[Assam] Another View of Things/Who Pays the Price for India's "Corporate Welfare"?

[Chan Mahanta]

This is a story related to the issues involved in the NY Times 
article about the Good Life in Gurgaon. And it touches on some of the 
points raised by Uttam, and how it impacts the PUBLIC GOOD.

http://www.evb.ch/en/p25010663.html



Note:

  A report by the McKinsey Global Institute came to the conclusion 
that the investment decision of corporations usually was not 
dependent upon these benefits. Especially in booming markets like 
India, corporations want to be present in any case, but are 
nonetheless happy to take advantage of the benefits that are offered 
to them. India's elites are not completely innocent: The success of 
having attracted a prestigious foreign corporation to one's own state 
is a great way to show off. It is India's poor who pay the price.

cm

***************************************************************************************************************

Who Pays the Price for India's "Corporate Welfare"?  (28.01.06)



Two reasons are given for India's economic attractiveness: 
well-educated, inexpensive high-tech workers and a booming internal 
market. But there is a third, more important motive that attracts 
investors: the abundance of incentives and sweetners offered by the 
Indian government to foreign corporations.

"Incredibly India: The Biggest Democracy for Global Investors": With 
this slogan, omnipresent in Davos, India takes a jab at China and at 
the same time makes clear: India is rolling out the red carpet for 
foreign investors. The enticements include tax breaks, tariff relief 
and inexpensive building sites already outfitted with the necessary 
infrastructure. Exemptions are also made to the applicable 
environmental and labor legislation. Since the individual Indian 
states are competing for investments, firms can combine individual 
and state benefits. And for large projects there are not only the 
standard incentives, but also tailor-made contracts and incentive 
packets, whose details remain secret.

The most extensive enticements are granted in the special economic 
zones, which are under the direct authority of the central 
government's Trade and Industry Ministry. Eleven such regions already 
exist, and a further 42 have been approved. The Trade Minister 
manages these zones himself; his colleagues in the Departments of 
Environment and Finance have no say. Former finance minister Jaswant 
Singh has complained, in vain, about the loss of tax authority over 
these zones.

Exemptions Without Rules
Labor laws find only a rudimentary application in the special 
economic zones. All firms are treated as public utilities, which 
means that workers may not strike. A toy factory has the same status 
as state-operated water and electricity utilities. Normal working 
hours and overtime as well as wages do not need to be made public, 
and there are no regular inspections for compliance with safety and 
health standards. In addition, no contributions need to be paid into 
the state's social insurance koffers during the first five years of 
operation.

There are also numerous exemptions regarding environment protection, 
the most important being that a corporation need not carry out public 
hearings as required by the 1986 Environment Protection Act. As a 
result, the results of an environmental impact assessment need not be 
made public. Corporations in the special economic zones are not 
encouraged to conserve; they can use unlimited water and energy, 
although these resources are chronically in short supply.

Last but not least, corporations in special economic zones profit 
from comprehensive tax breaks. All corporate taxes are waived for the 
first five years, and in the following five years a corporation must 
only pay 50 percent of the normal tax rate. This arrangement applies 
for a further five years for reinvested profits. In concrete terms, 
these tax breaks permit a firm in a special economic zone to double 
its profits in the first three years compared to a firm outside the 
zones.

The incentives for technology firms are even greater; these firms 
receive the benefits of a special economic zone, no matter where they 
are located. This applies not only for highly-skilled technology 
activities like software development, but also for simple call 
centers and data processors.

A Workplace for 420,000 Dollars
An example: Ford started a joint venture with the Indian firm 
Mahindra in 1999. The Indian states of Maharashtra and Tamil Nadu 
competed with each other to bring the factory to their state. The 
contract was eventually awarded to Tamil Nadu. The benefits for Ford 
included the exemption of sales tax on all locally-produced autos for 
the first 14 years. The state also offered land at no cost and 
subsidized electricity for four years. Then came a guaranteed water 
supply and the promise to build a purification plant. By an estimated 
production of 50,000 autos during the 14-year tax-free period, the 
additional profit for Ford (and the loss of tax revenues for the 
state) comes to a hefty US $378 million. The factory creates about 
900 workplaces, which means that each of these positions costs the 
the state of Tamil Nadu US $420,000.

This example shows that the combined measures from India's "Corporate 
Welfare" program create only a few jobs, at an absurd price. If, on 
the other hand, the state had higher tax revenues, it could itself 
create jobs, for example in the rural economy. Seventy percent of the 
Indian population earns its livelihood in agriculture, and eighty-one 
percent of those live in poverty (with less than US $2 per day). 
Instead of building streets and public utilities for the wealthiest 
transnational corporations, slums could be redeveloped and basic 
services could be assured for the poorest. A report by the McKinsey 
Global Institute came to the conclusion that the investment decision 
of corporations usually was not dependent upon these benefits. 
Especially in booming markets like India, corporations want to be 
present in any case, but are nonetheless happy to take advantage of 
the benefits that are offered to them. India's elites are not 
completely innocent: The success of having attracted a prestigious 
foreign corporation to one's own state is a great way to show off. It 
is India's poor who pay the price.

Koni Kuhn, Andreas Missbach +41 (0)79 478 91 94

Sources:

     * Indian Attraction, Profitable multinationals as subsidy junkies 
- A study of incentives for foreign investment in India, FinnWatch, 
November 2005. www.finnwatch.org


McKinsey Global Institute www.mckinsey.com/mgi/