Opinion

The uncertainty factor of doing business

Paran Balakrishnan | Updated on August 21, 2019 Published on August 21, 2019

Scrapping projects or changing terms has become commonplace. - ISTOCK   -  istock

Apart from red tape and government procedures, the real danger for businesses now is rules could change on a whim

Jagan Mohan Reddy, Andhra Pradesh’s new chief minister, is a man in a hurry and he also likes to do things differently. Other politicians rise to high office and rush to announce new projects. Reddy, though, is taking a novel approach: he’s rushing to rip up contracts and cancel as many projects launched by the former government as he can.

In fact, Jagan Mohan is cancelling contracts on a scale hitherto unseen in India. In so doing, he’s offering up one more example of why India’s become a risky business destination even for foreign companies, starry-eyed about our 1.3-billion population.

Now, for investors, it isn’t just about overcoming red tape and government procedures before being allowed to do business. The real danger is that rules and regulations could change after you’ve opened shop. Your problems might originate with the tax department or State governments or even the courts, which have become prone to delivering sweeping judgments.

Let’s return for a moment, though, to Andhra Pradesh where frenetic activity’s under way to scrap many of ex-chief minister Chandrababu Naidu’s pet projects. Out of the window has gone the grand vision of turning the proposed new State capital Amravati into a “world-class” city. Reddy earmarked only ₹500 crore for Amravati in the 2019-20 budget and many say he’d like to mothball the city altogether if he could. He accuses Naidu and other TDP leaders of cornering land in the area for a song and reselling it to the government.

Also for the chop are other Naidu mega-projects like the Machlipatnam Port which was to have been developed by Hyderabad-based Navayuga group. Then there’s the ₹58,000-crore Polavaram irrigation project on the Godavari River. Here, the government has cancelled a ₹3,000-crore hydel project which would also have been executed by the Navayuga group even though the Central government advised against the State’s plan to issue fresh tender notices.

Reddy also wants to take the hatchet to some of the State’s renewable-energy projects on the grounds that rates have fallen since the contracts were signed. Several of the country’s largest renewable energy firms have projects that are now under threat and have gone to court to fight the government’s actions. Reddy is undeterred and the government is also curtailing power taken from renewable-energy firms even though this contravenes contractual obligations.

But let’s face it. Reddy isn’t alone in his zeal to scrap projects or change terms after they were agreed upon. It’s become a fact of life for anyone doing business in India. In December, the government altered rules for e-commerce platforms in India and gave companies like Amazon and Flipkart only 60 days to change the way they did business here.

Data localisation

On another level, there’s the data localisation dispute that’s become a running battle between the Indian and the US governments. Last year, the RBI ordered that data on financial transactions be stored in India. Now the issue’s been kicked up to the Prime Minister’s Office because of the US’ strong opposition. Firms hit by data localisation include everyone from credit-card companies like Visa and Mastercard to tech players like Paypal and tech mega-giants Google and Facebook. Now shift from hi-tech areas and cross to Bihar where Chief Minister Nitish Kumar in 2017 clamped prohibition on the State. The chief minister obviously had a sudden change of heart about liquor because he arduously wooed international beer giant Carlsberg to set up a brewery in the State three years before. United Breweries was also forced to shut down its manufacturing unit in the State.

The liquor companies got another rude shock in 2017 but this time the party-pooper was the Supreme Court which ordered a stop to all liquor sales 500 metres from a national highway. A few months later the court clarified the order didn’t apply to highways within the municipal limits. But by then the damage had been done to the companies’ balance sheets.

In other instances, too, the courts have, with best intentions, caused huge upheavals. In December 2015, the Supreme Court ordered that diesel cars above 2000cc not be sold in Delhi. The court laudably cited the city’s appalling pollution for its ruling but the impact on automobile manufacturers was huge. Mercedes Benz said a quarter of its sales came from the Delhi region and other companies like Mahindra & Mahindra and Toyota Kirloskar Motors said they’d be similarly impacted. The Supreme Court amended its judgment a few months later but ordered the automobile companies to pay a green cess.

The government, meanwhile, can’t be blamed for wanting to fix the country’s dreadful pollution. But its cure has been draconian from the auto industry’s viewpoint. The government’s mandated that the industry vault straight from BS-IV pollution norms to BS-VI, bypassing BS-V by April 2020. The automobile industry will meet the deadline but Maruti Suzuki CEO Kenichi Ayukawa commented no other country had leapfrogged this way. “Worldwide, the transition’s been in phases first from Euro 4 to Euro 5 to Euro 6,” he said.

Look for a moment at the Vodafone case. It’s history by now but Vodafone bought Hong Kong billionaire Li Ka-Shing’s Indian telecom unit in an offshore transaction. But the Indian taxmen couldn’t get their hands on the seller who didn’t have any other operations in India so they presented Vodafone with an ₹11,000-crore tax bill. What makes the case really unusual is that Vodafone won its appeal in the Supreme Court but then saw its victory turn to dust when the government introduced a retrospective amendment to the Income Tax code which meant it would have to pay up.

It was the tax department once again that forced Nokia to shut down its mobile phone plant in Sriperumbudur in 2014. The tax department sent Nokia a ₹2,500-crore tax bill and that led to around 30,000 workers being laid off, both at the main plant and ancillary industry firms that supplied it. Nokia finally settled the claim by paying ₹1,600 crore. The factory was shut for four years and now is owned by Foxconn.

From the top

Sometimes the uncertainty factor of doing business has been brought in right at the top. Think for a moment about demonetisation, implemented ostensibly to curb black money and similar ills. It was a bolt from the blue which slugged consumption and prompted foreign investors to dump stocks.

Is the giant Indian market’s lure enough to counter uncertainties of doing business here? For an answer, look at how events have unfolded since US President Donald Trump slapped higher tariffs on China. Many factories have moved out of China and others are scouting new locations. Most popular is Vietnam but companies are looking all around Asia to places like Indonesia and even Malaysia.

Is India on the list of new destinations? In most cases, the answer’s no and it will stay that way unless politicians and bureaucrats stop throwing curve balls and realise they can’t change rules on a whim.

Published on August 21, 2019
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