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$1 trillion external investment awaits Modi 2.0 policy matrix

News$1 trillion external investment awaits Modi 2.0 policy matrix

External investors are looking forward to the removal of several business-phobic regulations that serve only to be used as a lever to extract bribes.


Mumbai: The business community is looking towards the next five years with hope and expectation. The assurance of political stability in India caused by the victory of Prime Minister Narendra Modi in the 2019 Lok Sabha polls, coupled with geopolitical tailwinds, opens the door for around $1 trillion of external investment into India during his second term, not just from the United States or West Europe, but from West Asia and East Asia. Within the former zone, the Gulf Cooperation Council (GCC) countries in particular are eager to strengthen their economic base in India, which has historically been close to the region, and has become more so because of the rising network of daily flights that operates between GCC airports and different parts of India. The Prime Minister has established close personal and working relationships with lead players within the GCC, including the royals leading the UAE and Saudi Arabia. In East Asia, both sides of the Taiwan Straits are looking to India as an investment destination. What they and other external investors expect from Modi 2.0 is a welcoming and stable policy environment. Hence they are closely watching as the Central government unveils policy initiatives in the period before the Union Budget gets presented and a clear idea of the direction and components of economic policy is revealed. Also under the scanner will be the manner in which the Prime Minister’s Office (PMO) deals with the obstacles created to growth by numerous growth-stifling policies of previous governments. Although the education system remains a work in progress despite efforts at change made by the Human Resource Development (HRD) Ministry, the superb overall quality of the young in India has meant in practice that a period of retraining—at levels of remuneration that are low by global standards—of individual recruits that lasts between 6 to 18 months is sufficient to ensure good performance by them in allocated tasks. Overseas investors looking towards India are also heartened by the emphasis placed on infrastructure development. As important as the jobs directly generated by such expenditure is the cascading effect of job creation in multiple sectors and rise in productivity because of the impact of better transport and other physical assets. Both in the case of the US as well as China, a paradigm shift in the range and quality of infrastructure preceded the period of steady progress towards the status of emerging as the top global leaders in the economic sphere.


External investors are looking forward to the removal of several business-phobic UPA-era regulations still carried forward that serve only to be used as a lever to extract bribe. Such a move would be in line with the declared objectives of Prime Minister Modi. The advantage facing the Central government is that what is needed is less new policy than it is doing away with several toxic policies formulated in the past. Modi has several times underlined the need to do away with laws and attendant regulations that give power to a miscellany of officials to insert themselves at will into the functioning of enterprises to threaten their closure or prosecution. Many such interventions are not motivated by genuine issues of corporate governance or the public interest, but are simply a lever to extract bribes through coercion. Rather than follow the global norm of using financial penalties as the preferred method of dealing with most mismatches between a particular company’s practices and the relevant regulations, in India the emphasis has been on prosecution, including, in many cases, the option of jail time. This is the case even in the plethora of matters concerning the GST, where even the option of bail in cases where the authorities allege under-payment of GST has been taken away. Were every official both competent as well as honest, such provisions may be workable without much disruption. However, in a situation where corruption amongst administrative personnel is still present, the possibility of an official taking recourse to penal provisions without just cause may not be absent. In the context of the harsh tax and regulatory regime put in place by Sibal-Chidambaram during 2004-14, the ubiquity of GST and the complexities which remain may result in lapses in compliance that do not have mala fide motives. However, this need not prevent penal action by the authorities, who are sometimes prone to using a “one size fits all” approach towards enforcement. The power of summary arrest vested in the official machinery has created what may be termed the “Sibal-Chidambaram Fear Factor” within swathes of investors and entrepreneurs that has a dampening effect on new investment. In the case of alleged GST defaults, as in other routine cases of an economic nature, the view of external investors is that a warning should be the first option, only sometimes accompanied by a financial penalty. A fresh deliberate and avoidable delay in the payment of GST should be followed by more severe financial penalties. Only those within the GST system who are serially and grossly delinquent should be subjected to the full rigours of the criminal law in India. By giving the power to impose loss of liberty or property to thousands of officials against hundreds of thousands of individual businesspersons, several investors are likely to prefer to locate in countries with less draconian compliance mechanisms. The banking system is an example of the manner in which highly coercive regulations may be indiscriminately used. There is a universe of difference separating the wilful defaulter from an honest entrepreneur, who is unable to repay because of unexpected and adverse market conditions. The two should not be put on the same scale of retribution, else genuine investors will hesitate to build new projects or expand existing projects for fear that business conditions may change but they may still be held criminally responsible. Risk is inherent in business, as are losses. During the UPA period, banks were telephonically ordered to give “ever greening” loans to businesses that were clearly bankrupt. While such transactions need to be identified and punished, others where the circumstances were less clear need to be looked at differently. Investigating agencies need to use a sniper’s rifle to shoot down the few Big Fish whose conduct is genuinely and massively criminal, rather than adopt a machine gun “spray of bullets” approach, where every businessperson in the vicinity gets “gunned down” i.e. falls into the criminal procedure quicksand. Of course, misuse of authority by officials for corrupt purposes needs to be met with summary and condign punishment, so as to weed out the bad apples from the basket of senior officials. Investors are welcoming reports that the Prime Minister has ordered his entire team to identify and dismiss corrupt officials, as well as those who are indolent and incompetent.

Several intending international investors are heartened by the growth-friendly reputation of Prime Minister Narendra Modi, and are hopeful that the PMO will soon utilise the electoral expression of confidence by the people of India in the Prime Minister to ensure a regulatory environment in which it is no longer “as easy as cake” for an official to send a businessperson to jail merely on the basis of suspicions or unproven allegations of misconduct. Unfortunately, such has been the situation put in place during 2004-14, the Chidambaram-Sibal years. There are indeed those businesspersons who have been successful in corrupting senior level policymakers and gaining windfall profits as a result, and the Big Fish among them in particular need to be made an example of as a warning to others. However, this is not the same as continuing a UPA-era policy matrix that makes the investor constantly worry if an error by his accountant (or the enmity of a politician or an official to whom he has refused a bribe) places him on a conveyor towards penal servitude. Removing the “Sibal-Chidambaram Fear Factor” (of arbitrary coercive, condign action) among investors both foreign and domestic would significantly boost the attractiveness of India as a global investment destination for companies eager to tap into the abundant human resources of the country.


Around 80% of the losses caused to the national exchequer from corruption comes from less than 1% of depredators. However, by diverting attention to tens of thousands and even hundreds of thousands, several of whom may not be wilful depredators, but fall into financial difficulties because of market conditions, most of the time spent by agencies on their investigations gets expended on those other than the Big Fish, thereby enabling several Big Fish to escape. A former Union Finance Minister was expert in using complicit officials, bankers, stock exchange players and others to generate substantial sums of insider and illegal profit from colourable stock market and currency operations. Such methods are akin to match-fixing in cricket, but unlike in the case of at least a few instances of the latter, foreign exchange-fixing or insider manipulation of stock prices did not attract any serious penalty. Reports of the complicity of office-holders even in regulatory authorities such as SEBI need to be investigated. A former finance minister created a punitive policy matrix that seemed on the surface to be harsh on wrongdoing, but which had hidden “backdoors” through which he and his associates siphoned off billions of dollars in profit. Thus far, neither the former minister nor his easily identifiable official favourites and other associates have been seriously questioned, in the rare cases where they have been questioned at all, except on matters that relate to trifling sums of money rather than the billions of dollars they scammed through their control over important institutions. Those involved in stock exchange, foreign exchange and currency manipulations have largely escaped scrutiny, much less punishment. As have several big names involved in (as the Prime Minister said, often telephonically) making banks hand over additional tranches of money to businesses that were clearly bankrupt in all but name. A like situation prevailed with regard to the widespread under-invoicing of exports and over-invoicing of imports that take place on a daily basis in India. A few university students proficient in commerce and mathematics could, with ease, identify the approximate extent of leakage of moneys through finding out the difference between prices received and paid for various commodities in comparison to (those received by or paid to) corresponding sellers and buyers in third countries. However, there is faith within the global investment community in the integrity of Prime Minister Narendra Modi, who has emerged unscathed from the numerous attacks made on him by political rivals during the 2019 Lok Sabha campaign. It is, therefore, anticipated that the Central government will very soon ensure that those responsible for billion dollar evasions in external trade or other manipulations will finally be held accountable, no matter what their status or reach within the bureaucracy. Prime Minister Modi has clearly achieved mastery of knowledge about how the governance system in India works at the Central level. The decks are, therefore, clear for decisive penal action on big depredators that is needed to give confidence to investors that it is the market and not crony contacts that will decide the success or failure of a billion dollar business. Recent actions against some high-profile UPA-era ministers indicate that the process of VVIP accountability may finally be getting under way


Among the immediate positive steps taken by Modi 2.0 has been the speedy manner in which the government moved through changes in declared policy to re-assure those within the country and outside who were apprehensive that the English language (and its attendant advantages) would get downgraded. Across all sections of the country barring some language purists, the global advantages of fluency in English are recognised, hence the mushrooming of private schools in Uttar Pradesh and Bihar, to which even economically disadvantaged parents seek to enrol their children. In leading countries across the world (such as Germany or Japan), emphasis is being given in the 21st century at an early stage of schooling to the learning of English, widespread knowledge of which is among the few advantages that India has over China. Chief Minister Adityanath in UP has followed this global norm in his state, showing great foresight in initiating a policy of making English accessible to school students from a young age. Investors further suggest that a possible innovation would be the granting of dual citizenship to nationals of specified countries. Such a privilege is available to citizens in several democracies, and Modi giving that right to select foreign nationals (especially those of Indian origin), who are citizens of a friendly country such as the US or the UK, would be an expression of confidence in their fealty to the stability and progress of not merely their adopted but also the native land of their forbears.


Given the colonial mindset still prevalent within the administrative machinery, it is no surprise that coercion is given much more emphasis than persuasion in order to ensure compliance. In matters of policy, there is the stick and there is the carrot. Given the population of the country and the often ramshackle administrative structures present in many locations, there are limits to the effectiveness of the stick. In particular, when wielded by a corrupt official, the stick may often belabour the honest, but unlucky while sparing the crooked. The Sibal-Chidambaram era of harsher and harsher penalties for a growing number of perceived offenses saw a multiplication of reliance on the stick. In India, a much wider band of activities has come under the ambit of criminal law, including in many instances imprisonment, than is the case in other major democracies. The laws and practices regarding income-tax are an example. During the UPA period, even the weak safeguards against bureaucratic misuse got diluted. As during the colonial period, it was assumed by the machinery of government that the average citizen was a crook rather than honest. Certainly the proportion of the population that pays direct taxes is still unrealistically low. Over the past five years, there has been an intensive effort by North Block to raise the number of taxpayers, mainly through the use of the stick, While this has had some success, much more progress would ensue were tax slabs to undergo substantial revision rather than remain much the same in real terms as they were since the 1996-97 Union Budget got presented. Looking at some of the GST rates, which are the most variegated and complex in the world, it seems that some in North Block believe that India’s citizens should follow the example of Anna Hazare and Vinoba Bhave and reduce their physical wants to a minimum. Elements of what is commonly accepted elsewhere (and by the growing and aspiring middle class within India) as a tolerable lifestyle have been taxed as luxuries, despite the fact that such industries generate employment and revenue in much the same way as the others do. Or that few millennials wish to follow the frugal example set by Mahatma Gandhi, an example cast aside by his successors in favour of luxurious lifestyles in the Lutyens Zone as soon as the British left. In the 21st century, when a citizen is bombarded daily with images from across the world, the elements of what is regarded as constituting a reasonable lifestyle have changed substantially since the era of the Mahatma, or even the 1970s period of tax rates of 97.25%. Hyper-high GST rates on presumed “luxuries” imply a policy matrix that is opposed to a steady improvement in the lifestyles of citizens and represents an effort to make such a process as financially painful as possible. After the reform having being kept in the waiting room for more than a decade, the rollout of GST has been a signature achievement of Modi 1.0. However, a lower level of rates would assist far more than “Arrest at Sight” provisions in ensuring wider and willing compliance, thereby fulfilling Prime Minister Narendra Modi’s command to keep the GST “good and simple.

Apart from looking for a substantial rise in the income limits for direct tax slabs (so as to promote higher consumption), investors are also looking to the PMO and the Ministry of Finance for lowering corporate taxes. In the US, such a policy (which has been initiated by President Donald J. Trump) has resulted in more than a trillion dollars of corporate reserves returning to the US for investment in that country by its corporates. High corporate tax rates result in company managements shifting profits to overseas subsidiaries through adjustments in payments and receipts. Lower rates, together with further ease of compliance through additional rationalisation of GST would assist in unleashing the animal spirits needed to break the present cycle of lower investment. In this context, domestic investors are taking heart from recent decisions of the Reserve Bank of India, whose current leadership seems to be abandoning the institution’s unfortunate tradition of looking towards the City of London and Wall Street while formulating its policies, rather than to the needs of those residing near the various Mahatma Gandhi Margs across towns and cities in India. Successive RBI Governors have done their utmost to handicap domestic industry through high interest rates, to cheers from global financial firms eager to cash in on such rates, and it is after a long time that growth of jobs in India is being given precedence in Mint Road over the profits of financial entities headquartered in New York and London. Given that the domestic market in India is important to external investors, this recent change in stance by the RBI will be a helpful factor in attracting a minimum of $200 billion of annual external investment into India over the next five years. This will be in addition to the extra investment raised from domestic sources as a consequence of a Modi-fied approach towards the economy.


Among the numerous ways in which the interests of those holding foreign currency have been given much greater priority than those unfortunates holding only rupees is the welcome that has for long been jointly extended by Mint Road and North Block to “Money making money”, as distinct from the money making goods and services. It is extraordinary that funds that flow into India only to get the risk-free arbitrage advantage of higher interest rates (and which flow out at the slightest sign of volatility) have been pampered by both fiscal as well as monetary authorities over investors who are willing to put their money into jobs and services through investing in infrastructure and other physical assets. While a dollar-denominated deposit can be removed in less than a second from a bank in India, a bridge, airport or highway cannot. Using the various means that are open to them through laws and regulations crafted by politicians and officials belonging to the “Swiss Club” i.e., those with undeclared assets abroad, those involved in “Money making money” operations can and do usually conceal their identities. The same anonymity could be extended to those investing in sectors where money creates goods and services. This could apply both to external investors as well as to domestic. If a job-creating unit is set up, such investment needs to be made more welcome by the regulatory system than mere “Money making money”. Even where domestic investors are concerned, disclosure or anonymity schemes could be evolved that incentivise individuals with large hoards of cash (including in banks) to not hoard but invest the same in sectors that are productive and which generate jobs. Substantial private investment is at present wary of making investments as a consequence of (a) fear of the consequences of discovery, combined with (b) the immense range of punitive options available to officials who are not always honest. They need to be encouraged to invest, as relying on expenditure by government will not be enough to meet the job deficit. What is needed is to unlock for productive investment the immense hoards of liquidity that successive sweeps by the investigating authorities have yet to uncover, often because of the connivance of corrupt officials. Deng Xiaoping said that it did not matter whether a cat was black or white, as long as it caught mice. India needs a lot of cats, no matter their colour, to catch the many mice scurrying around stunting the economy. In the Sibal-Chidambaram system, every shopkeeper was sought to be converted into a police officer, recording details of those who spent money on items stocked within the shop. The consequence has been that several shopping malls are empty on most days, except for those who go there for their morning or evening walk. An increase in the velocity of circulation of cash will lead to taxes getting collected with each circuit made, hence the obsession with catching them at the initial stage itself should not be retained at the P. Chidambaram (PC or Police Constable) level, which puts a dampener on overall demand. As for supply, the ability to generate a greater flow of goods and services should not be hostage to the whims of officials but should be given an environment to be plentiful. Prime Minister Narendra Modi has asked his ministers and officials to make India the most welcoming location in the world for start-ups, and this is a command that needs to be accomplished at the earliest.


Now that Modi has won a second five-year term, that too in such a spectacular fashion, deep reservoirs of money are looking to India as a destination for investment, but strategies will need to be worked out to attract them away from alternative locations. These strategies, which may sometimes be specific to country or industry, have to be within an overall policy geared towards generating investment that accepts that a Vinoba Bhave lifestyle is not what the youth of India are looking for. Moves such as the introduction of Interest Free Banking would be helpful in the banking system attracting funds. Kuala Lumpur has profited immensely from the Interest Free Banking system, as have New York, Frankfurt and London, and it is time for Lucknow, Hyderabad and Kochi to follow. In the case of China, which for India is among the most important potential sources of investment, an advantage that India has is the excellent relationship that has been built up between President Xi Jinping and Prime Minister Narendra Modi. This could be leveraged in order to secure investment from China to help offset the trade deficit between the two countries. In addition, there are companies from several countries that are looking to shift from China, both because of the trade war with the US and the mounting cost of skilled labour in that country, and India could be a preferred destination for several of them. Home Minister Amit Shah has shown his skill in ensuring that the Prime Minister’s image be leveraged in order to secure a repeat victory for the BJP in the Lok Sabha polls. The Groups of Ministers in which Shah is present will hopefully turn their attention towards ensuring that an annual target of $200 billion of external investment into India gets met. This would be besides domestic investment from those who have held off because of the overhang of the Sibal-Chidambaram years and the fear this has engendered of some officials using the multiplying thicket of rules and penalties to extort bribes. Such (domestic) investment would not be a small number, but would cross $500 billion during the term of Modi 2.0. There is money in India, enough to power double digit growth, but much of this is either not being used or is flowing to overseas destinations through both banking as well as non-banking channels.


Prime Minister Modi has shown immense skill in balancing relations between Beijing and Washington, or between Tehran and Riyadh. This is fortunate, as in different ways, there is need for a close relationship with both the global superpowers, the US and China. What is needed to place the economy on a sustainable double digit growth trajectory is a matrix of 21st century policy initiatives that combine the external with the internal; the financial with security imperatives; the use of soft power and an occasional display of hard power. After his overwhelming victory in the 2019 Lok Sabha polls, the formulation and execution of a conceptually and administratively integrated policy for double digit growth is the challenge facing Modi 2.0, a challenge that those who know Narendra Damodardas Modi are confident will be met with ease by the Prime Minister.


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