The aborted cross-border deal between India?s largest mobile services company Bharti Airtel and South Africa?s MTN has thrown up many issues India?s policy makers will have to grapple with in the years ahead. The most significant aspect of the Bharti-MTN talks was the pointed intervention by Prime Minister Manmohan Singh who told the South African President on the sidelines of the G-20 meeting in Pittsburg that the deal must not face any discriminatory treatment at the hands of the South African regulators. This is welcome as it marks a big shift in the attitude of the Indian State vis-?-vis its own big business class.
Visiting delegations headed by the US President or the British Prime Minister are routinely known to lobby the Indian Prime Minister against discrimination in tax laws against Fortune 500 companies headquartered in their countries. For instance, top US politicians visiting India in the past have routinely sought bringing Coke and Pepsico to a much lower excise duty slab. They constantly argue for strengthening the intellectual property rights of businesses to safeguard innovations in their country. Of course, this sort of engagement between the political class and wealth creators happens when capitalism matures to a stage where big business becomes integral to a nation?s identity as a rising global power.
Is India on the threshold of such a robust engagement between politics and big business? There are some early signs of that happening, seen against the prospect of the long term decline in incremental wealth creation in the developed economies. Prime Minister Manmohan Singh?s intervention with the South African President could be seen in this broader context.
This is a definite change in mindset because India?s foreign policy establishment traditionally has been loathe to speak on behalf of domestic businesses. This was essentially born out of a certain deep-seated suspicion of big businesses. All of that suspicion is not gone yet but there is a certain recognition at the popular level that wealth creators are integral to nation building and to India?s growing strength in international politics.
This process will only mature as we go forward. Policymakers and legislators will also respond to this maturing of the engagement between the political class and wealth creators within a democratic framework.
The one issue that the Bharti-MTN talks highlighted was that Indian laws and regulations are not entirely in tune with those of the other developed and developing nations. This was also seen when the Tatas were buying out European steel major Corus. Tata Sons could not offer its own shares of Tisco in lieu of cash to the Corus shareholders because the Indian laws and regulations did not permit that. Similarly, Bharti-MTN deal also came up against regulatory issues such as capital convertibility, Sebi?s take over code as well as company law provisions which made things difficult.
The Indian government obviously could not change regulations to suit Bharti Airtel alone. But in the years ahead many companies like Bharti would face such hurdles. As a rising economic power, India will then have to do a comprehensive review of its policy and legislative framework.
The move towards greater convertibility on the capital account is currently not so popular because of the recent memory of global capital moving in and out of countries post the global meltdown. However, increasingly this risk seems to be mitigating simply because western capital has nowhere else to go. A certain minimum quantum, whether through equity or debt, has to stay with fast moving economies like India and China that are generating returns that any global investor would salivate over.
In the decade ahead, a critical mass of global capital will come to stay put in India. It is for us to create conditions, through robust reforms, for absorption of such increased capital flows. The main argument RBI had made against the recommendations of the committee on capital account convertibility two years ago was India did not have the capacity to absorb big doses of capital flows. Theoretically, it is correct to argue that in the absence of adequate absorptive capacity in the real sector, large doses of capital could cause massive asset price bubbles which would burst at some time or the other, playing havoc with the real economy.
The solution to this problem then is to create the necessary absorptive capacity through the next round of reforms so that the money being pumped into India by global investors is used to create real assets which increases income and consumption on a sustained basis. Doing reforms to enhance the absorptive capacity of the economy is clearly the responsibility of the Central and state governments. Are they alive to this responsibility yet? There are some signs, but there isn?t enough focus on this larger problem.
It is not clear whether the doubling of the government?s gross tax revenues in the boom years after 2003 resulted in the Centre undertaking focused and productive spending that would result in the crowding in of private investment. True, the Centre needs to put in a larger framework of policy reforms to help absorb a quantum leap in domestic and foreign capital in the years ahead. It will then be justified in pressuring RBI to make necessary changes in laws and regulations that align with the rest of the world. The Centre and RBI are currently caught in a chicken and egg syndrome.
mk.venu@expressindia.com