It is time that a responsible official assessment of the fiscal impact of scams is routinely made available by the finance ministry to temper some of the wilder flights in the media.
November came in with the Obama visit and went out to the roar of scams. Tumbling out of political closets at such a pace that the average citizen is left with no reliable numbers on the magnitude of damage inflicted by each. Some like the 2008 2G spectrum allotment affect the central exchequer alone, since state governments do not get a statutory share of central non-tax revenue. (The scam itself might not have happened if states did have a share of non-tax revenue; there is nothing quite as effective as monitoring by diverse stake-holders with something to lose.) The land scams are typically confined in their revenue impact to the state where they occur, and some, like the diversion by the Delhi government of scheduled caste welfare funds towards the Commonwealth Games, affect particular classes of beneficiaries.
Media reporting tends to distort rather than inform. Take for example the 2008 telecom scam. Chapter five of the CAG report was very careful not to provide just one estimate of revenue loss to the central exchequer. It specified a range, with the methodological underpinning to each number in the range clearly spelt out. The media seized the estimate at the high end and flogged it to the point where the figure of 1.76 lakh crore is now firmly lodged in the consciousness of the public as the measure of revenue lost. That was the most fanciful of the estimates provided by the CAG, based on the bonanza from the 3G auction in 2010 of 1.03 lakh crore, three times what was expected.
Economists are fond of the term counterfactual, standing for what might have been. The 3G auction could be used as a benchmark if it were in no way influenced by consequences of the underpriced 2008 allotment. I have seen a persuasive unpublished argument by Abheek and Debdatta Saha, that the price war following the 2008 allotment in the 2G space made 3G more enticing and led to an unexpectedly high realisation. That rules out the 3G auction as a basis on which to quantify the loss in 2008. The numbers at the low end of the CAG range are far more plausible as the revenue counterfactual, based on what some of the primary allottees realised upon immediately offloading their allotment. These show an exchequer loss of around 1 per cent of current GDP. A big enough loss, not in need of further exaggeration.
Media slant was similarly responsible for generating a public sense that the Obama visit in November prised a $10 billion import commitment out of India, to generate jobs in the US. Those import deals would have happened anyway, but were bunched together for the presidential visit. The reporting of it made it look as though we had capitulated to a charming commercial salesman.
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Likewise, a flap is periodically raised over Obama’s threats to remove the tax breaks under US law that favour firms transferring jobs “from Buffalo to Bangalore”. So widespread was the conviction of the potential damage to India that the Republican victories in the November US elections were hailed as a stop to that threat. In itself, this is very unfortunate. External interests should not have a stake in the fiscal policy of any nation.
Those tax breaks are irrelevant to the Indian IT sector anyway. When business processes in the US are outsourced to an independent IT provider in India, the move is driven by cost advantages, not fiscal advantages. The US tax break impacts only US firms with foreign subsidiaries, and refers (principally) to the provision whereby profits earned outside the US get a tax deferral until actually brought back to the US. This has clearly fuelled expansion of US multinational subsidiaries, especially in destinations where the corporate tax rate is lower than that in the US. India does not offer a corporate tax rate advantage, but the 10-year tax holiday for units located in Software Technology Parks has driven the expansion of captive centres belonging to IBM, HP, Oracle and Microsoft.
The US tax deferral may not be ended altogether (although that would make the US tax regime more location-neutral). Instead, there may be a more targeted amendment, whereby payments by US multinationals to foreign subsidiaries for services rendered may disallow the profit margin of the foreign subsidiary (in effect, taxing external profits at the full American corporate tax rate). A more extreme move may make payments for services to foreign subsidiaries entirely non-deductible. If these make subsidiaries in low-cost destinations unprofitable, the subsidiaries may just be spun off into domestic ownership. Ending of the tax break is not a fearsome prospect, in short.
It is time that a responsible official assessment of prospective external fiscal developments of this kind, and of the fiscal impact of scams, is routinely made available by the finance ministry at the Centre to temper some of the wilder flights in the media. Central budget documents in recent years include a listing of tax revenue lost on account of concessions in both direct and indirect taxes. Scam impact assessment could be an appendix to this document, with a revenue component and an expenditure component (for rotting foodgrain, NREGA scams, and such).
Every scam is enabled by a system failure. A permanent scam impact and prevention cell in the ministry could issue periodic notifications on procedural correctives needed to prevent each type of episode and a status report on these correctives should be a required component of annual budget documentation. An official website, inviting suggestions from academics and practitioners would be a useful supplement.
The media have played a vital role in the uncovering of scams. Thereafter, governments at the Centre and states need to take ownership and responsibility for damage assessment and correction. This will reduce the amount of parliamentary and executive time spent on scams rather than on the business of governance. And it will give less room for media spin.
The author is honorary visiting professor, ISI Delhi