Government of Indias subsidy to the rich program : Off Budget, no debates- no scrutiny

By: Amit Bhushan Contact: amitbhushan@rediffmail.com Date: 27th July, 2013

The understanding of the people of India about the governance and administration of its economic structure, its working and nitty-gritty is still rudimentary at best. Its so called experts have long relied on maintaining a god like halo about themselves and an idol worshipping populace is made to surrender to such lords, meekly rather than debating policies and principles. This leadership is convinced that a policy cannot be made with debating the same in public domain. According to them, the policies should be made in a closed group and dictated to bureaucrats for implementation. The bureaucrats should be well leashed with carrot and stick policy whereby a complying (seemly honest ones) bureaucrat is rewarded with post retirement showers, while those not complying dealt with iron hand. The corrupt bureaucrats are also kept on hand for dirty work management often required to keep the political friends and foes in good humour. The laws and policies are made as per need of the political party to maintain its power status rather than need of the people for example, there seem to be 2 bills one on Land acquisition reforms and other on Food security that are pending parliamentary approval. The Land reforms bill has been drafted by consensus while the Food security is handiwork of a few in the government. The present government seems to believe that both bills have shortcomings which need to be corrected. While it has gone ahead on the Food security bill which has potential for votes with the argument that any inadvertent shortcomings can be corrected subsequently, it is busy discussing Land reforms bill with businesses and other interest groups to correct anomalies. However, the purpose of the article is to highlight the methods through which the government pays huge subsidies to the rich rather than highlight the policy conundrum of the present regime. The example is brought in here to highlight the fact as to how Laws are being pushed on to the people in a so called functioning democracy. The present day methods of transfer of subsidy to the rich is through fiscal route, Legal agreement/concessionaire route, monetary route and the executive route. In addition, one can have a composite route where features and benefits of all the four methods can be combined to varying levels. One can also see indirect benefits structured for some without any direct deals. Lets discuss a

bit of these freshly minted terms. It is important for business managers to understand these market practices which are seen in day to day life and their significant impact on business competitiveness. This can make some business super competitive while to some others; it may sound like a death knell. The purpose of the article is to help young managers appreciate the impact of such activities of which they may have some awareness already, develop an analysis about causes/supporting factors and learn to manage businesses/entrepreneurs take decisions in such conditions. Billions of dollars of benefits are transferred by government to rich business houses every year and this phenomenon is not unique to India alone. Probably we need to understand how to control & regulate such process in a better manner and the political class as well as ambitious bureaucrats are not helping the public in this regard. Benefits through fiscal route: This is like a direct benefit transfer to businesses from central, state or local body exchequer for a specific business activity. The difference between a fully funded government project and benefit transfer through fiscal route is that the project in this route is owned and operated by a non-governmental profit making or not-for-profit institution. The government is providing cash incentives, that could be one time or time-dependent (regular either periodic or milestone based). Sometimes such incentives may also be in kind viz. a resource such as land is offered at reduced price. Schools/Educational institutions and Hospitals are common examples where in governments usually intervene in market to promote public welfare (and we need bodies that monitor and publish delivery reports of such welfare, a function presently absent). Such incentives are also made available to businesses like large industrial units to spur jobs and industrialization of a region in manner such as capital subsidy, export incentives; tax breaks for various purposes, interest subsidies or regulated interest under banking priority policies. It is important to understand the modicum of distribution of such subsidies and processes there-under as followed by different regulatory offices/wings/regional centers of government since the competitiveness of a business/unit may be affected due to this. Fiscal benefits in forms of concessions are given to attract manufacturing units for exports in many countries of the world. Services sectors have also received such benefits for setting up units for exports and employment generation as this impacts competitiveness of such units. Benefits through Legal agreement/concessionaire route: The benefits that are vested to profit or nonprofit entities via this method are of the nature of right or privileges for use of certain resources usually for defined usage. This can be mineral resources like right to mine ore or use land or a right of way to lay electric/telecom cables or pipelines amongst common examples. The difference between land use in this method vis--vis the previous method is that here the end use is regulated and chances are

that the government would wrest back control in case of failure or improper use is proven. In the previous case, the chances of an endless litigation are much more pronounced with the entity in control having an upper hand over the government. Much depends upon how concessionaire are worded or the devil lies in the details of such concessionaire for example if a concessionaire for right of way for laying pipelines allows user to further rent the space may be for commercial use then the entity may end up making a killing over the one which does not have such rights. We have had other examples where government had failed on control how much to mine while concentrating only on end use control which became a Pandora box of litigations. Lack of policy level controls with bipartisan analysis allow people in power to draft fresh concessionaires as per wishes of pre-ordained benefactor threatening survival or profitability or competitive positioning of other players. It is strange that the government which has so successfully regulated technology like IP telephony or internet access thru television cable fails systematically in design of concessionaires so regularly allowing private interests succeed over benefits to masses or allowing public organizations including PSUs go bust with substantial losses to exchequer. Concessionaire should in normal course specify any benefit transfer or purchase transactions to supporting units at arm length pricing or competitive bidding procedure level to maintain sanctity of the process while clearly specifying doables as well as non-doables for the entity, otherwise which doubts would remain on the verifiability which is a clear need in a democracy. Benefits through executive route: The operating executives preside over much of the vast governance structure maintaining services and delivery of the promise. Very few executives form the policy and structure/process and procedure design sections of the government. The executives in distribution of services may not deliver such services in a uniformly consistent manner. This may be due to different office culture or modus operandi in dealing with state/local governments. The central government allows such way of functioning due to regional variation and diversity and frequently for political reasons. For businesses, this causes differential benefits being delivered. Like in some places some variation may accrue due to different interpretation of environment regulations, somewhere power leakages may benefit businesses and at other places different procedures may allow lower water and sanitation charges. Executives are involved in calculation of tax liabilities, control mining, calculation of extras in a project, certification of quality/completion or assessment of guideline violations etc. and this can be an area of substantial benefits. Benefits through monetary route: The benefits from this route accrue due to financial structure of the entity, the norms for capitalization, promoter groups holding etc. which change they risk endured by

promoters for the profits at stake and also manage apportionment of profits among stakeholders such as executive management, small shareholder, key shareholders, vendors and other key advisors. It is common knowledge that entrepreneurs rely on public money to run business entities. Such funds could be in form of equity, quasi-equity or debt from various public institutions. Since involvement of public money in proportion to entrepreneurs fund is much more, therefore businesses going bust would cause a huge loss to public compared to actual monetary loss to entrepreneur. This forces monetary institutions hands (banks, bond holders, central bank) who want to protect public interest to financially restructure asset to keep the going concern in business. The savvy entrepreneur spends much time in analyzing policy flip flops of the governments to turn their entities to banks for financial restructuring in which there is lot of money to be made now-a-days. Thus policy conundrum is another area of opportunity for the entrepreneur rather than risk. In spite of numerous amendment of company law, we have never realized any need to fill any gap in this regard so that such as creative exploitation of this area can be controlled. Off course a control on this area would require much improvement in other areas as well rather than just the company law. Composite benefits to an entity accrue due to multiple of the above factors playing along at the same time. This actually is a calculation problem since affect of any single factor cannot be assessed. Indirect benefits is said to occur when entity which has received government subsidies passes of benefits in form or preferential procurement, preferential sale to any other dependent unit of promoter which gains enormous clout or competitive value basis such preferences.