Business sentiment is grim. Few corporates have the financial capability to invest; even fewer the desire. The reasons are several but the common thread linking all corporates is a concern about the direction and predictability of the policy and regulatory environment. There is a lack of confidence in the ability of the leadership to convert the political promise of “ease of doing business” into bureaucratic performance. There is a “trust deficit”. The government will have to bridge this deficit to realise its economic growth strategy.
The government’s objective is to grow the economy to USD5 trillion by 2025. Given that the current size of the economy is USD2.7 trillion, this means it will have to grow at an annualised rate of 8 per cent over the next five years. This is a credible, albeit ambitious, objective. It has been achieved before and there is no fundamental or structural block to securing such a rate again. The twist is investment. Growth cannot be sustained at the 8 per cent level without reversing the current declining trend in private investment (and exports). This fact has been acknowledged by the Chief Economic Adviser in the Economic Survey and by the FM in her budget speech. Both have stressed the need to revive “animal spirits” to catalyse the virtuous cycle of investment, jobs, productivity, exports, consumption and growth. Investment is the centrepiece of their growth strategy.
The question, therefore, is: What must be done to resuscitate investor sentiment? At a macro level, the answer is clear.
Investors look for macroeconomic stability and a supportive regulatory and policy environment. They are incentivised to invest when inflation is under control, the fiscal deficit is within prudential limits and the external account is broadly in balance. They want connected and efficient infrastructure and the easing of supply side “factor market” constraints. This means expeditious processes for land acquisition, flexible and unshackled labour policy and deepened capital markets unclogged from the choke of NPAs. They also want competitive tax rates, simplified procedures and transparent and fair mechanisms for dispute resolution. These are well known and frequently articulated necessary demands.
The issue is whether these are sufficient. Is this all that is required to spur investment? I am not so sure. I believe there is a subtler condition that needs also to be met. The corporate leader must believe that promise will indeed convert to performance. His subjective preference is a non-quantifiable but important driver of investment decisions.
I was involved with a large multinational for many years. What struck me was that investment decisions were often driven by personal perceptions. The investment proposals were, of course, subject to rigorous economic and geopolitical analysis. Empirical data was gathered on the market, competition, costs, prices and regulations. Scenarios were built to capture the consequences of the unexpected. Sensitivity analysis was carried out to define the range of possible outcomes. But when the analysis was finally presented for a decision, the discussion often focused on the intangibles of geopolitical, bureaucratic and regulatory risk. And the decision was often driven by the leadership’s perceptions of these risks than by the hard numbers presented to them.
I was at the helm of the company at a time when China was the flavour of the international investor community. I found myself continually battling perceptions. People knew more about India than China. But what they “knew” about India was mostly negative. Their perception was it was tangled in an undergrowth of red tape, bureaucratic encumbrance and regulatory uncertainty. On the other hand, what they knew about China was positive, albeit limited. They did not understand the investment environment. They did not speak the language; and Chinese culture was an enigma. But they “knew” China offered a huge market with massive potential. This perception (and, of course, reality) was an important determinant of the final decision.
India also offered a large market and potential but unfortunately perception militated against a positive decision. On at least two occasions, an investment proposal for India was turned down in favour of a project in China even through the projects were similar and the earning power of the former was higher than that of the latter. The reason was the subjective predilections of the corporate leaders.
UPA 2 will be remembered for the ignominy of corporate scandals. The telecom and coal scandals showed up the nexus between corrupt politicians and opportunistic businessmen. It was crony capitalism at its worst. The banking crisis has its genesis in this nexus. Modi 1.0 broke this nexus decisively. It ended what Raghuram Rajan has referred to as “relationship based capitalism” in which the quid of corporate “hospitality” was exchanged for the “quo” of political favours. It redefined the nature of engagement between government and business. Today few, if any, corporate houses can be confident of extracting favours from the political leadership.
Modi 2.0 should carry forward this reset in the terms of engagement. It runs no risk in forging a collaborative relationship with business. There might have been a public backlash had it sought such a relationship in the aftermath of the scandals that shook the UPA government.
Modi 1.0 moved the needle somewhat towards meeting the necessary conditions for incentivising investment. The GST, RERA, the Insolvency and Bankruptcy Act, the improvement in the “ease of doing business” index, digitisation etc were welcomed by the business community. More was expected but the initiatives were appreciated. Modi 2.0 should now push this needle further.
Business and government occupy different spaces. But they have interlocking interests. The walls separating the two should therefore be perforated. The FM has called for such a perforation. She made explicit in her budget speech the government’s interest in bringing private industry into a partnership relationship with it. She should follow that up with assurances that government does not regard every businessman as a tax dodger; or every business as bent on gaming the system. That, instead, it wants to build a relationship based on trust and mutuality of interest.
The writer is Chairman and Senior Fellow, Brookings India
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