MSLGROUP India's 13 Economic Priorities for the Financial Year 2013-2014

A report by MSLGROUP India Part of the Publicis Groupe

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

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Table of contents • Preface

4-5

• Women’s empowerment

6-9

• Internal security

10-13

• Sports

14-17

• E-governance

18-21

• Corruption

22-25

• Low-cost medicine

26-29

• Affordable housing

30-33

• Agriculture finance and food prices

34-37

• A smoother road for FDI in retail

38-41

• Aviation

42-45

• Taxing the super-rich

46-49

• Goods and services tax

50-51

• Coalition politics

52-53

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Preface Exactly 50 years after he was assassinated, Kennedy’s warning continues to ring true. Ever since India set off on the reforms path in 1991, the parameters for judging the progress of the economy have been narrow. Growth rate, investment, expenditure and deficits are the terms frequently heard during discussions on ‘development’ and ‘progress’.

But an economy is more than just that. It has as its constituents obscure moving parts that are forgotten – sometimes deliberately – or which remain hidden because of a lack of understanding.

For instance, many would be shocked to know that sports are vital to the economy. Usually, discussions on sports are restricted to the number of medals or trophies won, or what sporting icons do for the national mood. But, did you know that the United Nations Millennium Development Goals view sports as an economic engine? Sports contribute to development through employment opportunities and demand for sports goods and services. An inclusive national sports programme would also provide economic opportunities and social upliftment for marginalised sections such as women and the physically challenged.

The positive economic impact of e-governance, too, is rarely discussed. Seen mainly as a tool for convenience and greater reach, a well implemented e-governance programme could slash government expenditure by reducing the cost of service delivery. These lower costs would help shrink the fiscal deficit, which has reached worrying levels.

- John F Kennedy, late US President

Yet, the link between such insurgencies and the lack of economic progress in the areas they affect – though understood by many – rarely finds a mention during debates on the Budget.

MSLGROUP India, through this report, aims to bring into focus precisely such linkages between issues and our economy, the opportunities missed and the ones that are within reach. We have focused on subjects rarely mentioned in the same breath as the economy, but there are also those more familiar to the economic debate – taxing the super-rich and the Goods and Services Tax are but two examples. Together, we have chosen 13 that we think should be India’s economic priorities for Fiscal year 2013-14.

Yes, there are many others on India’s plate of concerns and our 13 choices leave us open to allegations of subjectivity. To that charge, we plead guilty.

In our defence, we can only say that throughout our aim has been not to preach, but to foster an understanding of the issues and to suggest recommendations for the way forward.

We hope you find this report interesting and useful.

- Ashraf Engineer, Head – Content, MSL India Image: wikipedia

Economic growth without social progress lets the great majority of people remain in poverty, while a privileged few reap the benefits of rising abundance.

The internal security situation – alarmingly precarious across large swathes of India – also has a profound impact on citizens, industry and society. The economy is not immune to it. Naxalism alone affects 60,000 sq km of central and eastern India, depriving this area from the benefits of reforms and the chance to contribute to national progress. This isolation has kept farmers backward and made the establishment of industries virtually impossible. The delivery of government services is another casualty of this internal war.

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

A recent study by Booz & Company, which studied the economic empowerment of women in 128 countries, ranked India a low 115.

What’s more troubling is that the government is stubbornly apathetic towards women’s issues. The distress is evident when you see how various corrective recommendations are gathering dust. Take the example of the December 2012 Delhi gangrape case that shocked the nation. The delay in the filing of the chargesheet was typical of an uncaring system.

Gender stereotypes, discrimination and cultural beliefs foster disempowerment.

Image: allsettodonothing.blogspot.in

In India, a little more than 50%of girls are enrolled in school, of which many drop out by age 12. At least 40% of those who complete their primary education are not allowed to pursue higher studies by their conservative families. A survey conducted by the non-profit Child Rights and You (CRY) across lower-income groups of 480 households in five cities showed that 33% of households felt that girls were abused in school, while nearly 48% were abused en route to school. About 57% of them were ignorant of the Right To Education Act two years after its implementation.

Women’s empowerment Over the past two decades, India’s booming economy, strong manufacturing capabilities, and respected universities have positioned it as an emerging world leader. However, its gender disparity remains among the highest in the world, impacting not just economic growth but society as a whole

6

Image: lidovky.cz

upskilling of 500 million workers by

rural-urban divide in education access for

2022 is essential. Kiran Mazumdar

women, which indicates poor education

Shaw, chairman and MD, Biocon

infrastructure as well as the societal

Industries, told ‘The Times of India’:

response to the need for female literacy.

“Women have enormous opportunities

It was encouraging that Finance Minister

to excel and succeed. All they need is

P Chidambaram allocated Rs 97,134

to be willing to take on leadership

crore to the gender budget for 2013-14.

challenges and to use their spirit of

In 2009-10, the gross total allocation

enterprise and perseverance.”

towards gender budgeting was

Research shows that women contribute

Rs 56,857.61 crore and Rs 78,251.01 crore

three-fourths of the labour globally, but

in 2011-12 – a rise of 38%.

own only a quarter of the resources. It is

Security is a major concern for women

presumed that an increase in literacy and

working in the business process

the attainment of a higher level of

outsourcing (BPO) and information

education and skills will lead to greater

technology-enable services (ITES) sector.

employment of women at higher levels.

Increasing crime against women in Delhi

Still, women’s work participation in India

has deterred many from taking up jobs in

Implications

stood low at 25.6% as compared to

this industry. Incidents like the December

males’ at 51.7%, according to the

2012 Delhi gangrape have a profound

A strong society has as its foundation the social, economic and political well-being of women. The participation of women in decision-making is absolutely necessary since they will play a vital role in building social infrastructure and contributing to economic growth.

provisional 2011 census. This was blamed

impact on productivity in cities like

on gender discrimination.

Mumbai, Hyderabad, Bangalore, Pune,

Discrimination limits women’s economic

Chennai, Ahmedabad, Lucknow and

choices and freedom. The male-female

Jaipur. In an Assocham survey, a majority

literacy gap is a just indicator. Provisional

of the respondents working in firms in

2011 census data showed the female

Gurgaon, Noida, Delhi, Sonepat and

literacy rate as 65.46% compared to

Faridabad said they now insist on leaving

Their inclusion in the national push for

males’ 82.14%. There also exists a

offices immediately after duty hours.

This lack of education – and awareness about its essentiality – denies women the knowledge and skills needed to advance their economic status. At the community level, social and economic development of women is negatively impacted by corruption in developmental schemes and the absence of good governance.

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Image: addledbraindump.blogspot.in

Image: addledbraindump.blogspot.in

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Recommendations

allocation and release of funds mainly

return to work after a break owing to

•

due to faulty design, apathy and

family responsibilities.

bureaucratic bungling. This is why the

• More stringent laws would help

women’s development with a suitable

success enjoyed by government

tax policy, that is, gender budgeting.

initiatives is uneven.

Fiscal policies affect men and women differently; gender budgeting ensures greater opportunities for women, a better standard of living and fair distribution of income. Additionally, it ensures better allocation of funds to healthcare. Also, the tax code does not discriminate against work efforts or products that are the core expenditures of poor families disproportionately headed by women.

• As recommended in the 12th Five Year Plan, ensure all ministries and government departments tabulate gender-specific management information system (MIS) data for improving the gender budgeting mechanism.

•

Monitor funds allocation and utilisation

better. There is a delay between 8

reduce the number of crimes against women. The Rs 1,000-crore Nirbhaya

• The government raised the corpus of

Fund as a tribute to the 23-year-old

the Women’s Self Help Group (SHG)

Delhi gangrape victim can help if the

Development Fund from Rs 200 crore in

money is utilised well. The Ministry of

2011-12 to Rs 300 crore in 2012-13. The

Women and Child Development and

objective was to empower such SHGs to

other ministries were working out the

access bank credit through interest

details of the fund’s structure, scope

subvention. The effective interest rate

and application at the time of writing.

under this initiative works out to 4% for

• According to a World Bank study, just

women who repay the loan on time.

Establish more such SHGs to provide women bank credit at modest interest rates.

26% of women in India have an account with a formal financial institution compared to 46% of the men. The

• India can learn from women-friendly

proposal to set up India’s first women’s

tax policies of other countries. In

public sector bank is welcome. It is

Singapore, for instance, working

likely to start operations through six

mothers get child relief if they earn less

branches from November 2013 and will

than SGD 4,000 (Rs 1.74 lakh) per

lend to women and women-run

annum. Likewise, give tax exemptions to

businesses, and provide support to

women who run their houses and have

women SHGs. Moreover, it will employ

dependents. There could also be tax

mainly women while taking deposits

credits for professional women who

from men and women.

Image: posterwomen.org

Follow up allocation of funds for

Image: newslivetv.com

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Globalisation and reforms are turning India into an economic powerhouse. But growth is largely dependent on the internal security environment. Volatile political and social landscapes often destabilise administrations, adversely impacting the economy

Image: viiphoto.ning.com

Internal Security

India is home to diverse socio-economic

Between 2005 and 2010, the conflict

Grinding poverty, endemic malnutrition

groups. Some have been assimilated

claimed more than 10,000 lives, but

and virtually no healthcare have

into the mainstream, but many others

the root cause of the problems

worsened tribals’ living conditions. The

are still fighting for justice and identity.

remains unaddressed.

often-unrestrained exploitation of

Three regions – the Naxalite belt in

India’s economic growth – uneven, with

Central India, Kashmir and the

a tendency to create growing rich-poor

North-East – have felt the harsh

disparity – led to a demand from

economic impact of internal conflict.

NAXALISM: In 2004, Prime Minister

resources. Orissa, Chhattisgarh, Andhra

Manmohan Singh described Naxalism

Pradesh, Jharkhand, Maharashtra and

as India’s biggest internal security

Bihar have huge mineral resources.

threat. Almost a decade later, Naxal-hit

Business houses want access to forest

areas – about 60,000 sq km in central

and tribal land for development, but this

and east India – still comprise of some of the country’s least developed parts.

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business houses for land and natural

natural resources has also led to rampant environmental degradation.

Tribals claim they are not even adequately compensated for their lands.

They have no political voice to address their grievances.

have been accused of exploitation and violent crimes against the villagers. Often, they have been charged with using civilians as human shields during operations against the police. According to the UN secretary-general in his annual report ‘Children and Armed Conflict’, Maoists have even recruited and indoctrinated children to form squads deployed in their war against the state. In 2011, between January and August, 333 people were killed – 241 civilians and 92 security personnel. In 2010, 534 people were killed in 1,103 attacks.

Despite having an abundance of mineral resources, projects to set up refineries in these areas have run into trouble as investors have not been assured of protection from Naxalites. The Naxalites, meanwhile, have abducted officials, blown up roads and disrupted development.

– 1947, 1965 and 1999 – over the issue.

overall economic development difficult.

With the imposition of the Armed Forces (Special Powers) Act (AFSPA) in Kashmir in July 1990, the Indian Army and paramilitary forces have been accused of brutal oppression, extrajudicial killings, rapes, murders, and of arresting people on the mere suspicion of being terrorists or their informants. Many also accuse the army of displacing families and firing on unarmed protestors. All this has led to the radicalisation of large sections of Kashmiri society.

Even tourism, which played a central

Kashmir is primarily an agrarian economy

role in the Kashmiri economy, all but disappeared after the start of the insurgency in 1989. It is seeing a revival of sorts only now.

The National Sample Survey (NSS) estimated the rate of unemployment as 5.3% – much higher than the adjoining states’. There is an all-pervasive sense of disappointment amongst the youth, many of whom fail to secure jobs despite being qualified. The public sector, too, has been accused of discrimination along

KASHMIR: It is one of the longest standing and deadliest conflicts in the world, and it has the potential for nuclear war. The troubles date back to Independence. On October 26, 1947, the ruler of Kashmir signed the Instrument of Accession, acceding to India in exchange for military assistance.

Since then, India and Pakistan have been locked in a bitter standoff, both sides staking claim over the province.

Separatist leaders, meanwhile, demand complete independence from both countries. Three wars have been fought

Image: kashmirvoice.org

with sericulture and horticulture being major revenue earners. In 2005-06, the state reported Rs 1,150 crore in exports.

Several sectors were identified by Assocham, an industry association, to woo investors; the state and central governments are also working to establish special economic zones.

The economic potential is tremendous because of the availability of natural resources, but efforts to harness it have not paid off because of poor administration, corruption and

has meant the loss of homes and

Tribals see Maoists as their saviours because their ideology holds the government, bureaucracy and business houses responsible for their plight.

livelihoods for many tribals.

Over time, these ‘saviours’ themselves

the creation of roads, infrastructure and

government inefficiency. The scarcity of ration shops, drinking water and power, along with the security issues, has made

communal lines when hiring people.

While India grows at 6%, Kashmir’s economy remains crippled.

THE NORTH-EAST: Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura are connected to the rest of the country only by the 22-km wide Siliguri Corridor in West Bengal. This ‘geographical isolation’ from the rest of India has had far-reaching consequences on development.

The inclusion of north-eastern states in India’s ‘Look East’ policy in 2003 ushered in new hope for the region’s economy. The policy was meant to integrate the region better with India’s overall economy as well as that of its 11

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

exploratory works.

neighbouring countries. The socio-economic conditions of these states, however, are a reflection of the policy’s failure.

Violence is part of daily life, keeping the rate of economic development abysmally low. AFSPA, imposed on September 11, 1958, has empowered the army to control unrest to some extent but has also led to accusations of human rights violations, rape, murder and custodial deaths, leading to further militarisation of the people. Civil society groups are demanding the repeal of AFSPA. Irom Sharmila Chanu, a Manipuri political activist, has been on a hunger strike since November 2002 to support this demand.

protest a public hearing on mining by the Uranium Corporation of India Ltd, which wanted to invest Rs 1,000 crore in a mine and ore processing plant in West Khasi Hill District.

In Assam, insurgents often blow up oil pipelines and trains that transport coal and petroleum for industrial use.

Nagaland’s oil reserves are estimated to be worth billions, but locals fear forceful displacement by the government and the oil companies. They also fear environmental degradation and want protection for their rivers and paddy fields. In 1981, when the Oil and Natural Gas Corporation, found huge oil reserves in Wokha region, Naga insurgents stopped it from further

Meghalaya, for instance, has coal and uranium deposits and the governor has advocated their judicious mining to boost the economy. The tribals, however, are opposed to it. The Khasi Student’s Union in Shillong called for a 36-hour general strike on June 11, 2007, to 12

Image: de.flash-screen.com

Ironically, the North-East is rich in mineral resources, which should have created a thriving economy. Instead, there is a secessionist movement that charges the central government with exploitation of resources, especially oil, while neglecting the development of the region and interests of the locals.

The central government, meanwhile, has not adequately invested in infrastructure like roads and easy access to markets. This has led to slow industrialisation. The region’s agrarian economy, supported by primitive farm practices, can’t produce enough to feed the population. As a result, almost all states in the region are forced to buy food from other parts of India.

While the government claims that there is no dearth of investments in the region, there is a lack of accountability in development efforts. Corruption, social unrest and lack of a skilled workforce have made development difficult, and the unrest has kept investors away.

Mani Shankar Iyer, the erstwhile minister of development for the North-East, had said that the region’s gross domestic product (GDP) must grow at 16.37% by the 13th Five Year Plan for it to catch up with the rest of India.

There is renewed private sector interest in the region – it proposed investments worth Rs 700 crore in 2007-08 after the North-East Industrial Investment Promotion Policy was unveiled – but the opportunity will slip away unless law and order improves.

Image: indiatravelpal.com

Image: faujindia.blogspot.com

Guerrilla outfits like The National Socialist Council of Nagaland-Khaplang have threatened oil and gas companies with violence if they try to extract oil.

Implications

environment are prerequisites for

Invest in modernising state police forces

economic growth, but the insurgencies

and strengthen state security networks.

“Those who are in power are responsible for the issue of Naxalism. It cannot be solved by force deployment, but by social reform and change in policies,” former army chief VK Singh was reported as saying.

have excluded several parts of India

• These regions need both public and

This is a telling statement. The internal security crisis has landed a major blow to India’s image as an investor-friendly nation. Internal tensions have often destroyed pre-militancy infrastructure, making even investments from within the country impossible.

upliftment of troubled regions. Focus

doesn’t impact their lives and livelihood.

on social welfare, rural development,

• Tourism could be a cash cow. Focus on it.

• The onus can’t be only on the

Political stability and a peaceful

solution for internal security problems.

from the growth story.

Recommendations • Allocate more funds for the roads, bridges, power, drinking water, healthcare, industrial infrastructure and government services. Ensure statutory minimum wages for locals.

•

Military operations are often not the

private investment. Assure infrastructure and security to investors.

At the same time, address tribals’ grievances to ensure that development

government; it’s also up to business houses to invest in these areas, to assuage locals’ fears. The private sector needs to interact regularly with all potential stakeholders of their projects.

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Image: vwallpaperpassion.com

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

India trails nations poorer than it,

that the federation spends money on

despite the huge pool of talented sportspersons. The usual story is one of failure at the international level – barring a few exceptions like cricket, cue sports and the few recent Olympics medals in shooting, boxing and wrestling.

administration and junkets for officials.

The problem lies in improper training, poor organisation at the grassroots level and a woeful lack of infrastructure. No wonder, then, that India is a sporting disaster as per the Weighted Ranking system of the Olympics – 0.1 weight medal points per million; 48th position overall.

The story is one of political interference.

The underlying economic story here lies in the state-centre dichotomy acting as a barrier and the manner in which funds are allocated – through sports federations and authority centres. Much like with India’s social welfare schemes, much of this money never reaches the sportsperson in the form of training facilities or infrastructure.

Veteran sportspersons or experts rarely

A group of former officials and athletes court, charging that its funds were spent on foreign travel for its president and secretary rather than on athletes.

Image: kootation.com

took the Wrestling Federation of India to

Politicians with little knowledge of or interest in developing sports occupy top positions in associations and selection committees. Fifteen of the 39 Indian Olympic Association (IOA) constituent federations and 23 of 33 state Olympic association presidents are politicians. get a chance to run these bodies.

just on paper. Dynasties seem to rule Indian sport.” Former hockey star Ashok

Rahul Mehra, sports activist and lawyer,

Kumar told ‘The Sunday Guardian’ that

told ‘Tehelka’ magazine: “The IOA,

“when politicians started heading these

which is supposed to promote Olympic

bodies, initially sportsmen felt that this

sports, has created federations for

would be of use to them. We felt that

non-Olympic sports because it is easier

our grievances and voices would be

to manage these smaller bodies and

heard by the authorities. Some bosses

secure their votes. Since there are no

also began to take up our issues at the

Take the case of the Indian Amateur Boxing Federation. It claims that much of its Rs 12 crore budget for 2011-2012 was met through sponsors even though the sports ministry gave it Rs 3 crore for

stipulated criteria for becoming a

highest level. But once these people

member of a sporting body and the ‘be

settled in, they began to distance

all and end all’ is to stay in power, you

themselves from the welfare of the

nurture a vote bank by appointing

sportspersons. They began to further

people close to you. They also ensure

their own interests and distanced

administrative expenses. It was alleged

that even if they retire, the transition is

themselves from the sportspersons.”

SOME OF THE POLITICIANS HEADING SPORTS BODIES, NOW AND IN THE PAST Politician Suresh Kalmadi

The United Nations Millennium Development Goals (MDGs) urge that sports be viewed as an engine of development. They contribute to economic progress as sports programmes provide employment opportunities and stimulate demand for goods and services. The MDGs also stress the need for sports programmes to be based on the ‘sport for all’ model, ensuring that all groups are given the opportunity to participate, particularly those who gain additional benefits, such as women, the physically challenged and the young.

This is not a message India has taken to heart 14

Ajay Singh Chautala

Abhay Singh Chautala Jagdish Tytler

Political background

Sports Authority

Member of Indian National Congress

President - Indian Olympic Association

Member of Parliament, Pune

Chairman of Organising Committee, Delhi Commonwealth Games

Former Member of Rajya Sabha & Lok Sabha

President, Table Tennis Federation of India

MLA Haryana Assembly

Member of Organising Committee, Delhi Commonwealth Games

MLA Haryana Vidhan Sabha Member of Indian National Congress Former Member of Parliament

President, Indian Olympic Association Member of Organising Committee, Delhi Commonwealth Games President - Judo Federation of India

Vidya Stokes

Member of Indian National Congress

President - Hockey India

Sharad Pawar

President - Nationalist Congress Party

Past President of Board of Control for Cricket in India

Leader of Opposition - Delhi

SVP - Indian Olympic Association

Legislative Assembly

President - Archery Association of India

Vijay Kumar Malhotra

Source - The Sunday Guardian & Wikipedia

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

The problem of misadministration is compounded by the lack of good coaches and physical education (PE) teachers. There is practically no training for PE teachers; they are mostly former

athletes who get their degrees after a correspondence course. There is no system for renewal of coaching licences either, unlike in England where coaches must renew their licences every three years. China has 3.5 lakh sports instructors, whereas the Sports Authority of India (SAI) – which runs three PE colleges – churned out only 1,577 coaches in 2012.

Hence, the Rs 250-crore allocation in the Budget for the modern National Institute of Sports Coaching at Patiala was welcome. This will facilitate international-level coaching for athletes.

Sport in India has never been integrated with formal education, always ranking well below academics. There is virtually no effort to integrate sports science into training. In comparison, the West divides PE into three phases – foundation, basic skills and pick-up – to lay the foundation

for sporting success.

leadership in India.

Abhinav Bindra, who won an Olympic gold in the 10-metre air rifle shooting event, minced no words when he said that the training facilities provided by the authorities are below par.

Within days of the suspension, the International Boxing Association (IBA) provisionally suspended the Indian Amateur Boxing Federation (IABF), alleging possible manipulation in its recent elections. The former is now investigating the election and a potential political link with the IOA president, as former chairman of the IABF. Outgoing president Abhay Singh Chautala, who was elected IOA president despite the IOC suspension, was retained in the IABF as nominated chairman during the September 2012 poll.

Let’s look at what the US does. The effort begins at the grassroots level with scholarships given to those who excel. Schools are well equipped with coaching and infrastructure and sports are treated on par with academics. It’s no wonder that the US is a sporting superpower.

Implications The Delhi Commonwealth Games scandal damaged India’s – and the region’s – reputation immeasurably.

Generally, such games serve as a springboard to bigger events. Now,

international bodies think twice before thinking of India as a venue. In fact, the bid for hosting the 2018 Commonwealth Games was won by the Gold Coast in Australia as many nations privately expressed a wish to “stay away” from Asia. Hambantota in Sri Lanka was the rival bidder.

The Delhi games cost citizens Rs 14,830 crore. What they got in return was broken roads, choked drains, traffic snarls and incomplete projects. Azim Premji, founder of Wipro Technologies, called the games a “drain on public funds”.

In December 2012, the International Olympic Committee (IOC) suspended

IOA, barring India’s participation in the Olympics. IOA conducted elections under the government’s Sports Code, defying the IOC rule to hold them under the Olympic Charter. IOC had repeatedly warned IOA in the run-up to the elections. Now, IOA will stop receiving IOC funding and its officials will be banned from attending Olympic events. More significantly, India’s athletes will be barred from competing in Olympic events under the national flag; they can, however, participate under the IOC banner.

Technically, the suspension was not aimed at government interference but for the character of those involved at the top levels of Olympic and other sports

Recommendations • Adopt the United Nations MDGs immediately, not just in word but in deed.

• Corruption is ubiquitous in Indian sports bodies. Focus on undoing their politicisation. Focus on optimum utilisation of funds.

• In a ‘Tehelka’ article dated December 22, 2012, former hockey Olympian Jagbir Singh suggested that India revamp its youth centres. “Divide the country into five zones, identify rural and urban sports based on differing talents and popularity,” he said. “Create two centres of excellence in every zone, one urban and one rural. They should pick 30-40 children of both genders under the age of 14 every year. For three years, provide them state-of-the-art facilities, top coaches and foreign exposure. At the end, you will see 700 children mature into great athletes.”

That could be one way of ensuring the right use of money.

•

Develop an effective mechanism for

tracking funds released for sport.

Track the movement of money and its utilisation at all levels, including development of infrastructure, training facilities, research and development. This would ensure greater transparency.

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

After getting a certified copy of the electoral roll in just 72 hours from the nearby Common Services Centre (CSC), a smile appears on the wrinkled face of 50-year-old Nitai Charandas. For the resident of Bhootpara gram panchayat

in Sonitpur district of Assam, this was

pay a penny to either a government

visited the CSC, the operator filled his

unlike any of his past experiences with

official or an advocate. And, he did not

form online and gave him a unique

government service delivery.

require a bureaucrat’s signature or official stamp on the certificate.

This time, he did not have to commute 35 km to the district headquarters or

Three days [earlier], when Charandas

Informatics Centre tried to connect all

application number imprinted on a

participation in the decision-making process and making government more accountable, transparent and effective”.

computer-generated receipt. Well

The origin of e-governance in India

within 72 hours, Charandas had the

recently, the evolution of digital

dates back more than three decades

certified copy, digitally signed by the

communities have fuelled the

when the government started

concerned official.

computerisation initiatives. Back then,

e-governance drive. There is a

This story shared by the National e-Governance Plan is testimony to the emergence of e-governance in India.

the term e-governance was restricted to development of in-house government applications for defence, economic monitoring, planning and

district headquarters.

The growth of the web and, more

constant need for information and it is here that e-governance can play a significant role. With the increase in internet and mobile connections, citizens expect easy access to

E-governance is defined by UNESCO as

the deployment of IT to manage

“the public sector’s use of information

data-intensive functions related to

and communication technologies with

elections, census and tax

In the last few years, state governments

the aim of improving information and

administration. The next significant

and central ministries have initiated

service delivery, encouraging citizen

step was when the National

several projects.

information and services online.

RECENT PROJECTS

Effectively implemented e-governance can reduce the cost of public-government interaction, raise government and public productivity and significantly bring down governance costs.

The fiscal deficit worry could be partly addressed by lowering the cost of service delivery through e-governance

State/Union territory

Initiatives covering departmental automation, user charge collection, delivery of programme information, delivery of entitlements

Andhra Pradesh

e-Seva, CARD, VOICE, MPHS, FAST, e-Cops, AP online - One-stop-shop on the Internet, Saukaryam, Online Transaction processing

Bihar

Sales Tax Administration Management Information

Chhattisgarh

Chhattisgarh Infotech Promotion Society, Treasury office, e-linking project

Delhi

Automatic Vehicle Tracking System, Computerisation of website of RCS office, Electronic Clearance System, Management Information System for Education

Goa

Dharani Project

Gujarat

Mahiti Shakti, request for Government documents online, Form book online, GR book online, census online, tender notice

Haryana

Nai Disha

Himachal Pradesh

Lok Mitra

Karnataka

Bhoomi, Khajane, Kaveri

Kerala

e-Srinkhala, RDNet, Fast, Reliable, Instant, Efficient Network for the Disbursement of Services (FRIENDS)

Madhya Pradesh

Automatic Vehicle Tracking System, Computerisation of website of RCS office, Electronic Clearance System, Management Information System for Education

Maharashtra

SETU, Online Complaint Management System – Mumbai

Rajasthan

Jan Mitra, RajSWIFT, Lokmitra, RajNIDHI

Tamil Nadu

Rasi Maiyams - Kanchipuram; application forms related to public utilities, tender notices and display

Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland

Community Information Centre. Forms available on the Meghalaya website under schemes related to social welfare, food civil supplies and consumer affairs, housing, transport

Source: PC Quest

18

19

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Image: siasdeeconomica.blogspot.in

services, stamp duty calculations.

Implications On May 18, 2006, the government approved the National e-Governance Plan (NeGP) to “make all government services accessible to the common man in his locality, through common service delivery outlets, and ensure efficiency, transparency, and reliability of such services at affordable costs to realise the basic needs of the common man”.

NeGP aims to integrate e-governance initiatives into a single vision. As part of this, the government is evolving an

enormous infrastructure network that reaches the remotest corners of India.

Services offered 1. G2C or government-to-citizen services (accessed by citizens): Information on agriculture services, change of address in records, bill payments, birth registrations.

2. G2B or government-to-business Services (accessed by businesses): E-filing, purchase and sales invoices, issuance of statutory forms, information

3. G2G or government-to-government services (accessed by government departments): Collection of road tax, open space bookings, issue of disability cards, online publication of the government gazette.

Challenges

• Resistance to change: Government

officials have felt indispensible for the longest time. Processes that will ease services for citizens are bound to face resistance. There is a disconnect also between departments’ needs and solution developers. E-governance projects require great restructuring of administrative processes – a sensitive matter that requires intervention at various levels, making it a long-drawn process.

• Infrastructure and training: Not all departments have the necessary infrastructure, neither are they equipped to maintain and retrieve governance information electronically. There is no uniform policy that charts out an e-governance blueprint that can be replicated. The biggest challenge is the lack of training. Often, computerisation and the use of basic software programs are

mistaken for e-governance. While several

that facilitate easy accessibility, it

e-governance services to have IT skills.

departments have IT policies, not all of

reduces the role of middlemen and

them have staff qualified to execute them.

brings in transparency. For instance,

• Bring more beneficiaries into the

•

Aadhar [a unique identification

Lack of awareness, low IT literacy:

There is little awareness about the

number that will facilitate access to all

advantages of e-governance. This is

government services] is a great

compounded by a lack of trust, both in

initiative. However, the challenge lies

the technology as well as in the process.

in the last mile. Often, the ideas are

There are low levels of IT literacy even

excellent but execution is a problem.

among users.

There must be accountability.

• Poverty: With close to 30% of the

Awareness has to be created among

population living below the poverty line, the digital divide is a serious roadblock.

There are millions for whom even regular electricity supply is a distant dream; computers with internet connectivity are

social welfare schemes directly into their bank accounts through the Direct Benefits Transfer Scheme, reducing the scope for embezzlement.

•

Measure pilot projects better.

Engage an independent agency, which would also identify bottlenecks and causes of delay.

think it through to ensure that there

• Detailed documentation of successful

are no loose ends.”

e-governance projects is vital to build a central resource that would be a ready

Recommendations

strata of society that has access to

• Policymakers – politicians, senior

hoping for basic education.

mean more receive the benefits of

officials. Policymakers will have to

unheard of. In such a scenario, there is one e-governance while the other is still

20

citizens as well as government

digitised beneficiaries net. This will

public servants, members of the IT task force – require hands-on training. Often,

reckoner for all agencies concerned.

• Increase connectivity to make services accessible to rural areas or provide alternatives, such as e-governance kiosks in regional languages.

Ravindra Datar, VP and global head of

there is a disconnect between the policy

marketing, Cheers Interactive, said:

and its implementation, making it

• Ensure that security of sensitive

“Some of the policies are really good.

important for all those involved in the

information is not compromised. This

The minute you introduce procedures

implementation and maintenance of

will help win the confidence of citizens.

21

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Illegal allotments in Mumbai’s Adarsh Society, the Commonwealth Games scam, the Uttar Pradesh foodgrain scam, irregularities in coal block allocations, the Uttar Pradesh National Rural Health Mission scam… These were all merely the tip of the iceberg. The 2G spectrum scam – said to have caused a loss of Rs 176,645 crore ($32.15 billion) to the exchequer – once again brought into focus corruption at the highest levels as well as the nexus between media houses, the corporate sector

the siphoning away of public funds

In 2011, the 2G scam was ranked second in ‘Time’ magazine’s list of ‘Top 10 Abuses of Power’.

meant for social welfare.

Gone are the days when bribes used to comprise of petty sums or ‘bakshish’.

2008, makes active and passive

Now, corruption involves kickbacks

money laundering criminal offences.

worth tens of thousands of crores and

The law even puts a strict restriction

The Prevention of Corruption Act, introduced in 1988 and amended in bribery, extortion, abuse of office, and

on public servants’ involvement in the private sector. However, while the law is in force, the rate of conviction under it is dismally low.

Image: commons.wikimedia.org

India’s annus horribilis, 2010, was marked by a series of corruption exposés. The government came under fire from the Opposition, the media and the common man, as a series of high-profile scams were unearthed over the next two years

and politicians.

22

23

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

initiatives, such as the Right to Information Act, Guidelines on Corporate Governance, the Central Vigilance Commission and the proposed National Anti-Corruption Strategy, but none has effectively curbed the malaise.

Even the judiciary is not without its share of problems. People are discouraged from using the legal recourse in cases of corruption because of political interference, complex laws, ignorance of the legal framework and delay in imparting justice.

The private sector, which was for so long a victim of corruption, is itself under scrutiny. A survey by Marketing and Development Research Associates released in January 2010 showed that 9 out of 10 employees working in private firms felt that corporate India was fraught with corrupt practices. The private sector and politicians work hand-in-glove to perpetrate massive corruption, felt respondents.

Many projects hit roadblocks due to red tape, rigid laws and labour regulations, resulting in huge losses. The political class steps up to provide relief in return for kickbacks. Often, the private sector

Implications

major indicator of an economy’s

Before 2010, even double-digit growth seemed within grasp.

At that time, inflation was under control. Economists predicted that India would overtake China’s growth rate by 2013 and would remain the fastest growing nation for the next 25 years.

result in a volatile political and

The impact on growth cannot be escaped. Kaushik Basu, chief economist, World Bank, projected a growth rate of just around 6% for India in 2013.

According to advance estimates by the Central Statistical Organisation, growth for 2012-13 would be less than 5%, compared to 6.2% in 2011-2012. The heady days of 9% growth are behind us for the foreseeable future at least.

public contracts are doled out to those willing to pay the decision makers.

Former Supreme Court Judge N

nothing happens without a bribe.

Due to the complete lack of transparency, national resources and

Rarely are public servants and beneficiaries accountable.

The economic impact of corruption was

conducive to investment growth.

Fair business competition is another casualty of corruption. The World Bank’s Ease of Doing Business Index released in 2011 ranked India 134 out of 183 countries, significantly lower than China (79) and Brazil (127). Not surprisingly, India’s FDI inflows in H1 2012 stood at a low $10.4 billion.

FDI INFLOWS (H1 2012)

Management guru CK Prahalad estimated that the investment, economic growth and employment opportunities lost due to corruption amount to more than Rs 2,50,000 crore, or $50 billion, a year.

government in the creation of

could suffer an economic debacle

that only about 40% of the foodgrain

Social discontent finally saw the angry middle-class, comprising mostly the youth, taking to the streets, staging hunger strikes and anti-corruption street protests in 2011. This movement was led by septuagenarian activist Anna Hazare, (pictured below) who proposed a revised anti-corruption bill. The Jan Lokpal Bill would mean an anti-corruption ombudsman at the centre supported by Lokayuktas in the states. It would also mandate the appointment of judges and Indian Administrative Service officers through a transparent process, and

reaches the intended beneficiaries.

non-involvement of the central

COUNTRY

Santhosh Hegde has held corporate and political corruption responsible for the country’s economic woes. Corruption was also discussed at length at the World Economic Forum Annual Meeting 2013 in Davos. The Corruption Perceptions Index 2012, released by Transparency International, ranked India 94 out of 176 countries surveyed, with a score of 36 on a scale from 0 (0 = highly corrupt) to 100 (100 = virtually no corruption), warning that rampant corruption could lead to social instability and dwindling investor confidence.

According to the World Economic Forum’s Global Competitiveness Index 2010, freedom from corruption is a

FDI (IN $ BILLION)

China

59.1

Brazil

29.7

Russia

16.3

India

10.4

Source: United Nations Conference on Trade & Development

Corruption has limited India’s poverty-reduction efforts as public funds assigned for social spending – education and healthcare, for instance – are often embezzled. India spends more than 2% of its GDP on uplifting the poor, but a World Bank Study said social welfare schemes for initiatives such as food distribution are so riddled with corruption

Lokayuktas. The opening up of FDI in retail and other reforms are set to give growth a major boost. If corruption is controlled, India can get back to the 9% growth path. On the flipside, India with investment and growth opportunities eroding if corruption remains unchecked.

Recommendations • Transparent, speedy enforcement of existing laws will go a long way in curbing corruption, even in the absence of a Lokpal.

• Corporate India is not immune to corruption. Article 21 of the UN Convention against Corruption calls for legislative measures to ensure that private sector corruption is criminalised.

India is a signatory to it, so it is up to the Ministry of Home Affairs to introduce the necessary amendments to the

IT GOES ON AND ON ...

summed up by Comptroller and Auditor

SCAM

General (CAG) Vinod Rai at the 11th All

Indian Penal Code. However, the LOSS (IN RS CRORE) TO THE EXCHEQUER

no harassment in the name of the law.

• Introduce provisions to protect

Karnataka Wakf Board land

New Delhi: “Economic growth cannot be

Coalgate (coal blocks allocation)

185,591

2G spectrum

176,645

encourage public participation in

transparency and accountability.” The

Uttar Pradesh foodgrain

35,000

exposing corruption.

World Bank too identified corruption as a

Goa mining

35,000

inclusive, unless it is based on

major obstacle to inclusive social and economic growth.

Commonwealth Games Sources: CAG, media reports

200,000

government should ensure that there is

India Lokayuktas Conference 2012 in made sustainable, cannot be made

24

economic environment that is not

Cut to 2012-13. Chidambaram estimated the fiscal deficit at 5.2% for 2012-13; this puts pressure on India’s foreign exchange reserves and the rupee. There is no doubt that corruption has resulted in a significant loss of tax revenues.

According to a KPMG report, the all-pervasive high-level corruption will damage India’s credibility among foreign investors and stymie economic development, turning the target of 9% growth into an impossible dream.

obliges. The unwritten rule is that

competitiveness. Corruption can also

Image: thanthanpal.blogspot.in

There have been other anti-corruption

95

whistleblowers. The Whistleblowers Protection Bill, yet to be approved, will

• Industry bodies must adopt a zero-tolerance approach towards corruption.

25

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

For India to achieve a robust healthcare mechanism, it has to overcome several challenges. Inadequate facilities and diagnostics, insufficiently trained personnel, and geographical and socio-economic barriers are major roadblocks. Geographically, for instance, transportation and infrastructure make it difficult to build a network that makes drugs accessible to people in the remotest corners. Lack of culturally-sensitive services or ethnic understanding are also drawbacks.

Gender discrimination means women have minimal access to healthcare, making them more susceptible to disease and higher mortality rates.

However, the high cost of drugs is Image: the-healthy-omnivore.com

perhaps the biggest barrier. India has

MEDICINE

thousands of generic drug makers.

Some Indian multinational generic drug producers supply most of the world’s quality low-cost generics. A focus on improving quality standards and ensuring more stringent regulatory

cardiovascular diseases and several

hopes to increase the number of stores

conditions that can be treated and

to 3,000 under the 12th Five Year Plan. A

managed by low-cost generics that

tough ask, considering the original plan

have a proven track record. If the

was to have 600 stores by 2012.

country is serious about healthcare reform, it needs to prioritise access to these medicines.

oversight for domestic generics

For a developing country like India,

manufacturers would mean that millions

meeting the healthcare needs of its vast

of needy people would benefit from

population is a massive challenge. This

better access to low-cost generic

concern is even more crucial in the case

medicines, greatly reducing the

of millions living below the poverty line

economic and social burden of disease.

and who do not have access to

In India, the last decade has seen a shift from communicable diseases to chronic ailments such as diabetes,

healthcare. It is here that generic medicines can play a key role in breaking down the burden of disease.

In 2008, the government launched Jan Aushadhi, a chain of medical stores run by the Department of Pharmaceuticals that aims to make generic drugs accessible to low-income groups.

Unfortunately, the scheme was plagued by irregular supplies, lack of proper distribution channels, insufficient generic prescriptions by physicians and, most

The world over, life expectancy has increased on the back of improved sanitation, medical services and access to food 26

importantly, lack of awareness among consumers. Currently, there are 112 Jan Aushadhi stores that sell 348 medicines under the National List of Essential Medicines (NLEM). The department

AVAILABILITY OF CHEAP MEDICINES States/Union Territory

Jan Aushadhi Stores

Rajasthan

53

Punjab

21

Orissa

14

Himachal Pradesh

5

Haryana

4

Andhra Pradesh

3

West Bengal

3

Delhi

3

Chandigarh

3

Uttarakhand

2

Jammu & Kashmir

1

All India

112

Source: http://janaushadhi.gov.in/

27

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

The drugs available at Jan Aushadhi stores are anti-inflammatory, anti-bacterial, anti-infectives, anti-tuberculosis, anti-fungal, intravenous fluids, vitamins, gastro-intestinal, cardio-vascular, respiratory, anti-diabetic, cortico-steroids, anti-malarial and accines. Generic drugs are meant to be inexpensive but the difference in prices from branded drugs is at times drastic. This makes their production and sales even more important.

Dosage

A report in ‘The Economist’ pointed out

India’s pharmaceutical boom was

minor variations of existing drugs, a

bound to create fierce competition.

For international drugmakers battling

practice known as ‘evergreening’.

a stagnating market in the West, India

reformulations are often used to extend

is an exciting opportunity. This also necessitates a framework for the

CHEAP, BUT EFFECTIVE Medicine

Implications

protection of patents and intellectual Average MRP of Branded Medicines (In Rs)

Price of Generics Sold at Jan Aushadhi Stores (In Rs)

property. With a thriving generics industry, cloned drugs make up for 90% of the Indian market share. Drug

Ciprofloxacin

250 mg

55

11

Ciprofloxacin

500 mg

97

21

Diclofenac SR

100 mg

52

3

10mg

37

3

500 mg

14

2

Cetrizine Paracetamol Nimesulide Cough Syrup

100 mg 110 ml

Source: Press Information Bureau

39 33

3 13

patent laws are nascent and the government is supporting generics to ensure that prices stay low.

In a country where pharmaceutical patents were not even recognised for more than three decades, local manufacturers imitated drugs to produce cheaper versions. It’s only after joining the World Trade Organisation (WTO) in 1995 that India was compelled to change its patent policy. The policy, in place since 2005, has many loose ends.

that the law bars patents that are only

According to the report, “Drug patents elsewhere; they get no protection in India. The country also has broad criteria for ‘compulsory licensing’.

A WTO agreement allows countries, in some instances, to force a firm to license a patented drug to a generic company. India’s rules give officials broad powers to do this.”

Now, both provisions are under attack.

In 2006, India denied Novartis a patent for Glivec, calling it an unpatentable modification of an existing substance, nonsense. Only by making it in salt form, imatinib mesylate, did Novartis have a proper drug. The body absorbed the medicine 30% more easily. The government stand was recently upheld by the Supreme Court.

Paul Herrling, the chair of Novartis’s Institute for Tropical Diseases, had said earlier that the case was a test of what is patentable in India. “We are being

generic versions of patented drugs

prescribe low-cost generics, especially

could trigger retaliation from overseas

to those who can’t afford medication.

countries that may hit the country’s

Physicians can turn advocates by

ambitious drug export plans”.

consistently prescribing generic drugs

Talking about the complexities involved, from licensing and patents to production of generics, DG Shah, of the Indian Pharmaceutical Alliance, which represents major generic companies,

and driving home the point that their effectiveness is parallel to that of branded drugs. Till that happens, generic drugs will continue to face credibility issues.

told ‘The Economist’: “We realise that

• Pricing policies alone cannot boost

the industry will take a hit. We’re trying

access to medication; put in place a

to find a solution so that the

unified approach that involves all

government’s concerns on access and

stakeholders – doctors, diagnostic

affordability are addressed without

centres, patient groups, healthcare

threatening the long-term growth of the

service providers, insurance firms, the

pharmaceutical industry.”

pharmaceutical industry, non-profits,

should not win patents for minor

For patients and health advocates, the

academia, central and state

improvements. “This would keep generics

competition between major

governments, and the media.

off the market, driving up prices.”

pharmaceutical producers and local

• Awareness about generic drugs is

generic drugmakers spells good news as

critical. Highlight the fact that India has

medicine costs are set to get cheaper.

thousands of generic drug-makers and some Indian multinational producers

free generics in public hospitals would

Recommendations

boost sales of cheaper alternatives.

• Ensure regular supplies and efficient

low-cost generics.

distribution so that low-cost generics are

• A sustained effort is needed to make

easily available. Studies show that even

available resources and infrastructure

giving away medicines for free will not

to each individual. Extend public

apprehensive that the Indian drug

work unless the supply chain is strong.

services and encourage the

companies’ strategy of launching

• Sensitise physicians about the need to

public-private model.

accused of evergreening,” he says.

“Having that concept applied to Glivec, which was one of the major breakthroughs in cancer therapies, is completely ridiculous.” Michelle Childs of Médecins Sans Frontières, a non-profit, counters that drug firms such as Novartis

While the controversies continue, the government is working on measures to procure cheaper drugs. Plans to offer

On the other end of the spectrum, a report in the ‘The Economic Times’ suggested that “the government is

28

Image: marksolock.wordpress.com

imatinib. Novartis insists this is

Image: marksolock.wordpress.com

supply most of the world’s quality

29

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

According to the Confederation of Real Estate Developers’ Associations of India (CREDAI), there is a shortage of 1.81 crore houses at present, and another 3 crore would be needed by 2020. The demand is unlikely to contract for at least two decades. One reason for this is that India’s urban population is expected to rise from the present 28% to 40% of overall population by 2020.

low-income

houses is largely for the

population.

low- and middle-income groups.

The government’s

Also, there is a lack of

contribution

clarity on the price

has been

bracket for affordable

minuscule,

homes. The standard

with private

definition in India is when

players being

a household

the major

pays no more

Amod Kumar Singh, VP (low Income and rental housing), Tanaji Malusare City, a large affordable housing project close to Mumbai, said at a panel discussion hosted by the ‘DNA’ newspaper that they received 66,000 applications for their 3,000 homes in Karjat.

providers.

than 30% of its

One of the

annual income

primary

towards

problems is

housing.

the lack of

Homes in the

clarity on

Rs 6 lakh-Rs

what

15 lakh, Rs 20

constitutes

lakh and Rs 25

As they urbanise rapidly, developing countries face a severe challenge in the form of housing. India too is struggling to provide housing to its middle- and

affordable and low-cost housing. At

lakh-Rs 40 lakh segment are all

present, the middle and upper classes

categorised as ‘affordable’. Not

are being considered for the affordable

surprisingly, this has led to great

housing section when the need for such

confusion.

ROADBLOCKS GALORE 8-12 (Months)

Conversion of land use

4-6

Project letter of intent and license / Intimationof disapproval (IOD) Pre-construction approvals from state level bodies*

6-8

Pre-construction approvals from central bodies*

5-7

Approvals for construction plan sanction

Affordable housing

The housing sector contributes 5%-6% of India’s GDP. While the strengthening of policies would fuel the real estate and infrastructure segment, a special focus is required on affordable housing

30

5-7

Approvals for commencement of construction

2-3

Construction period

24-30

Inspection and approval procedure for building completion

2-3

Occupancy certificate receipt from dateof completion of above

2-3 Approval Process after Land Acquisition Till Commencement of Construction (24-32 months)

Months

0

12

24

32

60

Source: CREDAI- Jones LangSaile Real Estate Transparency Survey 2011 Note: The stage Pre-construction approvals from state level bodies and central bodies can happen simultaneously Doing Business 2011, World Bank and International Finance Corporation

31

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

While real estate players are aware of the need for affordable houses, they say they need governmental assistance. Although the margins are lower than in luxury housing, the high demand ensures that affordable houses are easily sold. However, government policies, difficulty in acquiring land, lack of adequate infrastructure and restrictive building norms have kept many large players away. In the ‘Doing Business 2011’ report, the World Bank and the International Finance Corporation ranked India a low 177 out of 183 countries on ease of getting permits.

The time taken to obtain approvals could

stretch to two-and-a-half years.

shortage was suffered by the

Another problem is that, while demand is high, many consumers are unable to raise money post the down payment.

Even if the buyers borrow money, there is no guarantee that they can furnish the repayment installments.

economically weaker sections and 11%

Sometimes, the challenge is lack of documentation. Often, buyers of low-cost homes are not part of the organised sector and hence do not have the necessary income proof.

sector became popular for investment

by lower-income groups.

Traditionally, developers have been interested only in high-end housing due to the high margins. However, during the 2008 slowdown, the affordable housing as the demand for high-end homes contracted. Large players – DLF, Unitech, Tata Housing, Mahindra Lifespaces – and smaller ones announced forays into this sector.

Implications

However, DLF seems to have rethought

A report by Jones Lang LaSalle (JLL) estimated that 88% of the housing

build 100,000 flats in the Rs 20-lakh

its 2009 announcement that it would range in major cities. Rajeev Talwar, executive director of DLF, was quoted as saying that they no longer found the segment profitable. Does that mean that investments in this sector are losing their charm? According to Ashutosh Limaye, head of research and real estate intelligence services at JLL India, the sector is bound to grow due to the high unmet demand which won’t reduce in the near future.

Estate Development Council (NAREDCO), told Magicbricks.com that clearances need to be issued within 48 hours for affordable housing to become a reality.

The success of China on this front is worth noting. In 2007, China’s government allotted $1.2 billion to low-income families’ housing. The aim was to house 20% of urban low-income families by the end of 2015. China managed to commence construction with 7.2 million affordable housing units, exceeding the annual target of 7 million.

Recommendations • Develop infrastructure outside cities.

If satellite cities are to work, amenities like electricity, water and high-speed transport must be available.

• Promote public-private partnerships.

Although private players are already in the affordable housing space, the government must encourage more to invest in this sector. For this, it needs to be more cooperative on the permits and policy front. An article in ‘The Economic Times’ in July 2012 said that private players were reluctant to enter the sector. According to Navin Raheja, president of NAREDCO, laws pertaining to this sector need to be revisited so that efforts are directed at the right audience.

• Promote efficient technology, specific design strategies, optimum utilisation of resources and lighting in order to reduce costs.

• Provide incentives for builders.

According to Mantri, builders pay up to 40% of the final sales price in taxes.

Incentives like exemptions of service tax or stamp duty, and waiving of customs and excise duty for imported

Image: architectada.com

construction materials, would help.

• Ensure greater transparency. The Housing and Urban Poverty Alleviation Department (HUPA) has demanded ‘infrastructure status’ for the housing sector, which would increase the flow of funds and encourage players to set up affordable housing projects. An article in ‘The Financial Express’ in February 2013 said that the government would present the Real Estate (Regulation and Development) Bill 2013 in Parliament. The Real Estate Regulatory Authority, established through the bill, would safeguard buyers’ rights.

While affordable homes are available in smaller cities like Raipur, Kolhapur, Sangli and Satara, they are rare in metros like Mumbai, Delhi and Bangalore which account for 20%-50% of the need. Some real estate developers feel that an increase in the number of rental homes could partially solve this problem.

Satellite cities could provide a solution too.

There are two major aspects to this: cost of land would be low, but infrastructure – including transport – would have to be put in place for the development to be successful. As of now, satellite cities have enjoyed mixed success due to lack of planning.

Sunil Mantri, MD of Mantri Realty and Image: fuzzywaffle.com

32

the vice-president of the National Real

Image: homeloanguru.co.in

33

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Agriculture finance and food prices

The irony of the world’s fourth largest agricultural producer – in terms of production, the government has declared India ‘self sufficient’ – being ranked 134 among 187 countries on the Human Development Index is inescapable. Roughly 212 million people remain undernourished despite usable farmland, manpower, largely favourable climatic conditions and perennial rivers.

The biggest problem is the lack of formal credit, which thrusts farmers into the clutches of local moneylenders and eventually leads to the loss of their land.

A large segment of small and marginal farmers have no access to institutional credit. There is a stark difference in credit flow between underdeveloped regions and those that have better infrastructure or are closer to urban areas. Lack of information has resulted in farmers not understanding the benefits of formal credit. According to an article in ‘The Economic Times’ in April 2012, only 50% of farmers avail of agricultural credit, both formal and informal. According to a National Sample Survey Organisation (NSSO) report on indebtedness of farmer households, 43.42 million of the 89.35 million households are in debt.

The middleman is the main connection between farmers and markets. A lot has been said about the benefits of middlemen – they are sources of information for farmers and drivers of technology transfer, they are an effective link to exporters, etc.

However, in practice, middlemen mainly play the role of purchasing produce at low rates and selling it at higher rates in cities, pocketing the difference. The farmers’ financial position remains unchanged.

which was sold at double the price to wholesalers. The eventual consumer paid Rs 8-Rs 10 at a local market and

This system also ensures that food prices remain high, leading to inflation, which has been the cause of great disquiet in India.

Farmers in western Uttar Pradesh supported the government’s move to allow FDI in retail as it would eliminate middlemen and help them get better prices for their produce. Hari Om, a farmer from western UP told ‘India Today’ magazine that they paid 10%-15% commission to agents. They were paid Rs 2-Rs 3 for a kg of potato,

much higher in the cities.

Farmers say the odds are stacked in favour of the middlemen. In the wholesale markets, middlemen decide the crop rates and get a commission. Farmers are not allowed to sell their produce directly to traders and they bear all the incidental costs.

One of the reasons farmers are dependent on middlemen is the lack of storage facilities; middlemen ensure that the produce gets to the consumer on time.

A CREDIT CRISIS ON THE FARM FRONT

Image: kalai-tzidis.gr

States

34

Agriculture accounted for 14% of the GDP in FY2012 and nearly 52% of the employment in rural India. Sixty-six years after Independence, most of our agriculture-related problems remain unresolved. Poor infrastructure; lack of irrigation, mechanisation and institutional credit; as well as the dominance of middlemen in the farm-to-plate chain plague the sector

Number of farmer house-holds

Number of Indebted farmer house-holds

% of indebtness

Andhra Pradesh

6033900

4949300

82

Tamil Nadu

3888000

2895400

74.5

Punjab

1844200

1206900

65.4

Kerala

2194600

1412600

64.4

Karnataka

4041300

2489700

61.6

Maharashtra

6581700

3609800

54.8

Haryana

1944500

1033000

53.1

Rajasthan

5308000

2782800

52.4

Uttaranchal

896200

64400

7.2

Meghalaya

254300

10300

4.1

Arunachal Pradesh

122700

7200

5.9

Source: Press Information Bureau

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

A farmer’s main income is the price he procures for his/her crop. However, the constraints and debt burdens have driven many farmers to suicide.

According to the National Crime Records Bureau, 2,70,940 farmers committed suicide between 1995 and 2011 with Maharashtra topping the list.

Andhra Pradesh, Karnataka, Chhattisgarh, Madhya Pradesh, Tamil Nadu and West Bengal have also reported several farmer suicides.

An article in the ‘Business Standard’ said that some southern banks were offering interest rate arbitrage on loans by which farmers could take an agriculture loan at 4% and keep the money as a fixed deposit in the same bank at 9%. This results in the farmer earning the interest rate difference and banks maintaining liquidity. However, it’s not clear whether all banks are providing this benefit.

An article in ‘The Times of India’ in August 2012 detailed the stranglehold enjoyed by moneylenders. For example, private moneylenders in Maharashtra’s Bhandara district gave crop loans of Rs 150 crore to 75,000 farmers at a monthly interest rate of 5%-10%, which is cumulative. Bankers, meanwhile, ignored the state government order to disburse loans to small and marginal farmers. Farmers, whose average land holding is 2 acres, had no choice but to approach moneylenders who then pre-fixed the rate of the paddy before the harvest, causing the farmers huge losses.

In this context, the Budget 2013-14 proposals on agricultural credit were encouraging. Agricultural credit was increased to Rs 700,000 crore from the revised estimate of Rs 575,000 crore for 2012-13. Farm loans would be provided at 4% to farmers who make timely payments. This discount scheme would be available for loans by private sector banks apart from loans disbursed by the 36

government and cooperative banks.

Timely availability of agricultural credit at reasonable rates, especially for small and marginal farmers, is crucial.

Additionally, the budget also provided Rs 500 crore for crop diversification to promote technological innovation and to encourage farmers to choose crop alternatives. Rs 1,000 crore was allocated for extending the Green Revolution to eastern India, particularly Assam, Bihar, Chhattisgarh and West Bengal. Finally, to improve productivity of land and water use, the allocation for integrated watershed programmes was increased from Rs 3,050 crore in 2012-13 to Rs 5,387 crore in 2013-14.

The Indian agricultural system is highly dependent on the monsoon, always a gamble since it can be irregular and inadequate. Irrigation facilities are needed to provide for areas with scarce rainfall and in months when there is no rain. Soil types vary across the country, which means that the quantity of water required also varies. As a country with more than a billion mouths to feed, India can’t afford to be so vulnerable.

The lack of mechanisation is worrying.

Most land holdings are fragmented, which makes it unviable for small farmers. Mechanisation would increase production, productivity and profitability.

China, India’s biggest competitor, has been taking large strides on this front.

According to an article in the ‘China Daily’, the Chinese government is Image: blog.ennovent.com

Implications

providing machinery purchase subsidies to farmers. In 2011, the country reached a farm and harvest mechanisation level of 54.8%, an increase of 22.5% from 2002. This resulted in more foreign investors flocking to China.

India, meanwhile, is struggling. The level of progress across the country is uneven. The north – Punjab, Harayana, Uttar Pradesh – have shown progress while north-eastern states are lagging behind due to their hilly terrain and socio-economic conditions. Some western and southern states – Gujarat, Maharashtra, Rajasthan, parts of Tamil Nadu – have made some ground due to the increase in irrigated land area and higher awareness of modern farming practices amongst farmers.

According to the National Bank of Agriculture and Rural Development (NABARD), India will have to double its food production by 2020. For this, mechanisation will have to play an instrumental role. The modern plough is 200% to 300% more efficient than the traditional one; efficient machinery increases crop productivity by 30% and allows farmers to grow a second crop. At a recent conference on farm mechanisation in New Delhi, Union Agriculture and Food Processing Industries Minister Sharad Pawar emphasised the need for farm mechanisation to satisfy the projected foodgrain demand of 280 million tons by 2020-2021.

Image: gtresearchnews.gatech.edu

Recommendations • Increase access to institutional credit for farmers. The Aadhaar project could be the key. Most farmers in rural areas have no proof of identity. This leaves them out of the banking net. The Aadhaar card would allow them to avail of formal credit.

• Involve the private sector in developing agriculture infrastructure. Agriculture requires huge investments. This would pay off with farmers getting better prices for their crops and middlemen being left out of the loop. In England, the government promotes farmer markets so that farmers have more control over their earnings. There are no middlemen and farmers diversify their skills as they gain experience in marketing and business, and get an opportunity to network. The local

economy benefits by promoting local

entrepreneurship. Due to their flexibility,

businesses and employment.

knowledge of the local problems and

• Train farmers in the latest technology and make provisions for them to access

presence in remote areas, they enjoy better acceptability.

it. Machinery rentals are one way of

• Mobile banking could be looked

achieving this. At the same time,

upon as way to reach people in remote

counsel farmers against taking drastic

areas. The high cost keeps most

steps in times of financial stress.

formal credit institutions away from

• The UK has come up with the Single Payment Scheme through which funds are provided to farmers to grow nuts, protein crops and those needed for

such regions; also, transaction values are very low. Mobile banking could help the poor open accounts and transact securely.

energy production. Farmers growing

• Agricultural scientists have

such crops receive a pre-fixed premium.

suggested a pilot project to establish

There is a lesson here. Not all farmers

‘nutri-farms’ that experiment with new

can avail of institutional credit, and

crop varieties rich in micronutrients. A

provisions need to be made to assist

provision of Rs 200 crore for this was

those who have no collateral.

made in Budget 2013-14.

• Encourage micro-credit. Microfinance

• Promote gender-sensitive farm

institutions assist farmers and small

equipment since the role of women

enterprises, and promote

farmers in agriculture is increasing.

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13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

While FDI in multi-brand retail is now a reality, the road ahead is a rocky one

India is struggling to come to terms with the initiation of foreign direct investment (FDI) in the retail sector. While the debate on whether 51% FDI in multi-brand retail will help resurrect the flagging growth rate has not ended, five months after the proposal became law very few investment bids have been received.

Global retailers want more clarity on India’s stiff sourcing and investment rules,

infrastructure. Some formats, such as fashion and electronics, don’t require such investments.

not buying the India story. If they had, he felt, they would have lobbied hard for the easing of norms.

All this has meant that India has been deprived of huge investments, in addition to the retail sector’s natural evolution being stunted.

Implications According to an Assocham report, the size of India’s overall retail sector was Rs 23,00,000 crore in 2011-2012 and is estimated to double to Rs 47,00,000 crore in five years. Considering India’s

Harminder Sahni, MD of retail consultancy Wazir Advisors, told the ‘Economic Times’ that big retailers are

and are adopting a wait-and-watch policy.

The political opposition to it has

RETAIL SECTOR

unnerved many. The Bharatiya Janata Party (BJP), the largest Opposition party, has declared that it would scrap

COUNTRY

POPULATION (MN)

FDI ALLOWED (IN %)

7

1,210

51

BRAZIL

36

205.7

100

FDI, only FDI in multi-brand retail. It

RUSSIA

33

143.1

100

alleges that there is no provision to

CHINA

20

1343

100

INDONESIA

30

242.3

100

the retail policies should it come to power in 2014. The BJP is not averse to

safeguard the interests of traders and fears that the entry of global retailers would lead to more unemployment

INDIA

ORGANISED RETAIL SHARE (%)

SOURCE: RESEARCH REPORTS

and farmers being pressurised to sell their produce at low prices.

The political divide is wide. States and union territories such as Andhra Pradesh, Maharashtra, Assam, Delhi, Haryana, Jammu and Kashmir, Manipur, Rajasthan, Uttarakhand, Daman and Diu, and Dadra and Nagar Haveli have okayed FDI in multi-brand retail. But others such as Karnataka, Tamil Nadu and Kerala – home to major metros such as Chennai and Bangalore – have given it the thumbs down.

The Opposition also believes that FDI in multi-brand retail would snatch away the livelihoods of those engaged in traditional grocery retail, which accounts for 10% of total employment in India.

Most global retailers would have a model that requires a nationwide rollout.

Few would want to invest in a country where several metro cities are out of bounds to them.

Also, there are problems related to norms that mandate at least 30% sourcing from small-scale industries and 50% of investment in back-end 38

Image: ruralmarketing.org

39

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

population, the share of organised retail is minuscule compared to other nations. This is mainly due to the heterogeneity of consumer tastes and preferences, which makes it difficult to standardise offerings.

FDI in retail would bring about several positive changes. The much-needed cold chain and logistics system would be developed and strengthened, which would reduce wastage and promote optimum utilisation of agricultural produce. Warehouses in India lack in optimal size, layout, ventilation, inventory management and storage.

This situation must be corrected if the agriculture chain’s efficiency is to be improved. Foreign investments in cold storage have been insignificant so far, even though 100% FDI in cold storage has been permitted through the automatic route. FDI in retail would encourage foreign investments in cold storage facilities.

Retailers would bring with them the necessary agricultural technology for creating critical physical and institutional infrastructure. In a recent interview, Nancy Powell, American ambassador to India, said that a better supply chain would drastically reduce

wastage, which currently stands at a staggering 40% in India.

to 15% growth for the overall retail sector, attracting investments of Rs 40,000 crore in multi-brand retail, while the organised market is likely to grow to Rs 4,80,000 crore.

Experts pointed out that the entry of global retailers would ensure better prices for farmers as they would directly engage and source

Recommendations • Take a firm stance on FDI, which has already cleared the parliamentary hurdle, in multi-brand retail despite the opposition. This would make investors confident about India.

• Fix problems in the regulatory environment, bring more clarity to reforms. Multinationals are skeptical

due to the ever-changing guidelines, complex market scenario and political unrest.

• Make it mandatory for companies to procure raw materials from India alone.

A regulator could monitor whether the norm is being followed and deal with farmers’ and traders’ grievances.

• Encourage traditional retail alongside FDI. Promote modernisation, innovation and competitiveness among traditional retailers. Take a cue from Singapore; its approach is to “cherish, but upgrade and modernise”.

• Upgrade the traditional supply chain.

The major difference between modern and traditional retail is the effectiveness of the supply chain. Retailers are able to provide quality products at low cost due to their strong supply chain. Strengthen infrastructure and services at wholesale markets from which small shops source goods. China and Mexico have adopted this policy for traditional retailers and reaped the benefits.

• Amend state laws to allow direct marketing, contract farming and market yards in private and cooperative sectors. So far, only 17 states and union territories have made such an amendment.

for 350 sq ft to 400 sq ft of retail space, which translates to 15 lakh jobs in front-end retail by 2017. Additional employment would be generated on the supply chain front to supplement the business model.

from them, eliminating intermediaries. This process would make the entire agriculture value chain effective and short, benefitting the final consumer as he/she would pay less for the produce. This would tame food inflation, which has been a major worry over the last two years.

Umesh Patel, analyst at KR Choksey Shares and Securities, said that with the advent of FDI, the retail sector would take massive strides and catalyse GDP growth. The benefits would take shape in five to seven years. Organised retail is expected to grow at 24% by 2016-17 as compared

There would be greater employment opportunities across the agro processing, sorting, marketing, logistics, back-end and front-end retail spaces.

Studies show that one person is needed

HOW FDI IN RETAIL WILL AFFECT DIFFERENT SEGMENTS IMPACT

Limited

KIRANA STORES IMPACT

Very little

WHY

WHY

Retailers across the world like to work with a small group of select vendors for economies of scale. Nevertheless, the supplier base will be larger in number and smaller in turnover than elsewhere, because of regional diversity in consumption patterns.

They operate in small towns and rural India, and serve the lower social class customers as well. Modern retail will target the top income layers in urban areas. In bigger cities, many kirana shops will morph and specialise, offering phone-in home delivery, e-commerce and the like.

INFRASTRUCTURE, COLD CHAINS

JOBS

IMPACT

IMPACT

Limited

Limited

WHY

WHY

Each retailer will invest only for what his own business requires.

A new skill category called 'retail jobs' will be created. The birth of modern retail could improve wage rates in traditional retail.

Image: hidecibels.wordpress.com

SMALL MANUFACTURERS

Source: ForbesIndia.com

40

41

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

The aviation sector was supposed to be a symbol of the new India. Once touted as red-hot, the industry has had a hard landing. Crippled by weak balance sheets, insurmountable debt, high taxes, insufficient infrastructure, high costs and restrictive investment policies, Indian aviation is struggling

Aviation Image: wlppr.com

42

43

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Earlier, the government had permitted foreign investors only from outside the airline business to buy up to 49% in domestic airlines. In September 2012, spurred at least in part by the Kingfisher debacle, the Cabinet allowed foreign airlines to buy up to 49% in local airlines. Investments made by foreign airlines would not be through the automatic route, but subject to various preconditions such as the chairman and two thirds of the directors being Indians, and clearances from the Foreign Investment Promotion Board (FIPB) and the Home Ministry.

Additionally, substantial ownership and effective control of the airline must remain with Indians.

High taxes are the biggest deterrent to aviation growth. The service tax of 12.36% on tickets and other services, such as landing and air navigation, is much higher than global standards.

Adding to the burden are high fuel costs on account of the 8.24% excise duty and variable state taxes, ranging from 4% to 30%. Aviation turbine fuel (ATF) is a decontrolled product, its prices reviewed and fixed fortnightly by oil marketing companies on the basis of international

crude prices. Globally, fuel costs account for 20%-25% of airlines’ costs, but in India it is 45%.

Even though the government approved direct imports of ATF in 2012, no airline has successfully done it due to high infrastructure costs – tankers, pipelines, refuelling capacity, storage.

Airlines have also been complaining about the high ground handling costs at the country’s two major airports, New Delhi and Mumbai. In April 2012, the Airports Economic Regulatory Authority (AERA) approved a 346% hike in charges related to landing, parking and other tariffs at Delhi airport, making it the country’s most expensive airport for airlines. In contrast, major aviation hubs across Asia – Bangkok, Dubai, Singapore, Beijing – have kept charges low to enhance connectivity and business.

Regional connectivity is yet another challenge. Anyone trying to fly between small cities is forced to use multiple modes of transport, thereby increasing travel time. Take the case of Mysore airport, which was renovated at a cost of Rs 80 crore in May 2010. It has a

capacity of only 200 passengers, with only Spicejet operating flights from there to Bangalore and Chennai. Also, tourist destination states such as Himachal Pradesh and Uttarakhand have negligible air connectivity. Work on the Navi Mumbai airport, which was expected to provide much relief to the overcrowded Mumbai airport, has not even begun. Its first phase was to have opened in 2014.

Implications Even though the government has opened up the skies to foreign investment, global carriers have been cautious about India. Of course, FDI is not a panacea. Unless the other issues listed above are sorted out, FDI will not help.

What can’t be denied is that the infusion of funds, knowledge and global best practices will help Indian carriers.

Experts said that the 49% investment cap is unattractive, unless sweetened with tax breaks and full freedom to run the airline. AirAsia Group CEO Tony Fernandes had said earlier that the aviation environment and tax structure need to be more conducive

Image: mouthshut.com

for low-cost operations.

The government needs to take decisive action so that the benefits of such a sector are shared across the economy.

Let’s not forget that India’s aviation sector supports 1.7 million jobs, handles 90% of international tourists and contributes 0.5% of the GDP.

Recommendations • Introduce policy and infrastructure reforms to make India a global aviation hub. Don’t view equity infusion merely as a means to bail out carriers, but to improve their credit profiles through strategic and operational tie-ups.

• Direct states to remove or reduce duties. If ATF duty is cut by 5%-10%, Indian aviation could be very different.

Image: topnews.in

44

• Speaking on the sidelines of the General Assembly of International Federation of Air Traffic Safety Electronics Association’s meeting in September 2012, Aviation Minister Ajit Singh urged the petroleum ministry to declare ATF a notified product so that prices can be lowered. Piyush Gupta, partner, Kochhar & Co, said: “The Ministry of Civil Aviation and Ministry of

Petroleum and Natural Gases are thinking of notifying jet fuel as ‘Declared Goods’ such that it can avail of the 4% sales tax levied on such goods. This is a practical and workable proposition since it will do away with variable state taxes.”

• Promote regional connectivity by restructuring of Route Dispersal Guidelines. This could provide a framework to enhance connectivity to areas such as the North-East, Jammu and Kashmir, and the Andaman and Nicobar Islands.

• Allow FDI in non-core functions, such as ground handling and training.

Gupta said: “The maintenance, repair and overhaul (MRO) sector is unattractive because of the tax differential between domestic and foreign MROs. The government should rationalise customs duty on the import of spare parts and simplify the service tax and the value-added tax (VAT) regime to ensure a more investor-friendly tax environment.”

requirement for Indian carriers to operate domestically for five years before they can get international routes.

• Reduce service tax on air tickets. All international and domestic tickets are subject to 4.95% service tax on the gross fare. This has raised prices, impacting consumers.

• Encourage more joint ventures with foreign firms. The recent one between Tata Sons, Arun Bhatia of Telestra Tradeplace and AirAsia to introduce a low-cost, no-frills model with an initial fleet of three to four Airbus A-320s is welcome. Together, they plan to invest $30 million to $50 million.

• Review the archaic 45

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

E H T G N I H X C TA PER-RI SU

The Indian economy finds itself in the pincer-like grip of soaring deficits and rising government expenditure.

The fiscal deficit target for 2012-13 was raised to 5.3% of the GDP, from 5.1%, mainly due to the increased subsidy outgo. Budget 2013-14 contained it at 5.2% of GDP. To bridge this gap and lower it to 3% by FY17, the government needs to enhance revenue while lowering expenditures through cost cuts.

The Budget for 2013-14 estimated plan expenditure at Rs 555,322 crore, an increase of 29.4% from the previous Budget. One way to improve revenues is through greater income-tax collection, but

a

uniform increase is hardly the solution.

In recent times, the debate over whether to impose additional taxes on high net-worth individuals (HNIs)

and to tax agricultural income, which is currently exempt, has intensified. In Budget 2013-14, Finance Minister P Chidambaram took a decision on taxing the super-rich, introducing a one-year 10% surcharge on those with an annual income of more than Rs 1 crore. Predictably, it was chided and cheered in equal measure.

The current tax rates have been in existence since 1997, surviving four governments and as many finance ministers. Chidambaram, it is said, had been toying with the idea of a higher tax on HNIs after the idea was raised during a pre-Budget meeting with economists.

During a recent interview in Singapore, Chidambaram said: “I believe in stable tax rates. However, I must concede that there is an argument that when the economy requires more resources, the very rich willingly should pay a little more.� C Rangarajan, former Reserve Bank of India (RBI) governor and current advisor to the government, gave the idea the thumbs up, saying that mere expenditure cuts may not bridge the current fiscal deficit.

Implications A higher tax rate for high-income individuals is in force in many countries.

TAXING THE RICH HIGHEST INCOME-TAX RATE

HIGHEST SLAB

Sweden

56.60%

$85,451

Denmark

55.38%

$70,633

Japan

50%

$234,484

Belgium

50%

$45,037

Australia

45%

$180,000

India

30%

Rs 10,00,000 ($200,000)

Image: dexigner.com

COUNTRIES

46

The Union Budget imposed an additional tax on high net-worth individuals (HNIs), spawning an intense debate. Which side of the divide are you on?

Source: Yahoo Finance, Wikipedia Image: uleth.ca

47

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

around 90% in 1973-74, are now at 30%. HNIs should not be overburdened with exorbitant taxes again. A modest increase would be acceptable. This would have many implications. Some HNIs would accept it with a view that it would have a national benefit. Another aspect would be higher tax evasion, if the proposed increase is steep.”

This would be counterproductive and is likely to dampen entrepreneurship by reducing the incentive to start, finance and grow a business. HNIs would start investing abroad for higher returns. By not taxing HNIs higher, you could facilitate job creation as they would then invest in India.

Recommendations

Image: www.addictinginfo.org

In fact, the focus of the Fiscal Cliff Bill in the US was to increase the tax rate from 35% to 39.6% on individuals earning more than $400,000 annually and to reduce the budget deficit.

Similarly, an increase in payroll tax from 4.2% to 6.2% for income up to $113,700, increase in tax on investment income from 15% to 23.8% for the top income bracket and 3.8% surtax on investment income for those earning more than $200,000 (couples earning more than $250,000) were other elements of the deal.

In the UK, those with an annual income of £150, 000 or more pay tax at the rate of 50%. This rate was likely to be reduced to 45% from April 2013.

better living standard. This is why there is tremendous opposition to higher taxes.

Wipro chief Azim Premji supported higher taxes for the super rich, but doubted the ability of the government to implement such a plan effectively.

While it is clear that a higher tax on HNIs would lead to more revenue, not everyone is convinced of its benefits.

Mahendra Kamdar, proprietor, MD Kamdar & Co, having spent 40 years in the taxation field, said: “Taxing HNIs is mainly aimed at reducing the fiscal deficit, which stands at 5.4% of GDP [at the time of writing]. However, this should be viewed purely from an economic perspective. Peak income-tax rates, which stood at

• HNIs comprise less than 1% of taxpayers. As per the 2011-2012 estimate of the Standing Committee’s report on the Direct Tax Code (DTC) Bill, there were 17.84 lakh individuals earning more than Rs 10 lakh or more out of the 3.24 crore taxpayers; they contributed 75% of the taxes collected. Rationalise the tax structure by modifying tax slabs to accommodate more payers in the Rs 10 lakh+ income bracket.

• Bring more people into the tax net.

Improving education and evolving demographics are creating a pool of skilled resources with better employability and a higher standard of living. Research shows that the average age of the workforce in India will be 29 years by 2020, compared to 37 for the

Image: blogs.reuters.com

US and China, and 45 years for Europe.

been increased from 5% to 10% for a

Normally, a rationalised tax structure

period of one year. The dividend income

would induce more individuals to

is exempt in the hands of the

comply, leading to higher collections.

shareholders. This proposal would

Kuldip Kumar, executive director (tax

affect promoter groups of large

and regulatory service) at

companies as well as individuals with

PricewaterhouseCoopers India, told

significant shareholdings.

‘Business Standard’: “Those earning

The aggregate of exemptions in

During a discussion on NDTV, tax expert

both direct and indirect taxes works

• One alternative could be to not raise

Subhash Lakhotia said: “Agricultural

out to Rs 529,442 crore (2011-2012),

taxes on income, but to tax the

income is kept untaxed due to political

or 5.9% of the GDP. Even the

super-rich’s dividend income – beyond

compulsions. Small farmers comprise a

parliamentary standing committee

a threshold limit – at the same rate at

major portion of the vote bank for

on finance recommended raising

which it is taxed in the hands of the

political parties.” About 80 years ago, Dr

the tax bar for companies and

company. Currently, domestic

Babasaheb Ambedkar spoke of taxing

phasing out exemptions rather than

companies pay a dividend distribution

agricultural income. A committee

burdening the salaried class and

tax of 15%; the surcharge on this has

formed in 1952 endorsed the view, as did

smaller tax payers.

could lead to better collections.”

schemes related to free education,

such return, not even in the form of better infrastructure, enhanced security or a

People earning more than `10 lakh a year account for 5.6 per cent of total tax payers ....

... But they contribute 75.1 per cent of the country’s total tax collections

respect of corporate income-tax

farmers, who earn crores, pay no tax.

Tax money is allocated to support

India, however, does not guarantee any

projected revenue foregone in

income-tax was Rs 42,330 crore.

rationale for it. Expanding the tax base

through these initiatives.

to the corporate sector. The

while the same for personal

tend to have strong welfare systems.

75.1%

need to withdraw exemptions given

income is untaxed. The irony is that rich

taxes, but the government needs a

that their money returns to them

analyst, stressed on a TV panel the

contributes 18.2% of the GDP; this

is strong. Countries with high tax rates

5.6%

• Devendra Sharma, food and policy

during 2011-12 was Rs 51,292 crore,

crores may not mind paying additional

unemployment. Taxpayers are assured

the KN Raj Committee formed in 1965.

• Tax rich farmers. Agriculture

The argument for higher taxes on HNIs

social security, pensions, healthcare and

48

Image: instablogs.com

49

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Contrary to popular belief, the GST is not an additional tax. The State GST will include VAT, stamp duty, taxes on goods and passengers, vehicle tax, duties on power, entry tax, luxury tax, entertainment tax, taxes on betting, gambling and lotteries, purchase tax, and all state cesses and surcharges. The Central GST will include central excise, service tax, additional excise, countervailing duty or additional customs duty and all cesses and surcharges, excluding educational cess.

The central sales tax will be abolished.

Exports will not be covered by GST. Direct taxes – income-tax, corporate tax, capital gains – will also be unaffected.

GST was mentioned in the Union Budget of 2006-2007. In 2009, while presenting the Budget, then finance minister Pranab Mukherjee said that GST would be introduced from April 2010 and the Empowered Committee of State Finance Ministers was asked to create a roadmap for it.

Image: usamail1.com

However, political interference ensured that the rollout did not meet the deadline and missed several deadlines thereafter.

Hailed as a game-changer after the economic reforms of 1991, the Goods and Services Tax (GST) is an attempt to integrate the economies of the states and boost the national economy. One of the most significant tax reforms introduced in India, GST is a value-added tax designed to replace all indirect taxes levied by the state and central government on goods and services. The tax system will be designed to ensure a single tax across the economy for goods and services 50

GST has run into trouble because of the absence of political consensus over it.

Staunch objections from Opposition-ruled states have stalled its implementation. The system has been accused of attempting to subvert states’ rights to impose taxes. The GST implementation would mean that existing tax structures would be done away with, resulting in a revenue loss for states. States fear that if the uniform tax rate is lower than the existing one their revenues would shrink. Economically backward states, especially, say they can’t afford that.

Pradesh, who has accused the Centre of introducing it to favour manufacturers; he also questioned its timing.

Implications States have demanded that their interests be protected and want compensation in case of a revenue loss; the central government has agreed.

Chidambaram announced a budgetary provision of Rs 9,000 crore as compensation for central sales tax loss to the states. He also said the government would table the draft constitution amendment bill and the draft GST Bill in Parliament soon.

Sushil Kumar Modi, finance minister of Bihar and chairman of the Empowered Committee of State Finance Ministers, has demanded a legal assurance that the loss would be covered. Modi said the law should provide for compensating states for at least five years after the introduction of GST. In India, like other nations which have implemented GST, the rate of taxation would be 16% to 20%, according to Sumit Majumdar, chairman, Central Board of Excise and Customs. This rate would eventually be lowered to about 12%. The impact of taxation on goods and services across India would depend on existing tax rates. Those with high existing rates would see a reduction in rates while those with lower tax rates would see the rate rise.

Goods and services required for

basic needs will be taxed at a reduced rate. The main benefit from this is that with multi-stage taxes removed on goods and services, prices of various goods and services would fall, benefiting consumers.

Mahendra Kamdar, proprietor, MD Kamdar & Co, said: “More and more persons will be forced to transact with bills in order to get credit for input tax, leading to a larger chain of billings – interlocking like paver blocks – across the country. The government will get more revenue, the chances of leakage would reduce and rates would be uniform across the country.”

Recommendations • Address the unmitigated disaster that is our tax system, push for tax reforms to create a uniform market that integrates all state economies. Introducing GST would the first major step.

• Introduce a phased rollout of GST in which states willing to come under the framework can do so immediately while others can observe the benefits and then join.

• Try to build political consensus. The rules allow states to opt out of GST whenever they want. States will now enter and exit the GST system based on their political affiliations. This would lead to frequent and erratic changes of rules and a complicated invoicing system. This would hamper trade activities.

Tamil Nadu, Chhattisgarh and Madhya Pradesh objected because the administrative infrastructure and technology systems were not in place by April 2010.

One of GST’s staunchest opponents is Raghavji, finance minister of Madhya 51

13 Economic Priorities For FY13-14 A report by MSLGROUP India, part of the Publicis Groupe

Coalitions are a political necessity, often involving partners with conflicting interests. No single party has secured a majority in the Lok Sabha, the lower house of Parliament, since 1984.

In fact, the number of parties sharing power has grown manifold, from 12 in 1996 to 18 in 1998 and 24 in 1999

With the largest coalition dependent on smaller regional parties, the power the latter wield is disproportionate to the number of seats they have. Often, smaller parties like the Trinamool Congress are the kingmakers, which gives them a veto on economic policy and urgently-required reforms.

Since coalitions are likely to remain a reality for the foreseeable future, economic growth will largely depend on the stand regional parties take on reforms.

Clearly, it’s time to put the economy at the centre of the political debate. In India, few parties have been willing to fight elections purely on economic issues; it’s always caste, personality-based or regional issues that are central to the agenda. Unless economic policy becomes the focal point of politics, India’s potential will remain unfulfilled.

The early 1990s saw the rise of market-led reforms, making the role of the central government in the economic affairs of states relatively redundant.

Private investors and foreign agencies pump money directly into states, boosting their economic sustainability. Some states enjoy great investor confidence with money being poured in consistently.

As a result, there is growing disparity and the poorer states – often led by coalition parties supporting the central government – are demanding a larger stake for infrastructure and other expenditure.

Take, for instance, the Trinamool Congress. While its leader Mamata Banerjee was railway minister, West Bengal, where her party is in power, got the choicest rail projects. When Lalu Prasad Yadav, of the Bihar-centric Rashtriya Janata Dal, was railway

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government dependent on unreliable allies like the Samajwadi Party and the Bahujan Samaj Party. This could also hit the pace of reforms.

For coalition governments, minister, it was his home state that received massive rail investment.

introducing economic reforms has always been a challenge. It’s not just the opposition, but internally too

Implications Last year, ratings agency Standard & Poor warned that India could lose its investment grade status. Lack of reforms, stunted growth and a burgeoning fiscal deficit eroded the country’s image and investor sentiments. The warning was a jolt for a government battling corruption scandals, poor governance and policy paralysis.

With the 2014 election in sight, the government swung into action. By furthering FDI in multi-brand retail, aviation and broadcast, it made a political gamble.

Finance Minister P Chidambaram went all out to win back investor confidence, wooing global investors with a series of roadshows. He assured the taming of the fiscal and current account deficits to help the economy return to the 8% growth path. Addressing a gathering of 200 representatives of leading European companies, banks and other financial institutions, Chidambaram said: “I am very optimistic that India can grow at a [high] rate for the next 20 or 30 years.”

they’ve had to deal with resistance. This insecurity has crippled growth, which has fallen close to 5%.

Recommendations • Coalitions must commit to an economic agenda that makes clear the economic direction of the country and reduces the scope for disagreements afterwards.

• Ensure better coordination with allies on policy announcements. Take, for instance, the fuel price hikes in 2012 and 2013. Many allies claimed that the government did not consult them before raising prices. Rising oil imports are inflating the deficit, so are oil subsidies. While most experts said the hikes were necessary, many coalition partners disagreed.

• Several key reforms have been languishing because not all allies are fine with them. FDI in multi-brand retail was just one example. There are also FDI caps in insurance and pension. The government must hold urgent talks with allies to resolve these issues.

• While the abovementioned issues may

For the ruling United Progressive Alliance (UPA), the run-up to the elections will be a trial by fire. In many ways, the country is poised to witness a paradigm shift in governance, where the ruling party will be placed precariously between populism and growth policies.

be sensitive, there are several which are

The pullout of the DMK has left the

urban infrastructure.

not political hot potatoes and can be acted upon. For instance, there is little opposition to developing the corporate bond market for investments in infrastructure or to developing the municipal bond market for financing

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Authors Ashraf Engineer, Head – Content, MSL India Amrita Choudhary, Deputy Head of Content, MSL India Nirav Khatri, Manager, Research and Insights, MSL India Shreyasi Ghosh, Account Associate, MSL India Pelak Desai, Account Executive, MSL India

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