Rewind. Crack down on wrongdoing

‘A man, a plan, a canal – Panama’ is a famous palindrome thought up when the Panama Canal was built. Today, after the leak of the Panama papers, it would, though not a palindrome, be ‘A man, a tax evasion plan, a channel – Panama!’

Other countries have reacted to the leak faster than India has. The Prime Minister of Iceland resigned and Australia has ordered a probe. India has set up a committee to investigate; a euphemism for doing nothing about it. Seven decades of the malpractice of having different sets of rules for those connected and those not so, have resulted in the cancer of corruption entering our DNA. This mountain of information has several Indian names on it and can be the stick to induce compliance with the tax settlement scheme currently in force.

Several thoughts flow from here.

Unfair taxes

One, the outflow of tax-evaded funds happens primarily due to unfair tax rates. Tax rates therefore need to be transparent, fair and without too many discretionary powers which can lead to corruption.

The Centre is working towards this by reducing tax exemptions and by lowering rates. Two, the judicial system has given far too much leeway to the wrongdoer.

The first conviction in the Coal scam came last week, four years after the CAG (Comptroller and Auditor General) report pointed to the loss to the exchequer due to discretionary allotment of blocks. The guilty have been given a four-year jail term and a fine of ₹5 lakh, which, set against the figure of the ₹1.8-lakh crore loss to the Exchequer as computed by CAG, however disputed, seems piffling.

The rating agency CRISIL has downgraded ₹3.8 lakh crore of corporate debts, the highest ever downgrade. The banking sector is the intermediary to channelise funds from savers to entrepreneurs. It is dominated by public sector banks, which have a combined 70 per cent share of deposits and advances, often lent without a proper appraisal.

The CAG has hauled up Gujarat State Petroleum Corporation (GSPC) for not producing gas from KG Basin, a decade after it had announced discovery of 20 TCF of gas.

The CAG report says that GSPC acquired gas blocks overseas, without having experience or expertise in managing them, and had to write off ₹2,500 crore expenditure when some of the blocks were later surrendered. Where did the money for acquiring the gas blocks come from? GSPC’s borrowing went up by some ₹12,000 crore, to ₹19,000 crore in just four years to March 2015. How could lenders lend to such an entity?

Non-performing loans with banks are huge!

Banks, thus, have fewer resources to lend for projects. It is the government which is kick-starting the investment cycle in roads and railways.

So, in order to kick-start investment, the appraisal process for new loans must be strengthened, the judicial system improved and decision-making made transparent.

Otherwise, a handful of people would always send borrowed money to Panama-like havens, cock a snook at lenders and live the good life.

The writer is India Head, EuroMoney Conferences

COMMENT NOW