Chal­lenges on the Econ­omy

Sim­ple but tan­gi­ble steps can make In­dia a sought af­ter des­ti­na­tion for for­eign di­rect in­vest­ment

The Economic Times - - The Edit Page - Ravi Venkate­san

In­dia has a new govern­ment. It’s top pri­or­ity must be to re­pair our dam­aged econ­omy. One com­po­nent of this is re­gain­ing the con­fi­dence of global com­pa­nies who bring much­needed in­vest­ment and jobs. From a peak of $31 bil­lion in 2009, FDI in­flows de­clined to $19 bil­lion in 2011 as many com­pa­nies were put off by the busi­ness un­friendly en­vi­ron­ment; it has re­bounded to $28 bil­lion but this is a frac­tion of the $125 bil­lion that China at­tracts.

In­dia is lucky; global com­pa­nies are nat­u­rally drawn to her size, de­mo­graph­ics and talent. The govern­ment just has to stop scar­ing com­pa­nies away. While is­sues like in­fra­struc­ture and labour law re­form are crit­i­cal, the fore­most task is to make In­dia a less hos­tile coun­try to do busi­ness in.

Ease of Do­ing Busi­ness

The World Bank ranks In­dia 134th out of 189 coun­tries in terms of ease of do­ing busi­ness. Even Pak­istan and Ye­men, two coun­tries where Amer­i­can drones cir­cle the skies hunt­ing ter­ror­ists, do bet­ter. This is why even CEO’s who are drawn to the vi­tal­ity of In­dia are in­creas­ingly put off by its vo­latil­ity. A 40 place im­prove­ment over the next five years would make In­dia the world’s best des­ti­na­tion for global com­pa­nies many of whom are seek­ing to de-risk their de­pen­dence on China. Of course, In­dian businesses would flour­ish as well.

How can this be done? The top pri­or­ity must be to stop what Naren­dra Modi has called “tax ter­ror­ism”. This is the ar­bi­trary and crude in­ter­pre­ta­tion of tax laws by the rev­enue au­thor­i­ties which makes In­dia one of the most chal­leng­ing places in the world to pay taxes; it ranks #158 on the same World Bank scale.

Tax Ter­ror­ism

All com­pa­nies face ha­rass­ment but multi­na­tional com­pa­nies like Nokia, Mi­crosoft and Shell make par­tic­u­larly easy tar­gets. The most egre­gious ex­am­ple of heavy hand­ed­ness was the retroac­tive amend­ment of the tax law back to 1962 to force a $2 bil­lion tax bill on to Voda­fone. A govern­ment that changes the law ret­ro­spec­tively in­tro­duces a ter­ri­fy­ing de­gree of un­cer­tainty, se­verely dam­ag­ing In­dia’s rep­u­ta­tion.

In gen­eral, the new govern­ment should be more con­sis­tent in its poli­cies. The sin­gle big­gest con­cern for global com­pa­nies is in­con­sis­tency of pol­icy. They can live with un­help­ful poli­cies but not with am­bi­gu­ity of pol­icy or pol­icy flip-flops. The new team in Delhi must also find a way to cut through In­dia’s scle­rotic and cor­rupt bu­reau­cracy.

This means elim­i­nat­ing scores of ar­chaic laws and reg­u­la­tions, re­duc­ing bu­reau­cratic lethargy and fear leading to faster clear­ances and ap­provals, us­ing tech­nol­ogy to elim­i­nate dis­cre­tion and in­tro­duc­ing a na­tion­wide goods and ser­vices tax in­stead of the frag­mented sys­tem of in­di­rect taxes.

Im­prov­ing the ef­fi­ciency of the ju­di­cial sys­tem in en­forc­ing con­tracts and re­solv­ing dis­putes also needs crit­i­cal at­ten­tion. Para­dox- ically for a coun­try that con­trasts it­self from China by cit­ing the rule of law, In­dia comes in at a lowly 186 when it comes to con­tract en­force­ment; only Ti­mor, Ta­jik­istan and Myan­mar do less well.

Ju­di­cial Re­form, Speed

Smart in­di­vid­u­als and com­pa­nies usu­ally set­tle rather than lit­i­gate even when the case facts are in their favour be­cause the cost of lit­i­ga­tion av­er­ages 40% of the con­tract value and it can take upto a decade to get jus­tice. Bluntly, In­dia at­tracts in­vestors de­spite the le­gal sys­tem rather than be­cause of it. A func­tion­ing ju­di­cial sys­tem would likely also see a re­duc­tion in In­dia’s risk-en­hanc­ing, ram­pant cor­rup­tion .

While the new govern­ment must work hard to make In­dia more busi­ness friendly, it must not cave in to pres­sure on other vi­tal mat­ters. For in­stance, on in­tel­lec­tual property pro­tec­tion, there is enor­mous pres­sure from global phar­ma­ceu­ti­cal com­pa­nies for In­dia to pro­vide stronger patent pro­tec­tion and end com­pul­sory li­cens­ing. These are dif­fi­cult con­straints for a coun­try where 800 mil­lion people earn less than $2 per day. In­dia also needs to des­per­ately re­vi­tal­ize its man­u­fac­tur­ing sec­tor. This will re­quire many pol­icy changes in­clud­ing pos­si­bly pref­er­ence for lo­cally man­u­fac­tured goods in govern­ment pro­cure­ment or lo­cal con­tent re­quire­ments. In such mat­ters, In­dia will need to thought­fully and coura­geously main­tain a fine bal­ance be­tween be­ing com­pli­ant with its obli­ga­tions to WTO on one hand and do­ing what is in her self-in­ter­est on the other.

The key is to engge in open-minded di­a­logue on these con­tentious mat­ters and search for win-win so­lu­tions with for­eign com­pa­nies and gov­ern­ments rather than an­nounce pol­icy de­ci­sion uni­lat­er­ally.

For twenty years, China has been a growth en­gine for many global com­pa­nies; these com­pa­nies are now ea­gerly look­ing for the next China. No other coun­try is bet­ter po­si­tioned for this than In­dia. Rel­a­tively mod­est changes in the busi­ness cli­mate can un­leash a tidal wave of in­vest­ment and pros­per­ity.


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