Two steps forward, one step backwards. This has been the story of the Indian economy. The government’s new strictures on “Angel Tax” and e-commerce guidelines belong to the 1960s. Those were the days when PM Indira Gandhi imposed a maximum tax rate of 97 per cent. The Licence Raj forced CEOs of leading business houses to make monthly trips to Delhi. Foreign exchange was tightly controlled, imports restricted and factory production output capped.
All that changed in one fell swoop in 1991. The Narasimha Rao government was no more intellectually liberal than its predecessors. Former Prime Minister Rajiv Gandhi, a commercial pilot, had earlier attempted to open up the economy and introduce computer technology, but the steel frame of the bureaucracy remained unyielding. Rao and his handpicked Finance Minister Manmohan Singh faced a bankrupt treasury in June 1991 when the Congress government took office after 19 months of the
ruinous prime ministerships of V P Singh and Chandra Shekhar.
But Rao and Singh were hardly natural reformers. Rao as chief minister of Andhra Pradesh was known chiefly as a steadfast loyalist of Prime Minister Indira. Manmohan Singh was a lifelong civil servant. Both were bred on socialist economics which had devastated economies around the world. While the free market economies of East Asia grew at 7-8 per cent a year through the 1960s-1980s, socialist India grew at the stately Nehruvian rate of 3 per cent a year.
A bankrupt treasury in 1991 transformed Rao and Singh into economic liberalisers with more than a gentle nudge from the IMF. India’s gold reserves had to be mortgaged to the Bank of England and the Bank of Switzerland before an IMF loan came through with strict reformist conditions. Forced to liberalise, Rao and Singh did a fine job, dismantling the Licence Raj and opening up the economy to foreign investment. But the old civil servant habit of doublespeak got the better of Singh during his landmark Union Budget of February 1992.
He announced that the Indian rupee would now be “partially convertible” and allowed to float in a free currency market. For a currency whose rate had been tightly controlled for decades, this move sent the markets into a frenzy. The Sensex nearly doubled over the next few months till the Harshad Mehta scandal hit the market in April 1992 and the realisation dawned that Singh had been economical with the truth on floating the rupee. What Singh had actually done was a two-step devaluation of the rupee. It was a slickly managed operation in the guise of currency liberalisation. The rupee hasn’t recovered since.
Old habits die hard even when governments change. Much the same bureaucratic sleight of hand has marked the recent changes in e-commerce regulations and the Angel Tax. Despite recent modifications, the twin shocks could end up hurting India’s bustling start-up ecosystem, a cornerstone of Prime Minister Narendra Modi’s Digital India and Startup India initiatives.
According to a recent report in a newspaper, “India’s top entrepreneurs and investors fear that the issue of Angel Tax along with some unfriendly e-commerce policy changes may push new start-ups to register overseas, especially in the US and Singapore.”
The “relaxations” in Angel Tax are largely palliative. The new e-commerce regulations are equally short-sighted. Designed to protect the BJP’s trader vote bank from ferocious discounting by Walmart-Flipkart and Amazon, the rules could kill the goose that lays the golden egg. In a free market, governments should not interfere by micro-managing business. Walmart and Amazon need India more than India needs them, but capricious regulations with political intent don’t serve India’s interests. Walmart CEO Doug McMillon said recently: “We were disappointed in a recent change in law and the lack of consultation, but the team has worked to ensure we are in compliance with the new rules. We hope to have an effective productive dialogue related to future changes that happen.”
In the 1960s, the financial bureaucracy was known to be atavistic. Not much has changed in its mindset today. For example, despite tweaking the Angel Tax regulations last month, nearly 300 start-ups that were already served tax payment orders will need to go through the laborious
appeal process to gain tax relief.
The report demonstrates the Orwellian predicament of young start-up entrepreneurs faced with endless litigation instead of focusing on innovation in their businesses: “Founders of multiple companies that have got such orders said appeals can take a year or even more in many cases.”
As ever, India moves glacially, two steps forward one step backward.
Minhaz Merchant
The author is an editor and publisher
Tweets @MinhazMerchant