The Hindu Business Line : Striking the right economic balance

The Prime Minister, Dr Manmohan Singh, has advised Indian industry to reduce the salaries of top executives. While addressing the Confederation of Indian Industry (CII), he said conspicuous consumption is socially undesirable.

Today, graduates of IIMs are offered salaries of Rs 1 crore per year or Rs 30,000 per day while the common man finds it difficult to earn Rs 100. In fact, wages of manual workers show a declining trend if inflation is taken into account.

The dilemma is that the policies being implemented by the Prime Minister are in direct contradiction to what he has said.

Currently, government approval is necessary to pay remuneration to executives beyond a certain limit. The Government had constituted a committee under the chairmanship of Dr J.J. Irani, former chief of TISCO, to suggest modifications to the company law.

Dr Irani had suggested the removal of this provision, on the ground that Indian companies need to attract the best talent to take on global competition. The Government is set to accept this recommendation and, thereby, give freedom to businesses to pay high remuneration.

The Prime Minister sought to explain the contradiction — objecting to businesses paying high remuneration but freeing them to do the same — by citing the bee analogy. He quoted Lord Keynes to say that, "bees are theoretically free to consume all the honey they collect on the tacit understanding that they consume very little in practice." Similarly, he said, private businesses are legally being freed to pay high salaries on the tacit understanding that they do not do so in practice.

Self-control, as apparent in the behaviour of bees, is exercised by realised souls. It is difficult for ordinary mortals to do this. Moreover, there is an ominous dimension to the analogy of the bee. The sole objective of thousands of bees is to provide honey for one queen bee.

This analogy only seems to justify monopolies and concentration of wealth. Such statements mislead the common man. He thinks the government is committed to reducing inequality while, in reality, the Government does the opposite. What, then, is the alternative?

Currently, the government is moving towards one single rate of excise duty and Value Added Tax on all goods. The chocolate consumed by the rich and the candy consumed by the poor are to be taxed at one rate. This encourages more consumption by the rich who pay lesser percentage of their income as taxes.

Instead, the government should levy higher tax on goods/services consumed by the rich, such as air-conditioners, cars, foreign vacation and air travel. It must tax at a lower rate the goods/services consumed by the poor. This would lead to less consumption by the rich and more by the poor.An `ostentatious consumption audit' of advertisements can be instituted. Print and electronic media can be rated according to the encouragement they provide to ostentatious consumption. These rankings can be publicised. These measures will discourage ostentatious consumption by the rich.

The problem of global competitiveness remains. Our businesses may not become globally competitive if they are prevented from attracting the best executives. The solution proposed by the J. J. Irani Committee is to allow Indian businesses to pay high salaries. But this leads to social discontent, as pointed out by the Prime Minister. The alternative is to provide protection to Indian businesses from cheap foreign goods. The Government can impose an Additional Import Duty on all imports to enable Indian businesses face global competition.

Indian businessmen can be encouraged, even subsidised, to send their managers for training abroad. In due course they will acquire the best capabilities. This is on the lines of the well-accepted policy of providing protection to infant industries.

The Prime Minister should implement economic policies to reduce consumption by the rich instead of giving homilies to industry captains.

(The author, a freelance writer, can be reached at bharatj@sancharnet.in)

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