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Column : Forget giving, just take less

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SummaryMuch has been written about how Warren Buffett and Bill Gates have had some measure of success in converting India’s hard-hearted businessmen to their way of thinking.

Much has been written about how Warren Buffett and Bill Gates have had some measure of success in converting India’s hard-hearted businessmen to their way of thinking. If Warren Buffett can give away 99% of his wealth for charitable purposes, and Bill Gates 66%, why can’t Mukesh Ambani or Sunil Mittal? It appears some 70 well-heeled persons attended the Gates buffet(t), though the names haven’t been revealed in order to protect their privacy. While no estimates are available of their wealth, Forbes estimates that the combined wealth of India’s richest 55 persons (perhaps most of them were at the buffet meal?) is $246 bn, or around 14.1% of India’s GDP—if a third of this was given to charity …

A study by consultants Bain & Company further cements the idea of how hard-hearted India’s rich are. Bain estimates India’s charity contributions are just 0.6% of GDP, as compared to the US’s 2.2%; of this, just a tenth was given by individuals and corporates as compared to 75% in the US—65% of India’s charity, says Bain, is done by central and state governments in the form of disaster relief primarily.

There are some important caveats to be made in the context of India’s lack of corporate philanthropy, some of which have even been made by Bain. The most important, that the US has a 46% inheritance tax for wealth beyond a certain limit; this doesn’t take away from what Bill Gates and Warren Buffett are doing, but it does give a certain perspective on it.

Since some bright guys will use this to argue India should also have a similar tax to encourage corporate philanthropy, you need to keep a few things in mind. First, much of the ‘wealth’ of India’s rich isn’t really cash in the bank, it’s the market value of their shares in the firms they run. So, if much of this is to be liquidated, its value will immediately fall—too much supply, if I remember my high school economics right, causes prices to fall. Two, much of this ‘wealth’ is not held in the personal names of the individuals; much is held in the names of investment firms that are not owned by the individuals; the directors on such investment firms are often paid employees of these firms. So you can put the inheritance tax at 146% and you’ll still get pretty much near zilch.

Another caveat: the wealth of rich Indians is exaggerated, and hugely so. $246 bn is around 14.1% of India’s GDP, but GDP is nothing but a flow of annual income of each and every Indian each year while wealth is a stock of savings over the years. TN Ninan (http://www.business-standard.com/india/news/t-n-ninan-equality-or-fairness/ 409883/) did a calculation of India’s wealth, the value of the cows, the land, the bank deposits, the houses, and came to the conclusion the rich owned at most 3% of the country’s assets.

Even so, not bad you’d say. So let’s look at another set of numbers to put this in perspective. This $246 bn is roughly the size of India’s annual budget. We’ve just argued not too much of this wealth can be gifted away, but even if you assume it can, what the corporate sector can give away and then have nothing left (!) is just what the government spends in a year. If you see the impact of the government’s spending, in terms of getting clean water, better education and health facilities, and so on, it isn’t that much. So, if the corporate sector is to become like Bill Gates and Warren Buffett, it’s pretty much a waste of time and money, unless the money is actually channelled into profitable and efficient ways to give it out. A good piece to read in this context is one by Jayant Sinha in FE (http://www.financialexpress.com/news/Column-Its-not-just-about-giving-money/766374)—Jayant works with Omidyar Networks and what Omidyar does is to invest its money in firms that deliver low-cost innovative solutions for the poor; in a firm that may provide, to use an example from the top of my head (and not from Omidyar’s investment portfolio), low-cost money transfer solutions using mobile phones.

So, instead of asking India’s rich to give, why don’t we turn the concept around, and instead ask them to not take? Every budget document has a table on ‘revenue foregone’, the amount of tax the government does not collect since it is giving some tax sop or the other, usually to the rich and famous. The latest figure for revenue foregone in the Budget is R5,11,630 crore in the current year, which is around 65% of the total budgeted tax collections and around 6.5% of the year’s projected GDP.

It is not my case that all tax sops are a bad idea, but if tax sops equal 6.5% of GDP and the rich people’s wealth is 14.1% of GDP, this means the annual tax sops equal half the wealth of the rich. In other words, the rich will probably contribute a lot more to society if they were just willing to let the government remove tax sops than as compared to a situation where Bill Gates and Warren Buffett have to try and apply moral pressure on them to part with their wealth.

There’s also the question of what the rich take away by way of corruption. Let’s take just the 2G scam. Discount the CAG’s higher estimate of R1,76,000 crore and let’s use the R60,000-70,000 crore figure given as the median estimate, based on the price at which Swan and Unitech sold their equity. Look at the kind of companies whose names are mentioned in the CAG report, and you see that India’s rich are getting away with a lot more than just tax sops. How much is difficult to say, but in the Delhi airport case, for instance, after winning the bid by promising to pay the government 46% of the top line revenues, the GMR Group has changed the meaning of what top line is. Large interest-free deposits are not being shared with the government on the grounds these are liabilities and not earnings—but if someone gives you R100 crore as an interest-free deposit, chances are he’ll also pay you R10 crore less by way of annual rent, right? This one change will cost the government over a thousand crore rupees.

My advice: Let corporate India just clean up its act. We don’t need its money. The government has enough.

sunil.jain@expressindia.com

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