Building India

In plain terms, I wish to state that India cannot and will not be built with tweaking something here and something there. Average per capita income of the world is $10,000 whereas that in India it is around $1600. The size of the world economy is $70 trillion whereas that of India is just about $2 trillion, ie, only 2.85% when we are about 16% of the world in population. If world grows @ 3% and India grows @ 7.5%, it will take us another 47 years to reach the world average, considering that growth in world population is 1.1% and that in India, 1.5%. This is not within the life time of present generation.

A country becomes fully developed on reaching about $25000 per capita income, and here we are talking about world average of just $10,000/-. Thus, there is no vision 2020 or the gimmick played by our visionary politicians time and again.

India does not represent world average in almost anything, be it per capita income, farm productivity, labour productivity, ease of doing business, law and order, competitiveness and so on. India ranks close to bottom in almost any international ranking. This will not change with the way India is being managed, both by its governments as well as the business leaders who interact with governments for desirable policies and implement or take forward such policies. It is simply because we have not diagnosed the ailment of India properly. In my view, India suffers from :-

I. Judicial mess – over 35 million cases pending in courts which will take more than 300 years to deal with ie, justice will never be done in the lifetime of the litigants.

II. Suboptimal farm productivity – farm yields in India are far less than world average in almost all major crops, and there is not even a talk about it. Nobody talks about it. The subject is almost a taboo, just like population control post 1977.

III. Taxation mess or putting it bolding, terrorism – India suffers from multiplicity of taxes, deliberately designed by the babus to conceal the real incidence of taxation and prevent any meaningful international comparison.

IV. Mistrust is the foundation of our governance – it is our primary gene and is conspicuously predominant in any policy, rule or system. We don’t trust anybody. Even Government doesn’t trust government. 

V. Shackles of bad policies – ‘revenue interest’ has become the sole ‘public interest’. Every ‘defaulter’ has become ‘willful defaulter’. Every omission of information has become ‘suppression of facts with intention to evade’. Entire banking sector has cartelized itself under credit information business (CIBIL) which is working solely as bankers’ agents to the detriment of borrowers. Difference between practice and preach is so vast that government dealings in private seem like a foreign occupier’s dealing. The whole nation has become hypocrite. This is contrary to the spirit of reforms and back to pre-reform psyche.

VI. India cannot be built without addressing the above primary diseases afflicting India. It is because:-

I. Judicial mess –

A. Ease of doing business ranking cannot improve with one criterion, contract enforceability, putting us at the bottom.

B. No business can avoid litigation in India. Early in the business, we are likely to suffer litigation about land diversion, sales tax matters etc, and little later, about excise/service tax, income tax matters, and in regular course, contract enforcement issues with suppliers, customers etc. In between, litigation in labour matters is inevitable.

C. Government is the biggest litigant. Then, large number of cases come to court to keep the opponent stuck for decades. If cases are decided in days, like in Singapore, there would be no incentive for most litigants to come to court at all. Most property cases, tenancy cases etc fall in this category. Our judicial system is a weapon in the hands of unscrupulous people.

D. Most laws are founded on communist ideology like tenancy laws, labour laws etc, while Indian society has at least superficially, become capitalistic. High time it becomes so substantially by doing away with those laws.

E. Courts de facto protect right to litigate and not right to justice. They award paltry 6 to 9% simple interest with decrees and no harsh requirement for debtor to comply with decree. Consequently, it needs another set of litigation in decree execution. This could be easily done away with, by awarding commercial compound interest, charged by banks upto date of decree and then, penal interest from date of decree to encourage its compliance. Same court could execute the decree to make it efficient and fast as well.

F. Judicial reforms surprisingly are least controversial and about the cheapest to take up. Amending laws suitably doesn’t cost anything, and establishing more courts doesn’t cost too much either. India presently has about 20,000 courts/judges. Setting up another 40,000 courts/judges should not cost more than Rs 4000 cr in building infrastructure across the country @ Rs 1 million per court for room, furniture, computers etc. Recurring cost of these additional courts should not be more than Rs 2 lac per court per month ie Rs 9600 cr annually. These are meager amounts considering that central government spends nearly Rs 20 lac crore and state governments spend similar amount, every year.

G. Judicial reforms will not only make life easy for business, but also improve law and order in the country. In terms of Return on Investment, I believe money and efforts spent on judicial reforms will offer the GREATEST RETURNS to India. Yet, nobody is demanding them and hence, nobody is offering them.

II. Suboptimal farm productivity –

A. India exists for its farmers if one considers any public statement from any politician in the country. Yet, nobody talks about poor farm yields which is the primary cause of poverty in agricultural sector.

B. Indian farm yields are about 1/3rd of world average. It means by being (world) average, our farm produce can triple, from some $300 billion to $900 billion (at 16% of our economy size of $2 trillion). Without the multiplier effect, it increases our economy to $2.6 trillion, by 30%!

C. Agriculture has tremendous multiplier effect. If it is 16% of economy, it is already having a multiplier effect of 6 in our existing economy. That being the case, at world average farm productivity, our economy size should stand at $5.5 trillion! This takes our per capita income close to middle income level which can sustain high growth in future to a fully developed status, in the life time of our kids in college today!

D. Again these reforms shall be free from controversy if the government can educate the people properly about the existing poor productivity and benefits that these reforms will bring.

E. Unfortunately again, nobody is demanding these reforms and hence, no government seems to have applied its mind to it ever.

III. Taxation mess/terrorism –

A. Business suffers from massive multiplicity of taxes in India. GST does not address this problem at all because it is not one GST but three GSTs where 3 major taxes are being replaced by 3 major GSTs (VAT replaced by GSTS, CST being replaced by GSTI and Excise/Service tax being replaced by GSTC). It will not even reduce cost of collection to the government because GSTC will be administered by central government, and GSTI and GSTS will be administered by state governments. This will not even abolish torturous declaration forms like C form, form no. 49 etc (of course, with change of form name/number). Local body taxes like entry tax will still survive. Hence, this is a false reform.

B. Industry should demand a single GST subsuming both central (excise/service tax, CST) as well as state taxes (vat, entry tax, professional tax, electricity duty etc). The problem of revenue sharing is a problem of 30 individual finance ministers of Indian states or 5-6 people being heads of major political parties. This should not hold hostage to the entire business-community in India and costing immensely to the government as well. Single GST could be administered by central government and hence, state commercial tax deptt could be abolished, saving enormous cost of collection to the government. The staff could be retrained and absorbed in other departments.

C. Unless a unified single GST is introduced, C forms and Form no. 49 will not vanish. These forms are required by one state government from another state government. If the tax is managed by just one government with both, buyer and seller being its own assessee, no such forms will be needed. This is the reason why excise deptt does not need a C form despite massive cenvat credits involved.

D. The culture of Cesses must be fought. If government needs revenue, let it increase rate of tax rather than introducing a new item of tax requiring independent accounting, payment, returns etc.

E. Departmental appeals are a farce, be it central government or state governments. The appellate officers are seldom impartial. They are more a prosecutor and a munsif both. Consequently, most appeals are routinely rejected and first impartial hearing is afforded at tribunal level. If governments cannot afford impartial appeal departmentally, let it be abolished and let first appeal go straight to tribunal level. This will save cost both to the government as well as the tax payers.

F. TDS has become a menace in India like Toll Taxes. Revenue hunger cannot justify tax payers being treated like agents of the government to collect revenue. Government has to collect revenue and tax payer is doing a business that cannot be treated as its agent to collect revenue. Similarly, Toll Taxes are unfair taxes because people are already paying road tax on purchase of vehicles. It is for the government to provide them with roads. What was introduced as an exceptional method of financing through toll tax, has become such a norm now that no road is built without toll tax, and toll tax does not merely cover cost of building and maintaining roads, but also a premium to the government for giving permission to build such roads. Likewise, MAT (minimum alternative tax) is also unfair. When income tax is paid on income computed according to the income tax law, there cannot be a minimum to be paid regardless of computed income. If higher depreciation is allowed in income tax (on WDV) and lower in books of account (straight line) for ease of comparability on the basis of going concern value of a tax payer, or certain deductions are allowed in order to encourage investment in certain activities, the deptt cannot use them as grounds for lamenting and crying hoarse at loss of revenue. These unfair taxes must go. It may be too much to ask at the moment, but road map must go into that direction.

G. Regardless of government claims, India remains a power deficient country. State monopolies collect every single rupee from the consumer for providing power connection. They even lay their lines through somebody’s private land, and later, when he wants to use the land for his purpose, he is forced to shift the lines outside his land at his own cost. Yet, these monopolies force minimum charges in each power bill, and force a consumer to pay a minimum of 2 years charges even if such power connection is disconnected much earlier due to failure of business or otherwise. When you don’t have surplus power, you don’t incur loss if somebody draws less power, and hence, minimum charges are not justified. Likewise, when you don’t incur any capital cost in laying connection, there is no justification in forcing a consumer with payment liability for at least 24 mths. These practices only hurt the businesses that are in trouble and need support, and not those which are doing fine. It is like the labour policies which are only encouraging automization and minimizing job creation which is contrary to labour interests. Mostly, hefty minimum charges pressurize a sick unit to close down before trying fully to recoup. Surely, this is not the way to build India.

IV. Mistrust is the foundation of our governance –

Least said about it the better. Government control is so firm and perversely based on mistrust that a single application for land diversion needs physical verification of the site by several authorities who wouldn’t trust verification by another government agency. Unfortunately, this is hurting India very badly and no relief is in sight.

V. Shackles of bad policies –

A. Hypocrite India makes policies which sound fair, like harsh measures against ‘willful defaulters’ but are practically applied to all ‘defaulters’ who are simply assumed to be ‘willful’. Any omission to disclose information is simply regarded as ‘suppression of facts with intention to evade tax’. The entire system of debt recovery, credit information etc does not consider a single possibility of banker being at fault. Banks have also cartelized themselves under CIBIL which is, contrary to CICRA, acting as their faithful agent. RBI is acting as a union of banks. It simply doesn’t wish to act against any banks that are violating law and RBI’s circulars. Even Ombudsman is manned by banking officials with accentuated bias in favour of banks.

B. Even at state level, revenue deptt does not wish to abide by Tourism Policy adopted by state cabinet, on one pretext or another. Despite clear statement in Tourism Policy that tourism projects shall be granted industry status, tourism projects are still regarded as ‘commercial  purpose’ and not ‘industrial purpose’ so that more diversion charges could be extracted.

C. Rules/Act (Land Revenue Code for example) are deliberately left vague. They don’t even define what is ‘commercial’ and what is ‘industrial’. It is left to the whims of the babus who zealously pursue revenue interest as if they are representing a foreign occupier and not the republic of India.

D. Tax exemptions are announced in order to encourage investment in desired sectors. Once investment is made, the government starts lamenting loss of revenue and starts restricting exemptions or even withdrawing them on one pretext or another. Indirect tax exemptions in certain zones and direct tax exemptions in income tax are live examples. This is not just unfair, it is simple fraud against private investors who are fraudulently lured into investing in certain fields and then, exemptions withdrawn/restricted.

Unfortunately, I could simply go on, but the point is simple. You cannot build India by tweaking something here and something there. You need to diagnose the problem first, and then, attempt solution. Till then, it is like giving paracetamol to a cancer patient!