Column : Forget giving, just take less

Written by Sunil Jain | Updated: Mar 26 2011, 08:47am hrs
Much has been written about how Warren Buffett and Bill Gates have had some measure of success in converting Indias 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 cant Mukesh Ambani or Sunil Mittal It appears some 70 well-heeled persons attended the Gates buffet(t), though the names havent been revealed in order to protect their privacy. While no estimates are available of their wealth, Forbes estimates that the combined wealth of Indias richest 55 persons (perhaps most of them were at the buffet meal) is $246 bn, or around 14.1% of Indias GDPif a third of this was given to charity

A study by consultants Bain & Company further cements the idea of how hard-hearted Indias rich are. Bain estimates Indias charity contributions are just 0.6% of GDP, as compared to the USs 2.2%; of this, just a tenth was given by individuals and corporates as compared to 75% in the US65% of Indias 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 Indias 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 doesnt 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 Indias rich isnt really cash in the bank, its the market value of their shares in the firms they run. So, if much of this is to be liquidated, its value will immediately falltoo 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 youll 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 Indias 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 ( 409883/) did a calculation of Indias 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 countrys assets.

Even so, not bad youd say. So lets look at another set of numbers to put this in perspective. This $246 bn is roughly the size of Indias annual budget. Weve 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 governments spending, in terms of getting clean water, better education and health facilities, and so on, it isnt that much. So, if the corporate sector is to become like Bill Gates and Warren Buffett, its 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 ( 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 Omidyars investment portfolio), low-cost money transfer solutions using mobile phones.

So, instead of asking Indias rich to give, why dont 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 years 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 peoples 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.

Theres also the question of what the rich take away by way of corruption. Lets take just the 2G scam. Discount the CAGs higher estimate of R1,76,000 crore and lets 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 Indias 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 earningsbut if someone gives you R100 crore as an interest-free deposit, chances are hell 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 dont need its money. The government has enough.