian as ours. Philippines and Cambodia have MATs (titles Minimum Corporate Income Tax MCIT for short) at 2 and 1% of turnover and Malaysia in a facilitative not extractive (purpose is to do away with procedures and elaborate book keeping etc) way has a minimum Tax on Labuan Offshore entities at 3%. Only S Korea has anything that comes close to India’s but the rates are 10-17% depending on size of profits (17% kicks in at an equivalent of about $ 100 million) and SMEs suffer 7%. All very low compared to India. Most of these economies offer various incentives for investment, trade and business promotion, export promotion, employment creation, development of less developed areas, etc. But none of these including incentives including on exports are offset by a levy like MAT.

India’s MAT design and the rate have more or less nullified all the incentives. In fact, Japan had protested strongly against MAT before and in 2014 praying for at least Japanese companies operating in India to be exempt from MAT.  What one policy and goal of government offers the other policy seeks to nullify that too within the same Act – great policy making indeed!

As its stands our investment incentives are neither focused nor competitive. The cash outflows from both CSR and MAT are peculiar to entities and manufacturers operating within India. However, if the same Indian market is accessed from outside India, the entities behind them suffer no such levies or cash outflows. The ASEAN agreement has reached a stage of fruition and in many segments India has seen steep increases in net imports into India due to inherent cost competitiveness. There are other free trade agreements in various stages of reaching peak effectiveness and newer ones are being negotiated.

As our imports grow – as of now there are signs that this will not abate anytime soon- the base on which the Government can collect MAT and CSR (or cause to spend in activities it directs) will shrink in relative terms if not in absolute terms.

Estimates of Loss: The PAT margins on India’s listed enterprises excluding government entities and finance sector is about 6.5%. Our imports excluding oil, gold, semi-precious stones (which are largely for re-exports) and defence, are about $ 200-210 billion. The estimated (at the same rate as ours) PAT margins on this is about $ 3.2 billion and the MAT and CSR that would have accrued to the government /welfare spends is about Rs 21,700 Crore. (Pl see table attached).

Mat and CSR

On deemed profits on imports this would translate to about 1.54% of import values. An equivalent levy should be imposed and recovered on imports. Imagine an addition of this to the existing margins of 6.4% – it can make a huge difference.

 

Sure similar entities suffer income tax levies in their home countries. But it is also important to remember that almost all countries provide exemption or even incentives for boosting exports and hence don’t suffer MAT or normal taxes. In several of these countries profits of units located in SEZs is exempt for long periods. And profits on specified products and units (depending on focus products and areas) are exempt for varying lengths of time some extending to 20 years.

MAT and CSR are a net differential on our imports and hence a source of competitive advantage for them. Domestic producers are to that extent at a disadvantage, since their profits are taxed at least at MAT. The government has to study all additional obligations on Indian companies and either impose similar obligations on imports or recover through compensatory mechanisms and create funds and spend on targeted activities.

Indian infrastructure is a huge drag on domestic firms; at least the additional levies should be neutralized.

The Irrelevance of CCI in an Open Economy

https://www.financialexpress.com/opinion/decoded-relevance-of-competition-commission-of-india-in-an-open-economy/1193644/

Like particles behave unpredictably under zero gravity in Physics, in economics what works well in a closed economy may not work that effectively in an open economy and vice versa.

The current controls over monopolies, anti-competitive practices, abuse of dominant positions and mergers exercised by Competition Commission of India (CCI) seem inappropriate for an open economy.

Somehow, from the days of Joan Robinson whose work on imperfect competition is the basis of such market interventions, lesser prices are taken to mean better consumer welfare in our socialistic mindset. Indian telecom market which has expanded solely based on cheap and cheaper prices is an example of how unremunerative  prices can destroy consumer welfare and lead to shoddy services: you cannot even say ‘I love you’ to your beloved on cellphones these days without 3-4 call drops in between.

As it stands today, India is a considerably more ‘open economy’ and particularly more so since ASEAN-FTA, trade agreements with S Korea and Japan from where virtually most goods are available at zero duty at cheaper import parity prices and from China despite duties.

Most manufactured goods can be freely imported – so how can anyone (or in collusion) control or manipulate prices and fix them beyond import parity prices? Conversely, if the Indian prices are lower despite nil-duty imports, it only signifies domestic industry being competitive – so what’s the grouse anyway. Indian firms would be exporting in such cases.

In an open economy the comparative competitive landscape is not just Indian firms alone but includes other relevant supplying countries say China, ASEAN, Japan, Korea and some others, over which CCI has no control. Controlling only the domestic subset leads to loss of competitiveness. Bangladesh and Vietnam have taken a huge part of our share in Textile trade (the prime reason for bleak domestic employment scenario is textiles, potentially our largest employer) due to scale economies: average firm sizes in BD and Vietnam are 10-20 times that of India’s. In some cases, a single machine or unit in China manufactures what the entire Indian industry manufactures or consumes. Scale is an essential component of efficiency and competitiveness and restrictions on them are self-destructive.

Indian regulators have often gotten into the morals of pricing – the very antithesis of free markets. Indian agri produce markets are the most ‘perfect’ competitive – many tiny producer sellers and many individuals buying: the ideal of any Robinsonian economist. Yet from time to time, Tomato and Onion prices fluctuate like an ECG graph whose needle has come unhinged – much more violently than tractor prices, airline prices, white goods, and electricals. Should the CCI get into controlling Onion and Tomato prices and underlying market practices? These have more impact on the daily lives of more people on the brink than many manufactured goods.

Does collusion work in India. Price is the main driver for most consumer decisions in India. Its not unusual to find a Mercedez buyer  bargain for a free key chain. In markets where demand curves have high elasticity there is very limited scope of manipulating prices by firms: small hikes in prices will drive away lots of customers to alternative products. Competition legislations are relevant more for inelastic demands.

Collusive price hikes would lead to reduction in sales in price sensitive markets. But who would volunteer to take these cuts like Saudi Arabia does for Opec? If demand is weak, most players would want to jostle with others and gain market share. If demand is inelastic and hefty price increases are possible with small cuts in production (very few such examples in India: can washing machine manufacturers cut production by say 5% and achieve 25% price jumps?), will any player cut his volume and watch others make money at his expense? Preposterous.

As economist William Baumal concluded over half a century ago, firms are more guided by sales maximization and other such proxies than profit maximizing in their behavior.

Collusion requires co-operation. Where sly and open evasion of every rule or tax-laws are the norm, gentlemen agreements or voluntary self-controls in India is unthinkable. We are terribly competitive in our behavior: otherwise you won’t see such uncouth queue jumping or impatient driving or ‘one for each day in year’ number of national level political parties. Giving up for greater good is just not in our bloodstream.

The right focus

Why be concerned with B2B transactions when both parties are informed, experienced and likely to behave rationally and not psychologically pressurized? Far more collusive behavior is witnessed in B2C transactions say between a doctor (prescribing tests upon irrelevant tests, refusing an operation unless you pass the ‘show me the money’ tests) drug firms and diagnostic labs or between lawyers, a legal system completely under their thumb and hapless clients. To focus on such B2C transactions would be far more welfare additive. CCI should focus more on beefing up enforcement and delivery of consumer protection laws.

Competition laws should definitely be concerned where the products or services are priced below their variable costs. A society not paying variable costs is wasting resources. Such cases in telecom, power and petroleum pose huge systemic risks to the financial system.  In any case why would an Ola or Uber recover less than variable costs unless it is to drive away competition and start exploiting when others have folded up. Such practices are a matter of larger concern, but don’t seem to merit the attention of our CCI.

Competition laws should not be concerned with products can be imported at zero duties or are being imported in large quantities despite duties or products of discretionary expenditure. Why be concerned with scale or prices of consumer electronics, white goods or cars except to ensure that contractual obligations are adhered to and people are not ‘cheated’. Let the consumer choose to stay away, if they are not satisfied with service – after all it is discretinary.

Competition laws should kick in only when firms reach one-half of ASEAN’s biggest capacity. It can be applicable for life saving drugs or non-discretionary products. Others can be followed up based on surveillance or based on grievance from end users.

There are several areas where there are no market structures or performance of existing ones is poor. The commission should work out structures in those areas (example: market structures for electronic wastes, scrapped automobiles, vehicle parking, rural finance and insurance, Public distribution systems, etc.)

CCI in our open economy context seems more a status symbol pining to belong to economic fashion street.  If Make in India refuses to get up, sub-scale will be one key reason and legislations like CCI will have a lot to answer for. India badly needs to consolidate and scale up for cost competitiveness.

The Art and Need for Creating Employment

Link to FE 29/5/2018:  https://www.financialexpress.com/opinion/the-art-of-and-need-for-creating-jobs/1184633/

If there is one thing that is common to every government since reforms they all had a growth consciousness but equally they all lacked an employment creation strategy. Employment it needs to be realised is like the insulin that delivers the sweet benefits of growth to the individual citizens. Otherwise growth accumulates like sugar in the blood as inequalities in society with their own adverse consequences.

The chart shows the employment in formal sector versus the economic growth over the last 40 years. Unfortunately, reforms have preferred cost cuts over ensuring adequate levels of government services and preferred efficiencies over employment in private sector. If only post reforms had created employment at half the rate as before, it would have taken care of the army of currently unemployed, a ticking time bomb. An employed and hence an engaged mind would tackle several of our social ills far better than investments in tightening surveillance or even infrastructure. Even the 1.3% uptick in the last few years may be more due to informal employment turning formal.

Presentation1

Unsatisfied needs – the basis of all markets and economic activity

Demand or an unsatisfied need is the basis on which any business is created. Meeting an existing demand with an established market and pricing mechanism is a safer approach to success. But, ingenious minds come up with IPL which fulfilled a latent demand (which perhaps even the customer didn’t know existed) for after day entertainment. Our telecom sector saw explosive growth by satisfying India’s motor mouth urges, never previously anticipated. But this requires foresight, some daring, financiers willing to take the bet, besides creative minds to come up with the relevant package of practices.

Demand for Government services arises out of public goods, constitutional rights like justice, safety, protection of property, ensuring equality of opportunity besides some commercial activities. It sometimes is required to serve needs where users may not be willing or able to pay commensurate prices.

Art of creating jobs – an example

Huge negative value is being imposed on the citizens by our unclean surroundings, waste and litter, sewage drains masquerading as rivers, un-cleared urban wastes spilling over to drive ways etc. There is sure a demand for neatness, cleanliness and hygiene, even if all those desirous of the service may not have the ability to pay for it.

India’s employment from rag picking and waste collection is abysmally low at 0.1% of population whereas similar activities employ 0.7% in South Africa, 0.5% in Brazil, 0.6% in Lima (Peru) as per ILO. The GDP from these activities in advanced countries vary from 2.5% to 3.8%. Employing the people required (say 50 lacs at even 0.4% of population) won’t affect other sectors since these skill sets are low and there is an excess supply in the labour market in any case.

The main missing link is who will pay for the services. At the macro level given the direct and indirect benefits it may be worthwhile re-distributing 1-2% of GDP through taxes and expending it in tackling wastes. But there are other ways. Elsewhere, nearly 30% of value of wastes generated are recovered and reused. There are people in various income classes whose desire for ‘cleaner surrounds, safe drinking water, litter free zones’ are more intense and more can be recovered from them for cross subsidizing the lower income strata. Hopefully the net unrecovered portion can be contained to 0.6-0.7% in the initial periods. People taking employment under these schemes could be made to give up all other subsidies.

The direct and indirect benefits of cleaner surroundings should also be taught to the citizens creating over a period of time greater ‘demand’ for them and higher willingness to pay for them. Or higher willingness to move into areas where such services are recovered at higher charges. The capital required for creation of each job in this sector is way lower than industrial or service sector jobs, private or public sector. The skill sets can be developed a lot easier with minimal training.

The open sewages in our cities, unclean rivers, garbage, etc.  are all a huge source of opportunity for employment creation. Of the various links in the supply chain the only missing link in this case is the poor ability or unwillingness to pay arising out of poor sensitisation of benefits and income. In the case of IPL virtually all the links were missing or invisible and it required some genius still to spot the opportunity and put all the links in place to create the ‘market’.  Similar opportunities exist where just one or two links may be missing and some creative thinking can add substantially to GDP, welfare and employment.

The disproportionate fatal accidents per vehicle is an opportunity to set right the systems by employing people (may be a lac or two) and adding positive welfare value. Our ill-disciplined roads, haphazard parking in crowded areas, rampant littering, usage of killer plastics are all potential opportunities of employment at low incremental capital investments. Our collapsed criminal policing and investigation (in deficit by at least 5 lacs); delayed judiciary can easily create new jobs for twice the existing number. Our deficient healthcare as Dr Shetty points out has a 50 lac employment potential at ‘fit for purpose’ doctors, nurses and service levels.

Government at both central and state level should identify ‘demand’ and need for its various services and ways to fulfil them rather than just run after roads, ports or infrastructure: our governance infrastructure for policing, justice, safety, protection of property, education and primary healthcare are in far greater levels of deficit.

Hiding behind our awful deficit of government services and under-development, chaos and disorder is a latent demand which could create 3 crore new jobs at comparatively low capital investment. This level of additional employment would have most certainly returned the incumbent government in 2014 despite all other troubles and could make a difference in 2019 as well.

This level of employment can be created at 1.8% of our GDP at Rs 100,000 p.a. wage levels. It requires some ingenious minds in the government to identify and fit the missing links in each case. The government should perhaps leave the return based (ICOR, IRRs and Paybacks) growth to private sector and chase newer indices like Incremental Employment per Capital Invested (IECI) for itself –a compromise of efficiency for employment.