This section of the Pragati Manifesto outlines how to unleash a nation’s entrepreneurial energy. Read the other pieces here.
In tiny Takamatsu town, on Japan’s Shikoku island, amid the Udon noodles and lobsters on ice, you can sniff out the tandoori chicken and channa bhatura served up by young entrepreneurs from Rajinder Nagar, New Delhi. From Edinburgh to Krabi, and Adelaide to Alaska, Indian entrepreneurs are to be found everywhere. The newspaper stands of London and the motels across the US are now an old story. In the brave new world of US technology, entrepreneurs of Indian origin lead more billion dollar start-ups than any other ethnic group.
In our native India, though, the jobs crisis underlines the fact that the entrepreneurial spirit is not finding fertile soil. Data on the service industry is scant and unreliable, but official data tells us the industrial sector is extremely sluggish. Between 2006 and 2012, an average of 14,500 factories were being set up every year. Since 2012, that number has tailed off to just over 3000. If more businesses were coming up, and thriving, more jobs would have been created. The locus of our agricultural distress is not located in the rural areas; it is located in our inability to create more economic activity in industry and services.
If inherent entrepreneurship is not a problem, then what can the government do to encourage more business activity? Here is a manifesto:
One: Ensure Reliable Economic Data
If you can’t measure it, you can’t fix it.
Our systems for collecting economic data were widely recognised as being detailed and reliable. Unfortunately, ever since Demonetisation, the Modi government has seen data as an enemy rather than an impartial milestone. It began with the RBI suppressing data on the return of old currency to the system. Later, when the method of calculating GDP was changed, the government refused to show how older, pre-Modi data would look in the new series. When it was eventually released, the data showed growth to have gone down under the NDA government; the back data was then rejigged to show lower growth pre-NDA. The periodic National Sample data on jobs was delayed. When it finally emerged, the government said it was preliminary data. The top statistician in charge said it was vetted and final, and then resigned. The government is now investigating — not why job generation is down, but why the data leaked. This helps nobody.
Data is a key lever of economic management. In the thrust to delink narrative from reality, data has become a victim.
Two: End Tax Terrorism
The ‘Angel Tax’ is an egregious example of how the tax-man persecutes those who create economic activity. Our Income Tax department sent out notices to 2700 start-ups, seeking to tax them for investments ‘angels’ had made in their business. This is a complete perversion of the concept of Income, which is the profit earned on investment, rather than the investment itself. In some cases, the tax department attached funds directly from the company’s bank accounts, without completing due process.
The attempt to levy retrospective tax on Vodafone became a global business story, but below the news radar, every Indian entrepreneur will share stories of attempts to arm-twist him into paying an assessing officer to ‘settle’ his case. This points to the need to drastically simplify the tax code, so that discretion plays a smaller role. In addition, an example needs to be made of corrupt tax officials, by arresting them and accelerating criminal proceedings against them.
Three: Lower Tax Rates on Capital
India is the only tax regime in which equity capital is taxed five times over:
- Security Transaction Tax, when you buy or sell equities on stock exchanges.
- Capital Gains tax if you profit on investment in equities. (Long-term capital gains were exempt until 2018, but now they are not.)
- Dividends are taxed 3 times over – first, the company pays tax on profits; then it pays dividend distribution tax when it distributes profits to share-holders; then, shareholders receiving dividends over 10 lakhs per annum pay an additional tax.
For political reasons, the government is unwilling to expand the tax base by including agricultural income. In addition, it continually pushes up exemption limits, to appease the emerging middle classes. To compensate, taxes on equity have continually crept up, which is a discouragement for capital markets.
Four: Ease Land Use/Release Government Land
The government is the largest landlord. Railways, the armed forces, government offices and local governments own large chunks of prize land across the nation, especially in prime urban areas. Much of it is grossly under-utilised, or could easily be relocated. Think, for example, of three-acre bungalows for ministers, judges and bureaucrats in the heart of Delhi, or the long-defunct Safdarjung airport. In private hands, each acre of Lutyen’s lawns could create scores of jobs.
In addition, our zoning laws are highly restrictive; the amount of floorspace you can construct on a plot of land in Delhi – the FAR, or floor-area ratio – is typically 2. In New York, it can go up to 15. The low utilisation of land makes urban real estate wildly expensive, and is a damper on both commercial activity, and private institutions in the fields of health, education and culture.
Five: Strike Out Archaic Laws
From PM Modi down, there is widespread recognition that India has too many outdated laws. While campaigning in 2014, Modi said he would strike out 10 old laws for every new one enacted. Nothing of the sort happened. Even the salt cess, which was iconic to India’s freedom movement, was never abolished.
This maze of laws empower bureaucrats and inspectors to exercise discretionary powers, which often descend into extortion. The sad reality is that there is no incentive for the governmental machinery to clean up the system – those in power see this maze of laws for what it is, namely, an instrument of power over the rich.
Six: Speedy Justice and Contract Enforcement
The power of the governmental system over entrepreneurs is compounded by delays in settling disputes and delivering justice. Reams have been written about the tardiness of our legal system. The government is the largest litigant in the Indian judicial system, a fact that has its roots in the complexity of laws and regulations. The time taken to enforce contracts through the legal system is about the longest in the world: 1445 days. Only Suriname is worse, at 1715 days, but both Nigeria and Nicaragua average below 500 days, and Singapore takes 164 days.
The judicial system is grossly inadequate to support a modern, commercial economy, and needs urgent reform.
Seven: Reform Our Labour Laws
The paradox of Indian labour laws is that they are designed to keep people in jobs, but reduce the pool of those employed in the formal sector. “Hire and fire” is seen as a capitalist tool to exploit labour. What this narrative ignores is the fact that both industry and labour are being shifted by technology and consumer demand. Horse-and-carriage give way to internal combustion engines, and then to electric motors. Legal measures to prevent labour retrenchment in all but the smallest factories end up discouraging entrepreneurs from setting up large factories, since a dynamic business environment will create situations where exit is the best solution.
Nowhere is the failure of our labour policy more evident than in garment exports. Two decades ago, this was a vibrant sector of Indian business. Today, the tiny nation of Bangladesh exports more garments than India, as our garment exporters are reluctant to set up large, globally competitive facilities.
If India wants to take a front seat in the global economy, it will have to embrace liberal labour policies, rather than restrictive ones, mired in a jaded socialist narrative.
Eight: Ensure Cheaper Freight
Economic activity requires goods to be moved around – rapidly and cost-effectively. On both scores, our infrastructure fails miserably. GST implementation has eased waiting time at state borders, but our highways are a joke, and the average speed of truck transport about the lowest in the world. Estimates for average truck speed in India vary from as low as 12 km per hour to 30 km an hour. (Yes, precise data is not forthcoming.) The global average is well over 60.
Bulk movement of goods is best done by railroad, but our railway system is grossly inefficient. A World Bank report on Indian transport says, “Freight transportation costs by rail are much higher than in most countries as freight tariffs in India have been kept high to subsidize passenger traffic.” These tariffs, combined with delays in loading and unloading, dissuade businesses from using rail, which is a much more fuel-efficient means of transport.
Nine: Enable Cheaper Capital
Availability of capital is key to investment and growth in the economy. Savings rates in India have fallen in the last decade, tightening the pool of what may be invested. This is why, despite low inflation, interest rates remain high. Government and business both compete for these savings, but the government has ensured first claim for itself, by mandating that banks invest a minimum of 22.5% in bonds.
This crowding out of private borrowings by the government gets accentuated when government deficits increase. While the central deficit has stabilised around 3.4%, state government deficits are rising. In addition, “extra-budgetary resources” are created by having government corporations, such as NHAI, FCI etc., borrow money from the markets and small savings funds. These are not shown as government borrowings even though it could be argued that they really are, as they are implicitly guaranteed by the sovereign.
These blurred definitions of government lending add to confusion around this critical issue of fund flows and borrowings, and make it difficult to project the arc of interest rates in the economy, which takes us back to where this began – to the sanctity of data.
Read the rest of the Pragati Manifesto here.