A Solution to India's Major Problems
(Note: This article was written sometimes in
2000 when I was creating this website. Maybe it was just a coincidence
but since then, India seems to be on the right track. Mr. Bajpai, Mr.
Manmohan Singh and Mr. Chidambaram have done fine job recently in focusing
on economy and they have also tried to resolve Kashmir dispute, improve
India-Pakistan and Indo-China relations, and harmony between Hindus
-Jayesh Patel, CFA
We NRIs, as well as resident Indians, often talk about India and discuss her problems. Each of us has our own view about what is wrong with her. Frankly speaking, as India has many problems, it is hard for us to prioritize on one solution that can effectively address many of her challenges.
After finishing my MBA in USA, I decided to go back to India for one main reason. I wanted to contribute, however small it could be, to India's ever growing problems and needs. My almost six years of stay in India and an involvement with Indian business and economy has given me an opportunity to look at things more closely. I have come to believe that single most thing that can solve many of India's problems effectively is EMPLOYMENT/JOBS.
We and also our politicians talk a lot about creating employment; but what is done so far in India is quite contrary. Our policies have abolished jobs, frustrated entrepreneurs, harassed businessmen and drove away talented people out of our country. It is the biggest failure of Indian democracy that vast majority of our graduates remain unemployed. We are often tempted to quickly pass on the blame to overpopulation. We passively accept that nothing can be done in this respect. I don't agree.
Following is an attempt to highlight importance of JOBS CREATION and then are some suggestions on how we can do it
Can you imagine what happens to a person who is qualified and despite great efforts is not able to land a job? Guess how much money a person in India would ask for working for a full month- six days a week? Average 50-100 dollars a month. In my humble opinion, with this kind of wages, no one in the world can stop India from becoming one of the biggest and the most competitive suppliers of goods. China is a nice example and just look at the trade balance China has with USA. What we trade with USA may not be even 10% of what China does. So what is wrong with us?
One more thing: Our youth and human resources which should be utilized for creating national wealth are wasted and often times diverted/'utilized' in antisocial and anti-national terrorist activities. India's all major internal problems like Kashmir issue, Zarkhand movement, Sheiks problems, terrorism, Nexellites, Hindu-Muslim riots-- all of them have their prime strengths and roots in young people, mostly those frustrated and/or unemployed.
Every new job in economy creates new consumers (worker and his family) in the society, more demand for goods and services and higher Gross National Product. Our problem is not supply of goods; it is lack of purchasing power and demand. Do you know how many factories are lying closed in India? I guess three out of five
|The main reason? Recession, lack of demand, hard to sell what you produce.|
There is no doubt that primary focus on JOB creation would revive more and more industries which would in turn create more and more jobs. It is a domino effect. (In fact we are looking at the domino effect in the reverse direction at present. More and more factories close day by day, losing more jobs and consumers. This creates more pressure on demand and on survival of other business units. We need to put our best efforts to reverse it immediately.)
and strong Rupee:
The job creation would increase GNP and exports which would reduce dependence on imports. This should strengthen Indian Rupee in the currency markets. Do you know the single most important factor of why our currency keeps on depreciating?
|In a layman's term: we take more (import) from other countries than what we are able to give them (export) in return.|
The day our exports overtake our imports, the reverse would happen. Tremendous increase in exports is possible because we have one of the world's most skillful, also the cheapest labor force and also the world's most entrepreneurial people. All we need is the RIGHT FOCUS and CORRECT POLICIES.
|Do you know that the 5% Indians which are there in other countries (I mean NRIs) are contributing more GNP for those countries than the GNP that 95% of the Indians in India create together?|
(Use the simple arithmetic and it would not be hard to realize how we can fulfill our long cherished dream of making our India a world leader). Every graduate in India feels 'he is struck in India' and wants to get out. Why? I guess the single important factor is lack of a well paying job which would guarantee a good life style for himself and his family. (Let us ask ourselves: If I had a well paying job and a promise of good life style, would I had been desperate to come to USA leaving my family and relatives there?). If we succeed in reversing this brain drain, our businesses, industries and products would benefit and would become more competitive in the world market. This would also increase exports and strengthen Indian Rupee.
There is no doubt that JOBS oriented economy would kick-start Indian economy and businesses creating more jobs and opportunities resulting in better standard of living.
Encourage business and industries:
Who creates jobs in the economy? it is always the private sector- businesses and industries. Every single job created is a small boost to the economy. Every newly employed person is creating/contributing some goods/services in the economy simultaneously causing some increase in demand for other goods and services. Government also creates some jobs- but most often such jobs does no good to economy; they don't result in value addition or value creation in the economy.
|So to achieve the goal of Jobs creation in the economy, the first thing we need to do is to understand the importance of and pay enough attention to growth of industries in the country. Economy be at center and not the Hindu-Muslims, Religions, BJP, Congress, Sonya, Cricket or Laloo....|
We need to respect business people, businesses and industries at every level. We need to provide a conductive environment and infrastructure for them to grow.
Do the reality check of the 'regulation raj':
(Update: India's "regulation raj" has improved a lot recently. Jayesh Patel, 05/05/05)
Excessive burden of rules and regulations (most of them hardly achieving anything good for the nation and its economy), the harassment by the government departments and the widespread corruption are acting against national interests.
|A typical business manager in India is spending on average 60% of his time (compared to 10-20 % in the USA) in unproductive issues most of that can be related to various rules and regulations and Government affairs.|
We need a courageous and business focused political leader like Andhra Pradesh Chief Minister Chandra Babu Naidu (preferably as a prime minister or a finance/industry minister) who can simplify and also eliminate if needed those rules and regulations. We need to do the reality check and the cost benefit analysis for all existing regulations. In other words we need to free the entrepreneurs, businessmen and industrialists from excessive regulations which are acting as constraints now and then and also from the beaurocrats who are harassing them for some selfish interests.
Do you know how many types of taxes are there in India? Income Tax, Corporate tax, wealth tax, Excise, Customs, Service tax, Sales tax, CST, Octroi, Turnover tax, Professional tax and so on.
|Look at the complexity of each of them and the differences most of them have from state to state. The worst part of this whole thing is the frequency of changes made every now and then and that also without any long-term target or policy.|
If you have a booming business and you want to expand it all over the India, the compliance with these tax laws of central, state and local city administrations would be a gigantic task.
The other byproduct is that the taxes (actual amounts plus compliance costs in terms of time and human resources plus fees charges by variety of tax consultants plus surcharges plus corruption) add up to 40-70 % of the price the consumer pays for most of the final products. In other words the higher prices (caused mainly by taxes) make things less accessible to most of our counterparts in India.
|Higher prices reduce demand to great extent reducing the overall size of markets and economy.|
I guess a car's final price to customer is made up of 60% of taxes and only 40% of the raw material, manufacturing, selling costs, other business expenses, dealers' margin and profits. So it in not a surprise that, we sell hardly a million cars among a population of 1000 millions India. Assume that the tax levels and also the degree of complexity are brought down to the level of a developed country, a car's price would drop by 30 to 40% causing the market to increase exponentially. Imagine how many more Indians would be able to afford a car raising their standard of living? And think about the Jobs created in the automobile, ancillaries industries, steel and aluminum industry and the service industries. That's is the real benefit. Cars is just one example. (Thanks to Manmohan Singh and Chidambaram, the talented finance ministers India had in 1990s. They really have brought down taxes significantly, as an example excise and customs duties from 250% level to around 50% levels for some products.... If Manmohan Singh were not there in early 1990s, Indian markets would have collapsed causing currency devaluation and high inflation.)
Free industries from ministers' discretionary powers:
Why should we let our finance minister and bureaucrats make arbitrary changes in duties on different products? Budgets in India do more harm to the nation than the good they do to it. Why should we one billion Indians give all power to one person- a finance minister to decide what products are good or bad for 1 billion of us? Why should we let him decrease duty on say nylon and viscose yarn and increase duty on cotton and polyester? Rate of duty have to be same (or maybe maximum three slabs based on the importance of the product to a common man) on all the products and all a finance minister can do is increase or decrease the rate across the board. This would instantly break the vicious links between industrialists and politicians.
|It would also bring a full stop to practice of different finance ministers giving favors to (relatives, friends) industrialists who support him and his party and the practice of punishing those with links with opposition party.|
These is nothing but robbery. The businessman who got minister's favor would make a killing by making say 20 crores and then giving maybe 5 crores to finance minister/his political party. Think who pays the cost of this ill practice? We the citizens of India. Fortune of score of Indian industries change overnight on Budget day.
|The worst part of this practice is that it prevents long term investments in Indian economy.|
If you are a businessman with ten million dollars to invest, would you set up a business in an economy where one Indian (a finance minister) could virtually destroy your business overnight by increasing duty on your product or lowering on the substitute/competitive products? This acts as a bumpy ride for good, honest and professional management. This also prevents Indian companies from growing bigger and achieving economies of scale which is a must for an export oriented economy.
(When I was in India during 1990s, I have seen most people asking for payback within 3 years if they were starting some business. )
Think of USA in this context where almost all products (except food products which have much lower taxes) carry the same rate of tax. Did you ever hear Clinton, Greenspan or anyone else in USA doing favors or punishing some particular industries?
|This is the reason you see score of Indian businesses dying within the first five years. A tendency among businessmen in India to do business with others' money- maybe banks, financial institutions and public (public issues-IPOs). A tendency to divert money and hide profits to save taxes and also to use the same money in bad time when their business gets into bad shape.|
You would be wondering why we are referring to gold here. ...We Indians are still obsessed with gold. We love and buy gold. Do you know that India is the single biggest buyer in the world gold market?
|India imports approx. 500 tones of gold which is roughly equivalent to 24000 crores (240 billion) Indian rupees every year. This is like 500 tons of gold coming in the country and these much money flying out. This money could be invested more productively in creating jobs in India.|
I think one crore Rs of investment would create 20 jobs in the economy. If the money that goes out of India for gold is invested in productive assets instead, it would generate around 5 lacs of direct jobs in the economy every year. If you consider broadly, this investment and the jobs created would generate tremendous positive impact on existing businesses and industries causing GNP to grow exponentially.
Government should not create even a single new job. The government and its employees are the biggest 'drain' on Indian economy. Not only their contribution to economy is questionable, the work standard and the pay standard it has created are bad and mis-aligned. It has indirectly killed moral of most of the common people working in private sector. I am not against the higher pay for people in India. But I am against the unnecessarily higher salaries paid to government employees from public resources which could otherwise be used for infrastructure development.
Do you agree with my opinions above? Would love to hear your comments: mailto: email@example.com