Using tax rebates to induce investment will favour sub-optimal projects that are not related to either local or global demand - it'll take India back to the '80s.
Tapan Kumar Sen
National Secretary of CITU and CPI (M) Rajya Sabha MP
‘The money is better spent on extending social security for the poor or building infrastructure - this will raise demand and induce firms to invest’
I am strongly against the introduction of investment allowance in the forthcoming budget. It’s a pity that companies and their lobby groups have now started demanding allowances to make investment. Usually it’s the employees who make such demands. As against nominal tax rate of 33 per cent on profits, industries effectively pay a tax of 12 to 13 per cent since several provisions in Income Tax Act allow them to claim deduction and reduce their tax liability.
Also, the demand for investment allowance goes against the basic tenets of economics. An investor will invest money only if he gets a return from this. So even if you give 100 per cent investment allowance, it’s not going to change his perception. It will only marginally impact his decision. Investment are made on the perception of whether they will earn a return or not.
Instead of giving investment allowance, the government should deploy its resources for developing enabling infrastructure to create markets for goods produced by entrepreneurs. This would result in an automatic flow of investment.What we need is a vibrant market with purchasing-power in the hands of people. If you neglect this part (developing the market), no amount of investment allowance can attract investments.
A vibrant market can be created by effective public investment and also through a practical redistributive-mechanism. Also, the government should focus its attention on encouraging employment-generating and labour-intensive industries.
Since more than 60 per cent of our population depends on agriculture for itsl ivelihood, the government should increase its investment in this vital sector. More money in the hands of such a large number of people will create market that will attract investment from companies.
How can one expect investment when such a large proportion of our population is earning so little? I would argue for policies that will increase purchasing-power of the people instead of putting money in the hands of companies.
The money can also be better spent by extending social security to the poor. The proposed food security act will target people below the poverty-line. But the income level we use to define poverty-line is so low that its very difficult for anyone to survive with just Rs 11 per day in rural areas. The government should increase its coverage rather than giving additional sops to companies. I would argue for creating enabling infrastructure in the form of higher public investment especially in agriculture, covering more people under food security act, and promoting employment-generating industries to attract investment.
It is argued that the world economy is going through a recession and we need to incentivise investment from private sector. But unless the market is attractive, no amount of incentives will attract investment.Therefore, if we have a strong domestic market with adequate purchasing-power in the hands of more than one billion people, then we can be totally insulated from worldwide economic recession. India Inc’s asking the government for an investment allowance, without which the investment levels in the economy would fall, seems like a form of blackmail to me.
As told to John Samuel D Raja
Chandrajit Banerjee
Director General, Confederation of Indian Industry
‘The global slowdown has meant a huge fall in demand, and corporate profits have got hit. Tax rebates for investing is the only way to fix this’
The slight upturn in the Index of Industrial Production (IIP) for April 2009 has signalled a ray of confidence that the decline in industrial output may have bottomed out. But the ‘green shoots’ of recovery are still fragile and need much nurturing before we can concretely talk of industrial revival. Re-introduction of the investment allowance would go a long way towards encouraging companies to invest in new plant and machinery, resuscitate production and plan for expansion.
The investment allowance was discontinued in 1990, but since this was later followed by industrial de-licensing and reduction in corporate-taxes, companies could invest according to market conditions. At that time, the environment supported huge investment as there was large unmet demand across industrial sectors. In fact, in the latter half of 1990s, production capacities exceeded demand, and corporate investment came down. It is only since 2001-02 that companies have reprised their expansion plans. Since then, private corporate savings have more than doubled, leading the jump in domestic savings-rate.
The current situation is very different. The global economic slowdown has led to large contractions in overseas demand, and consequently in exports and industrial growth. This could lead to a drop in corporate savings as corporate bottom-lines are squeezed. Indian companies need incentives to utilise the downturn effectively and restructure with new plant and machinery. Such incentives have been introduced in other countries at different times to support investment — for example, in UK and Australia for small businesses; in Germany for investment in eastern regions; and in Singapore for special projects.
India still enjoys robust domestic demand, arising from a relative insulation of the rural economy from global developments. Second, internal demand also arises from completion of infrastructure projects like power, roads and highways. Third, to be able to operate efficiently in the emerging global economic scenario, Indian companies should be allowed to upgrade technology to global benchmarks.
In its pre-budget discussions with the Ministry of Finance, the CII has strongly recommended reinstating investment allowance on assets acquired before March 31, 2010 at 25 to 30 per cent of cost. Given the adverse impact of the global conditions on smaller businesses, Micro, Small and Medium Enterprises, as defined under the MSME Development Act 2006, deserve an additional investment allowance of 10 per cent of cost.
To further strengthen the recovery process through accelerated investment, CII has also recommended that depreciation rate be increased to 25 per cent to combat rapid technological obsolescence. The current depreciation rates for plant and machinery are low at 15 per cent, comparing unfavourably with many countries. In Australia, the depreciation rate for assets depends upon its effective life; in Canada, depreciation on plant and machinery is allowed at the rate of 20 per cent; however, for plant and machinery used in manufacturing and processing, the rate is 30 per cent. Such discrepancies with the rest of the world render Indian industry uncompetitive in the global marketplace and must be rectified.
Government must supply every policy encouragement, including investment allowance, to make this possible.
