It will be a while before the euphoria surrounding the Modi visit to the US settles down. The high point of this visit was the corporate engagement and connectivity with leaders of new-age technology. Having been to the Silicon Valley for the Stanford conference for over a decade, I can scarcely suppress my excitement at this long-postponed event.
During his engagement with the CEOs Modi remarked, “The world is not going to wait for us. I know that.” This is a significant mindset change. It finally abandons the rhetoric of the past that the world needs India more than India needs the world.
In an increasingly inter-dependent world India has become significant enough, where both need each other more than ever before. Modi’s language suggests a sense of urgency and commitment to restructure governance and redress the infirmities of the past. Converting our promises into reality is always a learning curve. The visit, at any rate, unequivocally sets at rest any prevarication on whether and how much foreign investment we need.
Our past record on foreign investment has been weak and halting. In 2010, it was 1.6% of GDP, in sharp contrast to 4.5% in China, 4.4% in Malaysia, 3% in Thailand, not to speak of the whopping 23% in Singapore. It is only in the last one year that FDI inflows have increased; during October 2014-April 2015 there was a 48% rise. The decline in FDI flows during UPA2 synchronised with an overall decline in savings-investment ratio during the same period.
The savings and investment rates of 36.8% and 38.1% of GDP in 2008 sharply dropped to 30.1% and 34.8% in 2013. There is now increasing evidence that regulatory concerns, high-profile corruption, prevarication on tax rules, uncertainty in the rule of law (particularly on retrospective taxation) stymied India as an attractive investment destination. The advantages of foreign investment need no reiteration; it supplements domestic savings, supports higher investment, enables technological and managerial upgrade, and improves overall Total Factor Productivity (TFP).
Our willingness now to listen and to act augurs well for larger investment flows. Its composition in favour of new-age technology can somewhat make up for the lost time and missed opportunities. The Chinese slowdown and attendant uncertainties in contrast to our stable and decisive political leadership have created new opportunities which we cannot fail to grasp. Leapfrogging the typology of development and moving quickly to a Digital India enables us to harness more meaningfully the synergy between a Digital India and Skill India. It enables a better balancing of the investment- and consumption-led growth strategies while meeting large unsatiated demand.
PM Narendra Modi’s commitment to improve India’s ranking from 142 in the World Bank’s Doing Business 2015 study to 50 by 2017 is a challenge the government has accepted. These entail multiplicity of programmes and actions, many of which have commenced, like Make in India, Digital India, 98-point action plan, Ebiz portal, micro economic stability, rationalisation of subsidies, opening up of new sectors like defence and insurance for FDI and continued pursuit for passage of some stalled legislation, particularly the GST. By any reckoning, the engagement of Modi with key political and economic interlocutors has rekindled ‘The India Quest’. The recent initiatives of the Union finance minister, Arun Jaitley, in Singapore and Hong Kong evoked an enthusiastic response. What has emanated so far are significant commitments. India’s past record in converting commitments into tangible flows has been halting. Learning from the past and acting on the promptings of some CEOs, we need to act quickly. Some critical issues need to be addressed.
Simplifying our complex tax system. With the hopeful passage of the GST legislation, indirect taxes would have reached a resting point. On direct taxes, a satisfactory direct tax code has proven elusive. Aligning our tax rates to best emerging market practices can be helpful, particularly in emerging areas like transfer pricing and mergers and acquisitions (M&A) and with the commitment to lower corporate taxes in the next four years will lend predictability. While treaty-shopping, base erosion, or tax arbitrage can scarcely be encouraged, we need to make India a competitive tax destination as well. Not only laws but the modalities of their implementation are equally significant.
Enforcement of contracts, tardiness of litigation and court proceedings hurt. Setting commercial benches in High Courts is a positive step but making them functional, along with an alternative dispute settlement mechanism, will make a difference. The pending legislation on arbitration needs early consideration. The new bankruptcy law should be hastened. The opportunities of competitive federalism for faster land acquisition and flexible labour laws need wider emulation. Willing states must be incentivised in multiple ways.
Pedagogy and education reforms, aimed at promoting innovation, deserve priority. India’s ranking on the Global Innovation Index slipped significantly from 62 in 2011 to 81 in 2015. In the altered political environment and in conjunction with other measures improving the ease of doing business, we must recognise that a Digital India and Innovating India are two faces of the same coin.
Encouraging start-ups and venture capital can support small and medium sectors along with Mudra Bank. By definition, angel funding and venture capital have inherent risks. While rewarding innovation a milieu which also accepts failure needs wider acceptance and mindset change.
Finally, on bureaucracy, for far too long there’s premium on the status quo and stalled decisions. Rewarding meritocracy, protecting bona fide decisions, firewalling excessive political interference, encouraging lateral entry in stratified bureaucratic hierarchy are ideas waiting to happen.
The world expects big changes and not merely a congregation of incremental actions. Implementing initiatives which have commenced and synergising them with some of these ideas can make a qualitative difference. We can ill afford the Modi euphoria to become a false dawn.
NK Singh is a member of the BJP and a former Rajya Sabha MP. The views expressed are personal.