The Modi Government’s priority on the economic front, no doubt, is to arrest the deterioration in business environment that set in during the UPA regime. The term ‘policy paralysis’ entered the popular lexicon to account for the fading lustre of the growth story. All businesses — not just Indian, American or Japanese – found it hard to invest due to problems in securing clearances and regulatory hassles. The good news, however, is that investor sentiment has revived with the formation of the NDA government amidst high expectations that it can provide a growth-oriented environment.
While launching the high-octane PR agency-driven Make in India campaign, the Prime Minister forcefully emphasised the need to make the country an easier place to do business and aimed to improve its current low ranking of 134 out of 189 countries tracked by the World Bank – this includes yardsticks like the ease of starting and closing a business, dealing with construction permits, cost and time taken to get an electricity connection, registering property, the number of documents and the average cost of containers for export and import shipments, enforcing contracts, among others.
The big question is what the Modi Government plans to do to improve India’s business environment. According to a note by the Department of Industrial Policy and Promotion (DIPP), the initiatives it has taken so far are to further delicense and deregulate industrial activity, permit electronic submission of forms on a 24/7- basis and allow more self-certification. DIPP has also asked a private consulting firm to study the comparative practices by various states for clearances and ensuring regulatory compliance and has identified six best practices to be circulated among them for peer evaluation.
There are no prizes for guessing that Gujarat’s pro-business practices would be prominent among those circulated for peer review. Recently, the World Bank chief Jim Yong Kim lauded the Gujarat growth model –and of course Modi’s role in it — and stated that India’s business standing will jump 50 places if the ranking is done on the basis of this state alone. In other words, if Gujarat’s business environment can be scaled up to the rest of the country, India’s ranking would straightaway go up to 84. The Prime Minister, however, has raised his level of ambition higher, for India to move up from 134 to 50!
While all of this will be music to the ears of investors, they would prefer see more improvements on the ground before their animal spirits are rekindled! The first 100 days of the Modi Government does not offer much hope in this regard. On the eve of the Make in India campaign, the CEO of India’s second largest telecom company frankly stated that international investors were still waiting to see a difference on the ground despite the new government’s stated position of being business-friendly.
This ability to block extends to reforms in general. Contrary to popular perception, the private sector is hardly an ardent advocate of liberalisation as they are deep divisions within big business on the efficacy of reform, even in a post-Bombay Club scenario. Besides the bureaucracy, this is another source of opposition to reform that is rarely mentioned in popular commentary. Although the apex business chambers make all the right noises about kick-starting reform, politicians and babus are used to stalling it.
India’s business environment thus can improve only if the various states, bureaucrats and stakeholders like India Inc are on board. Getting the system to change is far from easy. The challenge is that mindsets need to change from wielding discretionary authority to a more market-driven mission mode. The big players are not as handicapped by the business environment as the small and medium players. Despite two decades of reform, the talk of further delicensing and deregulation harks back to the terminology of the old licence raj! Corruption is also a hardy perennial which hasn’t gone away with the new government.
While streamlining of procedures and clearances are necessary, investors require a stable policy framework. For instance, what sort of signal is being conveyed on India’s investment environment when the Supreme Court retrospectively cancels all but four of the coal block allotments made since 1993 as they were illegal and arbitrary? The power sector is already reeling from a critical shortage of coal supplies. Such a blunt judicial decision is bound to adversely impact the nascent recovery being made in India’s manufacturing sector and affect Rs 1 lakh crore of investments.
Investors are also concerned that India’s tax regime is adversarial and non-transparent. For all the assurances by the Modi government that it will not resort to retrospective taxation, the worry is that is that it still remains on the books. While the NDA Government goes out of its way to seek foreign direct investments, the tax authorities in the state of Karnataka have no compunction in targeting the business model of the e-commerce giant Amazon!
These are serious issues that need to be addressed. Improving the business environment by launching an e-biz portal is the easy part. The more difficult ones are the changes on the ground like enabling small and medium businesses cope with labour law requirements and predations of the inspector raj. Problems of land acquisition have bedevilled investment projects as it has become prohibitively expensive to acquire. The Modi government’s initiatives on the business environment must translate into changes on the ground to bring the shine back to the flagging India growth story.
(N Chandra Mohan is an economics and business commentator based in New Delhi)
N Chandra Mohan
