Tuesday, February 23, 2016

[Editorial # 71] Pro-manufacturing laws need of the hour : Business Standard

[Following editorial has been published in Business Standard on 21st February 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer-writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]

The 'Make in India' Week in Mumbai, which ended last Thursday, served as a welcome platform for states to make their cases for being business-friendly destinations to investors. Seventeen states had pavilions at the exposition centre in the Bandra-Kurla Complex, and several had special seminars. Chief ministers of states including Gujarat, Odisha, Haryana, Andhra Pradesh, Chhattisgarh and Jharkhand were present. It is unfortunate perhaps that most of the chief ministers from states not ruled by parties in the National Democratic Alliance did not turn up - the leaders of Tamil Nadu, Uttar Pradesh and Karnataka, all large states seeking investment, were not present. However, most states that were present did indeed make many ambitious announcements - there was news of several new collaborations and plans for manufacturing projects. This spurt of activity should certainly help in reviving a sector that had slowed considerably. The states subsequently issued statements adding up the notional value of promised investments. The total investment promised, if these promises are taken seriously, would amount to Rs 15.2 lakh crore, with the host state of Maharashtra accounting for Rs 8 lakh crore out of that. However, the proportion of such promises that fructify depends crucially on whether investors believe that a genuinely business-friendly environment has been created. In the past, only a small fraction of such memoranda of understanding has turned into actual investments. Indeed, as this newspaper has reported, even as the number of industrial investment proposals made in 2015 went up by eight per cent over that in 2014, the value of such investment proposals has declined by 23 per cent in the same period.

It is unfortunate, therefore, that in spite of assurances given to investors at the 'Make in India' Week that a stable business-friendly environment has indeed been created, the tax office chose the precise time of this important exposition to send a threatening notice to Vodafone about a tax demand that is currently in arbitration. This action, coming as it did at a time when senior leaders of the government were assuring investors that "tax terrorism" was a thing of the past, should serve to remind all concerned that no amount of assurances can take away the need for genuine and deep-seated reforms to institutions and governance. The overall impact of the 'Make in India' Week will be positive going forward if it also provides a similar energy to the governments deregulation and reform efforts. Both states and Centre need to do more in this respect.

There is an entire gamut of manufacturing-friendly policies that states and Centre need to work on. The Centre has unfortunately put labour market reforms on the back burner, although some states have been freed to move forward. However, a patchwork of state-level laws is not the same for manufacturers as simplified national regulations. Other factor markets too need to be reformed. Land availability is in many places a genuine problem. The Centre has abandoned its amendment to the land acquisition law that was meant to make acquisition for public purpose easier. However, it should at least work - as should states - towards a functional free market for land perhaps through relaxations in land leasing laws. The focus on infrastructure is welcome, but should be accompanied by deregulation that allows infrastructure to be properly used. New highways are not that useful if outdated laws keep trucks waiting at inter-state border; new ports will not help if turnaround times remain slow thanks to excessive red tape. And, finally, as the Vodafone issue shows, reform of the tax department and making it less arbitrary and confrontational is long overdue.


1. Which are the top 5 and bottom 5 states in terms of their State GDPs? Do you see a pattern in  the regional disparities if any?

2. What is understood by the phrase "tax terrorism"? What is the Vodafone case all about?

3. What is the share of manufacturing sector in India's GDP? How does it fare vis a vis other major developing and developed economies?

4. What are the factors for a relatively lesser contribution of manufacturing sector in India's GDP?

5. It is said that unlike other economies which saw a transition from agriculture-based to industry-based and finally to service-based economy, India jumped to service sector-based economy directly form agriculture based one. Do you agree? Justify.

6. What are the various reforms which the government must initiate in order to make programs like Make in India successful?

7. It was observed that during the Make in India week, those states did not send their representatives which are being governed by political parties having different colours than that of the central government. Do you think this partisan behaviour impacts the growth and development of the people? Explain with a few examples.


  1. Top 5 States in terms of GDP in India:-
    1. Maharashtra ₹16.8 lakh crore
    2. Tamil Nadu ₹9.76 lakh crore
    3. Uttar Pradesh ₹9.76 lakh crore
    4. West Bengal ₹8.00 lakh crore
    5. Gujarat ₹7.66 lakh crore

    1. Bottom 5 States in terms of GDP in India:-
      1. Lakhshadweep ₹.00407 lakh crore
      2. Daman & Diu ₹.01059 lakh crore
      3. Dadra & Nagar Haveli ₹.0244 lakh crore
      4.Andaman & Nicobar Island ₹.062lakh crore
      5. Mizoram ₹.1 lakh crore

    2. There exist a lot of regional disparities between the States that have high and low GDP. Most of the States with low GDP are either landlocked or States with lack of natural resources. States such as Maharashtra or West Bengal or even Gujarat have a well functioning coast line that allows these states to trade with different states and even countries. States like UP thrive on their agricultural production and farming which is the major occupation of more than half of the population in the state.

  2. 2. Tax terrorism is a phrase that was coined by the current PM Narendra Modi to describe the archaic tax rules adopted by the then UPA government.

    1. The Vodafone tax case began in 2007 when Vodafone International Holdings decided to buy Hutchinson Essar and spread it's footprints in the subcontinent. The deal between the two companies was however struck outside the subcontinent in Cayman Island, where the Indian tax authorities had no say at all. Since then, the tax authorities in India have been trying to nab Vodafone so that it pays the ₹20,000 unpaid tax. Even as the Supreme Court ruled that the actions of Vodafone were within the four corners of the law, the government of the day decided to amend the General Anti-Avoidance Rule which says that the government can dig up past deals, ask the way back to 1962.

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  4. Top 5 States
    1.Maharashtra (16.8lakh crore)
    2.Tamil Nadu(9.76 lakh crore)
    3.Uttar Pradesh (9.76lakh crore)
    4.West Bengal(8.00 Lakh crore)
    5.Gujrat(7.66 lakh crore)

    Bottom 5
    3.Arunachal Pradesh-0.14
    For the top 5 states the size of the state is considerably big when compared to the bottom 5 states. So the availability of resources is more.
    The bottom 5 states are infested with internal conflicts which affects the economy of the state and in turn its productivity.
    Most of the bottom states are land locked.
    The bottom five states are mostly North-eastern, where not much attention is paid by the central government.
    Bottom five states are located in hilly areas where cultivation is very difficult.

  5. The Phrase Tax terrorism was first used by the Current Prime minister Narendra Modi to describe the adversarial approach adopted by the tax authorities under the UPA regime. The phrase was used to describe the situation that was existing then. Wherein the Prime minister said that Government cannot be run by assuming that everyone is thief.
    Vodafone India was demanded to pay 3,200 cr as tax. This was demanded for issuing new shares to its parent company which was alleged by the tax authorities that it was done at an unduly cheap price. According to the Tax authorities they violated transfer pricing norms which requires the dealings to be done at fair price. In doing so the tax authorities alleged that Vodafone has saved a tidy sum of money. The court decided in favor of the Vodafone, wherein it held the Vodafone had a right to do so. The transaction was related to capital recieved by an Indian firm and not income so there was no application of income tax.
    The parliament then amended the tax laws with retrospective effect to make vodafone liable for past transactions.
    Other examples of tax terrorism is under section 143, 153, and 210 of the Income Tax Act provides that even after you have paid your taxes and filed their returns, if the scrutiny officer feels that you have under-reported income or there was a error in calculation then CBDT can send you notices.

  6. The share of manufacturing sector in India's GDP is 17.2%.
    Afghanistan 12. Argentina 14. Australia 7. Austria 18.Bangladesh 17. Belgium 14. Bhutan 9. Brazil 11. Chile 12. China 36.Denmark 14.Egypt 16. France 11. Germany 23. Indonesia 21. Iran 12. Ireland 20. Italy 15. Japan 19. Kazakhstan 11. Malaysia 23. Maldives 5. Nepal 7. Netherlands 12. Pakistan 14. Poland 18. Portugal 13. Russia 16. Singapore 18. South Africa 13. Turkey 18.UK 11. US 12.

  7. 1.Innovation is lacking due to significant gap in technology, skilled work force.
    2.Compliance burden. Ease of doing business. Environmental clearances.
    3. Land acquisition is very difficult.
    4.Difficult exit route. It is both time consuming and costly.

  8. Reforms which the government must initiate in order to make programs like Make in India successful
    1.Labor law reforms.
    2.Availability of good infrastructure.
    3.reduction of several window clearances.
    4.Making the work force skilled and also give vocational training.
    5.Advancement in technology.
    6.Investment in research and development.

  9. Partisan behavior of the political parties impacts the growth and development of the people.
    The impasse created over passing of GST Bill.
    The current JNU debate has deviated from the real issue of sedition law and due to party politics all that is being debated now is who is anti-national.