In the past ten years, the policies followed by
the PM Modi led central governments have stayed true to his reputation. For
example—
·
The effective tax rates of the
corporate sector have been reduced. This has resulted in the aggregate tax
collection from individual taxpayers to rise higher than the tax paid by
corporations.
·
It is widely believed that the
demonetization of high value currency notes and the implementation of GST have
also adversely affected the micro small businesses and favored the large business
in the organized sector.
·
The schemes launched to
incentivize the businesses to increase local manufacturing and exports, e.g.,
production linked incentive (PLI) scheme, also appear to be focused on medium
and large enterprises.
·
The government has allowed the
large domestic businesses to freely grow inorganically by acquiring smaller and
medium sized businesses. Large global players are also encouraged to set up
their local units and avail concessions. This budget also lowered the tax rates
for the local businesses of the global companies.
·
The bankruptcy resolution
process also allegedly favors large businesses subsuming the troubled small and
medium businesses rather than making efforts for revival of the troubled
business.
However, in recent months there are some
indications that the government might be considering to reorient its policy
direction. It might have something to do with the results of the recently
concluded general election in which the performance of Mr. Modi’s party, the
BJP, was much below expectations. But to me it mostly appears to be waning
mutual trust between the government and the corporate sector.
The language used in the latest edition of the
Economic Survey for the corporate sector indicates that all may not be well.
For example, consider the following excerpts from the Economic Survey 2024.
·
Hiring not commensurate
with the profit growth: In terms of financial
performance, the corporate sector has never had it so good. Results of a sample
of over 33,000 companies show that, in the three years between FY20 and FY23,
the profit before taxes of the Indian corporate sector nearly quadrupled.
Further, newspaper headlines told us that the corporate profits-to-GDP ratio
rose to a 15-year high in FY24. BusinessLine reported, “The corporate profit
for the Nifty-500 universe was up 30 per cent last fiscal to ₹14.11-lakh crore against ₹10.88 lakh crore in FY23. The
nominal GDP grew 9.6 per cent y-o-y to ₹295-lakh
crore (₹269-lakh crore)1”. Hiring and compensation
growth hardly kept up with it. But it is in the interest of the companies to
step up hiring and worker compensation.
·
Private sector capex
lacking: The
Union government cut taxes in September 2019 to facilitate capital formation.
Has the corporate sector responded? Between FY19 and FY23, the cumulative
growth in private sector non-financial Gross Fixed Capital Formation (GFCF) is
52% at current prices. During the same period, the cumulative growth in general
government (which includes states) is 64%.
Private sector GFCF
in machinery and equipment and intellectual property products has grown
cumulatively by only 35% in the four years to FY23. Meanwhile, its GFCF in
‘Dwellings, other buildings and structures’ has increased by 105%. This is not
a healthy mix. Second, the slow pace of investment in M&E and IP Products
will delay India’s quest to raise the manufacturing share of GDP, delay the improvement
in India’s manufacturing competitiveness, and create only a smaller number of
higher-quality formal jobs than otherwise.
·
Low employment density of
capex: In a recent article the Economist cites
independent research that predicted a slow demise of India’s services exports
over the next decade. While the boom in telecommunications and the rise of the
internet facilitated business process outsourcing, the next wave of
technological evolution might bring the curtains down on it. In this milieu,
the corporate sector has a responsibility, as much to itself as it is to
society, to think harder about ways AI will augment labour rather than displace
workers. Hiring in the IT sector has slowed significantly in the last two
years. We do not have a full picture of overall corporate hiring in the country
on a regular basis. In any case, deploying capital-intensive and
energy-intensive AI is probably one of the last things a growing,
lower-middle-income economy needs.
…the enlightened self-interest
of the Indian corporate sector, swimming in excess profits, to take its
responsibility to create jobs seriously.
…another article4 in The Economist that
hails the arrival of China as a superpower in science should be sufficient
inspiration for the corporate sector and academia to get their act together on
scientific research and development.
·
Nudge to banks: …just as corporate profits are booming, the net interest margin of
Indian banks has risen to a multi-year high. It is a good thing. Profitable
banks lend more. To sustain the good times, it is important not to forget the lessons
of the last financial cycle downturn. The banking industry must aim to lengthen
the gap between two NPA cycles. It should also resist the temptation to pursue
short-term profits at the expense of the customer. Product misselling is too
rampant to be dismissed as an aberration of a few overenthusiastic sales
personnel.
·
On pushing unhealthy food
and bad habits: Social media, screen time,
sedentary habits, and unhealthy food are a lethal mix that can undermine public
health and productivity and diminish India’s economic potential. The private
sector’s contribution to this toxic mix of habits is substantial, and that is
myopic. The emerging food consumption habits of Indians are not only unhealthy
but also environmentally unsustainable.
·
Final word: The tripartite compact that this country needs to become a
developed nation amidst emerging unprecedented global challenges is for
governments to trust and let go, for the private sector to reciprocate the
trust with long-term thinking and fair conduct and for the public to take
responsibility for their finances and their physical and mental health.
It would be interesting to see how the
situation evolves in the next five years. Whether the government changes policy
direction to promote MSME and impose additional taxes, duties and conditions on
the large corporations or the corporations obey the government dictate and
compromise their profitability to generate new employment and do CSR
activities.
