Capex depends on more than Ease of Doing Business – That’s why India’s highest capital formation was in the 2000s

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Published: November 20, 2018 3:52:22 AM

That is why India’s highest capital formation was in the 2000s when India was ranked very low in the Index.

Ease of Doing Business, GST, demonetisationThe government has done a great job in improving EoDB, but this can be gamed by focusing on the headline problems—and in just Delhi and Mumbai—that the World Bank Index looks at.

The irony of prime minister Narendra Modi’s meeting with investors on India’s performance in the World Bank’s Ease of Doing Business (EoDB) wasn’t lost on anyone. There has been a big improvement from the 142nd rank that India had when Modi came to power to the 77th ranking now, and India is all set to break through to the top 50; few believed Modi when he said this was his target four years ago.

But as the PM told investors about what he has achieved, and will achieve, the audience was probably more focused on the outcome of the RBI Board meeting in Mumbai, and whether this would result in the government backing down on some of its demands and the threat of using Section 7 to direct RBI to act according to its wishes—were Section 7 to be used, this would result in, sooner if not later, the resignation of RBI Governor Urjit Patel along with Deputy Governor Viral Acharya.

In which case, even as India’s EoDB rank has gone up, investors may pull out some amount of funds from India—at least in the short run—and this will drive up bond yields and will slow growth, precisely the outcomes the government wanted to avoid and why it asked the central bank to relax its PCA and capital norms and to put its February 12 circular on hold.

The government has done a great job in improving EoDB, but this can be gamed by focusing on the headline problems—and in just Delhi and Mumbai—that the World Bank Index looks at. More important, EoDB is just one of the many factors that investors focus on. Which is why, India’s investment levels were the highest in FY08—35.6% of GDP—despite the fact that India’s EoDB rankings were quite poor.

ALSO READ | PM Modi sets ambitious December deadline to break into top 50 of Ease of Doing Business

The reason for this was that, at that point, both global as well as India’s growth prospects were very good; indeed, with global growth so high, apart from the local demand, investors set up plants in India to cater for the rapidly growing Chinese demand. Today, by contrast, India’s growth is middling—the 7% of today is probably comparable to the 5% of the late 2000s—and, despite the high US growth, several economists are talking of the likelihood of a global recession in 2020. Also, in India, sectors like telecom, that once looked like being the engines of growth, are in deep trouble today. And in the absence of robust jobs creation—despite the government’s claims—demand in sectors like automobiles has slowed.

Investors are more worried about greater policy uncertainties; many of the parameters that have improved in the EoDB—like getting an electricity connection—are, in any case, areas that are taken care of by a plethora of ‘consultants’ for most large firms; making this easier, though, is important for SMEs.

What is more worrying for investors, for instance, is the fact that it still takes a long time to enforce contracts; indeed, India’s rank has fallen on this in the EoDB. The ranking on resolving insolvency remains poor despite the IBC. Investors must be worried that, despite Modi being there for almost five years, there is not even a categorical assurance that the government will abide by the awards given by global arbitration courts on tax disputes; indeed, despite all the talk, the government has tried to delay these proceedings.

And while the government is fighting RBI on implementing its February 12 circular so as to ensure power sector loans don’t turn into NPAs, the fact that SEBs are financially stressed is the primary source of the problem.

Thanks to this, Rs 36,000 crore of dues haven’t been paid to generators and it is also why another 20,000 MW of power plants don’t have PPAs. And, while an IL&FS has defaulted because one of its goals was to hide its debt in a web of subsidiaries, surely the fact that NHAI owes it thousands of crore rupees worries investors more than the jump in EoDB rankings? If Modi gets another term, he needs to fix such policy uncertainty, now that some of the really big reforms—GST and IBC, for instance—have stabilised.

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