Cost of doing business trumps ease of doing business

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Published: May 23, 2019 12:25:53 AM

The 100-Day plan of big ideas for decisive action is important. But, so is a longer term plan to overcome the systemic and structural challenges to making industry globally competitive.

Only political leadership of a high order can lead to the change in the deep-rooted ‘system-wide mind-set’ of being suspicious of business. A new narrative of equal partnership between these two critical stakeholders is necessary.

The biggest, the most colourful, the most contentious and perhaps the most expensive general election is finally over. During this period, governance had clearly taken a back seat as all decisions, except the routine ones, had come to a stand-still. Now that the electioneering is done and dusted, hopefully for another five years, the new government will focus on the urgent needs of governance to put India’s slowing economy back on a fast growth track.

I am writing this article before the results are out but given the exit polls, it seems that the ruling party is coming back to power for another five years. And they have been preparing for it and had been sounding out different stakeholders—both official and unofficial—on ‘big ideas for decisive action’ as part of their 100-Days plan as the new government. By chance, I engaged with some stakeholders on this question and was asked for my thoughts. We discussed many ideas that have the potential to create value and new jobs, such as taking the decision to systematically build a mineral map for India over next couple of years as a way to unlock one of the most under-leveraged national assets—the mineral wealth of the country—and grow the mining industry in a sustainable manner.
However, I also shared my view that a single-minded focus on ‘big ideas for immediate action’ is important to improve governance, but not sufficient for sustained growth of the country, as I believe that India faces some serious systemic and structural challenges in its economy, in a global economic regime (a paradigm that is changing rapidly). The answers to these systemic problems are not immediately apparent and call for an in-depth root-cause analysis, looking at the different options and their pros and cons before we can get to the sustainable solution. Let me offer my top three systemic priorities from the perspective of the Indian industry for the new government.

First and foremost is the current slowdown in credit off-take. Investment as a share of GDP has been falling and private investment has not just stalled but declined significantly impacting growth and new job creation. While on the demand side the slowdown of the economy and exports can be blamed, on the supply side we have the complex systemic challenge posed by the government ownership of PSU banks with its potential for political influence in various decisions, which impacts performance and builds up NPAs when they are taken for political rather than economic reasons. At the same time, the banking system globally is coming under enormous pressure from the growth of digital formats and shifting profit pools, and unless we find a solution to the first problem, which also helps address the second challenge, we will continue to face the same cycle of increased NPAs followed by re-capitalisation, and longer term erosion of market share of PSU banks, making them highly vulnerable. Dealing with the political-economy of a decision on PSU bank ownership and its implications on holding management accountable for performance of banks will be one of the biggest challenges that the new government will have to take on.

My second priority is the crying need for a focus on competitiveness and productivity as a country-wide initiative. Productivity, in the longer term, is the only factor that drives improvement of living standards across generations. This NDA government has done an enviable job focusing and improving its position on World Bank’s Ease of Doing Business (EoDB). But, that is only one part of the economic equation that drives competitiveness of the industry. The other, perhaps more important, part is driven by the competitiveness of factor costs—land, labour, capital and power. Today, India competes for global investments not with the high-cost countries as a lower cost manufacturing destination but with other fast-growing emerging markets. This calls for the important shift in the focus from EoDB to Cost of Doing Business (CoDB), where we benchmark ourselves against these competing nations. But the political-economy in each one of the four areas pose challenge and unless we can find systemic and comprehensive solutions to them, and not address the low hanging fruits, only Indian industries will continue to be hobbled in its efforts to compete globally and attract foreign, and even local investment, where the investor has a choice of other EMs with lower CoDB.

The third of my top three priorities is the systemic change in the way policy initiatives are developed to solve the problems of industry and the role of the latter in this process. Today, the industrial eco-system is becoming more and more complex as industry boundaries becomes fuzzy with growing digitalisation, new non-traditional players enter a sector, new profit pools emerge which cut across the traditional industry boundaries, and growing global digital integration of e-markets and data flows pose many regulatory uncertainties. It is, thus, becoming more difficult for the government to solve these big and myriad challenges without active partnership with all the stakeholders in the industry, which goes beyond the traditional process of ‘consulting’ in choreographed meetings with the stakeholders. As the CEO of a large industrial group told me, “The government must understand that industry has as an equal stake and commitment in making India more competitive and grow faster”.

Unfortunately, over past few years the trust between the government and the industry seems to have broken down and many business leaders feel that an unfortunate political narrative has developed, in which they are all branded as ‘thieves until proven otherwise’ due to unscrupulous behavior by few select promoters. If Indian industry has to grow and be globally competitive this trust breakdown between the government and industry has to be overcome.

Only political leadership of a high order can lead to the change in the deep-rooted ‘system-wide mind-set’ of being suspicious of business. A new narrative of equal partnership between these two critical stakeholders is necessary.

The winning political party will have fought and won a big fight. Now, its new government has to fight a bigger one to revive the fortune of the Indian economy and the industrial sector. The 100-Day plan of big ideas for decisive action is important. But, so is a longer term plan to overcome the systemic and structural challenges to making industry globally competitive.

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