InclusionRoad to Recovery

Value Capture is Critical to Transform Indian Economy

Story Highlights
  • RECOMMENDATIONS:
  • 1. Press the paddle on structural reforms. GDP growth slowdown could act as an opportunity to push forward structural reforms pending for years.
  • 2. Push public and private investments. Investments are the key driver of growth.
  • 3. Enhance rural wages. It will help boost consumption and demands. Anticipation of demand is what the companies use for investments.
  • 4. Rationalisation of corporate tax is critical. The loss incurring due to the cut in corporate tax would be made up by the resulting increase in personal income tax.

Big technology companies are extracting huge profits from the Indian market but are paying hardly any taxes. Majority of these companies are from the US and a few are from Japan, South Korea and China. “Value capture is happening by a few companies and they are not paying tax on the value capture here in India,” said Sharad Sharma, Co-Founder, iSPIRT Foundation.

He pointed out that in the Windows laptop 86 per cent of the profits are made by Microsoft and Intel. Only 14 per cent of the profit is left for the firms who make the hard disk, screen, PCB, etc and sell in the market. Apple makes even more than 86 per cent profit.

Referring to Apple’s manufacturing of iPhone in India, Sharma said it was a clever move on the part of the US firm which has extracted a lot from the government but added very little value. “Their value addition in manufacturing is only 2 per cent. Now they have come and said I will do this 2 per cent value addition in India and you give us 10 per cent tax relief. By doing very little value addition they have extracted a lot. No Indian business is going to benefit out of that,” he said.

Sharad Sharma, Co-Founder, iSPIRT Foundation
“Apple’s value addition in manufacturing is only 2 per cent. Now they have come and said I will do this 2 per cent value addition in India and you give us 10 per cent tax relief. By doing very little value addition they have extracted a lot. No Indian business is going to benefit out of that.”

He said major US firms have emerged like landlords who extracts most of the profits by doing very little. This is true for almost all the sectors where the US companies have acquired dominating position.

“All airlines put together for 70 years without any exception have made less profit than Boeing and Airbus. Pfizer makes more profit than top 100 hospital chains of the US put together. Cisco, despite having a bad year, made more profit than top five European mobile operators put together, including Vodafone,” he said.

While 90 per cent of the firms which are capturing the value are from the US, a few companies have also emerged from China, South Korea and Japan. “These people in the value chain can capture profit. 90 per cent of them are American. Remaining 10 per cent are from South Korea, Japan and China.”

Sharma said India needs to transform its system in order to create the companies who could capture value at the global level. However, he pointed out that the business condition, especially for small businesses in the country was very challenging.

“In our country job creation can happen only in the hands of small companies. We must acknowledge that there is pain in the system that is going to magnify and it is going to become a political issue, it is no longer an economic issue,” said Sharma, referring to the collapse of a large number of MSMEs in the last couple of years.

He said efficiency is a big issue in the Indian business. “We know that our steel plants at the factory gate can produce more efficient steel in the world, competitive to even China. From the factory gate to the actual building site, the cost of distribution is 26 per cent, which is higher than any other country in the world.”

He said small businesses have been treated badly by the system in India for the past 70 years and there is hardly any respite for them. “They have labour laws that are terrible, there is no credit available, inspector raj has not changed. Now you are at a cusp where all this is resulting in a very high level of mortality.”

Sharad Sharma

Sharad is one of the active technology angel investors in India with about two dozen investments. Details at https://angel.co/sharad-sharma and http://www.letsventure.in/person/SharadSharma Sharad is a passionate evangelist of the software product ecosystem in India. He is the co-founder and Governing Council member of iSPIRT. He was the Chair of the NASSCOM Product Forum and a member of the Executive Council from 2009-13. He has held a number of senior executive positions with leading technology companies. Most recently he was an SVP at Yahoo! and CEO of India R&D. Previously he turned around VERITAS operations in India. He also brought AT&T/Lucent R&D to India as an intrapreneur. Sharad is also an entrepreneur. He co-founded Teltier, now part of Cisco, and is currently the CEO of BrandSigma Inc.

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