By Pradeep S Mehta & Amol Kulkarni
Downgrading India as an investment destination seems to be the flavour of the season for international rating agencies. Ambiguous and inconsistent regulatory and policy architecture must shoulder a significant portion of the blame.
Predictability in economic policies is necessary to achieve credibility by any economy. While the government has acknowledged that ‘ease of doing business’ is a work-in-progress, we cannot remain ignorant of developments in the neighbourhood.
China has been an investors’ darling for long. In the last 10 years, foreign investment in China has crossed $2 trillion, compared to India’s performance of around $230 billion. China was successful in showcasing a stable, albeit managed, economy to investors. While its political governance model is not worth emulating, its experience highlights the benefits of certain and predictable regulatory regime.
When Chinese economy managers were busy offering an attractive investment regime, India was grappling with bustling democratic processes and fractured political mandates, holding back key economic reforms. The blame that ensued has resulted in several missed opportunities.
This is not to suggest that China did everything correct. In its obsession with managing the economy, it confused predictability with regulatory stiffness and unwillingness to change. It didn’t realise that no economy can isolate itself from the world for too long.
Regulation is not a one-way street and responsiveness to the market and the global scenario is crucial to prevent regulatory obsolescence. Which is why governance structures and processes to identify, analyse, predict and respond to market trends, in consultation with stakeholders, are necessary to inspire investor confidence.
Absence of such mechanisms has come to haunt China, which is now attempting to respond to market dynamics. However, lack of transparency, vested interests and reluctance to change is hurting it badly.
While structures and processes are necessary, they don’t guarantee investments. Short-sighted regulatory approaches to attract investments could do greater damage in the longer run than perceived benefits. This is what the Brazilian experience teaches us.
With a population of less than a fifth of India’s, Brazil has been able to attract foreign investments of around $500 billion in the last decade, more than twice of what India managed. Despite having a healthy and functional democracy, it shrank by close to 3.5% recently, and is now staring at significant erosion in GDP.
In the pursuit of fast-paced growth, Brazil’s policymakers and regulators raised monetary supply, fuelling credit spree. Certain sectors and industries were offered tax breaks while price controls were imposed on others.
Transparency was dented when market leaders became embroiled in corruption scandals. While Brazil’s macroeconomic fundamentals were in place, aggressive policies focusing on fast-paced growth and sector-specific policy and regulatory errors resulted in systemic harm.
In India, many have called for postponing the fiscal deficit target, reducing policy rates, increasing public investments and relaxing conditions for private investment in certain sectors. Indian policymakers would do well to conduct an ex ante impact assessment of available policy alternatives.
Commentators repeatedly blame policy and regulatory uncertainty as an impediment to investment. This escalated during the 2008-09 financial crisis, and world investment flows are yet to come close to pre-crisis levels.
like improving transparency and competition, and facilitating regulatory independence, have been suggested as a remedy. While being imperative, such reforms need to be pursued vigorously over a longer period, as they often become casualty to other political priorities.
So, it is clear that sector-specific strategy to manage uncertainty could deliver timely, positive results and convey the desired message to the investor community. Selection of sector, design of methodology, assessment of costs and benefits, and involvement of stakeholders since inception are critical to design-requisite reforms.
The e-commerce sector, for instance, has immense growth potential. But it is facing significant policy and regulatory uncertainty. Reforming the regulatory architecture will send positive signals to investors that government means business. This will have a domino effect on other sectors as well.
(The writers are with CUTS International)