(M.K.Venu is Executive Editor of Amar Ujala publications group)One would not quarrel with much of what Prime Minister Narendra Modi said during the high-profile launch of his government's "Make in India" campaign in the presence of the big business honchos. Modi sought to inject a new optimism among businesses and assured them that the government will treat investors with a lot of trust, unlike in the past.
The element of trust had eroded particularly sharply in recent years as cronyism, both at the Centre and state level, had caused a loss of public confidence in the system at a time when the expectations of the people were soaring. Modi is essentially calling for a revival of the trust between the government, business, civil society and other institutions such as judiciary. This is the most critical element in making a success of the "Make in India" project and restoring India's place in global manufacturing.
Going by available evidence, the doubts and misgivings that exist within the system will not go away very soon. This is exemplified by the Supreme Court cancelling nearly all the coal blocks allotted since 1993 as also in the way the credibility of the premier investigating agency has come under a cloud over the conduct of its Director, which is a now subject of the apex court's examination.
Narendra Modi did mention CBI specifically when he spoke of re-establishing institutional trust. But Modi must not lose sight of the fact that only a few weeks ago the CBI reopened a 12-year-old case of disinvestment which had happened in the NDA regime under Arun Shourie as Minister. Though there are many conspiracy theories, no one yet has an answer to why the CBI decided to reopen the divestment case. So while the PM talks of enhancing trust, exactly the opposite is happening on the ground.
Another issue with Modi's nearly 50-minute long speech is he did not speak upfront about some of the key problems which erode investor trust and confidence when it comes to doing business in India. Many of these problems are systemic and they predate both the NDA and UPA regimes. It is part of our collective governance culture. There is a need to face them squarely if "Make in India" is to take off.
By now the PM seems to have evolved a distinctive style of presenting his thoughts. He relies on very sharp and pithy slogans to convey his ideas-- Inch to Miles, Look East and Link West, Zero Defect -Zero Effect, FDI means For Developing in India, Highway to Infoway, Swach Bharat, to just cite a few.
Modi needs to go beyond these nice sounding slogans and get down to the details of how to revive trust and confidence among investors. A recently conducted empirical study by Anwar Ul Hoda, a former Deputy Director General at the World Trade Organisation and currently a professor at ICRIER (Indian Council for Research on International Economic Relations), shows exactly why India is not attractive enough to be part of the global manufacturing value chain in a big way as are China, Malaysia, South Korea, Thailand etc.
Hoda says India lags behind largely because of the "trust" issues which Modi has also talked about. For instance, India does not trust global companies to honestly pay taxes on the value they add in India. So Indian tax authorities constantly question the declaration of the profits made by the global companies operating in India. As a result there is no predictability in the taxation regime. The tax rate for Indian companies is 33% but for global companies it is over 40%, says Mr. Hoda.
Modi spoke of his government's belief in self-certification. But most regulators are still aeons away from the self-certification culture. The tax authorities too don't believe in the culture of self-declaration while dealing with MNCs.
The most glaring gap in trust is seen in the defence offset regime which allows foreign high-tech defence manufacturers to set up projects in India in joint ventures with local partners provided they either buy locally or indigenise up to 50% of the production over a period of time. This is a classic "make in India" policy. But it is marred by suspicion from the very word go because the "make in India" facility is not extended to services in high-tech defence. How can you allow indigenisation facility for manufacturing and keep services relating to manufacturing out? India has done it because there was some scam in the past relating to high-tech service delivery! So the policy makers decided to throw the baby out with the bath water.
Indian manufacturing becomes non-competitive for other reasons as well. Mr. Hoda says poor port logistics and infrastructure problems add an equivalent of over 10% tariff to the cost of import. Besides, 60% of Indian businesses rely on captive power generation which is two to three times costlier than the coal fired power drawn from the grid. Other Asian businesses rely on captive power for less than 10 % of their requirement. In China's case captive power serves only 18% of electricity consumed by business, much less than India's 60%. Captive power use is so high in India because of electricity cuts of upto 30 hours a week even in developed southern states like Tamil Nadu and Karnataka.
Myriad local taxes also add to the cost of doing business. The proposed national GST (Goods and Services Tax) is expected to address this problem. GST has been a political football for many years now, with Modi himself opposing it as Gujarat Chief Minister till last year. If the BJP had cooperated with the UPA on these bipartisan matters Modi would have been on a much stronger wicket today. He needs to get down to doing things over the next six months to meet the huge expectations raised by his government. "Make in India" too raises expectations of global investors sky high. If things don't fructify on the ground, his pithy one liners would begin to sound like empty cans.
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