Event Reports

More tax, IT reforms needed to make ‘Make-in-India’ successful

PM Modi's 'Make in India' is a grand idea to reboot the ailing manufacturing sector. But the success of this programme will largely depend on creating an enabling ecosystem for manufacturing. This would require serious reforms in taxation.

2015
Jul
03

This year’s budget speech was rife with economic theory, its linkages and implications for the macro-economy, and it seems to have been targeted more at economists rather than the common man,” opined M R Venkatesh, economic analyst, author and columnist.

Initiating a discussion on “Budget-2015” at the Chennai chapter of Observer Research Foundation on March 7, Venkatesh said “The budget speech is a political document. It has to disseminate economic policies of the government and must be simple in articulation”.

Commenting on the Indian economic scenario, Venkatesh said that marco-economic indicators for the past three years have not been promising. He cited the recent Credit Suisse report which shows that 10 Indian corporates accounted for 13 percent of bank credit. Nearly 98 percent of the net-worth of the nation’s banking system has a combined debt level in excess of $100 billion. Additionally, these 10 corporations are highly leveraged and their interest coverage ratio has declined steadily over the past few years. This is a reflection of crony capitalism cornering public credit institutions, said Venkatesh.

Profitability and NPA

Venkatesh said other economic linkages such as revocation of coal block allocations and mining-ban in Karnataka have had a detrimental effect on project viability and success. Reserve Bank of India has also reported that profitability of Indian corporates have come down by nearly 50 percent compared to 2007-08 levels. NPA levels of public banks are at staggering and critical levels, though not exceeding the five-percent boundary.

The Industrial Index of Production (IIP) has also shown a decline in the past year with consumer durables and non-durables recording negative growth. There is an enormous concern in managing our financial sector and the current exuberance in the capital market is completely speculative without any economic rationale, Venkatesh said.

Tax-law simplification

Speaking on the salient aspects of Budget 2015, Venkatesh questioned the rationale behind the announcement of a four-year phased reduction in corporate taxes (bottoming at 25 percent). He noted that removing exemptions along with the reduction in tax rates was less likely to benefit the corporations. For the current period, corporate tax has actually gone up owing to increased surcharge. Given the gargantuan complexity in our corporate tax laws that support myriad exemptions, only to be further complicated by their contextual definitions, Venkatesh called for a simplification of tax laws and reforms to the Income Tax Act.

Further analysing the budget, Venkatesh noted the conspicuous absence of allocation of funds for water management in the country that include policy imperatives and interventions for managing water scarcity. He suggested reforms in the MNREGA programme and noted that the livelihood programme can be used to build landed assets such as water storage facilities and toilets in rural areas, thereby realising effective utilisation of funds.

The manufacturing sector has been languishing for the past few years and its contribution to GDP has been well below par. Prime Minister Narendra Modi’s ’Make in India’ is a grand idea to reboot the ailing manufacturing sector, but the success of this ambitious programme will largely depend on creating an enabling ecosystem for manufacturing businesses to thrive and flourish. This would require serious reforms in taxation of sale and purchase of goods within the country, improvements in logistics sector especially railway freight rates which cross subsidise passenger fare, and development of port facilities.

Venkatesh noted that the textile sector, which provides the largest employment, is losing its competiveness globally due to undue taxation. Though the textile industry contributes significantly to the GDP, our exports are considerably lower than that of Bangladesh and Vietnam. There is much scope for improvement in the textile sector; better accessibility to basic infrastructure such as power, credit facilities and reforms in taxation can help achieve better growth. Speaking on the positives of Budget 2015, Venkatesh welcomed the accident and life insurance cover offered by the government.

Cooperative federalism

The government accepting the 14th Finance Commission’s recommendation to allocate 42 percent of tax revenues to the states is another major highlight of this budget, noted Venkatesh. While this is a right step forward in cooperative federalism, the budget has failed to address other concerns around creating linkages between central plans and state projects, the status of the 12th Five Year Plan (FYP) that has two more years remaining in the Plan period and the prospect of a 13th FYP.

Critiquing on other aspects of the budget, Venkatesh noted his disappointment on Finance Minister Arun Jaitley’s proposal to create a new legislation to curb black money when there are enough legislative provisions in the IT Act to curb black money, such as section 68, 68-A, and 69. This is further complemented by the provisions under the Corruption Act (Prevention) such as section 13(1)(e). Existing legislative safeguards are potent enough to deal with black money generation and circulation, what we lack are men of integrity and a prudent mechanism to implement these provisions effectively, remarked Venkatesh.

Concluding the discussion, Venkatesh said that this budget was expected to signify a progressive shift away from the ’Nehruvian economic model’ towards a more market-based model. On the contrary, this budget has been below expectations and has not delivered the ’big bang policy reforms’ that was expected of it, this being the first full Budget of the new government under prime minister Narendra Modi.

(This report is prepared by Deepak Vijayaraghavan, Chennai)