Column: India Inc under siege

Written by Arindam Bhattacharya | Updated: Jul 23 2011, 08:12am hrs
In the last one month there were three reports in the business media, quoting leading business leaders, who were highly critical of the investment climate in India. It was an unusual first as business leaders in India have been traditionally very circumspect in going public with any criticism of the government, preferring to voice their concern, if any, in private or off the record. First, Deepak Parekh was quoted as saying that Indian businessmen have started shifting their investments out of the country, given the unfavourable investment climate at home and to balance their risks. Then, Rajiv Bajaj was quoted as wanting to move Bajaj Autos next investment out of Maharashtra as the government has gone back on its commitment on tax, and only last week there was a quote from TVS Motors Venu Srinivasan saying that he wanted to shift his motorcycle export capacity to China as Indias manufacturing was not competitive, given the rigidities of labour laws and cost and time of compliance to the plethora of regulations. Unfortunately, these comments have come at a time when the most recent IIP figures show the lowest growth rate in recent months, and FDI inflow into India this fiscal has slowed down even as it has picked up in other developing countries after the recent economic crisis.

It was just a few months ago when the business leaders were applauding the Budget speech of our finance minister as pragmatic and growth-oriented. The manufacturing sector was especially pleased as it was the first time that the finance minister had acknowledged the sector as a growth engine for the Indian economy, and set a bold aspiration of increasing its contribution from the current 16% to 25% in the next 10 years. The change in this positive mood of India Inc has been precipitous and drastic, something that I have not witnessed in recent times. If you talk to any business leader, the general impression one gets is of a group feeling under siege.

Are these one-off statements and to be treated as such, or straws in the wind of genuine all round concern Let me play back four recent conversations with industry leaders which highlight the paradoxical situation we face in the country and showcase the challenges on the policy front.

The first conversation was with a highly respected business leader based in Chennai. He was speaking about the enormous challenge in hiring workers for their plants in Tamil Nadu, and being forced to import workers from distant states. As he explained, perhaps a little tongue-in-cheek, the combination of payout under NREGA, entertainment needs taken care of with free TV and free/subsidised power, subsidised rice and other food items, makes it unattractive for a person to work hard for 8 hours in a plant, even if the payoff is higher. And this situation is not restricted to Tamil Nadu alone. Clearly a paradoxical situation, where high unemployment co-exists with an apparent shortage of industrial workers.

The second conversation was at an industry leaders forum where a discussion on issues and challenges started with the power woes faced by the industry. While there were the usual comments on the high cost of power, which is eroding our global competitiveness, one of the participants described the paradox of Independent Power Producers (IPPs) being forced to shut off their power plants as the State Electricity Boards (SEBs), to whom they have to contractually sell the power, are unable to buy as they are reeling under severe losses. So we have a situation where we have power availability and power outages at the same time, and industry continues to depend upon expensive captive power.

The third conversation was between the CEO of an OEM and a leading tier-1 in the automotive industry discussing the problem they are facing in getting supplies from tier-2 and tier-3 vendors due to capacity constraints. High costs of funds and a commodity price increase on the one hand, and price control by the OEMs unable to pass price increases to customers on the other, has created a paradoxical situation where the SMEs, who make up tier-1 and tier-2 of the supply base, are unable to justify new investments despite growth in the industry.

The fourth conversation was with a CEO of a manufacturing company based in north India who contrasted his experience in setting up a new plant in India vs Thailand. He said that every time he has to deal with the different government agencies for getting all the permissions required to set up a new plant in India, he feels like a person under trial who is guilty until proven innocent! And like our courts, this process may take months, if not years. Contrasting this with Thailand, he said that he felt welcomed by the authorities, who approved his application with all the permissions in one month, sanctioned power and water connections, and showed him four plots of land to select from for the new plant. He was wooed as he was generating new employment. A paradox why a country that has to create over 220 million new jobs in the next 15 years makes it very difficult to do so.

These four conversations reflect the urgency to solve the critical issues of labour, power, SMEs and cost of compliance we face in the manufacturing sector. It is not as if the government does not know what to do in these policy areas. Several commissions have been set up and have given their recommendations. Clearly, the time has come to act rather than set up more commissions. Urgent implementation of the draft National Manufacturing Policy would be a good way to start.

But, more importantly, the time has come to decide whether India Inc is a partner in this journey or not. If they are, we have to change the thrust of our policies from over-regulating at each stage to facilitating, from asking the question why to asking why not. Otherwise, the aspiration articulated by our finance minister for the manufacturing sector in this years Budget will remain mere words and nice sentiments. And India Inc will continue to feel under siege!

The author is managing director, the Boston Consulting Group, India. These are his personal views