Decision Reversals, Policy Indecision Putting The Economy In A Difficult Position

It is common knowledge that India's GDP growth has nosedived from as high as 8.5-9% during 2005-2007 to the current level of 5%. Economic experts have given different reasons for such a sharp decline in growth, including the historic 2008 financial meltdowns that bulldozed through global economies, multi-crore scams (2G, Coalgate, Commonwealth, gas hoarding, etc.) that have subdued the business environment, and more importantly, policy paralysis during the UPA 2 regime. Considering the present state of politics and the complex legislative and legal system in the country, there is almost zero possibility that indecisiveness will move out from the policy environment, especially decisions related to industries, economy, financial and commercial activities. A look at the recent decisions by the government, courts and Parliament suggests that there is a serious threat that we are moving fast towards the path of “policy reversal”.

The problems are intensifying with each passing day, and business environment is acutely impacted by it. According to industrialist and FICCI president Sidharth Birla, “For the time being, India may have dropped from the higher rungs of the growth ladder, but whether this will be a temporary development or a more permanent one depends on how we respond to the situation. For this, it is imperative that the government, industry and society work in tandem”. Other industrialists have also expressed similar opinions, as infrastructure projects worth more than Rs 7 lakh crore have been stuck for the past couple of years due to policy indecision.

Of late, the government had shown some inclination to boost the business environment by forming the Cabinet Committee for Investment (CCI). The larger picture, though, is a mess of politics, legal hassles and red tapism. In the recent past, not a single decision related to financial activities has been executed without hassle.

For example, the government took a much-awaited and much-deliberated decision in 2012 to raise the FDI limit in multi-brand retail to 51% and that in single-brand retail from 51% to 100%. This decision was mooted as a big ticket reform and looked set to change the whole paradigm of Indian retail and business environment. However, for the past one year, only IKEA and Tesco have entered into the country, that too after much hemming and hawing. Experts are of the belief that the riders that followed the decisions (sourcing 30% products from the Indian SME industry, mandatory investment of 50% funds in back-end infrastructure, discretion of state governments to allow FDI, etc.) have played spoilsport and no big bang investment has come into the country.

The Jet-Etihad and USL-Diageo deals ran into bad weather: These multi-crore deals got enmeshed in legal and institutional tangles, which have marred the whole business environment. Now, both domestic and foreign investors are distancing themselves from large-sized deals over fears of long litigations.

The see-sawing over gas prices has been another big dampener as far as the business environment is concerned. In June, the Cabinet Committee on Economic Affairs (CCEA) cleared an increase in gas prices from USD 4.2 to around USD 8.4 per mmbtu. Then, the Finance Ministry raised an alarm against giving the benefit of raised prices to RIL following charges of gas hoarding against the company. The Cabinet then discussed the matter again and cleared it with a rider about RIL filing a bank guarantee. Now, with a PIL filed against the decision, the matter has reached Supreme Court.

Another pressing issue is about environmental clearance and land acquisition. The biggest problem that industries, whether in the public or private sector, are facing relates to acquiring land for setting up of industrial projects and getting the required clearances from the Ministry of Environment. Already, two ministers have been shifted from the ministry to give a spurt to approvals, but nothing has changed. The Land Acquisition Bill has been cleared, but industrialists doubt that it will change anything for the better.

More woes relate to tax litigations. The poor experience of Vodafone and Nokia regarding tax litigations and the recent doubts raised by the Competitions Commission of India (CCI) regarding many companies and deals has also created an environment of distrust among industries. What is relevant here is not who is at fault, but that these cases have caused the business scenario in the country to deteriorate.

This is just a small list of problems that have been millstones in the neck of what was the world’s second fastest growing economy. Today, India is probably the most problematic economy to do business in the world, and it is little wonder that we are heading towards a sub-5% growth rate.

N R Bhanumurthy, Economist and Professor at the National Institute of Public Finance and Policy has this to say, “The basic problem is not the policy paralysis, but the policy reversal, and in such a situation, there are bound to be doubts in the minds of investors. We have to change this situation very fast otherwise, it will certainly hurt the fundamentals of Indian economy".

As far as the ground reality goes, from the way the courts and the government are resorting to audits of private firms, it seems quite likely that this environment of distrust will be aggravated further.