Why US Spurns Totalization Agreement?

Business Economics & Services Team (BEST)



                           Why US Spurns Totalization Agreement?


Among the various vexatious issues that crave for amicable solution is the long pending demand of the Indian IT industry is to have an agreement between the two countries to avoid double taxation for the social security. It is popularly known as Totalization agreement. Interestingly, the US has signed this agreement with more than 30 countries. Once signed, this agreement will enable the expatriates in both countries  going on short  assignments to pay the social security only in one country. Presently, the Indian expatriates working in US for short duration assignments have to pay social security taxes in both countries. More so, the US social security taxes stipulate that a person has to work for 10 years and complete 65 years to avail the benefits of the tax in terms of old age pension and medical cover. Since the short term assignments are for a maximum of 6to 7 years, most of the Indians forgo their contributions. The amount foregone by Indians annually is estimated between US$ 1.5 billion to US$3 billion.

The forthcoming visit of  President Obama has rekindled the demand of India to conclude an agreement for  avoidance of social security tax. Some backdrop information is required to know how important is agreement. Prior to 1965, the number of people migrating to the US or going for short assignments were very few. After the relaxation of the immigration rules in 1965, mostly due to the severe labor shortage in that country and the considered view of the US administration to attract talents from all over the world into that country, the visa rules were relaxed. But still the immigration was limited to Indians having at least a degree and mostly preferred people with professional and high qualifications like doctorates, medical professionals etc. Since most of these people were emigrants and had the intention of settling down in the US permanently, social security taxes did not pose a problem to them.

But the immigration landscape changes since 1990's after the software boom in the US. The US had started introducing different types of visas for such professionals to work in that country. Most popular among them is HIB visa, which enabled a software professional to work for a maximum of seven years. Thousands of Indians have availed the H1B visas and started working therein the US on short assignments. That rend continues even now. In the absence of a Totalization agreement, every visa holder will have to pay social security tax there, blocking several billions of dollars there since they work for a maximum of seven years, short of   the cut  off period of 10 years and thus forgoing the remitted taxes.

Why the US is sulking not to sign the agreement. Foremost  is the reason of reciprocity. While a large number of Indians are working in the US on short term visas, the number of Americans working in India is very negligible. Also, in India deduction towards Provident Fund (PF) and Gratuity, the US equivalent of social security tax is optional and most often, the US citizens prefer remuneration packages which do not deduct  towards PF or gratuity. So a treaty of this nature is of no significance for the US citizens working in India. On the other hand, absence of an agreement will enable that country to hold on to huge resources, legally, though it may not be sound from the moral stand point. But morality seldom matter in trading relationship. Also, the Indian administration has not taken up this issue earnestly for one reason or the other.
The moot point is: will it come up for discussion at the Obama visit. Experts feel that nothing substantial will be there on Totalization agreement, this time also since there are many challenging issues other than this that may crop up during the bilateral discussions.             

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Obama to Open Up in India

Business Economics & Services Team



                                                Obama to Open Up in India

 If one goes by the media reports, the forthcoming visit of US  President Obama to India as the guest of honor at India's Republic Day parade will be a game changer in many sense. The Indian newspapers, electronic media are competing amongst themselves to be first in coming out with new angles and agenda items that will crop up Obama's second visit to India during his presidency, the first being in 2010.

Undoubtedly, the visit has rekindled a wider debate amongst all sections of the people. Some ar over optimistic, some are just optimistic and a sizable number of people are skeptic about   the visit mostly on account of the civic challenges that the Delhites have top face during the visit since the security arrangements are not not leaving any loopholes. Al;ready 1600 security personnel have arrived in Delhi and are combing every nook and corner the President is likely to visit in Delhi and beyond. Huge sanitation drives are on the likely hotels and public places the President is likely to stay or address meetings.

That apart, every day media is inventing newer items in agenda that will be thrashed at the bilateral meetings. A collation of such agenda is worth looking at. On the political front, almost all newspapers are unanimously opine that some strong words against terrorism, climate change etc. will be made   by both heads of state and some statements that can bond together people -to -people contacts. The US President is clearly going to praise Indian Prime Minister  Narendra Modi and the fast track he has opened for taking the Indo-US partnership to a higher  pedestal.    That will go well for Mr Modi since there is a perception that his popularity is sliding a bit, which is quite natural since being in the office for seven months or so. The President also will be praising the Indian Americans in superlative terms for their contributions to the American society, particularly in the filed of  business, science, research and  public administration (a sizable number  of Indian Americans are in Obama Administration).

The expectations in the economic front is very high and the media is lapping them up on a day to day business. Bereft of these speculative  and imaginative narratives and descriptions and high pitched wish lists tossed by both sides, there can be some meaningful discussions both in the track one and two dialogues. The track one dialogue (government to government ) will focus on the vexatious issues like nuclear liability law, recasting of offset arrangements, early conclusion bilateral invest treaty, strengthening of rules, regulations and enforcement of IPR, greater market access to US agricultural products to India and of course greater cooperation between the two countries in defense sector.

The Indian side will ring to the negotiating table its woes like visa restrictions, greater investment by the US companies in sectors like insurance, infrastructure, urban development, energy and greater market access to the US for Indian products like textiles, ICT products and of course earliest conclusion of the Totalization Treaty, which will enable mostly the H1B visa holders to pay social security taxes either in India or in the US, depending on their convenience.
Admittedly, the presence of Indian companies in the US has substantially gone up in the recent years since many Indian conglomerates are upping their investment in the US. The investments are mostly in the IT and biotech sectors. India will ask for more facilities and concessions to the Indian investors as the US administration grants to companies run by minorities in the US.
At the  end of the day, the three day visit of Obama will trigger a spate of discussions and dialogue and to expect all such debates to fructify into actionable maxims is asking for too much. Between two countries, which have intense and deep economic cooperation dialogue is a medium to consolidate the position and build on them , no matter how soon they become policy prescriptions.         

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Are We Over Hyping up Make in India?

Business Economics & Services Team (BEST)



                                                Are We Over Hyping up  Make in India?


There is a worldly wisdom: When something is played up over and again, up your ante to know what is there inside. There are people who suspect high decibel advertisement campaigns, steep discounts, over pitched demagogues. I do not think that I am not  the lone person who airs skepticism on these much touted projects, which are laced with a lot of promises, deliverable and marketed as game-changing strategies. Many have voiced concerns about the concept of Make in India in public forums.

The first to air a word of caution was the RBI governor, who maintained that Make in India should be more focused on the domestic market. Understandably, Indian products should become competitive within before it makes forays into the international market. How is this  possible? Economists give a benchmark for measuring the optimal growth of  the manufacturing sector in any economy. In India's case, the ideal share of manufacturing to country's GDP should be 40% or so. During the best of times, India had clocked only 25%. But slowly, the share had declined to 15% or so. The last UPA government had formulated a policy to up the share of the manufacturing to 25%. But it could not make much headway on account of the several scams that had erupted one after the other leading to a perceived policy paralysis.

If one tries to go beyond the veil of the new Make in India policy, the quintessence is the same, a new wine in the old bottle. it also aims to up the share of manufacturing to GDP to 25% in the conceivable future, create a modern technology focused manufacturing sector that  is globally competitive, creating an enabling infrastructure sector and importantly an export surplus. It has set up various enabling institutions to achieve that objective including manufacturing competitive council and skill development council. Bereft of rhetoric, the new dispensation has engaged in these tasks. If the new government wants to be different from the previous one, it should deliver in time and with least resources. Then only it can take credit for whatever it proposes to do.
 Can we create enough job in the manufacturing sector to absorb the multitudes of unemployed people? Empirical studies prove that intake people in the manufacturing sector will be less on account of the cap[ital intensity of the segment. Most of the state-of-the-art technologies need less number of people to operate them. Even with a manufacturing growth of 15% over a period of time, the number of people to be employed in the sector will be far less on account of the mechanization of many of its operations. therefore, no vistas have to be opened up for absorbing people in other sectors like construction, urban development etc.

Then there is the ecological  issue. Industry is concerned about slow clearance of the projects from the environment angle. The government has committed to look into that seriously. But in lax in stringent environmental norms can escalate the social cost to the detriment of everyone.               

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Will Mega Events Help Bring Investment ?

Business Economics & Services Team (BEST)


                                      Will  Mega Events  Help Bring Investment ?
In India big events are happening at regular intervals  presumably with twin objectives. One, to spread the India Story and two, to bring in the necessary investment. One is already over in Ahmadabad- Pravsi  Bharat Divas-mainly focused on People of Indian Origin (PIO), which going by the number of people attended was a big hit in terms of the number of people attended and the solidarity pledged by the participants to be involved in India's growth story in a  more meaningful manner. It remains to be seen what will be the likely fallout of the mega event in terms of accelerating the flow of investments into the country.

The second event-Vibrant India-is underway in Ahmadabad. It is not a new event but was rechristened from Vibrant Gujarat. This time around the event has captured the imagination of the foreign investors mainly on account of the fact that the event was crafted by the prime Minister Narendra Modi, when he was the chief minister of the state. This event had a snowball effect. Several states have tried to copy the event and now you have half a dozen similar events held by states like Madhya Pradesh, Uttar Pradesh, Kerala, Bihar etc. and the latest to join the band wag is West Bengal.
Business Associations and media houses are not falling behind. Economic Times, the largest financial daily in the country is organizing the Times Global Summit (GBS) shortly in New Delhi, which is being sold as an event where large number of foreign investors and Indian industry leaders are likely to participate and give their perception about India and the investment opportunities.

Why this herd instinct in organizing mega event? We have spoken to a few people about the usefulness of these events. There were positive and negative feed backs. A good number of them are of the opinion that such exorcizes will provide a platform for discussing broader macro issues that can can be resolved through policy decisions. The government can spell out clearly what they intend to do in creating a favorable environment for investment and they can hear the views of the investors as to what more has to be done in addressing their woes.
But there is a fairly large section of people who believe that such assemblage of people will not serve any positive results since many issues that affect the investors at the grassroots cannot be discussed at these forums. Investors come to these meets mainly to rub shoulders with the policy makers and fellow industrialists. Investment decisions are taken after a close study of many factors and no decision is taken merely on assurances.
Many confirm in private that such events will not serve any purpose, since every issue is discussed in such forums and the seriousness and intensity of discussions are merely superficial and there is positive of time to get   into the brass tacks. Some of the participants, whom we have contacted through  telephones say that same issues get repeated and many of the participating corporations refuse to divulge theoir issues in open forums. It would have been ideal to have small groups for every segment of industry to thrash out their problems, rather than airing them in such open  meetings.     

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FIIs Flow Declines-Alternatives For Indian Markets

Business Economics & Services Team (BEST)
               

FIIs Flow Declines-Alternatives For Indian Markets

 With the possibility of interest rates firming up in the US, the FII inflows into the country is likely to hit. This may sound not so good for the buoyant capital market in the country, which has been hitting  new highs these days. Forewarning of that trend is noticeable these days. There is a downward movement in the FII flows into the country. For instance, overseas investors pumped in a little over Rs 2100 crore in the equity markets in December 2014, the lowest in the last 10 months.

Analysts are not taking this trend  as serious since they believe that drop in net FII exposure in the equity market is on account of profit booking. They argue that the market will move up once the profit booking is completed in the next few days..
A look at the investment flows into the markets  is important. FIIs have made an investment Rs 98150 crore in equities and their invest in the debt market was Rs 1.6 lakh taking the total investment to Rs 2.58 akh crore. The net investment in the debt market for the same period was Rs 11,856 crore, making it higher than that of investment in the equity market.
Whether it is good or bad, stock market has emerged as an important barometer for measuring the buoyancy of the economy. Assuming that there will be marked drop in the FIIs exposure in the market in  the near future, some steps should be taken to sustain the trend.Before the advent of the FIIs into the country, capital market was sustained by retail investors and institutions. LIC, IDBI, IFCI etc had large exposure in the market. This trend has to come back to shore up the capital market.
The other important thing is to shore up the confidence of retial investors, who are shying away from the market because of the stock market crashes, which have been happening at regular intervals. SEBI, the watch dog of the capital market has been taking strict measures to curb malpractices in the market such as insider trading. But retail investors are not enthused in the market because of the legacy od bad expereinces that they had. It is time that we start a slow process of disintermediation between Indian markets and the FIIs. That does not mean that FIIs investments are not welcome. What it means that we have to have an alternate support system to sustain  the market in occasions when FII inflows slow down.  .

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Fight Against NPAs

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Business Economics & Services Team (BEST)

                      Fight Against NPAs


Now the focus has turned on curbing non-performing assets (NPAs)of the public sector banks. Going by the magnitude of NPA- which is currently estimated at Rs 2.43 lakh croe, of  which PSBs account for 35.9 %-the call  has come very late. The nation's assets have sunk into such non productive assets that a resource scarce country cannot afford. But that is a legacy that India has inherited on account of the unholy alliance amng bankers, industry and politicians. Also, it is a moot point what steps  the government is taking for curbing the NPAs in the non PSB sector, which is more than 60%.
It is the not the first time, the alarm bells for NPAs have been pressed.That has been with us for long. Occasionally, the government comes  out with bold steps to curb the NPAs. But mostly that schemes remain in papers evading any serious follow-up  measures.  There are some historical reasons for accumulation of NPAs over a period of time. First and foremost is the absence of  a foolproof system for monitoring sickness. Loans were disbursed to companies without undertaking any proper viablity study of the project. There are cases when people undertake projects on gut feeling that they  can succeed without heading to business norms.
Secondly, the nexus between the lenders and borrowers, which led to sanctioning of loans in an arbitrary manner, mostly driven by the relationships rather than sound prudential norms. Even before reform period such aberrations were rampant. For instance, debt equity ratio facilitated conversion of  lenders money taken as debt were indiscreetly got converted into equities. Preponderance of that culture had taken off the onus cast on the borrowers to repay the money and those who had repaid had often asked for easy rollover of the loan repayment time.   
There is a third category of people   who had indulged in willful default of loans. They skimmed the company of all assets and even sold machinery to make them sick. Once bled the company, they filed for getting the sickness status for the enterprise, which enabled them many advantages, especially moratorium  for repaying  the loan. Some companies even manged to get finance for restructuring companies and also squandered off that funds or diverted to some other activities.   
The fourth reason for mounting of NPAs is of a recent phenomenon , when banks were instructed by the government to give soft loans to corporations to help them fight the slowdown blues. No proper montioring has been done while pump priming resources to these companies. Not many companies have properly put to use the finances.

Now the finance minister and the RBI governor have given a clarion call to the general public to save more and channelize such investments for productive purposes.  The prime Minister also exhorted the general public to lessen their savings in gold and increse on investment portfolios. But that will fall on deaf ear if the investing public is not assured proper return on investment. Yet, it is a good beginning an uncompromising war on NPAs. 

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Hasty Ordinances

Business Economics & Services Team

                                                      Hasty Ordinances

A heated debate is on about the  hastiness of ordinances issued by the government to give effect to the important bills stalled in Parliament on account of the pandemonium orchestrated by the opposition parties. While there is near consensus on the insurance ordinance, the opinion seems to be divided on the one on land acquisition.

It is more due to the likely misuse of the provisions of the legislation, which can go against the interest of the farmers and other vulnerable sections of the society, who can be victims of land acquisition. The history is a testimony to that. In 1894, the British enacted the land acquisition bill as a tool to expand their colonial ambitions by taking over chunks of land masses from natives mostly on flimsy  ground, with almost nil or grossly inadequate compensation.  The colonial hangover continued even after independence. That served the interests of the ruling masters and their cohorts.
Undoubtedly, the step taken by the lat UPA government was more dictated by vote bank politics. But  it had its own advantages. It was a break from the past trail of exploitative governance to a more equitable dispensation by providing the people who are affected by acquisition of land more compensation  and also making the very process of acquisition on flimsy ground more difficult. The new act has not even worked for one year. And yet,  the government has decided to amend the act on the ground that the legislation has proved to be a stumbling ground for land take over  for productive purposes.
But the fact is that the government has yielded to the pressure exerted by vested interests, who stand to gain from the new dispensation. It is a known fact that many state governments have freely or at a throwaway prices, given land  for many industries. The land acquired by corporations in invest melas conducted at regular intervals by the state governments is a case in point. It is instructive to have a study undertaken to find out how such huge parcels of land have been put to proper use, how many such land has been sold  and how much of land has been put to other uses.
It is also instructive to evolve a new compensation matrix, which not only calls upon the acquirer to pay  adequate compensation but also to ensure that release of  compensation is staggered in such a way that the affected persons and their generations to come get the compensation in perpetuity. The best way is to make them stakeholders in the project. There are some reservations voiced against such schemes because in future there will be spate of litigation among the heirs. This can be resolved by naming who would be beneficiaries in the future and in what proposition. Also, such compensations should be indexed against inflation.
There is a lot of merit in evolving such a compensation matrix. Past experience indicates that one time compensation leads to conspicuous consumption and the beneficiaries blow up the compensation within no time, leaving  the next generation in penury.
Therefore, what  important  is to have a wider debate on the pros and cons of the desired amendment of the bill and  passing it through an informed debate, even if it takes time. That is what democracy is.              . 

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