Extend tax benefits to IT companies, a committee says

Financial Express reports

A high-level committee constituted by the PM has recommended that income-tax sops for software technology parks (STPs) be extended beyond the March 31, 2009, deadline, by another 10 years.

According to government officials, the committee, chaired by Rajiv Ratna Shah, member-secretary, Planning Commission, has said this would prevent any relocation of infotech units from export-oriented units (like STPs) to SEZs. Around 6,500 infotech companies in 47 STPs across the country stand to benefit if the finance ministry agrees to the proposal. According to the officials, the tax benefits beyond 2009 for units in STPs will be at par with SEZs: 100% I-T exemption for the first five years, followed by a 50% exemption over the subsequent five years.

India it appears would continue to be the only country in which a sector is not taxed because its not doing well (agriculture), and another because it is doing well (IT). And India has one of the lowest tax to gdp ratios in the world. IT companies, first to complain about lack of infrastructure, say they dont want to be taxed because they employ people, and pay salaries to them. Tell me, which company doesnt. It might be odd for a blog on free markets to be complaining about government not imposing taxes. But this blog is also about the lobbying power of businesses. And look at the things that goverment can do with the money forgone - how many rural roads, primary health centres, schools (or ideally, education vouchers)

Somalia - the perfect lab to test free market theories?!

free market theories are mostly based on logic and inference from select situations. economists generally lack the luxury of other scientists - to create a condition in a country to test a hypothesis like say a physicist does in his laboratory.

but what if a whole economy by some quirk in the governance chain was filled with free market experiments and the results available to all to interpret?

while it may sound perverse, improvised Somalia should logically be a free market economists delight. we can search for answers why the market does a great job in areas like telecom and works rather inefficiently in infrastructure creation like roads.

" Somalia has lacked a recognized government since 1991—an unusually long time. In extremely difficult conditions the private sector has demonstrated its much-vaunted capability to make do. To cope with the absence of the rule of law, private enterprises have been using foreign jurisdictions or institutions to help with some tasks, operating within networks of trust to strengthen property rights, and simplifying transactions until they require neither. Somalia’s private sector experience suggests that it may be easier than is commonly thought for basic systems of finance and some infrastructure services to function where government is extremely weak or absent." says the finding from a World Bank report tiltled "Anarchy and Invention: How Does Somalia’s Private Sector Cope without Government?"

telecom in Somalia seems to be a great success story with the country enjoying one of the lowest rates in Africs as this article illustrates. "Three phone companies are engaged in fierce competition for both mobile and landline customers, while new internet cafes are being set up across the city and the entire country." the rather old BBC story adds ( i coundnt google out anything more recent), "It takes just three days for a landline to be installed - compared with
waiting-lists of many years in neighbouring Kenya, where there is a stable, democratic government. And once installed, local calls are free for a monthly fee of just $10. "

now, i guess , in india, we shouldnt be as liberal as we are in our praise for the govt and the entrepreneurs for the success in the sector but just cheer everyones invisible hands!!

i wonder how economics plays out in countries where governance is almost non existent - where market or others beastly forces reign - the areas the invisible hands works but is paralyzed elsewhere. -- in Markets sans ministers.

ICICI Bank wants level playing field

BS reports

ICICI Bank Managing Director and CEO K V Kamath on Wednesday said there is need for level playing field for banks to compete with other institutions, such as mutual funds and insurance companies, for mobilising more deposits.

“A level playing field will enable banks to have their rightful share of deposits. And for this, a facilitating environment is needed,” Kamath said, declining to specify whether the facilitating environment includes tax incentives.
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K Unnikrishnan, senior vice-president, IBA, said “We will look at the issues concerning bankers. A lot of money is flowing into mutual funds and that doesn’t augur well for banks. The 80(L) benefits available on bank deposits earlier have been withdrawn.”

A lot of money is flowing into mutual funds. That's bad, is it not?

Cost of love for language

ET reports

THE Tamil film industry, which even a few months back considered English titles for their films as fancy, has suddenly developed a new found love for Tamil as a language. But, in reality, it is turning out to be more out of love for money than on the language itself. And the industry is laughing is all the way to the bank.

Many Tamil political and linguists leaders were up in arms against the Tamil film industry for having English titles for Tamil films like ‘Red’, ‘King’, ‘Three Roses’, ‘Citizen’, ‘Chocolate’, and ‘Samurai’.... The present DMK government solved the whole issue in a jiffy. It simply decided to waive entertainment tax for films with Tamil titles.

Earlier, the film industry had to pay 15% of the ticket price in the case of urban markets and 10% in the case of rural segments as entertainment tax. Just by having a Tamil title for their film, they get to pocket this 15% and 10% as additional revenue, which could be shared by the producer, distributor and the exhibitor.

“While this will benefit the industry to a large extent, the state ex-chequer stands loose over Rs 50 crore per annum on account of this concession,” say sources in the state tax department.

One of the problems with government intervention in businesses is that it generally takes govt's attention away from what its supposed to be doing. The time and effort a government spends on these things have an opportunity cost. Amartya Sen once said that Indian government has been overactive where it should not have been active at all, and underactive where it should have been active. I guess we can add that government has been underactive in some areas because it has been overactive in others.

The one above is a good example. If a penny saved is a penny earned, a penny forgone is a penny spent. Imagine what it could have done with Rs 50 crore - how many primary health centres, how many schools!

Do lobbyists cancel out each other

Reuters reports

India plans to lift a ban on sugar exports in the next fortnight with the country poised to produce a record harvest of the sweetener this season, Agriculture Minister Sharad Pawar said on Wednesday.

He said India's sugar production in the season that began in October would likely reach 22.7 million tonnes, up from about 19 million tonnes in the last season.

"We are seriously considering lifting the sugar export ban in the next two weeks as availability of sugar is not a concern now," Pawar told a conference of economic editors.
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India banned exports in July to help check inflation as prices soared, and said the restriction would last until the end of the financial year in March.

But traders have been clamouring for the ban to be lifted so they can capitalise on favourable global sugar prices.

A couple of posts back we saw starch manufacturers lobbying to ban exports of maize. And here, the traders want a ban on sugar exports to be lifted. Now, it's a right time to ask this question - wouldnt these pressures and counter-pressures lead to kind of happy equilibrium for everyone. Sadly no.

Two reasons.

Lobbying power varies. Unlike the theoretical 'voting power' (one man, one vote), lobbying power is not equally distributed. The most powerful pressure groups - the rich, the well connected, the elite - tend to dictate policies.

Policies, in most cases, are the same for every one, unlike the market for goods and services. In the market for goods/services there is a chance that you get the benefit of long tail (which says odd demands can not only be met, but can also be met profitably). When it comes to policies, if it's a ban, it's usually a ban for all. This brings to us another crucial difference between the two. In goods/services market if you are among 1% of population which prefers blue tie with yellow dots (against the majority preference for blue tie, with say, red dots) you have a good chance of getting the tie you want. But when it comes to policies, you don't. As Milton Friedman pointed out in his superb television show Free to choose, 'they come in packages'.

Fixing red gram prices

The Hindu reports

The official said the Union Government had fixed the MSP (minimum support price) for red gram at Rs. 1,410 a quintal this year. The State Government would fix a higher support price like it did last year, he said.

Last year, while the Centre fixed the MSP at Rs. 1,400 a quintal, the State Government fixed it a Rs. 1,740 for grade I and Rs. 1,690 for grade II.

Mr. Venkataiah said that unlike in the past, the market intervention by the board would be more effective this season and red gram procurement centres would be set up in Gulbarga, Bidar and Raichur districts, well before the second week of December when fresh stocks start arriving in the market.

I am sure there is no dearth of good intentions behind government interventions such as these. But such policies demand too little to think up (farmers are getting too little money, fix a minimum support price), and too much to put through (look at this, "the market intervention by the board would be more effective this season".) It should be the other way. Ideas?

Retailing freedom

Economist writes

Retailing is one of the last big sectors of the Indian economy to open up to FDI. Previous attempts by foreign retailers to start businesses were blocked by successive governments. In the 1990s opposition from traders and local shopkeepers was enough to convince politicians. Later on the government was persuaded by the political left, and also by the Indian business lobby. The current government now has no hope of allowing FDI into general retailing by the end of this year.