Thursday, May 31, 2007

"Opportunity Structure" & Un-earned Privileges

This is a long due post.... has been hovering my mind...

...Some months back, in my course Social Entrepeneurship, I had made a reference to the Opportunity Structure in a society. Opportunities are not equally distributed in a society, i.e., for some of us certain "opportunities" come easily, while for others they never do - and therefore, the achievements are not always a function of just "merit" and "capability".

    "...e.g., suppose, you go to Chashire Home or School of Hope - or a T-Shirt manufacturer, etc. - and give a bulk-order of their produce, so that you can sell it in the campus (or elsewhere), make some margins and share it back with them. The chances are that, if you ask, they may give you the products on credit, simply because you come from a "background". That is, you can do this venture without "working capital". Morevoer, you also have an easy access to the 'market' (batchmates, campus people, etc.) to sell these products.

    Now, imagine that instead of you, it is one of those construction workers who are there on the campus these days, who approaches the same suppliers (Chashire Home, School of Hope, T-Shirt Manufacturer, etc.), with the same "business plan". S/he will need the "working capital" and even though being in the "market" (XLRI Campus), his/her access will not be as smooth...

    This difference would remain irrepective of the "ability" of the person...
Around the same time, I had come across (thanks to Annie's post on theotherindia) an insightful listing by "M." about these "opportunities" (or as she puts them "undeserved privileges") on her blog.

This is a list worth looking at. To quote a few of these "Undeserved Privileges":

    1. i've had a complete schooling. it's not expected of me to drop out of school to do the housework or take up a job...

    6. when i'm seeking specialised help for a financial, legal or medical problem, i'm treated with courtesy. the people in charge don't treat me with scant respect because they're doing "Charity"...

    12. i live in a house where i can turn on the tap to get water enough for my needs, without having to fetch it from miles away...

    17. i studied in an english medium school. i will never be disqualified from getting a job because i dont know english...

    etc. etc...
In a subseqent post "M." also related many of her "undeserved privileges" to the traditional caste system that "has merely ended in my life", but still lives in many other lives:

    being a brahmin is a relatively small issue in my urban, metropolitan world. i am more affected by the global caste system based on wealth, than by our traditional one based on ancestry.while the caste system of money is equally savage and brutal, i realise that im still privileged to be able to say that that is the main caste system that affects my life. because for so many people - dalits, the indigenous tribal groups - caste is a daily, life-threatening, livelihood- depriving, degrading reality still.

    i, in my relatively well-to-do state, have no right to pass the judgement that traditional casteism has ended. very simply, because it has merely ended in my life. there are still many lives whose continuing suffering cannot be swept aside - their experiences are still valid and real and should not be denied.
All of this also reminded me of two other encounters with these "un-deserved/un-earned privileges" that we - I - have:

One was an old post on Vikrum Sequeira's blog about his Akanksha Experience about why the 8-10 year old Prachi dropped out of school. He had written as a teacher,and I could resonate with his hurt:

    "...Prachi was one of my best students. She had a flair for mathematics and was extremely creative.... Prachi recently left Bombay with her family. They left because of one simple reason: they could not make ends meet.... Prachi's father was working as a private driver and earning about Rs. 4000 (USD $87) a month. Almost half of his earnings paid for the squalid hutment in the slum; the rest of the money was used to raise his family of five.... I'm sad for two reasons:

    First, I miss her. As a teacher, you care about your students and want them to do well in life. In the case of Prachi, the goodbye is especially depressing because I will never see her again. If I were a teacher in a more developed country, I could have taken down a phone number or an email address. But all I know is that Prachi has gone to a village, somewhere in rural Uttar Pradesh.

    Second, I wonder what would have happened if Prachi was afforded the education she deserves. In fact, I believe that she would have done great things if she had grown up in a more privileged background or in a more egalitarian country. Most likely, her potential will not come to fruition. And that does more than upset me; it hurts."
The other was an old mail which had long back floated in my mailbox (don't know the origins), but parts of it did clarified the perspectives for me:

  • If you woke up this morning with more health than are more blessed than the million who will not survive this week.

  • If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture, or the pangs of starvation are ahead of 500 million people in the world.

  • If you have food in the refrigerator, clothes on your back, a roof overhead and a place to are richer than 75% of this world.

  • If you have money in the bank, in your wallet, and spare change in a dish someplace ... you are among the top 8% of the world's wealthy.

  • If you can read this message, you just received a double blessing in that someone was thinking of you, and furthermore, you are more blessed than over two billion people in the world that cannot read at all.

So, yes!... We have a choice:

We can:

  • count our blessings!
  • count our guilts!... OR
  • count our responsibilities!

  • Take your pick...

    Tuesday, May 29, 2007

    Do Highly-Paid Indian CEOs Really Add Value?

    It seems that CII (Confederation of Indian Industries) may soon decide not to invite politicians to their parties, summits, meetings, or whatever... First it was Mani Shankar Aiyer in April, who raised the question:

    "Industry has been enormously benefited by the processes of economic reform that we have seen in this country over the last 15 years or so. But the benefits of these reforms have gone so disproportionately to those who are the most passionate advocates of reforms that every five years we are given a slap in the face for having done what the CII regards as self-evidently the right thing for this country."

    ...and then, last week, it was Manmohan Singh, the Prime Minister himself, who in his Ten Point Social Charter, gave a not-so-gentle reminder to the CII members about their social responsibility: "corporate social responsibility must not be defined by tax planning strategies alone".

    Predictably, among all the other points, it was the fourth point about the CEO salaries - i.e., about "excessive remuneration", "conspicuous consumption", "vulgar display of wealth", "ostentatious expenditure", etc. - that caused much flutter...
    (I used the term "Predictably", since all other nine-points were about the nice things that the industry should be doing. This was the only one which mentioned what the audience of CII conference, the CEOs, should not be doing. This is what he said:

    "...Four, resist excessive remuneration to promoters and senior executives and discourage conspicuous consumption. In a country with extreme poverty, industry needs to be moderate in the emoluments levels it adopts. Rising income and wealth inequalities, if not matched by a corresponding rise of incomes across the nation, can lead to social unrest. The electronic media carries the lifestyles of the rich and famous into every village and every slum. Media often highlights the vulgar display of their wealth. An area of great concern is the level of ostentatious expenditure on weddings and other family events. Such vulgarity insults the poverty of the less privileged, it is socially wasteful and it plants seeds of resentment in the minds of the have-nots."

    The "damage control" started immediately. Sunil Mittal, CII's newly elected chief, complemented the Prime Minister for his "unusual and landmark" speech, but also pointed out the CEOs' salaries "cannot be legislated", since there is a crunch of talent.

    Financial Express was quick to point out that its research on the salary increase of top 100 CEOs ("only 30%" increase from Rs 189.98cr to Rs 246.96cr between 2005 and 2006) shows that "wealth generated by 100 big companies has been greater than the pay growth of their bosses." - FE's criteria of "wealth generation", however, was not profits/sales of the companies, but the increase in their market-capitalisation (and that too duing one year!)... I am not sure why FE did not look at profits, turnover, or other more tangible and sustainable criteria of corporate performance to prove its point...

    Mainstream media also went into a spin to point out the wasteful government expenditure, and/or why Manmohan Singh had to make this speech after his party was rejected by the "aam aadmi" in the UP election, and/or his speech was like a simplistic Sunday sermon, etc., etc...

    ...all of which may - or may not - be valid reasons to reject the suggestion. However, even if one acknowledges these counter-arguments as valid, and that if industry has to become competitive, there should not be a bar on CEO salaries to attract the world-class talent, it is worth asking the question:

    Do the Highly-Paid Indian CEOs Really Add/Create Value to Business?

    The only comprehensive study which related the CEO salary and corporate performance, that I could recall, was done by two of my colleagues - Profs Ramkumar Kakani and Pranabesh Ray - a few years back. A report on the study - titled CEO Salaries Outstrip Growth of Profits (The Hindu BusinessLine, Aug 9, 2002) - can be accessed here.

    A two part article by the authors can be accessed here (Part 1) and here (Part 2).

    I find this study more comprehensive because:

  • it covered the trends over 22 years, from 1979 to 2001 (and so, the conclusions are not based on temporary up-/downturns and business cycles), and

  • it compared the the hikes in CEO's salaries with increase in (1) employee wages, (2) sales and (3) Profit before interest depreciation and tax (PBDIT).

    Quoting from the findings:

  • "in the last 22 years, growth in managerial remuneration was almost five times that of the same in employee wages. Between 1992-93 and 2000-01, the compounded annual growth rate of sales was 11.52 per cent, 13.84 per cent for PBDIT and 9.81 for employee wages. However, managerial salaries grew by 33.1 per cent."

  • "...the welfare expenses and return on capital employed decreased over the year. Even the return on equity dropped sharply between 1995 and 2001."

    Conclusion of the Study:
    "It implies that while the compensation for the CEOs has increased, this has not resulted in a positive change in the performance from the point of view of all other stakeholders including equity shareholders. This in fact raises the question of justification in the phenomenal rise in managerial remuneration."

  • Wednesday, May 16, 2007

    The Coming "Unemployment Explosion"

    This is a continuation/ appendix to an earlier mail on Future of Work/Employment in India:

    According to the TeamLease' India Labour Report 2006 (pdf format, 100 pages):

    Coming Unemployment Explosion

  • India's working population in 2020 will be equal to India's total population when reforms started in 1991

  • Projecting current variables forward means 211 million unemployed in 2020; an unemployment rate of 30%

  • Unemployment will largely be a youth problem; nine out of ten unemployed are likely to be in the 15-29 age bracket

    Inefficient Labour Markets

  • Unorganized employment grew by 31% versus Organized employment of 4% in the nineties

  • Labour laws may not be affecting overall growth but are influencing where jobs are created and amplifying the substitution of labour with capital.

    The Report also predicts that by 2020, India will have merely 88mn graduates... (which, in a way would be a jump of the total 'stock' of 26mn in 2004)

    If interested, you can download the report from here...

  • Sunday, May 13, 2007

    Divided by "English"

    It is pardoxical to write this post in English....

    India consists of some 18-22 scheduled languages... A tower of Babel!

    One of its strengths is also its "large English-Speaking" population (but then, in India everything is large due to its size and proportion... where else on the planet, will one call a population on 120mn people - twice the size of the population of many countries - a "minority")

    But, the "large English-Speaking" population, actually consists of around just 30-40mn people (out of 1bn+)... These are the people who can read-write-speak "English". The others have there own version of "Hinglish", e.g.:

    Image and video hosting by TinyPic
    (Photo Credit: Unknown)

    One of the assumptions one makes as an educated, urban Indian is that it is the size of the "large English-Speaking" population that gives India an economically competitive advantage over other countries in the world in this globalised world. It also leads to some other implicit assumptions, e.g.,

  • "good" education gets equated with English-education

  • English is seen as essential for higher studies in engineering, medicine, science, social science, management, etc.

  • knowledge of English becomes a symbol of sophistication, of being cultured, and even of intelligence (or as the term currently in vogue, of "merit")

    And as happens with deeply cherished and widely shared social assumptions, they get enacted in the "real" world, shape the social reality, and become a self-fulfilling prophesy - i.e.,

    ...teaching in higher education is done in English, selection tests are designed in English, job interviews are conducted in English, candidates get selected on the basis of their knowledge of English, etc.,
    ...more technical books are written/published in English, there is greater demand for learning in English (or more number of shops that teach "English speaking"), knowing and conversing in English becomes "smart", "cool", "in" etc...

    It is in this context, Sankrant Sanu's post on the "The English Class System" is worth looking at (actually, recommended!)

    The following two tables are from his post, and show that:

    Rich countries are more likely to speak their native language:
    Image and video hosting by TinyPic

    ...while the poor countries adapt their "colonial" language:
    Image and video hosting by TinyPic

    I don't think that, based on this data, one can generalise that speaking the language of one's past colonial rulers makes a country poor. However, the fascination with English (or the colonial language) among the poor (and mostly post-colonial) countries does explain the historical antecendents of the linguistic divide between the "haves" and the "have-nots" of these societies. As Samuel Huntington had noted:

    "As the former colonies moved towards independence... promotion and use of indigenous languages... was one way for the nationalist elites to distinguish themselves from the Western colonialists and to define their own identity. Following independence, however, the elites of these societies needed to distinguish themselves from the common people of their societies. Fluency in English, French or another Western language did that. As a result, the elites of non-Western societies are often better able to communicate with Westerners and with each other than with people of their own societies..."

    And so - among many other divisions - India also remain "divided by English"... There are "English-haves" and "English have-nots"...

    ... Or as, in an earlier post about Garima's story, I had quoted from an article by Barkha Dutt:

    "...Garima’s story exposes India’s paradoxical relationship with the English language. Nobody in the world speaks English like us. We have our own idioms, our own words and our own accents.

    We pretend to love our own English and brag about how it is India’s great selling point; the reason we dominate the global outsourcing business. But, of course, deep down we know that our English is not the English that the West really wants. And so, each time we talk to Britons or Americans, we subtly alter our diction and inflection. When we set up our call centres, we drop the subtlety entirely and start accent classes to teach our young people to abandon the speech patterns of our own society and to migrate to a virtual, linguistic, middle America, where they become impersonators of people they will never meet and never know.

    But within India, we still treat our own English as the great social decider. We laugh at regional accents, smirk at those who make grammatical errors and feel most at home with those who talk like us. Everyone else belongs on the other side of the English divide. And as it turns out, the other side of the class and caste divide as well."

  • Monday, May 07, 2007

    India... between "Masses" and "Classes":

    This is worth a read...I picked this from here.

    I know some/many would comment/interpret this in terms of "who said it" and "why he said it"....

    .....which is one way to discount "what he said" - since, perhaps it is an uncomfortable narration of facts...

    Nevetheless, Mani Shankar Aiyer's (Minister for Panchayati Raj) speech to CII last month is worth a reading.

    [Incidentally... the only other person from the "establishment" who voiced similar concerns recently is KV Kamath, CEO ICICI Bank. In a Wharton interview last July, when asked the most important thing that can derail his plans for the bank's global and rural forays, he replied:

    "I guess in the Indian context, I would say something that is unforeseen, like social strife, because we are living in a world of haves and have nots. And there is a divide. Now is this going to be something that could bother us? To me, this is the single most important thing which could impact business."]

    If you have time to read, here is an abridged version of Mani Shankar Aiyer's speech:

    A few weeks ago the newspapers reported that the number of Indian billionaires had exceeded the number of billionaires in Japan, and there was a considerable amount of self-congratulation on this. I understand from P. Sainath that we rank eighth in the world in the number of our millionaires. And we stand 126th on the Human Development Index. I am glad to report that last year we were 127th.

    At this very fast rate of growth that we are now showing, we moved up from 127th to 126th position. This is the paradigm of our development process. In a democracy, every five years the masses determine who will rule this country. And they showed dramatically in the last elections that they knew how to keep their counsel and show who they wanted. We, my party and I, were the beneficiaries and we formed the government. Every five years, it is the masses who determine who will form the government. And in between those five years the classes determine what that government will do.

    In determining what that government will do, the CII has played an extremely important role. I am not surprised, as that is its job. It represents industry, and therefore it argues for the interests of the industry. Industry has been enormously benefited by the processes of economic reform that we have seen in this country over the last 15 years or so. But the benefits of these reforms have gone so disproportionately to those who are the most passionate advocates of reforms that every five years we are given a slap in the face for having done what the CII regards as self-evidently the right thing for this country.

    It is a sustainable economic proposition, because our numbers are so vast, that there are perhaps 10 million Indians who are just as rich as the richest equivalent segment anywhere in the world or in any group of countries. There are about fifty million Indians who really are extraordinarily well off. That’s the population of the UK.

    But if you look at the 700 million Indians who are either not in the market or barely in the market, then the impact of the economic reforms process, which is so lauded by the CII, makes virtually no difference to their lives. That is why there is a complete disjunct between what the democratic processes are trying for in the short run and what those who have made an enormous success of our achievements in the last fifteen years deem to be, at least in the short run, their own requirements.

    So when you talk of a nine point two per cent growth rate, it becomes a statistical abstraction: 0.2 per cent of our people are growing at 9.92 per cent per annum. But there is a very large number, I don’t know how many, whose growth rate is perhaps down to 0.2 per cent. But certainly, the number of those who are at the lower end of the growth sector is very much larger than those who are at the higher end.

    Yet what happens when you have the budget? As an absolute ritual every finance minister (my colleague Chidambaram is no exception) will devote the first four or five pages of his budget speech to the bulk of India and there will then be several pages, including whole of part B, which deals perhaps with one or two per cent of our population. Almost the entire discussion that takes place at CII or CII-like forums, will be about Part B rather than Part A.

    There are comfort levels that you get from statistics — for instance, suddenly Arun Shourie, announcing in the NDA government that our poverty rates have fallen from 35 per cent to 22 per cent. He did it by changing the basis on which you estimate poverty. You cannot compare apples and oranges. The next national sample survey has shown that our poverty levels have actually increased. Are we going to be mesmerised by these statistics or understand that 700 million of our people are poor?

    So we have an Indira Awaas Yojana which will ensure that there will be a ‘jhuggi’ for every Indian round about the year 2200. We have the PM Gram Sadak Yojana which was supposed to complete all the gram sadak in seven years — we are in the eighth year. And where we are told that the education of 1000 may be covered, who knows only the education of 500 will be covered. And if you happen to be a tribal in Arunachal, you are told that because of your social custom you are to live in one hut atop a hill, we can’t provide you a road.

    I was always something of a leftist. But I became a complete Marxist only after the economic reforms. Because I see the extent to which the most important conception of Marx — that the relationship of any given class with the means of production determines the superstructure — holds.

    This ugly choice is placed before the government. An unequal choice, because you have organised yourself to say what you want to say but the others are only able to organise themselves and that too without speaking to each other in the fifth year when the elections take place. That is why this expression anti-incumbency, although the Oxford Dictionary says that it is a word belonging to the English language, is a peculiarly Indian phenomenon. Because everything that goes in the name of good governance like the economic reforms either does not touch the life of people or affect them at all.

    We have seen what happened at Nandigram, we have seen what was happening at Singur and we have these propositions that say that SEZs are going to come and lakhs of hectares are going to be utilised for the good of the country. For what’s the syndrome in all this, it’s still ‘do bigha zameen’. The chap says that I want my one bigha of zameen to be reinstated, but you offer double the compensation and “baad mein dekha jayega”. You go to Hirakud, which is where Jawaharlal Nehru actually used the expression modern temples of India, and you ask what happened to the tribals who were driven out of there. Absolutely nobody knows.

    Coming to the cabinet, you see what happens. The minute suggestions are made as to what would perhaps benefit the people and what would benefit the classes, the tendency is to say that our great achievement is 9.2 per cent growth. Our great achievement is that Indian industrialists are buying Arcelor and Corus. That Time magazine thinks we are a great power.

    In these circumstances, when a proposal came before the government to spend Rs 648 crore on the Gram Nyaya department, we were solemnly informed by one of the most influential ministers in the government to remember that we are a poor country. I was delighted when the next day he was with me in a group of ministers and I reminded him of his remark and said in that case can we stop spending the Rs 7000 crore on the Commonwealth Games and he said, “No, no, that is an international commitment and a matter of national pride.” This national pride will of course blow up if you spend Rs 7000 crore on the Commonwealth Games. We will be on the cover of Time and Newsweek.

    I have always wondered why this rate of growth and economic reforms process is dated to Manmohan Singh. Because actually it should be dated to L.K. Jha’s book Economic Strategy for the 80s. It is the decade in which we quickly recovered from agricultural depression and registered a double digit growth. At the beginning of the decade our biggest import was crude oil and after that it was edible oil. By the end of the decade we were exporters of several kinds of edible oil.

    Why is it that Nehru became successful with his Hindu rate of growth? The reason is that the Hindu rate of growth was five times what our pre-Hindu rate of growth was. From 1914 to 1947, the figures of which are available, the rate of growth of the Indian economy was 0.72 per cent. And we got the Hindu rate of growth which was five times that and it made a difference to the people. The minute you had solid land reforms, the people had their ‘zameen’. That is what Mother India was all about. People felt that they were involved in the process. All the political talk was: gareeb ke liye ham kya kar sakte hain. Indira Gandhi matched it beautifully when the entire political spectrum joined hands against her by saying, “Woh kehte hain Indira hatao, hum kehte hain Garibi hatao.”

    There is nobody so marginal in a government as the minister of Panchayati Raj. I count for nothing. Nothing! When I was the minister of petroleum, I used to walk surrounded by this media. I kept on telling them that petrol prices can do only three things — go up, go down or remain where they are. And it was all over the place. But try and get them to write two words about the 700 million Indians — absolutely impossible. And now with terrestrial television it is even worse. You have to be quarreling with your mother-in-law or hitting your daughter-in-law to be able to hit the headlines. It is impossible to get particularly the pink papers to focus on issues that affect the bulk of the people. And it is so easy to get them to focus on issues that are of high relevance to only one or two per cent of the people.

    I believe the CII, if it is serious about the issue, should not be restricting itself to 25 minutes discussion before lunch but hold discussions for ten days and maybe something will come out of it.


    Needless to say, CII spent only 25 minutes - perhaps less - on this agenda....

    Saturday, May 05, 2007

    SEZs: Learning from China

    This is continuation of my earlier posts on SEZs...

    Economic & Political Weekly (April 28, 2007) has an interesting article about the SEZs in China. The learning from Chinese experience with SEZs is both instructive, and as the author points out, "frightening".

    Here are some excerpts:

    Key differences with India’s policy often cited include the number of SEZs in China -ostensibly only six in total – the large size of Chinese zones and the fact that the government retains ownership over the land.... But this image of Chinese SEZs is both incomplete and, in many respects, simply incorrect. China has far more than six zones, they have by no means been an unqualified success, and they have brought about severe economic and social problems.

    Economic Indicators

    Even from the narrow perspective of economic indicators, Chinese zones have not had uniformly positive results... the investment in SEZs was driven by capital from Hong Kong, Macao and to some extent Taiwan; 88 per cent of the new ventures in the SEZs in the early 1980s were by investors from Hong Kong and Macao. By 1995, 96 per cent of Shenzhen’s textile industry and 95 percent of its garments industry were owned by Hong Kong investors. No such sources of convenient foreign capital exist for India....

    Speculation and Land Loss

    Perhaps the biggest concern about India’s SEZs is the potential for real estate speculation and loss of agricultural land. The Chinese experience on this is both instructive and frightening... by 1991 administrative allocation of land gradually gave way to property markets, with SEZs leading the way....

    These markets are, in some respects, uncannily similar to those in India. In China, urban land belongs to the state and rural lands to the village commune, though families had been given individual contracts to their lands as part of the village commune reforms in the 1980s. Only urban land use rights could be transferred to private parties; rural land use contracts could be transferred only to the state, which then could change it to urban land and sell development rights on it. As the Chinese state swung in favour of big business, this system made farmers’ tenure insecure, especially in areas near expanding municipalities and within SEZs. Despite periodic revisions to the compensation standard, compensation for land acquisition was generally lower than the already low “market” value of these lands. Large-scale informal negotiations for land and administrative intervention also distorted the “market”...

    The similarities with India’s land market are strikingly apparent. In China, this produced a speculative market in land rights with requisition by the state followed by rapid transfer through speculators... This large-scale transfer of land to developers was partly driven by “zone fever”, namely, the rapid multiplication of zones as a result of continual promotion of SEZs as models...

    ...The Hainan SEZ is a particularly striking example. In 1992, The Economist reported that Hainan was the “world’s biggest speculative bubble”; Hainan had “few industrial firms and little industrial output”.

    "Everyone in Hainan has money to burn... Nobody any longer keeps track of the number of 30- and 40- storey office buildings being put up”, declared the magazine, stating that “This is not happening because anybody actually wants to use the space. Whole floors, indeed most floors, of the office buildings are empty, and practically none of the new flats and villas are lived in. What is going on? Speculation, almost pure and simple, and tax evasion.”

    ... In June 1998, the Hainan Development Bank, the main banker to the provincial government, closed down under bankruptcy. It was followed soon after by the Guangdong International Trust andInvestment Corporation of Guangdong province, where Shenzhen is located; this was the largest bankruptcy since reforms began...

    Labour Abuse

    In addition to real estate speculation, ... abuse of labour is rampant in Chinese SEZs. Seven million people out of Shenzhen’s total population of 12 million are migrant workers, with almost no legal or social protection... data for the Guangdong province, home of Shenzhen, shows very high death rates among industrial workers and more than 5,00,000 child labourers – a phenomenon which had been greatly reduced in post-revolutionary China. In 2003, at least half the firms in Shenzhen owed their employees wage arrears, and at least one-third of Chinese zone workers received less than minimum wage... Indeed, Shenzhen workers are so desperate that despite the lack of any independent unions, more than 10,000 wildcat strikes took place in 2006 alone.

    This labour abuse is accompanied, unsurprisingly, by crime. Shenzhen now has a crime rate that is nine times higher than that of Shanghai, and is notorious for the trafficking of women and sex trade. Relaxed customs have also led to large-scale smuggling; two of the original zones, Shantou and Xiamen, were hit by massive tax and smuggling frauds in 2000 and 1999 respectively...

    Etc. etc.....

    There is, indeed, much to learn from Chinese experience of SEZs, isn't it?

    Wednesday, May 02, 2007

    How Much Income Tax did You Pay this Year?

    One takes these things for-granted as per the definition. So, one sort of knows that Indian companies pay more than 30% of their profits as the Corporate Income Tax. According to Wikipedia:

    For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%. An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies...

    This belief is also reinforced by the high-decibel noise about this tax-burden (and need for "tax incentives" to promote growth and entrepreneurship, etc.) which is made by the industry captains and media... one assumes that this is how things must be!

    Well, at least, I thought so - till I came across Mayank Krishna's posting on his blog....

    Digging further, I learnt that the "effective tax rate" (i.e., those that the companies pay) is substantailly lower than the "actual (i.e., the prescribed) tax rate".

    In an interview in Business World, Parthasarathi Shome, the advisor to the Finance Minister, noted:

      "...The effective tax rate of all companies is 19.26 per cent (a sample of 301,376 companies). Now, every group based on the profit before tax shows that every group is lower than this average other than the Rs 0-1 crore tax group (with 164,352 companies). These companies are 24.29 per cent. The greater than Rs 500 crore companies come close to the average at an effective rate of 19.1 per cent and every other group is actually lower."
    Which is an interesting obsevation: Companies in Rs 0-1 tax group pay the highest, 24.29%, in tax!!! - which is still below the actual tax rate (and is higher than income tax rate for many salaried people)...

    In fact, this table below from an earlier issue of BW, shows that some of our stalwart corporations pay just 10-12% or even less as corporate tax - e.g., Reliance Industries (8.41%), Infosys (12.61%), Wipro (10.95%), TCS (11.72%), Bharti Airtel (7.29%),..and GE Shipping only 2.97% !!!

    Image and video hosting by TinyPic

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    So how do companies manage not to pay taxes?

    Two articles from July 14, 2003 issue (by Anjuli Bhargava), "Taxpayers ko Gussa Phi Kyon Aata Hai", and "Incentive to Evade" (registration maybe required) provide some interesting insights.

  • According to Kelkar Committee Report on Direct Taxes (2003) almost 2/3rd taxes remain unpaid due to "legal leaks in the system". This tax evasion happens through "legal leaks", i.e., the loopholes in the tax laws, the exemptions and the incentives. If one adds the outright fraud, the loss to the exchequer will be many-fold, e.g.,

  • In 2003, of the 5.69 lakh companies, only 3.49 actually filed returns. The number of companies that actually paid any taxes would be a fraction of even this number. After the formation of Tax Information Network, and electronic monitoring, this number must have decreased. Nevetheless, it is still a substantial proportion of companies (specially, the big ones).

  • There are also a number of companies that suddenly stop filing returns. Some of these "stop filers", of course, are companies that may have actually shut down. The number of "stop filers" (both corporates and individuals), however, has been increasing: from 15 lakh in 1986-87 to 71 lakh in 1996-97 to over 90 lakh in 2003-04. And, given the numbers, it is difficult for the IT dept to really verify it.

  • But apart from such illegal "tax evasion", corporates routinely use (and have access to) "legal" means to evade taxes. This is because, in India, as one of the articles mentions "the web of exemptions, incentives and loopholes that have been offered to private industry is so complex that even income tax authorities cannot see through".

  • Unlike in India, in most other countries where tax reforms (i.e., reducing tax rates) happened, the governement simultaneously also the exemptions and incentives. In India, on the other hand, the reduction in tax rates have paralleled increase in incentives and exemptions - which perhaps says a lot about the influence of industry lobby groups, ranging from CII, Nasscom, etc., to perhaps... Ok, whatever!

  • For instance, exemptions in Section 10 A and B of Income Tax Act, one has a long list of reasons for not paying taxes.A company can avail tax holidays on profits for (1) setting up operations in backward areas, (2) for getting into specific business areas, and even for (3) companies with high gestation periods. (An earlier post on SEZs, is an indicative example of such tax holidays that Indian corporates get)

  • While one may say that these corporate incentives/exemptions/subsidies are required to build a robust economic infrastructure, but these concessions, apparently are used by many companies to increase their profits (and increase returns to the shareholder) than to really add to the economy.

    Here are some instances (quoting from the articles):

    • "In the absence of an agreed definition of “manufacturing”, several enterprises take advantage of the available tax incentives for activities that involve only processing (the product is basically manufactured at another location and a bit of value addition is done at the unit located in the backward area, but not the actual production from scratch)."

    • "Enterprises producing the same goods at different locations claim that the entire production has been done in the backward region unit to claim incentives even when the goods are produced at a location outside the backward area. Other enterprises, with different units to produce goods at different stages of production, some located in backward areas and others outside the backward areas, have tended to undervalue supplies to units in backward areas (and conversely, overvalue supplies to units outside the backward areas) to reduce the tax liability everywhere."

    • "...common expenses of enterprises located in backward areas have tended to be allocated to units outside the backward area to reduce the taxable profit.".... According to one IT official: "These companies often have ‘faceless factories’. They run a bogus operation in a backward area and claim tax benefits, though the actual production is done elsewhere... here is usually some kind of fa├žade, a bit of infrastructure, but no real production there. So, they can inflate expenses also. They run a parallel system of sales and have a legitimate business also, but what enters the books is only what they want to pay as tax."

    • "...incentives, available to exporters and export-oriented units, have been among the worst abused for years and exporters of all categories have taken advantage of these. Other than overinvoicing the export turnover to claim a higher incentive, exporters have often deducted income attributable to domestic sales along with the income from exports. Claims are made for deductions for export of goods that are ineligible for the incentives (like mineral oil, unprocessed minerals and ores). Unaccounted incomes of businesses have been channelled and shown as export profits to avoid paying taxes on such incomes and to convert the black money into white. Several domestic 100% EOUs in software technology parks sell products to a sister concern after showing a large value addition. The sister concern gives a confirmation that it will export the product purchased from the EOU without specifying any time frame for carrying out this commitment. On the basis of this commitment alone, incentives are claimed under Section 10 A (whether the products are actually exported usually goes unchecked)."

    Etc... The list goes on...