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Photo: Bloomberg
Photo: Bloomberg

The difficulty of decoding business incentive schemes

They should be simplified and freed of bureaucratic clutches for them to prove truly effective

In her bestseller The Code of Capital, Katharina Pistor postulates how law creates wealth and inequality, and stays firmly in the service of capital. Illusion, scarcity and complexity are deliberately coded around ownership, transfer, and the utilization of ordinary assets. This makes it difficult for ordinary citizens to prosper. One way in which nations aim to reduce economic inequality is by incentivizing entrepreneurs to operate in sub-optimal conditions, and India is no exception. However, not all such attempts have achieved success. Perhaps the problem lies in the complex and ambiguous design of such incentive schemes.

India’s government recently approved a production linked incentive (PLI) scheme worth 1.46 trillion for 10 sectors, over and above the electronics and pharma input and medical-device sectors announced earlier. From a review of PLI guidelines, it appears designed to prevent undeserving entities from claiming incentives, rather than facilitating this for deserving companies. There are stringent eligibility criteria, allowing only firms with adequate track records to claim benefits. Applicants must submit detailed proposals with steep application fees. Despite concerns of entry barriers and competition distortions, this appears to be a fair trade-off to separate the wheat from the chaff. If found eligible, applicants can focus on operations.

However, the incentives are typically tied to increases in both sales and investments made by companies, to be released after data substantiation. A project management agency (PMA) set up by the government is to verify compliance. For disbursement of incentives, companies have to submit claims along with certificates from chief executive officers, statutory auditors, company secretaries and chartered engineers to the PMA, which is also authorised to obtain any other document it may need. The PMA makes recommendations to an empowered committee (EC), which will forward its endorsements to the competent authority. Such complicated processes do not help, especially if the spirit of fraternity descends into servility to a grouchy bureaucracy.

Compliance with the stated conditions by businesses need not be sufficient for their receipt of incentives. In case a clarification is needed, the PMA refers it to the relevant government department, whose decision is considered final, without necessarily asking the applicant to clarify. In addition, the EC is authorized to revise incentive rates, conditions, eligibility criteria, and target sectors, as it may deem fit, without necessarily taking into account the views of entrepreneurs. Such mistrust seems cast in the scheme that it puts the government’s goal at risk. Mistrust may be a part of our governance DNA, but no effort appears to have been made to change that.

Moreover, in case of excess disbursement, beneficiaries are required to return the extra amount with interest. There is no reverse provision in case of insufficient disbursement or delayed/non-payment for the government to pay up with interest.

In our consultations for a study on the convergence between trade and industrial policies being done by us for the department for promotion of industry and internal trade, some stakeholders have pointed out that the Special Incentive Package Scheme in the electronics sector suffers similar challenges of inordinate delays in the evaluation of applications, and even longer delays in the disbursal of incentives. The guidelines offer no accountability mechanism for the government officials involved, nor does it envisage any grievance redressal system for manufacturers.

Incentive schemes in other sectors also seem to suffer from similar or other deficiencies. For instance, the incentive amount under the Formalization of Micro and Food Processing Enterprises Scheme appears to be inadequate and raises doubts about the size of projects that the government is willing to support. The conditions under the Mega Food Parks Scheme, such as a need to acquire multiple acres of land without government support, seem to have deterred interested parties from taking the plunge. Its disbursement conditions, including documentary proof of land allotment, do not make life easy for entrepreneurs.

It has been argued that the government has sought to insulate and de-risk itself through such conditions, despite being aware of the uncertainties that arise from a high degree of complexity.

Such examples can be cited until the cows come home. The bottomline is that while schemes of this nature create a façade of incentivising those willing to take on risk and perform even in unfavourable situations, they may end up demotivating exactly this group of stakeholders with their complicated procedures and compliances. Business incentive schemes, therefore, need to be coded in a more inclusive, transparent and mutually accountable manner to inspire confidence among entrepreneurs.

How can this be done? Mervyn King, in his book The End of Alchemy, speaks of financial alchemy—the creation of extraordinary financial powers that defy reality and common sense. He argues for doing away with overstuffed and needlessly complex legislation to clear a path to durable prosperity. Some of his suggestions may be helpful to rein in the extraordinary bureaucratic powers that attend our government incentive schemes and make them more utilitarian.

Amol Kulkarni of CUTS contributed to the column.

Pradeep S. Mehta is secretary general of CUTS International

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