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Royalty payouts widening India's current account deficit: Deveshwar

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30 July 2014

ITC chairman Y C Deveshwar has come down heavily against a policy that allows limitless repatriation of royalty to overseas holding companies, which, he said, is widening India's current account deficit while supporting jobless consumption growth.

ITC chairman Y C Deveshwar Reports suggest that since the policy change in 2009 that allowed increased royalty payments such payouts have increased by 70 per cent to reach Rs40,000 crore, Deveshwar said at the 103rd AGM of the company in Kolkata on Monday.

''This outflow is equivalent to about 20 per cent of India's annual foreign direct investment,'' he said, adding, ''This transfer attracts a much lower withholding tax of around 10 per cent, given India's bilateral agreements across the globe, thus rendering infructuous the 25 per cent tax imposed in the budget 2013 as a remedy.''

ITC alone, he said, paid approximately Rs3 crore as royalty last fiscal.

International enterprises bring in their brands, technology and know-how in their enlightened self-interest,  to continuously enhance market share and market competitiveness by competing with other global and domestic players; there is no justification whatsoever to allow royalty, let alone limitless payouts, by the Indian subsidiaries to their overseas holding companies, he pointed out.

With little value addition within the country and increased outflows, the vulnerability on the external front is further accentuated by the build-up of accumulated international debt that is far ahead of the foreign exchange reserves. As a result, the ratio of foreign exchange reserves to India's total external debt has declined from about 114 per cent to 69 per cent over the last 5 years, he said.

India's billion plus population represents potentially a huge consumption market. With rising disposable incomes and a growing middle as well as affluent class, there is a substantial growth momentum in the consumption of higher-end value-added products and services.

Over the years, India has progressively allowed free competition leading to the establishment of a growing Indian global market. Dating back to pre-Independence days and more so post liberalisation, brands owned by foreign enterprises have held sway over this expanding market.

Many of the international companies operating in India rely, in part or full, on their global supply chains to service the Indian market. This is primarily due to the difficulties faced in establishing competitive manufacturing units in India.

Their ready access to well-developed supply chains overseas facilitated further by lowered import duties makes international sourcing more attractive. As a result, the country's consumption basket has a large share of imports either as finished products, sub-assemblies or components. Therefore, despite the presence of multinational entities in India, a substantial part of the value created remains outside the country. This is one major reason for the jobless consumption growth witnessed in recent times, Deveshwar pointed out.

''Multi-national corporations possess the unique competitive ability to switch supply chains globally depending upon currency fluctuations as well as opportunities arising from labour arbitrage. This does not always make for a stable employment opportunity and value addition in the domestic economy. International enterprises must therefore be encouraged to create supply chains in India that enable larger value capture in the domestic economy.''

He said, with consumption expenditure expected to grow from the current level of $1 trillion to $3.6 trillion in 2020, such unrestrained outflows can assume even more alarming proportions.

''The low rates of withholding tax on royalty payments will entail a considerable loss to the Indian exchequer as this method of profit repatriation escapes the full income tax rate that Indian companies are subjected to,'' Devashwar pointed out.

The revenue deficits will have to be ultimately borne by domestic industry through higher taxes, placing them at a competitive disadvantage, he added.

Royalty payments, according to Deveshwar, should therefore be permitted only between unrelated parties, based purely on commercial considerations with little or no governmental intervention.

''This will facilitate Indian enterprises in accessing intellectual capital to compete effectively with international players in the Indian global market,'' he said, adding that such a policy framework will go a long way in creating a level field for Indian enterprises.

He said ownership of intellectual capital will be the springboard that will propel India from a developing economy to a developed nation. It will transform the country from a provider of labour, commodities and relatively lower value-added goods and services to a position of leadership in innovation, thereby earning global respect.

Growth with employment and equity
''The challenge of the times is creating growth with employment when the economy itself continues to be in a tailspin with a second successive year of sub-5 per cent growth. Persistent inflation, high fiscal, trade and current account deficits have severely curbed the growth potential. The cutback in investments and piling-up of stalled projects also contributed to the dismal performance, resulting in a de-growth of 0.7 per cent in manufacturing.''

Though fiscal and current account deficits have been reined in somewhat, it has been at the cost of productive expenditure and dependence on a weak rupee for exports. The new government therefore has truly an unenviable task of resurrecting the economy, whilst ensuring that growth is equitable and can spur more than commensurate employment, he said.

Conducive policies ought to be crafted to boost India's natural advantage in sectors like agro-forestry and promote employment-generating wood-based industries.

''I am given to understand that agroforestry has the potential to create over 15 billion person-days of employment.''

Successful global brands have been steadfast in nourishing their consumer franchise through ongoing innovation and remaining well ahead on the learning curve. Therefore, the challenge of building brands in competition with such established players is no mean task. The countries that have accomplished this seemingly impossible mission have done so through close collaboration between the governments and their companies over the long haul.

Indian companies, on their part, must invest in cutting-edge R&D to build intellectual capital. The government can provide the right signals by refocusing the incentives to more result-oriented outcomes. Currently, weighted tax deduction on R&D expenditure is based merely on inputs without any linkage to outcomes in the form of consumer franchise. Such incentives are best linked to revenue generated through the sale of branded products.

He said, a percentage of sales of the Indian brands could be an effective basis for crafting the incentive.

(Full text of  Y C Deveshwar's address to shareholders: ITC: Building World-Class Brands, Multiplying Sustainable Livelihoods





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