FDI, judicial delays & ease of doing business

One of the main thrusts of this government’s economic policy is to attract more foreign direct investment (to provide jobs, and bring in new technologies/products). Towards this aim, the government has taken several steps to make it easier to do business (India’s ranking has improved significantly) and to welcome FDI.

Yet, according to a report by CARE titled ‘Foreign Direct Investment in India’, the country received just 2 per cent of global FDI in 2016. Given the size of the country, its favourable demographics, and its high GDP growth rate, why is FDI not higher?

Perhaps one reason is the slowness of the judicial system in quickly resolving disputes of foreign companies. The cases of NTT DoCoMo (dispute with Tatas) and Diichi Sankyo (with Religare) are well publicised cases in point.

So, on the one hand we have a need for direct investment in order to provide growth, and to bring in the latest technologies, and on the other hand we have the natural apprehensions of foreign direct investors to invest in India, despite the opportunities, for fear of being stuck in litigation that moves at the pace of a corpulent snail with a severe case of gout.

The solution must be to speed up the judicial process. The solution to this must be to disallow more than one (maximum two) adjournments per side. Adjournments are granted to suit the convenience of lawyers and the fraudsters, to the detriment of the victims. Other countries have time-bound schedules to decide cases, and permit not more than two adjournments per side. Why is this too difficult to follow?

Stock markets continue to rally on the back of a huge shift of domestic retail investor money from the traditional bank deposit mode of safe investing (where rates of interest do not cover inflation) to equity or balanced mutual funds, after they have seen their neighbours profiting from the rise in the markets. Only a large external shock can change this money flow into equities.

This shock may come from (though unlikely for a long term, because it has been anticipated) the recent 0.25 per cent hike in US interest rates, which promises three more in 2018. If others, such as the EU, Japan and China also tighten the liquidity tap, then the impact may be felt in the Indian markets too. There would be a move towards safety.

Now, safety is seen as defined by rating agencies. Yet their record of risk assessment is not always unblemished. After the 2008 global crisis, Moody’s, after a five-day review of its own sub-prime ratings in February 2009, downgraded over 90 per cent of its own ratings given to Alt-A instruments, from Triple A to junk, in one shot! (Rating upgrades/downgrades are always one notch at a time).

As an example, earlier in December, the state of Illinois, which is nearly bankrupt due to unfunded pension liabilities, was given an AAA- rating.

Yet India, with stronger financials than Illinois, hovers just a notch above investment grade. S&P upgraded Italy one notch higher than India’s rating, in October.

Yet Italy’s debt is 133 per cent of GDP (India 69 per cent), its economy is smaller and its demographics worse than India.

The stock market will rise as long as the flow of savings continues from FDs to mutual funds. A stronger IPO pipeline is needed to absorb this.

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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