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Time to grow up, Corporate India

LiveMint logoLiveMint 27-02-2017 Huzaifa Husain

In this year’s Union Budget, the government has taken on the role of an ‘enabler’ rather than an ‘allocator’ of capital. This year’s Fiscal Policy Strategy Statement, which accompanies the Budget document, emphasizes fiscal conservatism when it says: “…strong fiscal discipline over the medium term will reduce the government’s share in the economy and free resources for private investment.” Instead of looking for largesse from the government, it is time Indian companies grew up and learned to fend for themselves in the private sector.

The focus of the present Budget has been on the expenditure side. Expenditure of the government can be grouped into three areas: running of the government including interest payments, spending on the social sector and finally, spending on infrastructure.

In the case of government expenditure, one of the areas that has always stood out is the inability to achieve stated outcomes. This is due to inadequate capacity. Building such capacity within the government will help to achieve objectives in the social sector as well as help in ease of doing business.

The vulnerable sections of society are in dire need of support. This is true especially in terms of providing equal access to basic facilities such as health, education and housing. But it is also an area that is difficult to address as problems here are not easy to solve.

Merely throwing money at these issues may not achieve the objectives. The government is trying to address this in a timebound manner, which is a rational way to get discipline in execution.

The infrastructure sector is important for growth but is also capital intensive. Most commentators expect the government to spend money in this area. But it has no such intentions as it realizes that private capital can do the same job more effectively and efficiently. Instead, the government is trying to provide an encouraging environment so that deserving companies can attract private capital easily.

Some are dismayed at the lack of a large capital infusion into public sector banks. Why should honest taxpayers pay for the misdeeds of these banks? It is high time such banks realize that they are getting nothing from New Delhi and that they need to find other sources of capital. Raising senior equity, sale of subsidiaries, and sale of bad loans are options they should evaluate seriously, as time is running out. Banks are slowly losing market share to other forms of fundraising, especially the capital markets. It is now up to them if they want to remain relevant in the future.

Some advocate the creation of a bad bank, yet they do not say who exactly will pay for it. Taxpayer money, either directly from the government or indirectly from the central bank's balance sheet, is a non-starter if loans are transferred at 100 paise for every rupee. How can any government justify such a bailout to its citizens? If such loans are sold at a discount, then why create a bad bank because private capital can easily do the job? Incidentally, this is exactly what the government has done by allowing securities receipts to be traded.

The Budget proposes to tighten cash spending on capital expenditure by companies and by abolishing cash transactions over Rs3 lakh. Abolishing high-value cash transactions above a certain limit is presently being debated in Europe as well.

Also, there is a discrepancy in the tax treatment of debt capital versus equity capital. By disallowing complete deductibility of interest expenses by heavily leveraged companies, which have borrowed money from foreign associates, the government has made its intentions clear. It has also placed limits on interest deductibility for mortgage payments by individuals. The tax laws, therefore, now restrict the amount of interest that is deductible for individual taxpayers—first and subsequent homes—and for foreign companies.

If this is the correct approach for an individual and a foreign company, how long before it is applied to Indian companies? If extended to Indian companies, the government can bring down the corporate tax rate significantly without the loss of revenue.

There is a widespread belief, which is not wrong, that capital owners are better treated than workers. Nowhere is this more obvious than in the taxation of capital gains from securities, especially short-term gains. Why is it that a speculator in the stock market who makes money owning a share for 10 minutes, pays a lower tax rate than a doctor who treats a patient for the exact same time? How is a trader more important to the nation than a doctor? Some would say such a speculator provides liquidity. Liquidity for whom? Fellow traders, possibly. They are surely not providing any capital to the company. In fact, there is absolutely no empirical or analytical evidence between liquidity and capital raising by companies. After all, unlisted companies can and do raise capital.

It is clear that the government wants to encourage private investment. It should, therefore, abolish MAT (Minimum Alternate Tax) because it negates the incentive provided by the income tax law of higher depreciation. Unless tax incentives in the form of allowing higher depreciation are not restored, acceleration of investment growth will be hard to achieve. 

It will soon be seven decades post Independence. The economic sector of the country needs to stop depending on taxpayers for its growth and survival, and instead focus on attracting private capital. In a democracy, it is the people who should always come first and in India many of our fellow citizens need support, which is where government spending should be focused. A healthy and educated citizenry is the biggest and the best asset any nation can have.

Huzaifa Husain is head-equities at PineBridge Investments, India.

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