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Wednesday, 02 April 2014 00:42
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Reduce the powers government has — to give licenses, grant tax breaks, etc — and you fix cronyism

Big Business may or may support Modi because of his fondness for crony capitalists, as the FM has alleged. Without cleaning up the plethora of tax breaks, the system of giving licenses or of allocating land for industry .. the potential for abuse is huge

 

Attacking rivals, distasteful as it may seem, appears to be part of the cut and the thrust of politics. So, you have Narendra Modi’s constant jibes at ‘shahzada’, and now some reports suggest, even ‘matashree’. In turn, finance minister P Chidambaram talks of Modi’s ‘deep character flaws’ and how sections of Indian business are in favour of Modi as his brand of capitalism is crony capitalism. Given the support the BJP’s prime ministerial candidate apparently enjoys across industry—not just from a section of businessmen—it would appear the finance minister has painted large swathes of India Inc with the same brush.

Given the plethora of scams unearthed during the UPA government, of course, that’s a bit rich. While the CBI seems to be undecided as to whether money changed hands, and if so how much, in the case of Coalgate, there is very little doubt in the case of the 2G scam that saw A Raja and his telecom secretary in jail for several months. It is of little help that, in many of the cases talked about, the prime minister was opposed to the way the licences were given out and wanted a more transparent system.

The larger issue, however, is that the way the levers of power are structured—whether at the Centre or at the level of states—it is next to impossible for companies to do business without getting numerous clearances from the government. In such a situation, whether it is a Modi or a Jayalalithaa, any chief minister in a state where industry is doing well, will be accused of being a crony capitalist—was declaring the auto industry to be a ‘public utility’ in Tamil Nadu a sensible act or was it an act of crony capitalism, designed to help a few auto firms? And why just the chief ministers, the Central government is being accused of favouring Reliance Industries—ironically, by several BJP leaders—when all it is doing is to allow free market pricing of gas, something that is not only desirable from the point of view of attracting investments, it is something promised in the contracts the government signed with these firms.

Were Modi to become the prime minister, it is this that he needs to work on. If he doesn’t, the tag of being a crony capitalist is likely to stick to him. Every time there’s a hike in prices of gas, or a reduction in diesel subsidies—the latter is what allows a Reliance or an Essar to start marketing diesel in the country—or a restructuring of a bank loan, a tariff hike for power plants, Modi will be accused of helping some cronies, in quite the same manner the Congress party is today.

Most such ‘deals’ entail giving generous tax breaks to investors. One such, for instance, involves allowing investing firms to, for instance, collect sales taxes on the products sold, and to return the money to the exchequer only years later—in other words, to help finance projects since no interest is paid on the sales tax collections. Others include helping acquire land from farmers at low prices, and often enough, by force. The Supreme Court’s rejection of several such land acquisitions in Uttar Pradesh is an example of such high-handedness.

Only a serious investigation will reveal whether Modi has indeed helped industrialists grab land, as has been alleged by some—or changed the land usage after they bought the land, which increased its value manifold—but it is worth keeping in mind most land acquisition in India takes place in this manner as there is no genuine market for land, particularly for the kind of large tracts industry requires. Indeed, while the Land Acquisition and Resettlement and Rehabilitation Act (LARR) will deal a body blow to land acquisition because of the onerous R&R restrictions, this is precisely what it was seeking to fix by dramatically hiking the compensation that land losers get. That said, it has to be acknowledged that land acquisition is one of the toughest parts of setting up industry. So, one of the things done by state governments to attract investors—and Modi is not alone here—is to try and simplify the process by helping acquire the land.

What of the huge tax breaks? Aren’t these examples of crony capitalism? There is what fellow columnist Surjit S Bhalla calls crony socialism—huge leakages in the government-spending programmes and simply letting resources rot in inefficient PSUs. But let’s leave that be. Let’s look at the actual sops given.

Once again, the problem starts at the Centre, and we are not talking of just the UPA, it goes back to the NDA years and even before that. If anything, the UPA deserves credit for trying to clean this up, albeit only marginally. Tax write-offs were 64% of the total tax revenue in FY05—data is not available in this form in the NDA years, this is the closest approximation—and this fell to 56% in FY13. For indirect taxes—which affect imports and manufacturing—the giveaways have, however, risen from 72% in FY05 to 98% in FY13. Whether such tax giveaways—such as to industry which set up base in Uttaranchal during the NDA years—are crony capitalism is not clear, but they do distort the playing conditions as Punjab discovered when industry left its borders. More important, when a government has the power to reduce a tariff, or to hike it for a rival, there is potential for cronyism. Which is why, were Modi to come to power, one of his top priorities has to be to reduce these tax giveways.

Lowering government stakes in PSU banks to 26% for instance, would not only help them raise the several lakh crore rupees they need for their operations over the next three years, it would eliminate the possibility of politicians and bureaucrats asking bankers for special dispensation for a favoured few. It has to mean something if PSU banks have significantly higher NPAs than their private counterparts—it is, though, true that PSU banks have a larger exposure to infrastructure, and so tend to be worse off.

Yet, no matter how transparent processes are made—auctions for every licence, for instance—there will always be decisions that call for discretion. Should tax breaks already given be revoked as was done for gas exploration some years ago? Should excise duties be cut, as they were, to stimulate demand? Should bank loans or licence conditions be restructured? Should that be done for particular firms or groups of them—road developers lined up before the Rangarajan committee and power companies before CERC for precisely this purpose.

If we are going to blindly cast aspersions, India is going to hear a lot more of the kind of allegations it has been hearing recently. If the BJP accuses the Congress of playing Reliance Industries’ game on gas prices now, the Congress can blame the BJP for changing telecom licence conditions in 1999. For what it’s worth, the US government was accused of being soft on banks when it bailed them out—the telecom decision is what gave India its vibrant telecom sector and bailing out the banks is what saved the US and global economy. While the idea is to eliminate as much discretionary power as possible, governance is about taking decisions. And the flak that goes with it.

 
 

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