It is no news that India was politically and economically prey to imperialist politics and economics in its yesteryears. Lately, the Indian subcontinent has been severely impacted by the commercial activities taking place around the globe with most of the businesses incurring sufficient losses. The wealth of the nation is flowing out disproportionately and the phrase “rich getting richer, poor getting poorer” wouldn’t have made us agree to it any more than till today.
Slowing private capex and restricted bank credit
I have been following the Indian business scenario for the last few years and have come to the conclusion that today the economy is in a pretty bad shape. A report by Financial Services and Investment Research firm Ambit, says that “Economic growth in the first quarter of the current fiscal may have decelerated and is unlikely to pick up for rest of the year due to slowing private capex and restricted bank credit .It adds that “economic growth in all probability decelerated over April-May 2016” as compared to the first quarter data for 2016-17.
It is difficult to figure out what are the reasons for our businesses slowing down and not making profits. While different financial agencies have come up with various reasons for this downturn (as mentioned above), my reading and analysis is a bit broader. These are my opinions and are not meant to deride anyone else’s views.
Ineffectual banking system
I continue to believe that the root cause of all this is the ineffectual banking system and other related misconducts of the driving forces of our economy. In retrospect, what exactly led to all this, is beyond comprehension.
Banks, in the present day, give out loans at a rate as high as 10-12%. In addition there are government levies, taxes and processing fees. This is crippling especially in the kind of global meltdown we are facing. How many businesses make enough profits to repay this kind of interest and costs? In the Western countries, the interest rate is 2%, why can it not be 4% for us? Only then will our businesses be viable. Banks can reduce the interest they pay out on fixed deposits and use the slack to charge a lower rate of interest on borrowings by businesses. It is the current lack of profit making that is causing many businesses to go under.
If the central bank of any country, say the Fed for US and RBI for India, lowers the interest rates, the commercial banks can in turn borrow money from them at a lower cost which consequentially turns out to be the most beneficial for the ultimate individual customer. It makes the loan attractive and affordable and hence the end buyer of the money will get enough to spend more and as a result more money is injected into the economy.
High rentals for commercial spaces
The second reason behind the wavering of the economy is higher rentals. Global Real Estate consultancy Cushman and Wakefield report that Housing in India is consistently augmenting at a remarkable rate.
Commercial space rental per sq ft in India’s top 10 most expensive locations are given below:
Delhi Connaught Place Rs 185-450
Mumbai Bandra Kurla Complex Rs 225-320
Mumbai Nariman Point, Fort, Ballard Estate Rs 200-250
Mumbia Worli/Prabhadevi Rs 185-225
New Delhi Nehru Place Rs 175-250
Mumbai Kalina Rs 150-200
Mumbai Lower Parel Rs 145-190
New Delhi Saket Rs 130-190
Gurgaon MG Road Rs 110-150
Gurgaon Golf Course Road Rs 100-150
Other cities have slightly lower rents but at the levels currently prevailing, it is becoming increasingly difficult for businesses to meet expenses. Rents have been rising and will continue to do so unless the government steps in and regulates the rents for commercial and industrial spaces.
Salaries at a crazy high
In addition to the above, the next factor to be considered is the whopping amount of salaries that are paid to passing out IIM post-graduates and the like. The point I’m trying to make here is that businesses have to service not only interest, high rentals, but also high salaries. Salaries of over 2 to 3 lakhs per month are highly unrealistic and devastating for trade and commerce.
Youngsters fresh out of business schools walk away with annual salaries of upward of Rs 2.5 crores. This creates an enormous rich-poor divide. Why can’t corporates create a system of performance-based incentive payments for everyone at all levels?
High tax burden on business entities
Saving the “Worst” for the last in this case, taxes are a great cause of worry for any developing economy. As Benjamin Franklyn correctly stated, “Nothing is certain in this world but deaths and taxes”! Inevitably, tax policy has definitely evolved in this country, over the years, in response to the needs of changing development strategies but it still is a far cry from eradicating the evils of poverty completely.
The Corporate Income Tax is a basic high of 30%, going up to 30.9 -34.6% ( dependent on total income) after inclusion of surcharge, education cess and other government levies).
There is definitely a reason and scope for rationalizing the tax structure in India.
Benefits not for business alone
If these measures are put in place, businesses will make profits. But they should not be the only ones benefitting from this. The government would need to put a cap on business profits too. Profits in excess of the maximum allowed should be utilized for government welfare schemes, charitable organizations, for implementing corporate social responsibility or for starting new business ventures. This way there would be advantages and benefits for all – business entities, government, employess and society.
Will working on the list of aforementioned issues cure the ailing economy of our country? No one can say for sure, but being in business for years now, the experience and observation of how things function makes me say this with conviction that it will undeniably be an all-round benefit and facilitate growth in businesses as well as boost a vigorous society and dynamic economy.