Siddhartha and a Five Trillion Dollar Economy

I have not been writing for a while now.  Last of my posts was in the end of May.  Roughly 30% of my readers have reached out to me to write more, i.e., two of my whole of seven readers have texted and asked me when is my next blog?  Here it is.

Now that I have attracted your attention with the title, I have a confession to make.  Well, I am not going to write about Siddhartha and definitely not about how it feels to be a part of five trillion-dollar dream.  I wanted to write my impression on the budget presented by Smt. Nirmala Sitharaman, the state of Indian economy with respect to domestic consumption, the industry performance and the suffocating environment in which the Indian industry operates in general and SME in particular and taxation.  However, laziness took the better of me.  Unfortunately, Siddhartha was the trigger to shake it off. 

Call it a vision statement or call it a pipe dream, the budget has set the agenda for this Government, which is in right direction.  Is this strategic statement backed by sufficient tactical framework?  That is a five trillion-dollar question.  

Q1 results of FY 20 has made it clear that the economy is in a very sluggish mode.  Further, the much touted great Indian consumption has in fact reduced.  Quarter on quarter comparison with 2018 paints a sordid story.  Total project announcements on quarter on quarter basis reveals that actual announcements made are only half of 2018 numbers.  NBFC and banking sector continues to reel in problems. Farm production is a worry. Lack of employment cannot be wished away. Stock market is not confident on macro economics.

If what BJP spokespersons say is anything to go by, Government is in a perpetual state of denial.  Be it, Sociology, Law and Order, Politics or Economics, denial is the only mode of introspection, it seems.

“Yediyurappa is 76 years old.  How has he become a CM?” would ask a TV anchor.

“Congress and Kumaraswamy have hijacked people’s mandate.  The MLAs have resigned in protest against the government.  BJP has nothing to do with it.  Yediyurappa is the tallest leader in Karnataka.  Cases against him, have not been proved”.

“What about Unnao?  Why has the MLA not been sacked for so long? Why no action for nearly two years?” 

“Law and Order is the state subject.  The Minister is in five star jail and he was suspended long back, law will take its own course. It has taken no course till Supreme Court intervened. We have no control on the judiciary. If judiciary has not taken action, what can we do?”

“Why have you poached MLAs in Goa?”

“We have nothing to do with it, MLA split the party and joined BJP.  We have just made them Ministers”.

“India is facing worst employment crisis.  What actions have been taken?”

“There is lot of hidden employment which does not meet the eye. Provident Fund registration has gone up.  Collection of data is inherently faulty.  There is no unemployment crisis in India.  We have delivered on the promises and the MGNREGA subsidy directly goes into beneficiary account through the governments Jan Dhan Scheme”.

“Economy has slowed down, what steps have been taken? 

“India is the fastest growing major economy in the world.  We are the sixth largest based on nominal GDP and we are the third largest economy just based on Purchasing Power Parity”.

“What about Agrarian distress?”

“Government has improved on the distribution of farm subsidiary.  This is a welfare state. We have already distributed Rs.4000/- to all farmers through Jan Dhan Account”.

“What about infrastructure development to meet lofty GDP targets? Where will be money come from?”

“We have laid a zillion kms of rural roads under Prime Minister Grahmin Sadak Yojana.  We have constructed houses at the rate of 2 lacs houses per annum.  About billion toilets have been built and all the subsidies are distributed through Jan Dhan Accounts, without any middleman.  We have electrified all houses and even provided led bulbs.  We have financed all these and yet kept the fiscal deficit under control.  Mr. Modi’s government is a welfare state that delivers”.

“Siddhartha was harassed by tax financials and that’s why he committed suicide”. 

“This is just a hearsay and there is no proof to it.  India has jumped 70 of places in ease of doing business index.  We have no major corruption charge”. 

“What about MPA Mess in the banking sector and NBFC crisis?” 

“We are in the process of repatriating  Vijay Mallya. Same would be true with Nirav Modi.  Nobody can escape law in our government.  We have not given these loans.  These loans were given by the congress governments”.

Don’t you dare to make any sense out of these ramblings.  We have not made any sense in this type of discourse between 2004 & 2014, when congress was answering the question.  Why should we make sense out of it now?  If you think BJP is different from congress.  it is only your problem and not BJP’s.  it is definitely not the problem of Government at the center.     

In all fairness, government has indeed taken some right actions.  Insolvency and Bankruptcy Code (IBC) is indeed making headway. Enabling amendments in the Income Tax Act and the latest amendments to IBC which is recently passed in the parliament will only help.  Government has brought NBFCs into the banking regulatory framework under the supervision of RBI.  This is a great move and first of its fruits, were delivered two days before.  RBI has allowed NBFC’s to raise cheaper funds from foreign markets through ECB routes for onward lending.  Systematically important NBFC’s will be able to tap international markets for raising cheaper funds.  Set off and carry forward all the losses is allowed in case there is changing ownership through IBC route.  Hither to this was not allowed.  Considering the magnitude of the problem, these are but baby steps.

MSME Data

MSME Data
EconomyReversal

Photo Courtesy
MoneyControl

Coming back to Siddhartha, the problem of tax terrorism is for real.  Regardless of the reasons behind the unfortunate demise of Mr. Siddhartha and regardless of the denial mode of the tax administration, the problem of tax terrorism is real.  If I remember correct, the word tax terrorism was coined by none other than by Mr. P. Chidambaram.  He did nothing about it.  Prior governments did nothing about it.  The present dispensation has in fact compounded it with multitudes of raids throughout the country and other amendments. Recent amendment to IBC gives preference to Secured Debts before taxes. This would have already raised the antenna of taxmen.

This problem is continuously raised by Mohandas Pai in various fora for the past couple of years.  However, nobody gives heed to such an eminent voice.

Granted, the great Indian virtues may be anything.  But, paying taxes and being on the right side of the law are not among them.  Still, unbridled authority to the taxmen is not fair on the citizens.  People who have seen the working style of DGCEI (today CE is replaced by GST, since Central Excise gave weight to GST) or any other intelligence wing of any tax department, will immediately agree.  The way the officers in the rank of Superintendents terrorize entrepreneurs is almost frightening.  They are ill-treated badly the moment the officers think tax is due.  The immediate assumption is that the entrepreneur is guilty.  There is nothing called disputed tax.  Everything is a tax default, and everyone is a defaulter, unscrupulous at that.

It may, still be the case that the entrepreneur may have used the tax collection as working capital, due to compulsions of economic eco system. No chance is given to correct mistaken priorities. These intelligence agencies have enormous powers and they routinely use terror as a weapon to collect taxes.

Our tax administration and tax dispute resolving mechanism are so dysfunctional, nothing gets resolved for 15 years.  Hence the tax administrators resort to tax terrorism as a departmental weapon to collect taxes.

The government is also unreasonable, and they are giving astronomical targets for tax collection!  I can understand tax estimates, but stiff tax collection targets?  Don’t you think tax is a function of economy at large?  On the one hand the taxman has stiff targets on the other hand 85 to 90% of the tax is collected through automatic route – direct payment advance tax, TDS, Self-assessment Tax, monthly GST payments etc.  With this stiff target and only 10% of the tax is left to be collected, the taxman does not have any elbow room.  Their only way out is snooping, pressuring and terrorizing taxpayers.  Unless you have a muscle power, this is an unequal game. Government should reign in on the tax administration.

This is one of the problems plaguing SME sector. This is the next major problem faced by the economy. This tax collection thrust, complicating already complex tax structure, making GST compliance, time consuming and expensive, DeMo and lack of funds are proving to be death knell for SMEs.  One gets a feeling, this government is just interested in GST growth even if it is at the cost of SME sector.

Apart from paying lip service or increasing the turnover threshold (which is a good move) if the government is serious about SMEs survival, they have to do some radical reforms. The way things are going on, SMEs are fast becoming like dinosaurs in business eco system.  They will soon be extent.

This is as good a time to write about the twin problems of liquidity and GST, the Indian SMEs is facing.

Multiple levels of taxes have made unscrupulous and unaccounted commercial activity a lucrative business.  Businessman who generated black money do not keep everything in cash.  This was a parallel economy with the debtors, creditors stock in unaccounted form.  Demonetarisation put spokes to it, albeit temporarily.  Cash, in itself is not bad, what is bad is unaccounted cash.  Indian economy is a cash economy.  This is a reason why we have much more cash circulating today, than the time of demonetization.  In its zeal to bring everything to books, the government is taking serious of measures without understanding the repercussions it causes on a vibrant sector.  SME sector employs 40% of Indian labour and produces 25% of the GDP. Process of killing the proverbial golden goose has firmly set in.

The ideal way would have been to finance the transition and making them fall in line.  This sector was crying for money.  A regularization mechanism could have been worked out and help them to go straight.  Instead taxman gets hyperactive.  Soon after demonetization, GST came in with all its problems. GST has become a big business game. 

SMEs now have to finance GST too.  SMEs have to make sure his supplier actually pays the GST charged by him. If the supplier does not pay the GST, the person who has made the payment will not get credit for it.  This is not the problem for big companies.  Since, they do not pay the GST component till such time SME entrepreneur produces evidence of payment of GST.  Now, the SME has to finance not just its operation, but the GST component also. 

Apart from GST and demonetization major worry of SMEs is lack of credit.  Since PSU banks lend for working capital on the basis of outdated Tandon Committee norms, which is over 25 years old.  Without getting into complexities, simply put, maximum permissible bank finance is 75% of Stock + Book Debts – bills payable.  Public sector banks reeling under bureaucracy and threat from Central Vigilance Commission worry more about their own retirement benefit rather than financial health of SMEs. SMEs require funding’s for various necessities, for e.g., they may have to replace a machinery which is broken down.  Long term capital is not readily available, and they end up using working capital limits provided by the banks.

This leads to a vicious circle.  Drawing power in working capital is limited by the stocks, book debts and creditors.  If you have to maximize the drawing power, you have to increase stocks (artificially without underlying assets), increase debtors by booking bogus sales.  Increase in stock will imply reduction in consumption than, what it actually is.  Both these factors result in showing more profits than what is generated and paying more taxes than what is legally necessary.  This is a bubble and it gets burst.  I personally know of bank managers, who are in the know and will look the other site, since the alternative is to classify as non-performing asset. 

If SMEs have to survive, one-time amnesty has to be given.  They should be encouraged to clean the books by writing off stocks and debtors which are non-existent or irrelevant to business and converting the excess borrowings to a long term conceptional debt (say 10 years).  This does not involve additional outlay, since the cost has already sunk.  Alternative is what we see today.  More and more NPAs, the busier debts resolution mechanism and an excessive use of insolvency and bankruptcy code.  Present disaster, the SMEs are facing can be avoided by this simple mechanism.  However, it requires enormous political will.  Without making SMEs vibrant, 5-million-dollar economy by 20 – 24 is a far cry.  One important reason for dwindling domestic consumption is limping SME sector.  The reforms should go much beyond lip service.  There is no point reducing the taxes for non-existent profit.

Best case estimates for fiscal year 2019 – 2020 is a GDP growth of 5.6%.  This requires frenzied infrastructure development at breakneck speed.  Just look out of the window and tell me if you see it happening.  None of the well meaning people are against subsidiaries.  But subsidiaries are atleast 50% higher compared to 2014 levels.  Welfare measures may win elections once, just like it did for Modi government 2019 and just like it did for congress in 2009, due to introduction of MNREGA.  Furthering MNREGA, has not helped congress in 2014, when corruption and inflation became focal points.  It may not help BJP beyond 2019, unless the economy fairs well.  One tap per house, electrification, rural roads are all fine.  Economy is not going to improve unless industrial and commercial infrastructure gains momentum.  All optics are provided in the budget.  One estimate says in order to reach 5 trillion- dollar GDP in 5 years, infrastructure investment should be @ Rs.20,00,000 crores p.a.

Funding long gestation infrastructure projects is not easy.  Government is looking at bonds in international market even at the cost of exchange risk.  One has to agree this government has the courage to take a call like that and perhaps succeed.  One silver lining is our sovereign debt profile is far better compared to China or USA.  So, there is space to maneuver in withstanding exchange fluctuation risks.  Hope the government implements it early.

There is another pretty good source which does not require repayment, i.e., privatization of banks and all other business is in which the government is involved.  Today, every three banking transactions out of four is government controlled.  Retaining State Bank luster and Bank of Baroda luster with the government and privatizing all other institutions may be a good idea.   I am not sure if there is a clear disinvestment plan. If there is one, I have not read about it.  I initially thought Nirmala Sitharaman will have a clear plan for disinvestment.  I just wish to think it will be done sooner. Land acquisition and labour related legislations have to be passed.  Lot of projects are stalled on account of these.  Times of India article dated in late July indicated a figure of close to Rs.8,00,000 crores.  Without comfort in land acquisition, labour and smooth completion of project, Make in India is going to be a non-starter.  This is a huge and difficult task.  Here again, we do not know whether there is road map. 

Agricultural productivity has to be improved.  We are about the lowest in terms of productivity among major economies.  Our best is about 60% in case of rice, about 70% in case of maize, about 15% in case of pulses and about 25% in case of soya bean. 

Net effect of all these is dwindling private investment.  All told the Finance Minister and the Prime Minister have an unenviable job on hand.  This may still be achievable.  For starters government can instruct the spokesperson to come out of denial mode and brace the reality.  My best wishes to
the Government.

2 Replies to “Siddhartha and a Five Trillion Dollar Economy

  1. அந்த ரெண்டாவது ஆசாமி யாரா இருக்கும் 💭 😊

    ரொம்ப சீரியசா இருக்கு.
    நாட்டு மக்களில் பாதிக்கும் மேல சீரியஸான விஷயங்களை படிக்க விரும்புவதில்லை.

    எங்க மேல தப்பில்லை. புரிஞ்சா படிக்க மாட்டோமா……

  2. I agree with sridhar rajaraman Romba serious a iruku Puriyala pathiku mela honestly. Next time when we meet u can probably try explaining to me. So i am the 8th guy right?

Leave a Reply

Your email address will not be published. Required fields are marked *

Enable Google Transliteration.(To type in English, press Ctrl+g)