The non-translativity of any Rate Cut into employment generation and growth
The RBI will very soon unveil its Monetary policy. Rate cuts will be good from the Banking system point of view as it will give banks the room to make provisions for NPAs from Fixed income gains. But that will not automatically translate into higher economic activity no matter what bright Bankers tell you on 24x7 media.
For growth to really pick up, India needs three things immediately. First is Investments, Second- Investments and third- Investments.
Can the Government provide the Fiscal muscle today that it did provide in 2008-09 when the US subprime crisis broke out? Not really. Fiscal numbers are in worse shape today than they were in 2008.
So how do we get the Tiger up and roaring?
Private Investment is the answer because Public investment is not available. But how do we attract Private investment. A stable tax regime for sure- but more importantly an attractive tax regime that attracts the right kind of capital -not just hot capital flows.
A. Investment Tax breaks
For far too long taxation theory and practice in India has concentrated exclusively on enlarging the tax base. Remember in a faltering economy the size of the cake reduces rapidly -the taxman will then have only a shrinking base no matter what the legislation or the enforcement.
A1. FDI(Foreign Direct Investment)
FII and FPI have again enjoyed the greatest attention from Policy makers, media and the markets. It's now high time to consider that piece of foreign investment that will actually generate growth and jobs.
A1(a) Regional incentives in areas to be classified as SEZs (Special Economic Zones)
Special incentives need to be provided for investment in non-aerable and non-tillable areas such as in Kutch, Thar, certain areas of Rajasthan, islands of Andaman & Nicobar and Lakshwadeep. The rate of income tax levied on production-oriented foreign investment enterprises in these SEZs should not be more than 15 per cent unless it violates laws related to environment conservation. Similar reduced tax rates should for foreign investments in certain research and technological development zones (RTDZs), which could include the following-Hyderabad,Secunderabad,Vizag, Bangalore, Navi Mumbai, Ghaziabad, Bhopal, Noida, Rajkot, Haldia, Jammu, Thane, Raigad, Warangal, Porbandar, Surat and so on.
A1(b) Sectoral incentives for fresh Foreign investment enterprises in technologically advanced areas scheduled to operate for at least 10 years, and engaged in production-oriented activities, should entitled to an exemption from income tax for two years, starting with the first profit-making year. This can be followed by a 50 per cent reduction of the usual income tax rate over the subsequent three years, provided they remain technologically advanced.
A2. Domestic Investment
Fresh domestic Investment can also be extended A1(a) and A1(b) schemes above.
B. Indirect Taxation relief
So what is the average rate of taxation in the commin man in India?
Income Tax 30%
Indirect Taxes 25%
Inflation Tax 10% (Invisible Tax)
___________________
Total a cool 65%
So why doesn't saving + consumption go up? Because out of every Rupee earned, 65% goes away as taxes and only 35 paise is left. That leftover is for health , education and basic necessity like food and shelter.
So what must we do to reinvigorate savings rate? One doesn't need to be an Ivy grad to figure out that Indirect taxes has to be attacked first to give a much needed filip to the economy because workers earning below Rs 2,00,000 /- per annum do not actually have to pay income tax as per law.
Every % reduction in indirect tax will translate into equivalent growth in the savings rate and lower the cost of capital or rate if interest at which savings and Investment are at equilibrium in a stable and growing economy.
But will not a cut in indirect tax revenues bloat up Indian fiscal deficit. A 5% cut will not. In fact a 5% cut will actually generate enough growth to generate additional revenues elsewhere in direct taxation revenues to more than recoup the loss of the indirect tax revenues.
C. Debottlenecking Investment approval red tape and enabling Investments
This is purely a governance issue that has to be tackled by the PM and his team of Ministers.
No amount of writing or analysis can earn for the country in terms if growth what a proactive Government can do.
A,B and C taken together will give D- Dashing growth. Don't just pine away for cut, cut, cut -rate cut. Go for growth- a job generating growth.
The RBI will very soon unveil its Monetary policy. Rate cuts will be good from the Banking system point of view as it will give banks the room to make provisions for NPAs from Fixed income gains. But that will not automatically translate into higher economic activity no matter what bright Bankers tell you on 24x7 media.
For growth to really pick up, India needs three things immediately. First is Investments, Second- Investments and third- Investments.
Can the Government provide the Fiscal muscle today that it did provide in 2008-09 when the US subprime crisis broke out? Not really. Fiscal numbers are in worse shape today than they were in 2008.
So how do we get the Tiger up and roaring?
Private Investment is the answer because Public investment is not available. But how do we attract Private investment. A stable tax regime for sure- but more importantly an attractive tax regime that attracts the right kind of capital -not just hot capital flows.
A. Investment Tax breaks
For far too long taxation theory and practice in India has concentrated exclusively on enlarging the tax base. Remember in a faltering economy the size of the cake reduces rapidly -the taxman will then have only a shrinking base no matter what the legislation or the enforcement.
A1. FDI(Foreign Direct Investment)
FII and FPI have again enjoyed the greatest attention from Policy makers, media and the markets. It's now high time to consider that piece of foreign investment that will actually generate growth and jobs.
A1(a) Regional incentives in areas to be classified as SEZs (Special Economic Zones)
Special incentives need to be provided for investment in non-aerable and non-tillable areas such as in Kutch, Thar, certain areas of Rajasthan, islands of Andaman & Nicobar and Lakshwadeep. The rate of income tax levied on production-oriented foreign investment enterprises in these SEZs should not be more than 15 per cent unless it violates laws related to environment conservation. Similar reduced tax rates should for foreign investments in certain research and technological development zones (RTDZs), which could include the following-Hyderabad,Secunderabad,Vizag, Bangalore, Navi Mumbai, Ghaziabad, Bhopal, Noida, Rajkot, Haldia, Jammu, Thane, Raigad, Warangal, Porbandar, Surat and so on.
A1(b) Sectoral incentives for fresh Foreign investment enterprises in technologically advanced areas scheduled to operate for at least 10 years, and engaged in production-oriented activities, should entitled to an exemption from income tax for two years, starting with the first profit-making year. This can be followed by a 50 per cent reduction of the usual income tax rate over the subsequent three years, provided they remain technologically advanced.
A2. Domestic Investment
Fresh domestic Investment can also be extended A1(a) and A1(b) schemes above.
B. Indirect Taxation relief
So what is the average rate of taxation in the commin man in India?
Income Tax 30%
Indirect Taxes 25%
Inflation Tax 10% (Invisible Tax)
___________________
Total a cool 65%
So why doesn't saving + consumption go up? Because out of every Rupee earned, 65% goes away as taxes and only 35 paise is left. That leftover is for health , education and basic necessity like food and shelter.
So what must we do to reinvigorate savings rate? One doesn't need to be an Ivy grad to figure out that Indirect taxes has to be attacked first to give a much needed filip to the economy because workers earning below Rs 2,00,000 /- per annum do not actually have to pay income tax as per law.
Every % reduction in indirect tax will translate into equivalent growth in the savings rate and lower the cost of capital or rate if interest at which savings and Investment are at equilibrium in a stable and growing economy.
But will not a cut in indirect tax revenues bloat up Indian fiscal deficit. A 5% cut will not. In fact a 5% cut will actually generate enough growth to generate additional revenues elsewhere in direct taxation revenues to more than recoup the loss of the indirect tax revenues.
C. Debottlenecking Investment approval red tape and enabling Investments
This is purely a governance issue that has to be tackled by the PM and his team of Ministers.
No amount of writing or analysis can earn for the country in terms if growth what a proactive Government can do.
A,B and C taken together will give D- Dashing growth. Don't just pine away for cut, cut, cut -rate cut. Go for growth- a job generating growth.
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