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Modi Sir, Aware Of ‘Egregious Officers Destroying Business’ – ‘EODB’?

How Gujarat Inc.’s warning to Prime Minister Modi got drowned out in the ‘Ease of Doing Business’ din.

Prime Minister Narendra Modi with leaders of industry, at his official residence in New Delhi, on Nov. 19, 2018. (Photograph: narendramodi.in)
Prime Minister Narendra Modi with leaders of industry, at his official residence in New Delhi, on Nov. 19, 2018. (Photograph: narendramodi.in)

I admire two things about Prime Minister Narendra Modi. He is an audacious and energetic propagator of his pet ideas. And, he coins really smart acronyms to catch the popular imagination.

Of course, once he encounters success, his performance becomes incomparably virtuoso. That was apparent when he celebrated India’s leap of 23 spots, from rank 100 to 77, in the Ease of Doing Business Index compiled by the World Bank. Modi beamed. He was now tantalisingly close to his target of “getting India into the Top 50”, so you could not grudge him the joy. “Now our effort is to take India to the five-trillion-dollar club as soon as possible”.

Of course, what was left unsaid is that even at a GDP of $5 trillion, India would have a per capita income of under $4,000 per annum, which is a hefty distance away from the $10,000 mark, considered the real milestone that would justify such self-congratulation.
Modi Sir, Aware Of ‘Egregious Officers Destroying Business’ –  ‘EODB’?

Eye-Popping Facts On EODB’s Narrow Remit

Several other things were left unsaid too.

Most of us assume, quite innocently, that the World Bank’s EODB Index is the gold standard of economic performance.

In reality, it’s an extremely narrow, even misleading, summation of a few economic rules which matter to a tiny, very tiny sliver of India’s vast population.

Here are a few eye-popping facts:

1. EODB is derived from the subjective views of a few dozen experts in Mumbai and Delhi. That’s it! It’s not based on an objective, statistical collation of hard facts gathered from across the country.

And its outcome matters to less than 5 percent of India’s population.

2. Most of the improvement came from just four rules that were swiftly changed by the Finance Minister at a meeting held on December 26, 2017. This has been criticised as a “Kota Coaching Class” approach to “gaming the system” rather than effecting a fundamental change:

  • enforcing a single window clearance for building permits in Delhi and Mumbai.
  • allowing exporters to seal their containers electronically, reducing physical inspections to 5 percent of shipments.
  • introducing a single form for company incorporation; and
  • lowering the cost of getting electricity.
I’ll say it once more. That’s it! Just these meagre tweaks to a few rules in Mumbai and Delhi are supposed to have transformed India’s economy. Never mind the fact that on three significant parameters—paying taxes, resolving insolvency and enforcing contracts—we actually slipped. But why bother with such trivia in a post-truth world.
Prime Minister Narendra Modi chairs a session on India’s Business Reforms, at the Pravasi Bhartiya Kendra in New Delhi, on Nov. 4, 2017. (Photograph: PIB)
Prime Minister Narendra Modi chairs a session on India’s Business Reforms, at the Pravasi Bhartiya Kendra in New Delhi, on Nov. 4, 2017. (Photograph: PIB)
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Eye-Popping Facts On What EODB Does NOT Consider

Even more critical is to check what the EODB Index does not take into account. You will be now astonished to see how lethally narrow its underpinning is.

  • Drop in the investment rate from 37 percent to 27 percent in less than a decade.
  • Shortfall in Goods and Services Tax collections by nearly Rs 1 lakh crore in the current fiscal.
  • Withdrawal of nearly Rs 1 lakh crore by foreign portfolio investors this year.
  • Increase in unemployment to 1.89 crore by 2019, as per the International Labour Organization.
  • Sluggish exports through the four years of Modi rule, failing to touch the 2013-14 record of $313 billion even once.
  • Non-performing assets of about Rs 9 lakh crore or nearly $130 billion on banks’ balance sheets
  • Refusal by the government to honour global arbitration awards on tax disputes.

The Gujarat Echo Chamber Is Distressed

Prime Minister Modi’s older echo chamber, the Gujarat Chamber of Commerce and Industry, had given a dire warning just two days ahead—November 16, 2018—of his euphoric EODB outing. Modi though, in another virtuoso act, remained silent on their prophecies of doom; which I am quoting verbatim:

  1. Gujarat’s textile production to fall by at least 20-25 percent this year, on account of GST and attacks on migrants.
  2. Surat’s synthetic cloth production is down from 4 crore metres to 2.5 crore meters.
  3. Gems and jewellery exports down by 4.3 percent this year; 50,000 units in Surat and Saurashtra, employing 2,00,000 workers could down shutters because of the delayed refund of input credits.
  4. Over 2,000 SMEs are on the verge of closure due to the ban on plastics in major Gujarat cities.
  5. Nearly 5.38 lakh youth were registered as unemployed in Gujarat in December 2017; only 12,689 youth got government jobs over the past two years; Ahmedabad has the highest number of unemployed youth registered at the exchange, at 62,608.
  6. This slowdown can be termed as the worst in the past four years.
A conference at the Gujarat Chamber of Commerce and Industry on the MSME sector, in Ahmedabad, on Nov. 23, 2018. (Photograph: GCCI)
A conference at the Gujarat Chamber of Commerce and Industry on the MSME sector, in Ahmedabad, on Nov. 23, 2018. (Photograph: GCCI)
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No Problem, Here’s Another “Grand Challenge”

But the Gujarat warning was drowned in the EODB din, as Modi conjured up yet another big sounding theme. He announced a “Grand Challenge” for India’s techies to come up with smart ideas in “artificial intelligence, internet of things, big data analytics and block-chain technologies to streamline and speed up processes” that would catapult India into the Top 50. He used all the fancy tech terms in vogue to talk up his newest ‘brain wave’.

(Image: DIPP/Twitter)
(Image: DIPP/Twitter)
But Modi’s call to digital arms could fall on scared, helpless entrepreneurs, battling his regime’s tax hounds. Just over the last month, two thousand Indian startups have received notices from the Ministry of Corporate Affairs asking them to “justify the premium” at which they have raised equity funds, or else face harsh penalties and taxes. This has reopened and sprinkled fresh salt on old wounds. It’s a second whammy for the same ‘crime’.

Here Comes Another Dreaded ‘Angel Tax’

Two years ago, the income tax department had issued similar notices, slapped taxes, and begun prosecution under the dreaded ‘angel tax’ provisions.

It’s an outrageous levy, which places the power to ‘value’ startups in the hands of clueless inspectors.

Imagine, even the most successful professionals, from private equity and venture capital outfits, get valuations right less than once in ten times. Because valuations, like beauty, lie in the eyes of the beholder!

For example, if five investors had valued Flipkart at $1 billion, $2 billion, $3 billion, $10 billion or $15 billion in 2012, who would have been right, and who wrong? Clearly, each person’s valuation would depend on her:

  • relative risk appetite,
  • return benchmark,
  • time horizon of the invested capital,
  • understanding of the e-commerce business,
  • bullishness on India’s economy,
  • Etc, etc, etc!

Each person would have given different weights to these individual factors and arrived at any number of different valuations. And each would have been right, because Flipkart was eventually sold for $20 billion in 2018.

So now, if the taxman had whimsically determined Flipkart’s valuation at $0.5 billion, he would levy taxes of $200 million, $600 million, $1 billion, $ 3.8 billion and $5.8 billion, respectively, on each hapless investor, even before a penny of cash gains had been realised!

Do you seriously think any of our hypothetical investors would have put money under such a tax regime, where they were being coerced to pay cash taxes on unrealised/uncertain ‘profits’?

Clearly, this tax is a travesty, and tragedy, inflicted on Indian startups by Prime Minister Modi. It’s an astonishing repudiation of Standup India, Startup India, Digital India, Make In India and God knows how many more schemes.

Union Finance Minister Arun Jaitley addresses the opening session at the launch of Startup India in New Delhi, on January 16, 2016. (Photograph: PIB)
Union Finance Minister Arun Jaitley addresses the opening session at the launch of Startup India in New Delhi, on January 16, 2016. (Photograph: PIB)
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Brickbats On Another EODB!

So, even as Prime Minister Modi got ‘India Shining’ bouquets from his Mumbai/Delhi echo chamber on EODB (Ease of Doing Business), his Gujarati kinsmen and India’s first generation founders, if he had cared to speak to them, would have given a very different ‘India Taxing’ brickbat:

Egregious Officers Destroying Business, i.e. EODB!

Modi Sir, Aware Of ‘Egregious Officers Destroying Business’ –  ‘EODB’?

Raghav Bahl is the co-founder and chairman of Quintillion Media, including BloombergQuint. He is the author of two books, viz ‘Superpower?: The Amazing Race Between China’s Hare and India’s Tortoise’, and ‘Super Economies: America, India, China & The Future Of The World’.