THE EXCHANGE. The gap between intent and outcomes

There has been a deluge of debates on the health of the economy and the recent trends. Some dwelt on a post-mortem of events. But lamentation over the inevitable (or days gone by) serves no purpose. However, everyone agrees on the basics that (i) domestic production (hence consumption and exports) must be driven; and (ii) domestic business investment must revive in a hugely significant way.

Domestic confidence is, in my opinion, a key factor that sustains meaningful foreign investment. Increased consumption is key to private investment. Enough numbers have been analysed on production, employment, demand, so let us not examine them here. Much virtue has been ascribed to the IMF chief’s assessment of the “very solid track” the Indian economy seems to be on, even if it has an unspecified “medium and long-term” timeline.

While there can be no other long-term view of India, I believe we must take into account the reality that distant rainbows matter little to people who worry more about either food at the end of a day or wage and interest payments at the end of the month. This, sadly, is the true state of individuals in the informal sector and much of the MSME sector.

In a 24x7 connected world aspirations are driven beyond reality, and in an age of mouse clicks patience is a lost virtue. In this context I was surprised when I revisited various commentaries of 2013 and Ficci’s national economic agenda of 2014. Most basic issues identified in these remain mostly where they were then, for example, state of manufacturing, lack of employment, banks’ stress.

Investment is an act of faith; softer factors merit critical evaluation even beyond numbers. To goad corporate boards (in general) to consider investments after five or more years of not doing so requires both surmounting lethargy and a more-critical-than-before assessment of risks.

It is relevant to restrict ourselves to concepts of risk related to typical domestic entrepreneurs and corporates — not those funded by foreign or “expendable” capital. The idea is not to criticise, but hopefully to identify concerns that need to be holistically tackled by policymakers.

For the sake of a line of reasoning let us classify risks into a few categories: (i) Business risk; (ii) Commercial risks outside usual business/equity risk; (iii) Risks of regulatory or taxation overdrive; (iv) Disruptive risks via policy/judicial actions; and (v) Occupational risks of others.

The core risk that every entrepreneur — large and small — is prepared to take is business risk. This evaluation covers all factors currently the focus of discussion — interest rate, market conditions, acquiring loans/finance, availability of skills, labour laws. So, given the estimates of the IMF and World Bank chiefs and of our own leadership, and the serious intent of the Government to improve the ease of doing business, a favourable assessment on business risk seems imminent.

When an entrepreneur puts his own skin (equity) in the game, the essence of his implied contract with other stakeholders is that his equity stands the same risk as the balance equity, and that the business will be run with probity, and with due sensitivity to the privileges of all stakeholders.

Willy-nilly the risk of an entrepreneur has expanded well beyond his equity. Limited shareholder liability is a proven principle and an essence of corporate law. The age of personal guarantees to secure corporate loans is passé and should have been phased out with other mechanisms established. To the contrary, the environment seems to be heading in the opposite direction.

At some point, unjustified reputational risk and the threat of enforced personal ruin can become risks that cannot be justifiably assumed. We must find equitable moderation.

To any observer of the Indian economy the impact or the possible future impact of regulatory and/or taxation overdrive cannot be lost. It is repeatedly found that operating rules confound well-intentioned laws. Almost by design, the rules stop being principle-based and start veering to try and plug all loopholes.

This leads to the eternal struggle of well-intentioned people seeking a creative solution, and not-so-well-intentioned rent-seekers (or intrusive personalities) finding a problem for every answer and/or imposing multiple proceedings to single incidents.

Good governance is increasingly being reduced to ticking boxes, and the perceived absence of true governance is leading to more rules that create more boxes to be ticked. The tendency of some regulators to exercise “control” rather than “promote development” is being increasingly felt, including by way of restricting pricing flexibility, dictates and/or other means which can strike at the root of viability. Anecdotally, the control mentality has intensified. Only the leadership can dismantle it.

In India’s political economy, moves that are economically disruptive cannot be ruled out. Further, by definition, disruptive moves cannot be preceded by reasonable options analysis. Any analysis of risk will certainly bear this unknown in the back of the mind.

For the record, one must not consider GST disruptive policy but constructive. Here, and in rule-writing generally, the devil lies in the details. The gap between rules and reality is widening.

Lastly, an unknown risk is fending for the risk of others. It may be fear due to uncorrected definitions of corruption (in government acts), or the fear of what may happen to an individual in the system if even an above-board business should run into problems.

If business must bear effective indemnification of outside risks or consequences of uncharitable allegation, any investment analysis gets skewed. Advances in the real economy, reinforced by investment and robust consumption/production, need a broad-based sentiment of rational positivity. Exhortation is necessary but not sufficient. It is critical that the risk-return paradigm is appreciated and addressed for real world solutions.

This column explores ideas and opinions on Indian enterprise and economy. The writer is an entrepreneur and former president of Ficci. The views are personal

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