The big challenge for India is the failure of the justice system to deliver in time; while another big issue is taxation.
The Union Government has five major functions. That of protecting our borders; protecting life, liberty and property of citizens; ensuring justice through courts; managing our external affairs; and managing the currency, for which it taxes citizens.
The current government initiated many good programmes to help the poor and provide social security, build infrastructure, and clean up the banking system among others.
This May, India will get a new government. What should its priority be for society and for the markets?
Of the main functions, the biggest failure is that of our justice system. This has reduced respect for the rule of law, increased criminal activity and corrupted our society.
Our courts take long to decide civil and criminals cases, appeals move at a snail's pace, and costs - especially in the Supreme Court, have become prohibitive for ordinary Indians. An 'activist' court has also created uncertainty in the economic area.
People charged with grave criminal acts often move freely on bail and appeal the case knowing well the time it takes for a hearing. Meanwhile, lakhs of poor undertrials languish in jail, sometimes 'serving' the potential punishment without being sentenced, only because they are too poor to get bail.
We only have 18 judges per million people, while the Law Commission recommends 50. For perspective, most developed countries have 50 to 100.
Our courts lack capacity, proper infrastructure and are under-invested. We need to increase capacities in our prosecution, investigative and intelligence gathering systems, along with making changes in the functioning of our police. Delayed justice is restricting our growth and the rule of law.
Another big issue is taxation. As a labour surplus, capital short country, we do not incentivise the creation of jobs adequately and overtax capital. Thus, our cost of capital remains high and burdens investments and costs.
The current government incentivised jobs a bit by refunding employer contribution towards provident fund (PF) and Employee State Insurance (ESI) for the first three years for new employees, which has accelerated formal employment.
However, we need to increase employer funds towards training and apprenticeship, and for the development of specialised skills which will make our labourers more productive and enable them to earn more.
Capital is taxed highly. We pay corporate tax at 35 percent along with a tax on dividend of more than 20 percent -- individuals pay an additional 10 percent on dividend receipt above Rs 10 lakh, capital gains short term of more than 35 percent, long term of 10-20 percent, tax equity purchases by securities transaction tax (STT), and stamp duty on share issue, etc., which drives up the cost of equity.
Thus more people borrow, enhancing risk in the system whereas increased equity investment is needed. Further, corporates suffer the highest tax even though economically they offer greater capacity to invest, pay taxes, create value and good high paying jobs. A sole proprietor pays more than 35 percent at the marginal rate, with no dividend tax if they withdraw the profit.
We need to exempt payment of the dividend from tax or drastically lower rates, eliminate capital gains taxes or reduce them, and on the whole lower taxation on capital to increase investments.
We need to create a good debt market for government securities (G-secs) and bonds. For 40 years, governments have worked on this and we are yet to see a liquid debt market.
The reasons are structural. We need to incentivise debt trading, capitalise large debt trading intermediaries, and lower the cost of raising debt.
Today, a large number of jobs are created by service sector entities who are heavily taxed, while capital intensive entities are incentivised via liberal capital allowances through high depreciation.
The depreciation needs to be reduced to 10 percent and overall corporate tax to more than 25 percent as promised. Overall costs will decrease if the cost of equity for banks, NBFCs, labour incentive entities, and regulated utilities are reduced, improving competitiveness.
We need these two areas to be prioritised to ensure a big impact and a more productive and law-abiding society.
TV Mohandas Pai is Chairman of Aarin Capital PartnersSubscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.