Tuesday, March 1, 2016

My Disappointments with Budget 2016

Is this Really an NDA Government?

Prime Minister Modi was decisively voted to office on the basis of his promise of 'Acche Din Aanewaale Hai' credo (Good Days are around the corner), and in a manner of speaking, to take up from where Prime Minister Vajpayee had left off. Big Bang Reforms, Job Creation, Wealth Creation and Robust GDP Growth were supposed to be a given, and a departure from the regressive Left of Center politics of the ungainly UPA Coalition Governments of the past was supposed to be a reasonable expectation. However, on several counts, Finance Minister Arun Jaitley disappointed me with his Budget for 2016. The large outlays for Rural Development without creating urban wealth and Jobs, makes this look like just another UPA-X Budget.

Direct Taxes - A Historical Anomaly

I cannot profess to be an expert on all aspects of the Economy and Union Budget preparation but I do understand this. We have been "Robbing Peter to pay Paul" since the past 65 years. The salaried class continues to bear an inordinate burden of the Direct Taxes and nothing is being done in every Budget to widen the tax base.

Why cannot the Government consider bringing all Aadhar Card holders (a known and verified database, with the yet un-enrolled eager to enroll, to enjoy the benefits of subsidies) into the IT net with a voluntary low rate of tax, say 5% with compulsory filing of Returns? 

There must be hundreds of million people in India, who are self employed, earning handsome incomes but not paying a rupee in tax and thus contributing nothing to Nation Building. If the Govt. brings all earning folk into a benign tax net and expands the Direct Tax Revenue, Salaried Class Income Tax rates can be cut and their disproportionate burden towards the nation reduced. Nothing done, disappointed. 

Reduce and Simplify Direct Taxes

Ideally, a simplified Tax Compliance mechanism where all the Salaried Class pays 10% Flat Tax Rate on income with no Exceptions and Rebates is something we need to work towards. No move towards implementation of the recommendations of the Direct Tax Code, which has been gathering dust for years. Disappointed.

A Harebrained Scheme to Tax Provident Fund Savings

So instead of rationalization of taxes to reduce the burden on the Salaried Middle Classes, we have a completely incomprehensible move to tax even their savings. The Provident Fund Saving is the only nest egg that a Private Sector Employee has to retire on. To want to tax that too is akin to twisting the knife in the back a couple more times, as though bleeding them dry was not enough. One day after I wrote my piece, The Times of India had pretty much the same thing to say.

Where is the much publicized Disinvestment?

The NDA from the Vajpayee days had a stated principle that the Government's job is to Govern and not to manufacture Soap, Operate Hotels or Run Airlines. The huge financial package for the loss making Public Sector every year could be used to build hospitals, schools, roads and other infrastructure, and the reticence of Modi to boldly take a position on the same is baffling. His early political learning seem to be very Left of Center, and perhaps, he still carries some baggage of Nehruvian Economics where all things were supposed to be Government run or controlled. In this one aspect, Prime Minister Modi is more old fashioned than his much senior NDA predecessor, who had a Disinvestment Ministry and wanted the Government to exit all non-critical ventures and unlock the wealth held in these properties and businesses. 

One was hoping that the Government would make some significant announcement in connection with 100% Disinvestment in a few Public Sector Undertakings and stop the continuous bleeding of tax payer money by supporting inefficiency and sloth that constitutes the sector today. Instead, we see some spineless Stake Sale of marginal significance. This is not a reflection of the 'Government should not manufacture soap' policy. Disappointed again.

I was hoping to see genuine investment in Farm Infrastructure

One is deeply distressed that the state of our farmers has not materially improved over the past 65 years. Surely, everyone should strive to ensure a situation where this noble profession would be a safe and remunerative one on which a farmer and his family could depend on? I believe every patriotic Indian should be deeply concerned about them and use their knowledge to help better their situation. 

I support a Farm infrastructure impetus. 

I have previously written on this subject to Agriculture Ministers, Food & Civil Supplies Ministers, Secretaries of Agriculture, even to FCI and Warehouse Corporation, but not one of them have responded to either initiate action, or to rule out the idea as un-viable. I appeal to the Government to constitute a Preliminary Study to check the feasibility of my suggestion, and provide some direction and hopefully later to obtain some commitments from the Government in the Budgets.

All Governments, regardless of their political persuasion since independence, have done nothing substantive to modernize the Farming Sector and tragically, the average Indian farmer even today remains stuck in the medieval age using cultivation methods which were developed thousands of years ago. True, a lot of progress has been made in the creation on a large talent pool of Agricultural Scientists and Graduates who are working to change the sector in terms of providing a Knowledge Base on Cultivation Methods, Crop Rotation and Soil Management, but the vast majority of the millions of farmers have no access to this expertise and have to come a long way just to catch up to subsistence. One is particularly concerned about the state of post cultivation collection, processing and storage of produce, which is in a 'rotten situation’ in more ways than one, fraught with corruption, leakages and unscientific methods, but no efforts or thoughts are being extended to remedy this.

Successive Governments have thus far, spent Thousands of Lakhs of Crores of Rupees in promising Remunerative Prices in the form of MSP, providing Free Power, Pushing (sometimes controversial) Seeds, Promoting Unsafe (and sometimes banned) Insecticide and offering Fertilizer Subsidy which have just kept the farmer dependent on the Monsoon, on Usury and his produce slowly turning Pesticide-Ridden and Non-Prime over the years. In addition to such upstream efforts, the government needs to invest in downstream capabilities, in the form of contemporary farm infrastructure and help the farmer modernize the entire chain of activity from soil preparation to the ultimate storage of grain. The Government is expecting Modern Retail Trade to make these investments, but has made the Retail Industry a minefield of regulations, deterring investment (more on this later).

I have recommended exploring the need to invest in farm infrastructure in addition to subsidy, which I have tried to bring to the attention of many of the powers that be, but have found no success. No one it seems, is interested in pursuing an alternate path. I sincerely believe that this has the potential of changing the landscape of rural India and will go a long way in improving the Food Security situation of our nation. No Capital Expenditure proposed for Farm Modernization in the Budget, a further disappointment.

Our Cities are decaying due to a step-motherly treatment

Touching on an co-related matter, for 65 years, we have been repeatedly told that releasing funds for Urban Infrastructure was 'frivolous expenditure' as India is a rural agrarian economy, and thus, a lion’s share of the past Budgets were allocated to Rural Initiatives. Consequently, due to neglect and sheer non-investment in our urban centers and poorly managed investment in our villages, we are now facing a situation of both urban decay where the worlds most polluted and grid-locked cities are Indian – on the edge of collapse, while on the other hand, the farmer is still killing himself for his inability to repay a loan of a few thousand Rupees, or curiously, abandoning his farmlands to move to decaying cities. In this connection, we see however some positive action, and investments are planned for Smart Cities and improvement of the creaking infrastructure of our major urban centers. However, far more targeted and aggressive investments are required to overcome the lag imposed on our cities for 65 years. So, yes, disappointed!

Finally, my pet peeve. No clarity on Retail Trade continues to stifle it.

Mr. Amitabh Kant, Secretary DIPP, had recently accepted that the Government may not have all the answers, especially when it comes to Sunrise Industry, and hence, it was more than willing to solicit the views of the Domain Experts in assisting in the formulation of policy. While Minister for Commerce and Industry, Ms. Nirmala Sitharaman stressed that the primary aim and immediate concern of the Government was the creation of millions of jobs for our young adults, who are just entering the Economic Contributory Stage. Both spoke during the events organized for the promotion of Start Ups in India. In the background of the above, the one Sunrise Industry that has the ability to create, and absorb millions of fresh High School (Class X and XII) graduates i.e. Modern Retail Trade, is unfortunately mired in so much confusion and politics. If it is harnessed properly, Retail is a low hanging fruit that can change the outlook of the nation while contributing immensely to job creation.

  • At the outset, it is no secret that India was perceived as the ‘Most Desirable’ Retail market for investors for over a decade and a half, but is now considered as a ‘High Risk’ market.
  • The policies governing Retail in India have not been enablers, perhaps due to the political sensitivity to the adverse effect unbridled Retail expansion may have on the Kirana Stores, and they have been made very complex and confusing.
  • The primary problem was the classification of Retail proposed by the UPA Government, i.e. Single Brand and Multi Brand Retail.
  • This is a classification that is not natural in Retail, as the Activity Chain / Processes depends on type of Merchandise, and not whether they bear a single brand name or not.
  • Retail Business Models are generally not amenable to the above classification and hence the Back-End Investment mandates and Sourcing Criteria do not make fiscal sense to most Retailers.
  • This has resulted in no significant investment in Retail since the policy was announced by the previous Government, when it actually has the potential to be one of the best Forex earners for the country.

The Government refuses to take the advice of Retail Experts

Despite Mr. Amitabh Kant's statement of consultative process to be followed for Start Up's, when it comes to Retail Trade, he obstinately refuses to engage with Retail Experts to help formulate enabling policy. 

To ensure that the artificial barriers to investment in Retail are dismantled and the country becomes the most desirable destination for Retail Businesses the world over, while still keeping a tight watch on the deleterious effect Retail can have on the Kirana’s, the following approach that has been endorsed by the Retailers Association of India, may be worth considering.

  • The entire policy framework governing retail needs to be re-looked into, and the same aligned with the business processes of the industry.
  • The new suggested classification could be ‘Food Retail’ and ‘Non-Food Retail’.
  • Non Food Retail which can be anything from Car Showrooms to Apparel and Consumer Durables to Jewelry Retail should be permitted as freely as possible. 
  • Whether we permit 100% or 76% or even 51% FDI it is immaterial, as most retailers will be able to find Indian partners without much problem. It is critical however, to have minimal restrictive rules and regulations governing this segment.
  • Thus, without even impacting the Kirana in any manner, we can open our market to literally thousands of Retail Chains and create a large number of Entry Level Jobs.
  • To ensure that investment in Food Retail like Supermarkets and Fresh Chains is done in a very planned and controlled manner, this category can have reasonable restrictions to minimize their impact on the Kiranas while at the same time, encouraging them to invest in upstream infrastructure like Grain Elevators, Cold Storages and Logistics.
  • Retail creates jobs for young people with Minimal Higher Education, and Short-Term Training (could even be On-The-Job Training), hence the benefits to the economy and the politics of the issue can be had within a very short gestation period.

Thus, in addition to creating a large number of jobs, the freeing up of Retail (or simply clarifying the classification) will improve our grade in the Ease of Doing Business Rating, improve our Currency Valuation and contribute to a Feel-Good Business Climate, as investors in other more Critical Sectors will be comforted when they see Retail Brands from their own countries flourish in this market. Needless to say, the influx of Retail will also have a positive spin-off on the IT, Malls, Manufacturing, Construction, Apparel and Consumables industries, and support a vast number of indirect jobs in addition to the direct ones.

We in India deserve to have a fully enabling environment for Retail, and permit us to reap the benefits of the low entry barrier investment it can bring even while protecting our Kirana heritage and jobs. No move towards clearing the logjam of Retail. Disappointed? No, distraught, actually.

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