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Story Of Budgets In Years' Past

The government must realise that the legal cost and the cost of time lost are also part of the ease of doing business

Photo Credit : Reuters,

In years past, the annual budget speech was such a momentous occasion, that senior managements gathered to watch the speech with considerable anxiety. By the stroke of a pen or turn of phrase, entire industries could be significantly disadvantaged by their competitor lobbies. Fortunately, budgets are moving from annual exercises in suspense and trepidation to their real role, an annual report card of the nation's financial position. And fortunately, like mature economies around the world, our governments are taking decisions throughout the year and not waiting for one big bang unveil. But old habits die hard and we are all still writing pre-budget articles, will be watching budget speeches and multi-city, multi-anchor panel discussions that generate much heat and noise.

Level the playing field
In its enthusiasm to back the latest initiative, governments are often guilty of forgetting the existing setup. For e.g. while I welcome the support for startups, policies that give them an unfair advantage against their existing peers would not create accretive growth but a zero sum. As an example, I point to the restrictions placed on FDI into the multibrand retail sector while simultaneously turning a blind eye to the farcical structures used by e-commerce players to decimate their brick and mortar peers. One unintended consequence - hundreds of good retail jobs are lost due to store closures and have been substituted by dead end delivery jobs. Or take tax holidays based upon the vintage of companies - in today's age, in 12-24 months, an entirely new industry could be born and several others decimated. So why should an existing business, built by prudent reinvestment over years, be handicapped against a newbie, funded by huge gobs of capital and also aided by tax breaks and other regulatory concessions that are not granted to the competitors they are decimating?

Tax compliance vs non compliance
A side effect of private equity investment that doesn't get enough credit is the dramatic improvement in tax compliance by PE funded companies. However, a lax tax administration often creates a significant disadvantage for the tax payee versus his non tax paying peers. Using the economics of these newly tax compliant companies, the government should do a sectoral tax compliance drive that will level the playing field for the tax payees.

Ease of doing business is not a rank
Global investment capital is constantly determining the best locations for capital deployment. India must compete for such capital with other countries. The government must recognise that ease of doing business is not a rank - it is what is experienced every day by investors and their investee companies. Unfortunately, given the federal nature of our political system, the majority of investments need to deal with local regulations, the local inspector raj and extortion by the local politician. Until that changes, there is no likelihood of any meaningful change in our attractiveness as an investment destination.

Contract law
The confrontation between the judiciary and the executive does not bode well for the legal system. Delayed justice is injustice even if there is a fair judgement. Hearing of cases that took 40 years to get a judgement is not a joke. Savvy litigants are taking advantage of the slow pace of the legal system to use the courts to prevent the execution of executed contracts. They are using the limits on fund life to try and extort advantageous settlements. This process of using the tepid pace of the judicial system to distort contract law is perhaps unique to India. The Government as the biggest litigator is a big part of this problem. Overburdened government lawyers can't cope with their case loads and have been chastised by the SC for not being prepared and asking for repeated adjournments. A routine case in which I was named took 16 adjournments by the government pleader before it even got its first hearing. The government must realise that the legal cost and the cost of time lost are also part of the ease of doing business.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
Union Budget 2017-18 fdi policy taxes opinion

Jacob Kurian

The author is Partner, New Silk Route Advisors

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