The CostOfDoingBusiness includes the cost of capital, the risk of policy changes, the government not honouring contracts, etc
Given how, as CMIE DATA SHOWS, new investment projects announced fell to 3.8% of GDP in Q32019 versus 7.5% a year prior to this, the investment slide continues to worsen. With the Sensex not too different from what it was before the FM announced large corporate tax cuts, a lot of the euphoria has also gone; though, even when the rates were cut, it was clear the immediate impact on growth would be limited.
So, what will it take to increase investments? And, as panelists at this year’s FE Best Banks Awards asked, how will cash-strapped banks/promoters fund the debt or equity for projects?
What emerged from the discussion (see opposite page), is that the Ease of Doing Business (EoDB), where India’s rankings have improved dramatically—from 134 when Modi came to power to 77 today—is just one factor driving investment. The Cost of Doing Business (CoDB) which is driven by the Risk of Doing Business (RoDB) matters more; also, EoDB is easily gamed. The ease of getting an electricity connection in Delhi and Mumbai was a big reason for the jump in the rank, but when is the last time you heard a Sunil Mittal or a Mukesh Ambani say they were going to invest because it takes a lot less time to get an electricity connection; or vice versa?
Indeed, as Edelweiss chairman Rashesh Shah said, while a lot more investment would take place if capital became cheaper, it can’t till the CoDB and RoDB are fixed. CoDB includes, for instance, costs associated with poor infrastructure and rigid labour laws—by definition, these will take longer to fix. While entrepreneurs are more worried about RoDB, paradoxically, large parts of RoDB aren’t that difficult to fix, should the government put its mind to it.
Shah’s examples of RoDB were the Supreme Court cancelling 2G spectrum, or coal mining licences and, now, the Andhra government wanting to renegotiate renewable power licenses issued by the previous chief minister. While it is difficult to argue that illegal licences—there were serious graft allegations, and even the then-PM Manmohan Singh was against granting them—shouldn’t be cancelled, there are a lot of areas where arbitrary government policy causes the problem, and this can easily be fixed.
So, for instance, even when farmers weren’t complaining, the government imposed price controls on Monsanto’s seeds; it also argued, in court, that the patent issued by its Patent Office was not really valid! Some other instances are the arrest provisions brought in for violating CSR-spend guidelines, and the government changing the rules on FDI in e-commerce after Walmart spent $16bn to buy Flipkart. Such arbitrary policy, surely, is something that can easily be fixed?
If investors in Amravati were jolted by the Andhra decision to junk the plan to make it the new capital, NITI Aayog’s grand plan on electric vehicles shook industry; but the government took a long time to say that this was just a NITI proposal. Thankfully,it held back on the plan to ban various types of plastic since, even if it was desirable from the environmental point of view, in the absence of viable alternatives, this would have been another huge disruption , the likes of which industry has had to deal with in quick succession, from demonetisation to GST to RERA.
It is also shameful that, as Ajit Gulabchand of Hindustan Construction never tires of pointing out, when the government owes contractors money and even loses these cases in arbitration courts, the money doesn’t get paid. While Arun Jaitley tried to address this when he was FM—as Nirmala Sitharaman is doing now—it is worrying that India ranks 163rd out of 190 countries on enforcing contracts; it was 143rd out of 145 in 2004. Ironically, while India is trying to position itself as a global arbitration centre, the government usually challenges the arbitration awards—including global ones—that it loses.
In other words, as Rajiv Lall of IDFC Bank concluded, India’s reforms need to go much deeper than was originally envisaged. Over 70 years, India has built layer upon layer of bad regulation/policy; removing just one—like the recent corporate tax cut did—may not be enough. Take the example of coal mining. The government allowed the private sector to commercially mine coal last year, but no investment took place despite huge shortfalls in the country since no mine was ever auctioned/allocated for this. Even when that happens, it may not help since the process of forest and environment clearances can be long and arduous—recall Vedanta’s Niyamgiri fiasco—and even that may not help till high central/state levies on coal are slashed …
Clearly the present government can’t be blamed for all of this since much of it is a 70-year- old problem; but, the short point is that reform is a 24×7 process, it can’t be restricted to one tax cut here, or a limited relaxation of an FDI rule there. Since it is not possible to fix everything at one go, a more sensible way, perhaps, is for the government to take a few big projects—like, getting an Apple or a Samsung to shift a large part of their mobile manufacturing and component base to India—and dedicate a team to fixing each problem that comes up along the way.
Interestingly, as a Credit Suisse note suggests, thanks to India’s policies not being as attractive, the lion’s share of the investment that is likely to shift out of China will move to Vietnam (see graphic). India missed the first export boom that resulted from China exiting large parts of the garments’ exports market; this market was mostly captured by countries like Bangladesh and Vietnam. So, let’s not exult in the jump in India’s EoDB ranks, and instead focus on reducing both CoDB and RoDB; both require 24×7 reform, and mere chest-thumping or bragging about the size of the Indian market aren’t going to help.