The recent announcement of a list of services that would fall within the service tax net is not a bad move in itself. It should have happened long ago, since no government can survive without taxing what constitutes the major segment of its economic activity. Service tax collection during May 2012 alone was Rs 8,607 crore, a hefty 45.4 per cent more than the collection during May 2011. This is bound to grow enormously with more services being included with effect from this month.
One wonders how much of the additional tax collected will be reinvested to facilitate further growth of the service sector. If past records are indicative of the future, then too little will be reinvested, and too late.
The tourism industry is a case in point. Our tourism ministry recently announced the allocation of an additional Rs 28 crore a year during the next Five-Year Plan, over and above the central outlay of around Rs 1,000 crore for this year, amounting to a total of Rs 1,028 crore for the current year. To assess whether or not this is adequate, let us compare it with the travel and tourism industry’s impact on the economy. Last year, the industry accounted for six per cent of India’s GDP and generated Rs 91,200 crore in foreign exchange. The amount allocated, Rs 1,028 crore, is less than 0.2 per cent of what our economy gains from this industry.
In the last few decades, by overtaxing the hotel industry – at local, city, state and central levels – and by unleashing draconian rules and controls, with close to 120 separate licences to be obtained to open a hotel, the government has played a key part in making India a very costly place to visit. A hapless hotelier has no alternative but to pass on to the tourist all the additional taxes and costs incurred, including that of projects delayed through waiting for licenses and the enormous amounts of “under the table payments” required to obtain each of these licences. International business travellers find Indian hotels to be about thrice as expensive as those in Shanghai.
The impact of these commissions and omissions is easy to measure: in 2011, China earned 4.7 per cent of the $1.03 trillion generated globally through international arrivals, while India’s share was 0.6 per cent. Thailand, which is about as large as one of our mid-size states, had thrice as many tourist arrivals as India had last year. The city of Paris alone had 80 million tourists last year as against just over five million who visited our vast country, one that had a glorious history before most of the West had any geographic identity.
What we are doing to our tourism industry reminds me of a German folk tale. The citizens of Schilda, to whom clever tricks of every possible sort are attributed, possessed a horse with whose feats of strength they were highly pleased and against which they had only one objection — that it consumed a large quantity of oats. They were determined to break it of this bad habit gently, by reducing its ration by a few stalks every day. The horse was finally weaned to the point of eating only one stalk a day, and on the succeeding day, it was put to work without any oats at all. That was when the horse finally died, leaving the myopic residents of Schilda still unable to fathom the causal relationship between their actions and the death of the horse.
The seriousness of the lopsided thinking was well brought out by Deepak Parekh in his recent chairman’s statement in HDFC’s annual report. He reckons India spends barely 0.1 per cent of its GDP on urban development against a minimum requirement of 0.25 per cent, although 43 per cent of the country’s wealth is generated by our 100 top cities. For the mathematically challenged, this means we plough back a mere 0.23 per cent of what urban India generates.
A recent McKinsey Global Institute (MGI) report underscores the gravity of the problem highlighted by Mr Parekh. There are 36 Indian cities in the list of 440 emerging cities identified by the MGI report as having the potential to generate 47 per cent of expected world GDP growth between 2010 and 2025. Mumbai and Delhi were ranked first and second, respectively, in this list in terms of expected growth in municipal water demand for the next decade and more.
Besides water, these cities need electricity, gas, green space, educational facilities, transportation and so on. Residents of the richest suburb of Delhi, Gurgaon, are already struggling due to the paucity of the very same infrastructural services. Long before 2025, urban India might become impossible to live, work and do business in.
What can be done to avert this looming disaster?
First, the government ought to restrict its role to speedy decision-making on priorities and policies and hand over the rest to the private sector, albeit with performance measures in place. Freeing up the economy was the reason for India’s boom between 1993 and 2008. Let us just do that again, allowing our country to be run like IndiGo rather than Air India.
Second, the government should view it as a priority to ensure that urban India does not become a glorified slum where ghettos of self-managed, gated communities become the escape route for a fortunate minority who can afford it, leaving the vast majority to live in totally unacceptable conditions. Use the services of people like Mr Parekh to solve this problem.
Third, make India a country of choice for global organisations when they are planning their future investments and growth. A World Bank report placed India a lowly 132 among 183 countries on the dimension of “ease of doing business with” based on a survey carried out last year. The licence raj and the babus who thrive in it are the core of the problem. We need to flush out the corridors of power they occupy, much like Hercules cleaning up the Augean stables.
Finally, the government should reinvest a substantial amount of what it earns from service taxation to boost this sector’s growth. Even the most illiterate of people know that they must feed their cow and look after her well if they want her to provide them with a bountiful flow of milk. Likewise, feed the service sector, which accounts for 60 per cent of our GDP, before milking it. Our future could well depend on whether we treat the service sector like a “holy cow” or the horse of Schilda.
The writer, a former corporate executive, was the founder-director of the Centre for Service Management at the University of Buckingham, and is now MD of Chennai-based VSM Consulting Services.