‘India headed for economic doom’, prominent US think tank says

India is heading straight for economic failure post-Chidambaram's budget as a direct result of the lack of meaningful economic reform, says Heritage Foundation, an important conservative thinktank in the US. Assessing finance minister, P Chidambaram's budget, Derek Scissors of the Washington-based organization said that it "leaves India on the same, failing course it's been on of undisciplined spending and unrealistic expectations".

The Indian economy is in dire health, he said, not only because Indians' incomes have stagnated, income growth slowed and consumer inflation is high, but because manufacturing that should lead the Indian economy that would create jobs for the swelling ranks of young Indians is refusing to take off.

"Services lead in large part because the labour market is more flexible in services industries than in manufacturing. Rather than labour market reform, the Indian government offers a state-led infrastructure program. But the infrastructure program has no chance to succeed while property rights to land remain so ill-defined," he explained.

Mr. Gerard Colaco: Financial journalism these days appears revel in alternating between unjustified euphoria of the “India Shining” variety we had a few years back, and the gloom, doom and ruin variety we have in the Times of India article referred to by you. Generally, in a country as large and diverse as India, neither scenario comes true. I am not saying that the US think tank called the Heritage Foundation is not comprised of extremely intelligent individuals. I am sure it is.

But it is not the only think tank in the US. I will not be surprised if I find other think tanks that state the opposite. We must understand the mindset of citizens of the US, Western Europe and other advanced countries versus the Indian mindset, where relations with the government are concerned. In the advanced countries, to a very large extent, their citizens have enjoyed an environment of very low corruption, encouragement to free enterprise and generally liberal, good governance.

As a result, most people of these countries, including individuals, tend to veer round to the belief that their governments are everything. The end result is that citizens start depending upon the government for a variety of services and aid, including medical services, retirement benefits, old age pension, unemployment doles and the like. That is why, when recession strikes and the government introduces austerity, there is a shocked response. Human misery reaches an all-time high and people just cannot cope with the new situation when their governments fail them.

Now contrast this with India, where we are born, live and perish secure in the knowledge that our government will fail us. We know that the government mainly exists not to develop the country but to feather the nests of politicians and bureaucrats. We do not depend upon the government for help. In fact, most of the time we are thrilled if the government gets out of the way and does not interfere.

Even our much vaunted liberalisation which was kick-started in 1991, was not because either politicians or bureaucrats wanted to develop the country. It was to extricate itself from a huge balance of payments problem, which would have resulted in India defaulting on payment for its international purchases, especially crude oil. So, economic activity in this country does not have a high dependence on government policies. That is why the country keeps ticking, regardless of whether the budget is good or bad and regardless of the size of scams that occur with a regularity that is almost monotonous.

Of course, the right policies of decontrol, downsizing of government, reforms including labour reforms, privatisation, cutting of red tape, greater integration with world markets, etc., can result in the Indian economy growing at a much faster rate. But there are interests that are too deeply entrenched in the present third-rate system to allow this. So, there is a lack of will at various levels to implement swingeing reforms.

On the other hand, if politicians think that fiscal and monetary recklessness will help them win the next election, they will not hesitate to venture down this path of profligacy, without giving a damn about the either the country or its finances. We are in an election year, but Mr Chidambaram has refrained from this kind of irresponsible behaviour in the 2013 budget. For this, we must be grateful.

The Indian economy will certainly not turn in any outstanding performance in the near future. But neither will the doomsday predictions of the Heritage Foundation come true. We will continue to cheerfully muddle along, with bad laws, myopic vision and mediocre performance. Indian citizens and businesses will of course be driven by the profit motive to constantly improve their performance. If our businesses think that they cannot achieve satisfactory performance in this country, they will take their capital abroad and do business there. To that extent, Indian shareholder will be benefited.

There is an old saying about the four 'V's of a vibrant economy, which are Volume, Velocity, Variety and Versatility. We have variety and versatility, no matter how poor or illiterate our citizens are. We can also produce the necessary volumes whether in India or abroad, as our software services industry has shown. What we lack is the velocity needed to propel the economy forward, which must come from the government, which we unfortunately do not have.

To conclude, the dire forecasts Heritage may have been made without a proper foundation. They will not frighten me, just as the old predictions of India Shining in 2007 and early 2008 did not excite me. India appears to be a country where, with apologies to Shakespeare, if you are not born a stoic you will either achieve stoicism or have it thrust upon you!

 

THE UNION BUDGET 2013 - A BRIEF ANALYSIS

 Mr. Gerard Colaco: The problem with Indian finance ministers is that they are tinkers, not leaders, much less visionaries. If a man of Mr. P Chidambaram’s learning, knowledge, experience and ability could present a budget as insipid as the one tabled on 28^th February 2013, then there is not much hope for this country.

There has been needless tinkering with surcharges both at the individual and corporate income-tax levels. These are short-sighted methods to raise revenues. The best way to shore up government revenues and the country’s economy is by bold economic reforms aimed at stimulating growth. Revenues will automatically rise in a resurgent economy.

On the other hand, if revenues are sought to be increased by tinkering with surcharges, the only result will be that the affected individuals and entities will employ avoidance strategies. For example, if the surcharge on dividend distribution tax is raised, companies may either lower dividends or withhold dividends or resort to methods such as share buyback to neutralise the increased surcharge.

As for the surcharge on high income individuals earning more than Rs 1 crore per annum, the finance minister appears to have overlooked one simple and obvious fact. These individuals have the wherewithal to hire the best consultants to advise them on tax avoidance and tax reduction strategies. In short, revenue-raising by tweaking existing tax provisions is short-sighted to say the least.

The relief in the form of a tax rebate of Rs 2,000/- for tax payers with taxable income up to Rs 5 lakhs, though small, is welcome. I would not take the finance minister’s assurance that all additional surcharges on income-tax are only for a period of one year. Such promises have been made in the past and what was supposed to be temporary has been made more or less permanent. A classic case is the education cess of 3% on income-tax that has been in force for several years now. The old licence-permit-quota raj has now well and truly been replaced with a cess-and-surcharge raj.

On the positive side, the finance minister has ensured that sufficient funds have been provided for all existing flagship welfare schemes, particularly those designed to benefit the weaker sections of society, women, children, the disabled, health, education, providing of drinking water, rural development, infrastructure and agriculture. The government cannot be faulted on intent in these areas.

The difficulty is in implementation and in ensuring that the funds spent actually result in the desired outcomes. The bane of this country with its high levels of corruption is that there is a huge difference between funds sanctioned and funds utilised. Funds ultimately utilised tend to be only a fraction of funds sanctioned thanks to a depressingly alarming quantum of leakages along the way. No budget can plug this.

On the other hand, technology can be harnessed to eradicate corruption. But bureaucrats will always attempt to scuttle speed and transparency in the delivery of government services through technology, given their love of rent seeking at all levels.

Despite the rampant rise of materialism, there is still an appreciable amount of thrift left in Indians. This should be harnessed and exploited by the government. Meaningful, attractive and substantial incentives must be given for savings. Some good, some bad and some mad measures in this area are visible in the budget.

The proposal to issue inflation index bonds is laudable. But I can finally comment on these bonds only after their terms and conditions are known. The income-tax provisions applicable to these bonds will be of vital importance in judging whether they are of real value to investors. If the said bonds are heavily taxed, the very idea of protection against inflation will be defeated. It will also be interesting to see against which inflation measure the bonds are benchmarked, given that rates of inflation put out by the Indian government are largely a work of fiction, as every prudent Indian housewife knows.

The additional deduction of Rs 1 lakh on interest for a person taking a housing loan to finance the purchase of a house for the first time is undoubtedly good.

But the Rajiv Gandhi Equity Savings Scheme (RGESS) has been and will continue to be a dismal failure. The tax saving is insignificant and the target investor group is pathetically small, because it is only for first time savers in equity and equity mutual funds. When a much more attractive provision like total exemption on long-term capital gains on investments in equity and equity mutual funds has been in existence for years, but failed to bring investors into the stock market, I wonder by which flight of fancy the government imagines that an unattractive scheme like the RGESS will suddenly and magically cause an investor stampede into the equity market.

Neither the government nor SEBI has realized that the stifling documentation in the form of KYC and KYC updating procedures are what are driving investors away from equity and mutual fund investments. Similarly, in financial services firms, the main activity is compliance with needlessly complex bureaucratic procedures, rather than business and client service.

Unfortunately, when analysing modern Indian budgets, we consider a budget good not if it is full of vision, leadership and reform, but merely if it does no harm. From that point of view at least, we must be thankful that the union budget of 2013 has not
done any serious damage.

On one front, the budget proposals must be appreciated. The finance minister has resisted the temptation to announce a slew of populist measures in an election year. Had this been done, it would have weighed heavily on the exchequer and exacerbated an already unenviable fiscal position. The commitment of finance minister to give some priority to fiscal discipline and consolidation, thereby attempting to control inflation, has to be admired and appreciated.

In the ultimate analysis, the union budget 2013 is like the curate’s egg – good in parts. Writing in The Economic Times, veteran journalist Swaminathan S Anklesaria Aiyar put things in lucid perspective: “A budget is just one element in the broad framework needed to improve the investment climate and rejuvenate growth. Much more is needed outside the budget to cut red tape, expedite clearances and improve governance.”

In the one year that he has left, if Mr. P Chidambaram can get his act together on the reforms, decontrol and clear and speedy decisions fronts, he may yet redeem himself.