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

Tue Jun 10 09:08:44 PDT 2008

Couple of points ....  

1)  The TN govt DID NOT provide land at no cost.  The
land was Free Hold instead of leased.  The author does
not seem to understand the difference.  (Refer
http://books.google.com/books?id=Au3R0DblY7wC&pg=PA56&lpg=PA56&dq=ford+mahindra+tamil+nadu+exemption&source=web&ots=p1RzEZNoXT&sig=9T-FNqYOxcpPM6neQ6eLNZp5DKI&hl=en#PPA57,M1
  Page 56-57)

2) What the author fails to see is the anciliary
industries. For example ,  in case of Ford,  the parts
suppliers of TN lobbied to get the Ford factory.   
The ancialiary industries offer much more job then the
main industry.  
We have seen this happening in Western and South India
and lately in WB.  

3) The author says that the Govt offers Tailor Made
incentives which are secret.  I am not sure how the
"secret" info on TN-Ford negotiation became public.  
However,  everywhere including US, Govt offeres
incentive to investors.  The same report which I
referred to says about US (Page 60).  It also says
that in US the negotiations are often done in a
clandestine manner. 

4)  The author says "If, on the other hand, the state
had higher tax revenues, it could itself create jobs,
for example in the rural economy."   However,  what
the author fails to see (but even a layman can
understand)  is that the potential of earning tax
depends on number of industries and jobs.  So,   if
the govt raise the tax to (say) 30%     and there are
0 industries Govt will not have money even for basic
development not to talk of creating jobs. On the other
hand,  by getting new industries, they are getting
corporate tax, and tax from anciliary industries.
Further,  the subsidized electricity for Ford was only
for 4 years and after that the govt makes money out of
that too .... at industrial rate.

5) The original article which started this discussion
(NY Times article) praised Chinese model.  However, 
the Berne Declaration site (from which
http://www.evb.ch/en/p25010663.html has been picked
up)  also cites article on Chinese model (by same
author).  It says "  The "Chinese economic miracle" is
based on the exploitation of rural migrant workers." 
(http://www.evb.ch/en/p25010664.html).   Does that
mean ALL developing countries are going the wrong way?
 I have seen some assam netters going ga-ga on Chinese
model while belittling all of Indian developments. 
What is their view on this?  

Does anyone have access to the McKinsey report which
the author refers to ?

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

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/