Is India a stable place to do business in?

Paran Balakrishnan | | Updated on: Jan 08, 2020
image caption

Till very recently, India’s political stability and growth prospects were taken for granted. Now, both are coming unstuck

There hasn’t been such a gloomy start to a new year in a very long time. In the US, President Donald Trump’s set off a firestorm of unknown proportions by ordering the assassination of Qassem Soleimani, commander of Iran’s Quds Special Forces. The Iranians have vowed revenge and Trump has issued extraordinary counter-threats, saying he’d bomb Iran’s historical monuments — even though that would be a war crime as it contravenes the 1954 Hague Convention on protecting cultural sites.

When the Pentagon insisted Trump’s threats were misreported, he doubled down and repeated them. The next few weeks could determine whether open war erupts in the Gulf, a region where we’ve got crucial interests.

Cross to the UK, where newly re-elected Prime Minister Boris Johnson, bolstered by an 80-seat majority, aims to rush through in three days a complicated law to ensure Britain leaves the EU on January 31, and has set what critics call an “extremely unrealistic” 11-month deadline to conclude a wide-ranging free trade deal with the European bloc.

Johnson’s planning big celebrations to mark Britain pulling up anchor and sailing away from Europe. But such festivities will only distract Britons for so long from Brexit’s potential grimmer effects.

Unstable environment

Here in India, too, the picture’s bleak. The country’s been in turmoil over the government’s new citizenship law and protests against the legislation have claimed at least two dozen lives. In the closing days of 2019, police went on the rampage in Jamia Millia University.

By sharp contrast, when goons wielding sticks and iron rods smashed their way around Jawaharlal Nehru University (JNU) injuring dozens of students this week, the police stood meekly on the sidelines. Late at night, they appeared to be escorting a group of goons off the campus.

A war of words has now broken out between the BJP student wing, the ABVP, and Left-leaning parties that control the JNU students’ union, each side blaming the other for the violence. The ABVP insists some of its members were armed with sticks and iron rods because they’d been warned thugs were wandering the campus.

All these developments are worrying investors. India may have had slower growth in certain years, but it has always been a “beacon of economic stability”, noted Utkarsh Sinha, managing director of boutique investment bank Bexley Advisors. Now “global LPs (limited partners) are for the first time asking a dreaded question: what is the long-term stability in India looking like?” he said.

Sectoral distress

Meanwhile, look at the economy, which is in the grip of a deep downturn. India was a country so poor, the only way to go was up. No danger, we thought, of sliding back toward what was derided as the ‘Hindu rate of growth’. Now, most industries are struggling to keep their head above water.

Consider real estate, down in the dumps for several years and still a long way from coming out of its depression In Delhi. A drive along the Noida Expressway reveals scores of unfinished or empty buildings.

The government’s also imposed the GST on first-time buyers, which isn’t helping the market. There’s no GST on resale, which appears to be another one of the many errors that the GST Council must fix in the coming months.

Then, there’s the power sector, once seen as a sure-fire profit-making sector. After all, India was chronically short of power, so how could anything go wrong? Well, it has.

Around 2010, a handful of private companies announced they would be building power plants, and even the banks figured it was a business that could hardly go wrong. Now, a new term is constantly being bandied about when talk turns to the power sector: stranded assets. That means gigantic power plants which produce electricity that has no buyers.

But hang on a moment. The idea was that coal-fired power would be replaced by renewable energy like solar or wind power. But renewable power has suffered a blackout even before it could be switched on. Prices have been falling so swiftly in the industry that its financials have become unviable. Adding to the trouble, there’s Jagan Mohan Reddy, the new Andhra Pradesh Chief Minister who’s determined to undo every initiative started by his predecessor N Chandra Babu Naidu. As a result, renewable energy companies, which flocked to the State are finding their money not coming from the government. It’s even threatening to stop taking power from them unless they slash rates to almost a quarter of current levels.

Also, famously, the automobile industry is stuck in a deep rut from which it hasn’t been able to accelerate out. It’s had to deal with the double whammy of an industry slowdown coming at a time when it has to implement the humongous transition from Bharat Stage IV (BS IV) to BS VI. Till about three years ago, the auto industry had enjoyed fast-lane growth. The great question now is whether the industry has halted to take a deep breath, before the next growth phase. Alternatively, has it stalled permanently?

Blunders and obstacles

The government is casting about, looking for ways out of the economic doldrums. But that’s easier said than done. It’s now getting to be widely accepted the government erred by imposing its eccentric demonetisation that took a heavy toll on cash flow, especially in the small- and medium-sized sectors of the economy. Then, it compounded the error, by rushing to implementing an overly complex GST with too many tax slabs that’s also stymieing growth.

Also, many compromises had to be made to persuade the States to sign on for the GST and that resulted in a poorly thought-out scheme. It’s difficult to make changes because alterations need a two-thirds majority.

In addition to all its other problems, the government hasn’t been able to push through its ambitious privatisation scheme that involved selling high-profile companies like Bharat Petroleum and Air India. Both are large and complex companies and it will take a considerable time to get their books in order before they can be put on the block — which surely could have been anticipated by government planners. That leaves the government with a large hole in its books because it was counting on privatisation to reduce its budget deficit.

So, what’s left to be said about this year and Prime Minister Narendra Modi’s “New India”? Will India’s economy and political scene fall apart more swiftly than we could ever have expected? Let’s hope that tensions, both domestic and international, de-escalate. On the domestic scene, if the government’s able to steady the ship, it could still be full steam ahead for the economy. Otherwise, India’s could be headed for even darker days.

Published on January 08, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you