Challenges on the Economy
Simple but tangible steps can make India a sought after destination for foreign direct investment
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.
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.