Disappointed but not dismayed or cynical

union budget 2019
First Thought this morning 
Media reports suggest that the number of Indian rich seeking permanent residency in Canada and USA is rising at unprecedented rate. In 2018 alone 36,677 Indians were admitted in Canada as permanent residents (Green Card holders).

It is feared that proposal to hike effective tax rate for people earning more than Rs20mn/year in the recently presented Union Budget, would further motivate people to seek residency in foreign jurisdiction which either have lower effective tax rate or offer much higher quality of life and social security than India.

It is pertinent to note in this context that as per the latest released by the Income Tax Department, in Financial Year 2016-17 only 83206 (81344 individuals; 1028 HUF; 834 BOI/AOP) persons had reported “Gross Total Income” of more than Rs1cr.

These would be mostly promoters of large companies, top executives of global corporations and employed persons with high skills. All of these are critical for the growth of the economy and markets; and most of them would have option to obtain tax residency or even permanent residency outside India.

The government immediately needs to make an assessment how much the cane could be bent such that it does not breaks.

Union Budget:  Disappointed but not dismayed or cynical
We usually do not mark Union Budget as an important event in our calendar. Our usual budget day activities include listening to the budget speech, flipping through the budget documents, especially the finance bill, forming a quick opinion about the socio-economic and investment portfolio implications, reviewing  investment strategy and sharing  thoughts with the friends/investors . We would mostly finish the budget chores much before dinner time. All queries from friends and family members would be answered before going to bed on budget day. The day following the budget would be a normal day.

This year however has been unusual. Five days have elapsed since presentation of budget on last Friday, and We are  still busy with budget tasks. The number of queries is much higher than usual. The character of inquisitions is also quite different. I found most inquisitors dismayed and disappointed. Some are delusional and yet some others have turned cynical. As of this morning, not more than 10% are hopeful of a stronger economy and more progressive society 5yr down the lane.

This is unfortunate.

Most common question We have faced in past five days is Are we again slipping into the socialism trap that held back India’s economic progress for long? Is stronger and clear political mandate forcing the ruling party to work harder to protect their enlarged voter base by following excessively socialist economic policies at the expense of tax payers?

It is not only the proposal to impose higher surcharge on people earning more than Rs20mn/yr that is driving these concerns. Taxation of LTCG; additional reservation in education and jobs on economic consideration, introduction of an elementary universal basic income covering all farmers, small traders and retailers; frequent loan waivers for farmers; highest budgetary allocation for rural programs and social security of poor (insurance and pension etc) at the expense of middle class tax payers, are some of the things that are bothering people.

Our prima facie view is that we are a socialist country by constitution. The Constitution of India mandates our government to follow socialist economic policies. Our politicians may choose to say, promise and claim whatever they like. But the government is bound by the Constitution, which categorically mandates it to fallow socialist economic policies.

Investors, businessmen, entrepreneurs, employed and other tax payers who get lured by the promises and claims of the politicians to provide a laissez-faire and low tax regime are themselves to blame for their misplaced expectations and strategies.

On second thought, We find a strong economic rationale in following economic policies that are primarily aimed at empowering and enabling a larger segment of population that shall contribute to the economic growth in coming deacdes.

Till 1989, our governments remained firmly committed to the idea of socialism, which essentially meant 
(i) control consumption rather than increase production;
(ii) heavily tax the rich to pay for the subsidies to poor rather than empower an enable the poor to move up the economic ladder; and
(iii) focus on import substitution rather than export promotion.

The primary reason for this, in our view, was disconnect between the “Ruler” and the “Subjects”. The feudal ruler would decide what is good for the subjects and make policy accordingly. Mostly few feudal friends & coterie of the “Ruler” were licensed to do business and own resources & assets. This in turn ensured a secular low growth period with pervasive poverty, backwardness and external vulnerability.

Things changed after 1989, when the economy reached the breaking point and the majority poor, underprivileged and backward decided to take the things in their own hands. They decided to oust the feudal lords from power. One by one most states elected leaders coming from the bottom of the pyramid. It took 25yrs to complete the process of elimination of feudal lords from the top echelons of Indian politics.

This included the process of eliminating the poor and backward who gained power in 1990s but soon degenerated into neo feudalism.

Now, in 2019 here we are, debating:

(a)   Whether we should go back all the way to pre 1989 days when pseudo socialism governed the economy. Only a few got the opportunity to grow. The large majority just survived, with extreme difficulty.

(b)   Whether we go back to the interim state of 1989-2014 when a mix of pseudo socialists and degenerated socialists governed the economy. Now a large number of people had the opportunity to grow but corruption was pervasive; the direction of growth questionable and sustainability totally ignored.

(c)    Allow the change to progress further.

Those fearing higher taxes need to assimilate one thing very clearly. With only 1% of the population able to earn, consume, save, and invest is not sufficient to sustain even the present ~6-7% level of growth. We need at least 35% people earning, consuming, saving, and investing to grow @8-9% that could make us a middle income economy in next 12-15years.

Future of our businesses and markets totally depends on our effort to enable more and more people in the economic mainstream by enabling them socially, physically and economically.

We are certainly not saying what this government has doing is the Right way of doing things. There would certainly be better ways to achieve the goal of elevating one third of population to tax payer status. But going back is certainly not an option; whether stock markets like it or not.

Like others We are  also afraid that excessive taxation might be highly de-motivating and potentially drive the rich, skilled and talented out of the country; and dis-incentivize foreign investments. It may not be desirable at this stage of economic growth in our country. We feel, we are taxing on runway towards the take off point. At this time, we need maximum energy to propel our economy into higher orbit. Dissipating energy at this stage could be disastrous.

We think these concerns only have driven the government to find equilibrium between Gandhi, Marx and Adam Smith. Marx is evident in the budget proposals. Gandhi and Adam Smith are presented as ideas. Let’s wait to see how these ideas are implemented. Remember most past attempts at bringing this triumvirate together have failed miserably. If this government can pull through this, the results would be miraculous. Else, we lose few more years in our journey of socio-economic growth and development.
We are certainly disappointed for not getting tax concessions and subsidies. But that does not make us cynical or pessimist.

Author: Midas Finserve

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