Get cracking on reforms

The recent months have seen a sharp decline in India’s attractiveness as an investment and business destination. Foreign investors and rating agencies have downgraded India, despite its obvious potential as an economic powerhouse. Policymakers have sought excuses by blaming the Euro crisis and global factors, but a large share of the blame must lie at the Government’s doorstep. Coalition paralysis has taken its toll.

There are a few hopeful signs that inaction is now giving way to some action. Reassessment of the state of play on economic reforms and kick-starting the process must be the top priority for the government. Only then will it have the room to manoeuvre to tackle poverty and provide employment to the youth coming out of schools and colleges. The approaching elections in 2014 add to the sense of urgency.

FDI policy

FDI policy needs a complete revamp. The present sectoral caps and restrictions have been put in by Ministries seeking to protect domestic players, especially PSUs, from competition — the so-called level playing field argument. The caps arise from Indian company law, which gives holders of 26 per cent equity a blocking vote, and 51 per cent control over the enterprise. But control of an enterprise can be effected in many ways other than equity holding. In the case of Ministries playing the role of regulator and player at the same time, there is clearly a conflict of interest. The Competition Commission of India would now be able to deal with cases of unfair competition and restrictive business practices. Therefore, there is no need for sectoral caps and restrictions. Besides, sectoral caps distort cross-sectoral linkages, and discourage enterprise diversification.

FDI need not be only in cash. It can be in the form of equipment or technology. The Chinese take a flexible view on this. Our system should be liberalised to permit the foreign partner to invest through technology as well. The residual value of used plant and machinery shifted to India can be treated as FDI. If this is done, companies may shift their production to India. Similarly, technology provided by the foreign collaborator should be allowed to be converted into FDI. For example, a Cuban-Indian joint venture in biotechnology for producing valuable anti-cancer products faced problems in getting the Cuban technology input treated as FDI. Providing for technology to be valued and treated as FDI, rather than just cash, will help high-technology companies to be set up in India.

STREAMLINE PROCESSES

Downstream processes for converting FDI approvals into actual enterprises need to be made as simple as possible. This requires streamlining the process for registering companies, getting banking facilities, infrastructure facilities, and local clearances. If these areas are streamlined, Indian as well as foreign investors will respond positively.

Our processes should at least be comparable to those of other Asian countries. India’s relative surge in the services sector is no surprise. It is the manufacturing sector that is hardest hit by infrastructural deficiencies.

State governments will find that efficient servicing of investors and projection of the comparative advantages available pays handsome dividends in terms of investment and new projects. Large-scale projects which need natural resources, land, etc. must be subject to a fair and transparent process that gives all stakeholders the opportunity to be heard before approvals are granted.

Stability and predictability in our tax regime and processes is a must. Retroactive changes in tax laws and applying them arbitrarily is a sure way of driving away foreign partners to other countries. All countries are involved in fighting black money, money laundering, and financing of terrorism.

But the Indian requirements on investors for providing information, KYC, etc should not be excessive in comparison to competitor countries in Asia. Otherwise we will lose out on investment. The burden of compliance should not be too much, especially for small and medium enterprises.

India’s taxation policy and processes have emphasised revenue generation over economic growth. The impact of tax measures on business confidence, growth prospects and foreign investors needs to be brought adequately into focus. A loss of revenue in the short term can be compensated by economic and business growth in the longer term.

A sensible tax regime and tax laws will greatly help boost economic growth and business confidence. Taxation must be regarded as an integral instrument of economic policy rather than a means for raising revenue and balancing the government budget.

DEALING WITH SUBSIDIES

Finally, subsidies must be rationalised and reduced to sustainable levels. The present subsidy burden of 2.5 per cent of GDP is the highest in 10 years and is growing, is unsustainable. Phasing out of subsidies can be done in a gradual manner, over a time span of 2-3 years, in order to alleviate shocks to stakeholders and the systems within which they operate.

This applies to diesel, kerosene, LPG, fertilisers, foodgrains. To deal with populist requirements and political necessities, BPL stakeholders who are affected most by subsidy reductions could be given cash grants or coupons redeemable at market outlets. This would remove the high costs and inefficiencies of the distribution system by making it more market-based, as well as enabling better monitoring and targeting of assistance to those most in need.

Sustainability needs to be built into our economic growth by providing incentives for activities such as organic farming, renewable energy, and energy efficiency. The key problem of meeting our burgeoning energy requirements needs urgent attention. Individual households should be encouraged to use renewable energy, and transfer surplus energy production to smart grids with built in incentives. The large losses in our transmission and distribution networks should be reduced to the minimum. Energy self-sufficiency remains the single most serious problem facing India in the long term.

If the government has indeed woken up from its coalition stupor and is serious about getting India’s economy running on all cylinders, economic reforms must be fast forwarded. Only this will enable citizens to benefit and yield electoral dividends.

(The author, a former Ambassador of India, has served on the Foreign Investment Promotion Board and Foreign Investment Implementation Authority.)

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