Is India really open for business?

J Srinivasan | Updated on August 05, 2020

Speed-breakers A plethora of licences and permits are still needed to start a business in India

For attracting MNCs relocating out of China, India must end the usual glacial pace of taking decisions and acting on them

According to a Nomura report, only three of the 56 companies that shifted out of China, at the height of its trade war with the US in 2018-19, came to India. Thereby hangs the grim reality of the limited attraction India seems to have for MNCs, many of which are now serious about a China-Plus-One strategy in the post-Covid world.

As the raging pandemic disrupted Chinese supply chains, Prime Minister Narendra Modi, eyeing an opportunity, did move to bring in reforms, made States amend laws, and launched the Make in India campaign to woo foreign investors to turn India into an alternative manufacturing hub. He followed it up with the “Buy Local, be Global” campaign for a quantum leap in exports by enhancing the capability to make diverse products, scale up technologically and attract foreign investments.

After all, the ability to make anything is what has turned China into an export powerhouse. Big, small, basic or technical… China’s factories are not just able to turn out any product but do it efficiently, professionally and cost competitively. All major draws for corporates.

India’s intentions are commendable but, as has happened repeatedly, translation into a reality is not easy.

Even the government’s own executive arm — the bureaucracy — has tended to be a speed-breaker, if not a road-block. Then, the Centre and States are often not on the same page, especially if the governments are run by different parties/groupings.

Corruption; it is said to be coming down but still very much there. The various activisms that often land a project in court. Not to forget the traditional trouble areas: inadequate, if not poor, infrastructure; labour laws caught in a time-warp; and land acquisition issues.

Bottomline: Delays, rent-seeking and costs.

Barring the corruption aspect, China scores on all other points. A single-party Communist rule means no dissonance between the central and provincial governments. The rule structure does not permit any activism and labour laws or land acquisition pose no trouble as all provinces, on the central government’s diktat, do what it takes to make it easy for a foreign investor/corporate to set up shop. As for infrastructure, there is nothing to be said as China has built everything on a massive scale that can cater to the requirements of not just today, but at least for the next decade.

And, despite being a Communist nation, labour in China has few rights and little bargaining power. Wages are rising but still lower than in most comparable nations. Plus, a diverse talent pool that can make pins to chipsets. Chinese universities usually are credited with developing new technologies and, with much forethought, launching start-ups to work on frontier areas and develop new intellectual properties.

A winning draw for corporates.

Where China has leveraged the idea of Special Economic Zones with each city/province concentrating on one product, and offering common facilities for the many outfits that form part of the SEZ, India has been struggling with the concept. Barring a few exceptions, SEZs are yet to take off. A new plan is to be put in place to revive them.

Lagging in parameters

India has been touting on how easy it is to do business in the country. It has indeed jumped 79 places from 142 to 63 in the World Bank’s latest Ease of Doing Business rankings. Most of those in the know agree that things have vastly improved, but still it remains a fact that you need a plethora of licences and permits to start a business in India. According to a recent media report, you need some 20 permits to open a restaurant in Mumbai; this number is much higher for other metros. It is made worse with States having differing requirements.

In contrast, in China or Singapore you need just four. According to the same report, quoting a World Bank survey of 190 countries based on 10 benchmarks, India lags in parameters such as Ease of Starting Business, placed at the 136th spot in 2019. In registering property, India came in at 154, in paying taxes at 115 and in enforcing contracts far back at 163. Not exactly, very inviting.

Ergo, India has its task cut out if it wants to go anywhere with its plans of wooing MNCs to make the country their second home. The only concrete step it has taken is dropping the tax rate for corporates to 25 per cent in line with what most of its peers charge. Hopefully, this will be implemented as much in letter, as often the Taxman has been more loyal than the king and made claims that not just lead to legal disputes but also to soured relations and a wariness for prospective investors.

Of course, India is not all warts. It still presents one of the biggest markets, still enjoys a demographic advantage with a large population in the earning (which translates to spending) bracket, has a large manpower pool (though the oft-levelled charge is the education system only arms them with degrees but does not graduate them for employment), significant English-speaking ability, a good banking/credit institution framework, a creaky but working legal system (usually later than sooner justice will be served), and is a working (not failed) country with a robust democracy.

While the last highlight should be a draw for most Western corporates, democracy can also be an irritant, too. With governments changing every five years, there is always fear over policy continuity.

Can the government leverage these advantages and incentivise MNCs to come to India?

Foreign Direct Investment limits have been raised in some sectors but, then, the colour of this money is not entirely green, but more the colourful Indian rupee getting a green hue; the bulk of the FDI comes from, or rather does a U-turn in, Mauritius.

The government think-tank NITI Aayog has suggested 10-year full tax exemption for companies investing a minimum of $500 million in sectors such as medical devices, electronics, telecom equipment and capital goods. Another idea is giving a four-year tax holiday to companies investing $100 million or more in labour-intensive sectors such as textiles, food processing, leather, and footwear.

These investors are also to get a lower corporate tax rate of 10 per cent for six more years. A single-window Centre-State clearance system is also said to be in the offing.

Need to act fast, diligently

Good moves, but only if put in place quickly and implemented diligently. As another war of words rages between the US and China, India’s policy-makers must realise the intense competition for attracting MNCs relocating out of China. They must end their usual glacial pace of taking decisions and acting on them. Else, it will be another missed opportunity, a la 2018-19, when of the 56 companies that moved out of China, 26 went to Vietnam, 11 to Taiwan, and eight to Thailand.

Published on August 05, 2020

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