The Budget for 2025 is almost upon us and it’s the time for economic inanities and blame games. As usual there is the murmuring and grumbling about high taxes, increased expenditures, deficits, rupee falling, slowing growth, etc.
But let’s face it: the private sector is not pulling its weight. Thus, with a new excuse, the CII says consumption has to increase before investment resumes. CII is the voice of the larger units of the Indian private sector. So it is asking the government, as always, and a la Keynes, to take up the slack in investment. But it forgets one minor detail: in order to invest more, the government has to tax more. The alternative is to borrow more, like Rajiv Gandhi did — and caused a balance of payments problem. The path to hell, it has been said, is paved with good intentions.
There is a backstory, too. In 1958, in order to increase investment, the finance minister, TT Krishnamachari, presented his first Budget and increased taxes sharply to finance the Second Five Year Plan. That worked. It and the Third Plan saw massive increases in public sector investment and economic growth. But by 1985 the public sector ran out of steam. Since then both public and private sector investments have generally been lower than needed. The latter has been the bigger laggard.
So in September 2019, in order to increase private sector investment, the government gave the corporate sector the option to move to another exemption-free regime. The rate was 22 per cent. But that hasn’t worked. (Oddly, however, when taxes were cut in 1985 and 1992, the private sector did increase its investment despite low consumption and high interest rates).
Now, six years later, it is asking the government to reduce personal income taxes and GST rates. It knows it can’t ask for lower taxes for itself because even it knows the limits of the country’s patience.
One brave iconic Indian businessman has, instead, asked employees to work 72 hours a week. Another has said that’s not enough, but 90 hours per week will do. Karl Marx must be chortling. He had developed the labour theory of value. These two guys can google it.
Horses to water
The so-called ‘Captains of Indian Industry’ are thus once again proving that you can take a horse to the water but you can’t make it drink. To cover up their reluctance — I would say pusillanimity — they are citing that catch-all term ‘ease of doing business’.
But despite how tough the private sector says it is to do business in India, its profits are doing very well indeed. In 2024, profit-to-GDP ratio was at a 15-year high, of around 5 per cent.
The latest numbers also suggest that it’s investing heartily in other countries — $12.4 billion in April-October 2024, the highest since at least 2011-12, and a 55 per cent increase over the same period of 2023.
So could it be that just like in cricket, the ‘captains’ are our prime NPAs? It certainly looks like that. As a long dead development economist said, “the natives’ response to positive incentives is negative.” You can’t put it better.
The private sector has also asked the government to give a ‘fiscal push’ while holding down the deficit. It’s not said how this is to be done. That, by the way, was pretty much what it told Nehru in the 1950s. The message was simple: we will reap what you sow.
It has also forgotten that the “Make in India” policy is simply another name for Nehruvian protectionism, to shield it from foreign competition. It was the West then. Now it’s China. But the basic approach remains the same.
The private sector has overlooked one other basic truth: politicians are accountable and, when pressured like Nehru was between 1953-55 or Indira Gandhi between 1969-72, they can go off half-cock. The reason is that public investment is risk free: the taxpayers pay for it. It’s no skin off a prime minister’s nose.
That’s why if this refusal by the private sector to invest persists, it’s only a matter of time before some exasperated future government resorts to selective nationalisation. When confronted with a similar situation in the 1960s, that’s what Indira Gandhi did throughout the 1970s. If you don’t kick your ball, she said, I will.
The private sector wants us to believe it’s always been the heroic victim. But the time may have come to ask if it’s not the villain.
So I have a recommendation for the Finance Minister which will increase consumption. She should simply invert the tax rates currently applicable to companies and individuals: companies pay 44 per cent and individuals 22 per cent.