Govt. 'subsidies' to the rich exceed fiscal deficit! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Govt. 'subsidies' to the rich exceed fiscal deficit! 

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In this issue:
» India Inc's June quarter earnings performance disappoints
» Acche din evade Indian consumers
» Cairn India gets penalized by shareholders
» Coal shortage could be the biggest challenge to India's infrastructure growth!
» ...and more!

00:00  Chart of the day
Subsidies for the poor have often been attacked for the economic mess that India has landed itself in. Time and again, we have discussed how these subsidies due to the lack of proper implementation have been misdirected, hardly ever benefitting the intended beneficiary and the poor. Indeed, that's an area that needs urgent action. But amid all these discussions, there is a 'subsidy' scheme of the Government that has not got the attention it deserves. This could well be the mother of all other subsidy schemes. What makes it more special is that it's being offered to rich guys in the country.

We are here referring to huge write offs in corporate income tax, customs and excise duties. The revenues thus foregone amount to staggering Rs 36.6 trillion in last 9 years. In FY14 alone, such charity to corporates amounted to Rs 5.3 trillion. To give you a perspective, for FY14, it comfortably surpasses India's fiscal deficit that stood at Rs 5.1 trillion. This is an amount that makes the money lost on a lot of scams, including 2G and Coalgate scam, look paltry. The data speaks volumes about the lack of fiscal prudence and management capabilities of the Government. And its apathy towards the common man in the country.

An exercise on what the Government could have done with this money flashes many wonderful but unfortunately lost opportunities. Not to mention that a better use of money could have led to multiplier impact on country's wealth and progress. And that too for the really deserving ones. As an article on suggests, the amount could have funded Public Distribution System (PDS) for more than four years. Or could have improved the prospects for rural India by funding rural job scheme for around three decades. Or could have led to better state finances.

The break up of this extravagance is even more distressing. As per the latest figures, exemption on diamond and gold over last three years is more than what India intends to spend on PDS. The corporate India that cries foul over policies and governance is the key beneficiary of such hand outs. One must also keep in mind that it is the same class that is responsible for the menace of bad debts in the Indian banking system, something that remains one of the biggest challenges to the India's economic recovery.

So this is how the precious money is getting squandered. Not at the implementation level but policy stage (or rather a lack of it) itself. What has been shared here is just the data from 2005-2006, the year since which the Budget started carrying the data. The size of the corpus, if prior years are accounted for could be anybody's guess. Perhaps, an entire book can be written about how the same could have been used to improve country's fortunes.

What is more worrying is the trend of these corporate tax waivers. The revenue foregone on corporate income tax has gone up by 120% in last nine years. In the last one year, it has grown at the rate of 10%. This is almost double the growth rate of India's economy. However, forget the corrective measures; the issue has not got the attention it deserves. With such free lunches to India's affluent class, 'acche din for aam aadmi' is likely to remain a distant dream we believe.

Do you think that a cut in corporate tax waivers could make a huge positive difference to India's economy? Let us know in the Equitymaster Club or share your comments below.

An ongoing account of Government subsidies to the rich

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Just yesterday Indian stock markets closed at a record high. Ever since the election verdict has been out, foreign institutional investors (FIIs) have been pumping money as sentiments have revived. And markets have been scaling new highs as a result. Belief that a new government will break policy deadlock and revive investment cycle has led to an unprecedented money flow into India. So much so, that some sectors are on the verge of breaching their maximum allowable FII sectoral limits.

However, is this rally backed by fundamentals or will it turn out to be a dead cat bounce? We know that earnings drive stock prices. Hence, in order to answer the earlier question, analyzing the earnings performance of India Inc is the best alternative. And a cursory look at the June quarter earnings performance does not instill confidence.

As per an analysis by Firstbiz, net profit growth of 155 companies (excluding banks and NBFCs) that have announced results until now languishes at a 4 quarter low of 7.6%. This is despite the fact that interest costs were low in this quarter and other income displayed strong growth.

Such a performance clearly indicates that the earnings revival may take longer than expected. But markets price the recovery in advance. And this is why they have rallied so much. Thus, if we have another couple of quarters of dismal earnings performance we could well see a correction.

Even as the stock markets touch new highs and business sentiment is beginning to look up, not everyone in the economy is singing the 'Achchhe din' song. Indian consumers, the backbone of demand in the economy, are still a pessimistic lot. They are still feeling the 'big squeeze'. The squeeze where inflation has kept the prices of everything higher over the last few years. Even as their salaries have gone nowhere.

And consequently, consumers continue to hold back on their wallets and curb spending, especially on non-essentials. After all, at a time when it is proving to be difficult to manage even basic expenses, most have no choice but to forgo certain pleasures and luxuries. Companies across the board, from the consumer goods to real estate, all still continue to feel the effects of this. So until the new Modi government cannot relieve consumers out of this squeeze, it will be hard for the economy to get back its erstwhile momentum of growth.

Imagine a manager reaching out for his shareholders' pockets once. How likely is it that he's gonna do it all over again? We say very likely for the manager is under this wrong impression that the act is totally legitimate. However, this is nothing but bad corporate governance as per us and the company should be adequately penalized for this. And this is precisely what investors in Cairn India did yesterday. Apparently, the cash rich oil exploration major is using its surplus cash to lend a whopping US$ 1.25 bn to a subsidiary of its affiliate Sesa Sterlite Ltd. The move has certainly not gone down well with the company's investors as the share closed almost 7% lower yesterday. And it is down another 5% as we write this.

Ideally, the surplus cash on a company's balance sheet belongs to the shareholders of the company. And therefore should be used to either expand its own operations or pay it back to shareholders in the form of dividends or buybacks. But to use it to fund the operations of a group company is taking it a bit too far. It simply amounts to value destruction in our opinion. However, coming from the Vedanta group, this move isn't too shocking. The group after all has a history of not working in the best interests of minority shareholders.

Rs 360 bn! That is the value of investments in power sector that are stuck up. Even at a time when basic electricity 24*7 supply to metro cities has become a challenge! As per Hindustan Times, power generation capacity of 7,230 MW spread across 12 projects is yet to get commissioned. And this is primarily due to lack of coal supplies. The power ministry has allowed the power generators to even import coal for these projects; where the imported cost will be passed through. The amount of coal allowed to be imported is dependent on the shortfall as per fuel supply agreements. While these temporary measures can help in the short term, imported coal is certainly not a long term solution for power generation in India. Without enough stress to improve Cairn India's productivity, both incremental power generation and power cost will suffer. These in turn could paralyze India's infrastructure growth plans.

Can central bankers really prevent market bubbles? The actions of the US Federal Reserve, the world's most power central bank, seem to suggest a belief that the economy can be manipulated to achieve desired results. There is no denying the fact that central bankers do tend to have a significant impact on the economy. And in recent decades, their interference in the market mechanism has increased multi-fold. But let's go back to the question that we just asked above- can central bankers prevent market bubbles? Who would be a better person to answer this question than former Chairman of the US Fed Alan Greenspan? It is worth noting that Greenspan served as the Fed Chairman from 1987 until 2006, after which he was succeeded by Ben Bernanke.

During his tenure, Greenspan oversaw two major bubbles in the US economy. The first one was the dotcom bubble of the 1990s that eventually busted in the year 2000. And then the mother of all bubbles - the US housing bubble - in the new millennium. As per an article in, Greenspan believes that the Fed cannot prevent market bubbles. This is quite an admission, especially because it comes from a central banker. He now seems to have the view that the only cure for bubbles is to let the free market forces pop them. We couldn't have agreed more. In its vain attempt to tame market bubbles, the Fed has completely failed. Its dangerous monetary experiment such as the QE programs has only delayed the eventual crisis. And in the process, they have made the crisis so big, that whenever the bubble bursts, it will have disastrous global consequences.

In the meanwhile, the Indian stock markets continued to slip deeper in the red. At the time of writing, BSE-Sensex was trading lower by 249 points (-0.95%). Barring pharma and FMCG, all the sectoral indices were trading in the red with realty and power being the major losers. Asian indices were trading mixed with China and Japan being major gainers, whereas Taiwan and Singapore are trading weak. European markets opened the day on a weak note.

04:40  Today's investing mantra
"Owning stocks is like having children -- don't get involved with more than you can handle". - Peter Lynch
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14 Responses to "Govt. 'subsidies' to the rich exceed fiscal deficit!"


Aug 2, 2014

Pl publish names of companies getting such write-offs



Jul 27, 2014

No govt. in this world will put cut on tax waiver to corporate. We hv federal system which which ensures flow of money from poor to rich. Inflation and corruption are the main tools to achieve this goal. Other wise how come worlds' 75% wealth is in the hands of 6%:of its population.



Jul 26, 2014

With reference to the "revenue lost" heading, Mr. Jetley has made it clear in Loksabha that this is the sum total of all the concessions given under various categories. This includes relief given to corporates as well as that given to income tax payer under different clauses like 80 C. Therefore it is not recoverable. The concession is given to make the product competitive. Above all there is a political compulsion, if we have to buy LPG cylinder at 1100 rupees in stead of subsidized price, how many of us will vote for the same political party again? Our main problem is the monitory benefit under various schemes doesn't reach the needy and is usurped by middlemen.


Rajesh Kumar Jain

Jul 26, 2014

Can we get the break up or details of these phenomenal figures we are talking about, i.e., names of the companies or business groups who have been benefited with these subsidies. Can a PIL be filed so that some money may be recovered out of humungous amounts lost till now ?

Like (2)


Jul 26, 2014

It is true. The corporates have taken advantage of Governments weaknesses and enriched themselves by wrong policies and favoring the their supporting corporates without any consideration for the common people. Another big policy deficiency of the previous Government give away the freebies and enrich the intermediaries without reaching the needy people thus widening the gap between rich and poor. Policy paralysis is be tackled properly to bridge the gap between the rich and the poor.

Like (2)

Rameshwar Gagrani

Jul 26, 2014

Dear sir,
I bring a similar parallel episode recently enacted by Indore municipal corporation Indore. IMC recently declared
that water bills dues of defaulters who have not paid the same since years will be freezed i.e.condoned. They are calling it "relief". Means to dishonests and evaders at the cost of innocent and honest tax payers.
They also give such tax reliefs to evaders of property tax
from time to time. AAM admi pays penalty just after due dates.
No political party opposes such move, wonder isn't it

Like (2)


Jul 26, 2014

Our New PM Mr. Narendra Modi should not be blamed for this. It is the government headed by the DALAAL Corrupt Manmohan Singh and Italian Waitress Sonia Gandhi who have subsidised the rich apparently in return for personal benefits. But it is good that Modiji has initiated steps to prosecute all the Ministers in the previous government. The Corrupt, Anti-national Congress may call it witch-hunting but they all deserve to rot in jail for corruption.

Like (1)


Jul 25, 2014

Yes, beyond any doubt. One of the reasons as to why reform-benefits do not reach have-nots is that much more goes to rich Corp India and they still want more reforms to make their business more profiteering, selfish, greedy, unethical people in the name of growth. CSR is that Corp India should let go part of their profits to govt in taxes.

Like (1)


Jul 25, 2014

This is mainly because the fund the corporate india supplies to the political class for elections and other undeserving purposes.Since the dependence is only increasing, there is very little chance of the subsidy getting reduced unless there comes a drastic change in the thinking of political class to reduce the burden on the common man.However, let us not lose hope as many things have changed by educating the political class which in turn has builtup pressure.

Like (1)


Jul 25, 2014

Amazing Article - All this finally gets to one conclusion, the middle class man who spends 95% of his lifetime working for someone is the most impacted person, as the Rich... are getting richer and the poor are anyhow supported by the subsidies Gov has to offer...

Like (2)
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