Corporate India has long been a big votary of free market, but with a constant, insatiable hunger for support from the government. When JRD Tata, GD Birla and six other top industrialists proposed the ‘Bombay Plan’ for India’s economic development in 1944, they would not have imagined that 78 years later, India’s large companies would still want their business risks to be mitigated through government policies.
Large firms in India have been the biggest beneficiaries of fiscal and tax concessions, bank credit and policy-enabled protection from competition. This is despite the fact that the big listed firms have generally done better than the rest of the economy. The ongoing “formalisation” of the economy, aided by government policies encouraging digital transactions, the Goods and Services Tax etc. have increased larger companies’ market shares.
Among the big firms, those in the public sector, have had the benefits of natural resources available to them on nomination basis (Coal India, ONGC), exemption from competitive bidding (NTPC), monopolistic existence (Gail India, PowerGrid and Coal India).
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Their private-sector counterparts may have lost out on such privileges but have gained even more from tacit composite transfers from the state. These were in the form of lower effective tax rates, massive loan write-offs by public sector banks (Rs 10 trillion in the five years through FY22 alone), high import tariffs and even risk capital support, as under the hybrid annuity model for highway construction, where private developers have very little skin in the game.
Corporate India had long grumbled about relatively high taxes on their business incomes, and cited this as one factor blunting their global competitiveness. In September 2019, the government slashed corporate tax rate from 30% to 22% and from 25% to 15% for “new manufacturing firms.” . The tax cuts were meant to revive the private capex cycle.
Although the pandemic blurred assessment of the utility of the tax cut, the investment rate only declined from 32.4% in FY19 to 31.8% in FY20, before plunging further to 30.5% in FY21, the pandemic year.
India’s applied tariffs on industrial goods used to be as high as 80% in early 1990s. The MFN tariff walls have crumbled over the years to 15% in 2020, but the rates inched up further since then to 18.3% in 2021, partly at Corporate India’s instance.
The government had to defer the plan to clinch a free trade deal with the EU in 2013, as the domestic industry vehemently opposed somr proposals. New Delhi’s decision to walk away from the RCEP in 2019 was prompted by fears of Chinese competition expressed by some top Indian firms.
Protectionism hasn’t withered away even in the developed world. However, protection accorded to corporate houses in India had over the decades assumed the character of self-perpetuating privileges. It is high time India’s large firms shunned this wrong sense of entitlement and be true to their avowed commitment to free market.
Looking back, Looking ahead
1 British imperial rule resulted in drain of India’s wealth & income to the tune of 13.39 trillion pounds till 2020, four times the UK’s GDP in that year.*
2 First note ban: The Janata Party-led government revoked the legal-tender status of Rs1,000, Rs5,000 and Rs10,000 banknotes in 1977, to launch an assault on illicit wealth.
3 In July 1969, the Congress government nationalised 14 private banks, citing the need to step up lending to agriculture.
4 The marginal rate of income tax in 1947-48 was 31.25% (for annual income above Rs15,000), comparable with the current rate.
5 The highest I-T rate was raised to 65% (plus 20% surcharge) in 1965-66, and further to 70% (97.75% including surcharge) in 1974-75; the rate was cut to 50% by VP Singh in 1985-86 and lowered further by Manmohan Singh and P Chidambaram later.
6 Corporate India for govt control: Substantial govt control in independent India was first envisaged by eight top industrialists, including JRD Tata, in the famous Bombay Plan.
7 The first Industrial Policy Resolution came in 1948, which proposed a mixed economy, with limited scope for private enterprises.
8 While the first two 5-year Plans met targets with growth rates of 3.6% and 4.3% respectively, the third and fourth didn’t; higher growth rates were seen between the 9th and 12th (terminal) Plans.
*Utsa and Prabhat Patnaik