New Delhi: One can only hope that the PM’s recent sharp criticism of exemptions to India Inc was with an eye on the upcoming assembly elections in April-May and does not in itself signal a sudden change in the government’s business friendly credentials.
His question seemed just: why should corporates continue to get tax exemptions when increasingly subsidies, meant for the poor, are expected to be rationalised?
But Narendra Modi made it an ‘either-or’ debate when ideally there should be no competition between the two at all as far as the government support is concerned. Both need it, but in different forms. In a responsible state, no one goes to bed hungry. And in a democratic free market economy, regulatory hurdles are minimised and incentives given to the best performers.
If the problem is falling revenue receipts, the government needs to broaden the revenue base and raise disinvestment proceeds etc. instead of expecting India Inc to pick up the tab of its social experiments.
Modi's ridicule of the support the corporate sector has been enjoying sounds like a warning to his own government and as it came just before the Budget, there is every chance that India Inc might just have to bear the brunt of such populist ideas. He may be responding to the ‘suit boot ki sarkar’ jibe of Rahul Gandhi or he may be worried about being projected as anti-farmer but this stance hardly seems practical. An indication of things to come can be taken from this piece in the Economic Times today which speaks of mammoth outlay for food security in the Budget.
As we have noted earlier, subsidies should be rationalised but side by side, the government should continue enabling the corporate sector too. Coporates have historically been the drivers of innovation, efficiencies, employment and growth. It is their balance sheets that will make capital markets buoyant again and allow the government’s own disinvestment targets to be achieved.
Moreover, this is the time for boosting morale, especially when global headwinds are rocking the corporate world. Many companies are swimming in debt and others suffering from the dive in commodity prices. Without a pick-up in sentiment in the private sector, the PM’s best laid plans — Make in India or Skill India — will be still born.
The success of Pahal — the Direct Benefit Transfer scheme for LPG subscribers — shows that streamlining subsidies can be a hugely rewarding proposition. So a massive food security outlay is great but only if it is targeted better. Corporates have not begrudged even the cash guzzling MGNREGA since it has led to a spike in rural demand in the past. If there is criticism of this scheme, it lies in how easy it is to fake a job card or that it fails to build any reliable infrastructure. That’s the part the government needs to address.
Anyway, tax incentives are provided on the basis of investments companies promise or actually make. If the government were to lessen or withdraw these incentives, job creation and fresh investment in infrastructure etc would surely suffer. If tweaking is the need, then the government should look at subsidies, not corporate incentives, which are prone to misuse and where massive leakages are a norm rather than the exception.
This is specially a good time to stop the ‘either or’ debate between subsidies and corporate exemptions since falling oil prices give the government a cushion which can effortlessly bring down the overall subsidy bill. Instead of cutting down exemptions for companies, the government would do well to frame a policy around a phased reduction in subsidies.
For India Inc, Finance Minister Arun Jaitley had announced a gradual reduction in corporate tax rates to 25 percent over a four year period from 30 percent earlier this fiscal. But there is still no clear roadmap on this. One is needed, in the upcoming Budget, so corporate India can plan its capex.
In the 2015-16 Budget, the impact of major tax incentives given to the corporate sector was a little over Rs 62,000 crore. And the government's total subsidy bill for FY16 is Rs 2.27 lakh crore, about 10% lower than the previous fiscal due to a continued fall in crude prices.
In the Budget being presented on February 29th, Jaitley is widely expected to propose a significant further reduction in the government’s total subsidy bill for FY17 due to a steep fall in crude prices and because of better targeting of subsidies through schemes such as DBT.
In the current fiscal, the government has budgeted for spending Rs 2.27 lakh crore on subsidies for food, petroleum and fertilizers. A back-of-the-envelope calculation shows for every rupee the government spends, about 10 paise are spent on major subsidies.
In the current fiscal, it targeted Rs 1.24 lakh crore on food subsidies alone; fertilizer subsidy was pegged at a little less than Rs 73,000 crore while petroleum subsidy was halved from the previous fiscal to just Rs 30,000 crore on softening crude prices. The key question is whether benign oil prices are used by the government to further lower the petroleum subsidy in 2015-16 and whether better subsidy targeting has brought down its food payouts.
Over the last 10 years, subsidy pay out of the government has witnessed a steady increase from Rs 47,500 crore in FY06 to Rs 2.51 lakh crore (revised estimate) in 2014-15. Subsidy as a percent of GDP also increased almost steadily during this period.
Expenditure on subsidies in 2014-15 was at 2.1% of GDP, only marginally lower than 2.2% of GDP in 2013-14. A Crisil analysis has said that subsidy expenditure as percentage of GDP is budgeted to reduce significantly to 1.7% of GDP in 2015-16, benefiting from lower fuel subsidy bill.