Can We Make India Businessman-Friendly?

by Jaithirth Rao - Jul 13, 2015 07:45 PM
Can We Make India Businessman-Friendly?

Indian bureaucracy has over the years become more and more hostile towards business. If you can reform babudom, your reward will be to go down in history in the company of Deng and FDR.

Dear Pradhan Mantriji,

I speak to you in my capacity as a business entrepreneur who has been involved in the creation of tens of thousands of jobs in India, in the creation of several thousands of crores of wealth in India, which benefited both domestic and foreign investors and now in the creation of affordable homes and home finance for thousands of aspiring middle class Indian families. I have experience of doing business directly or indirectly in at least a dozen foreign countries in several continents. For persons like me, your election is extremely significant as we are convinced that finally there is a statesman who does not view business and entrepreneurship with hostility, disdain, suspicion or merely as a source for obtaining wealth in return for supplying State patronage.

The purpose of this letter is not to indulge in a common Indian practice of picking holes and finding fault, but to give you inputs which I believe can be of help in moving India forward as a country that is friendly to entrepreneurs and which sees business as source of economic development, employment and prosperity.

It is in this spirit that I would ask you to study the following:

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1. The Indian bureaucracy has over the years progressively become more and more hostile towards business. The origins of this attitude may lie in the disdain that the colonial ICS officers had not only for Indian Banias, but also for British box-wallahs. The leftist indoctrination that Indian civil servants have been subject to since Independence has added to this foundational hostility.

The bureaucracy has had a central role in the drafting of legislation, in the drafting of innumerable rules that are written under the legislations and finally in the implementation of the same. The underlying assumption of all these processes has been that somehow business is a bad word—businesses need to be constrained and controlled—otherwise they will do grievous harm to the nation, particularly the nation’s poor.

2. Ironically, the very existence of these laws, regulations and rules has resulted in a self-fulfilling prophecy. Businesses simply cannot operate in India without bending the often ill-conceived and ill-drafted rules and without seeking special favours, exemptions and subsidies. Business leaders end up becoming supplicants in front of officials, thus leading to a confirmation of the contempt that the officials have to start with.

Contrary to perceptions common in a certain genre of Hindi films, Indian businessmen are no more venal or immoral than businessmen of other countries or for that matter, Indian teachers or journalists or even civil servants. Neo-classical economists would argue that in their pursuit of favours and fixes, Indian businesses have behaved exactly like any other rational optimizer would have behaved.

This leads to a vicious downward spiral of more rules to fix the so-called loopholes that the business fixers make use of. This spiral can be referred to as one that results in reducing
oxygen and ultimately strangling businesses altogether.

3. The idea that the present bureaucratic set-up can be adequately managed in order to achieve freer and more positive business outcomes is a misplaced one. The late Lee Kuan Yew, who you admire, had this to say about Indian officials: “The Indian civil servant still sees himself primarily as a regulator and not as a facilitator. The average Indian bureaucrat has not yet accepted that it is not a sin to make profits and become rich. The average Indian bureaucrat has little trust in India’s business community.” A detailed content analysis of the Singaporean statesman’s views can be very helpful.

4. Regulate, do not facilitate. Let us start with this. The assumption is that any facilitation of business would involve encouragement of something illicit and unsavoury. Such activity has to be kept under the tightest of regulations. Does one notice a Manusmriti-driven Brahminical fear that if Vaishyas are allowed freedom, they would somehow contaminate a purer version of India?

I must add that the average civil servant in Gujarat, irrespective of the state of his or her origin, tends to be a facilitator. With respect, please do not assume that bureaucrats who come from other state cadres and who are ensconced in imperial Delhi, share this trait. There is something in the very air of Gujarat which allows for a positive Vaishya-ization of society and government. The rest of India suffers from a Brahminical disdain for business, a disdain over which a fashionable leftist patina has been painted.

The attempt to leverage the bureaucracy in Delhi to support rather than choke business is fraught with very high levels of risk.

5. Profit-making and getting rich—is that sinful? Most civil servants, from early on in their careers in district towns and in state capitals have witnessed businessmen making deals, cutting corners, seeking squalid favours and exploiting loopholes. Again, rather than seeing such behaviour as being rational responses to the incentive systems in place, this confirms the attitude that Lee Kuan Yew refers to.

The moment any industry or any group attains a level of financial success, the Indian bureaucracy becomes hostile to that sector. I have personally experienced this apropos of the IT Sector. As long as it was a fledgling sector, it was either ignored or received appreciatively in the corridors of Delhi. When this industry came of age, one noticed a certain coldness in the official receptions. The message seemed to be that you folks have grown rich on your options and now it’s time for us to start ill-treating you. Suddenly a plethora of absurd tax claims on on-site earnings, difficult transfer-pricing decisions and virtually incomprehensible claims against embedded imported royalties started springing up.

There is a historical pattern to this. As the so-called evil imperial rule ended, India actually inherited a glorious textile industry and China had none to speak of. But then was it not a self-evident fact, attested to by numerous Hindi movies, that textile mill owners were bad fatcats? So the very first piece of economic regulation of the non-evil free socialist India was the Textile Industry (Control and Regulation) Order. The rest is history. All our glorious mills—Binny, Calico, DCM, Mafatlal, Dhanrajgir, Kohinoor, Thackersey—and so many others, have disappeared, leaving behind pockets of valuable urban land for vultures. In the meantime, the Chinese market share in the world textiles market is orders of magnitude ahead of ours.

Can We Make India Businessman-Friendly?

This article was part of our July 2015 issue. Subscribe today to receive 12 print copies for just ₹1500.

6. Can the Indian business community be trusted? The very question is curious. Like all other business communities, they can be trusted to optimize their business pursuits within the constraints that they face. In medieval India, many rapacious rulers had the habit of seizing the wealth of merchants and artisans in a whimsical manner. Merchants responded by lying low, not showing off their wealth, living inconspicuously and so on.

Charles Augier, the British Governor of Bombay actually invited Indian merchants to come and settle in his city and promised them safety of life and property besides modest taxation. Indian merchants thronged to the British enclave and not so surprisingly, started to spend lavishly on weddings and other functions, knowing that their wealth was safe from expropriation! The average Indian bureaucrat is unable and unwilling to take up Augier’s way of thinking. Hence the constant needling attacks on any successful business.

7. Whenever you bring in new laws, as no doubt you will have to, please ask which earlier laws can be eliminated or superseded. The bureaucrats on their own will never tell you. They relish the prospects of new approval/patronage powers without ceding the powers they have under earlier laws, many of which are of colonial or socialist vintage.

When the panchayats were empowered by Constitutional amendment, one assumed that the decentralization of power would be genuine. What has happened is merely an addition to the layers of approval. Now in addition to the approvals of the Registrar, the Tehsildar, the Collector and so on (all relics of colonial era laws) we now need a panchayat approval. Why can we not do away with the other approvals and leave it to the panchayats? Why inflict one more tyrannical set-up on hapless citizens? When asked such questions, you will invariably get stock responses: “possibility of abuse”; “national security considerations”…and so on. These are all red herrings that only serve to make the system more opaque and difficult.

With the abolition of FERA and the introduction of FEMA, several obnoxious controls did get removed. But on a variety of trivial matters we still require the approval not only of the venerable RBI, but the newly-formed FIPB also. Again a case of layering one law over another. In the last six decades, India must have acquired the world’s record in the number of official bodies that read like a dictionary of acronyms: JCCIE, DGTD, DGS and D, FIPB, DIPP, PCB, MOEF, DGCA and so on. While these have provided good career breaks for bureaucrats, have they improved the lives of citizens or actually oppressed them more?

8. The horror-comic nature of the situation confronting a business is best illustrated when two government departments disagree. What exactly is the business supposed to do? It is amazing that after so many decades, we do not have a process for resolving inter-departmental turf differences. There is a farcical element to the spectacle of departments entering into prolonged, endless and disputatious correspondence with each other as the business simply has to wait and suffer.

In the recent past, we have also been witness to departments deliberately leaking matters to the media, in order to make a compromise difficult. These leaks result in positions hardening and everyone getting into sanctimonious Mexican standoffs. These leaks also provide a golden opportunity for Indian businesses to cleverly lobby against their competitors by supporting rigid inaction which suits current incumbents and protects them from new entrants. And in recent times, the anti-development NGOs have found a fertile field where they can merrily thwart any forward movement that might benefit India’s economy.

9. The other solution for which the Government of India has to be awarded several Nobel Prizes, is in the area of setting up Committees and Commissions. These bodies, which again offer lucrative sinecures for bureaucrats, are symbolic responses to real problems. Since the Committee reports will take years anyway, the problem has been solved by postponing it! Once the Committee Report is in, we can appoint yet another Committee of Secretaries to study which recommendations will be implemented! The bizarre comedy takes on the garb of the famous story without an end.

10. For many years I was under the impression that the high frequency of badly drafted laws and regulations was merely due to bureaucratic incompetence. Bad drafting, by the way, has a long history. When Indira Gandhi nationalized banks, the Act was struck down by the Supreme Court primarily because it included two totally unnecessary clauses on compensation calculation and the right to do business, neither of which were germane apropos of the central intent of the law. We have taken this tradition of bad drafting and made it worse.

Your government has had to amend sections of various Acts which have been passed very recently merely in order to deal with issues of impracticality and ambiguity. I am now beginning to have a sneaking suspicion that the intrusive, impractical and ambiguous nature of regulations may even be a deliberate strategy in order to increase the obstructive powers of a discretion-loving bureaucracy.

It is imperative that any new laws must be posted on the web in draft form and comments invited from citizens. These comments, especially in the areas of practicality and possible unintended consequences must be addressed in the final draft. But one warning, sir: We have recently noticed that some mysterious source adds new clauses which are never there in earlier public drafts and which seem to sneak in by a sleight of hand. Many of the new problems faced by Indian businesses in the last 10 years have been on account of these “sneaky” provisions. We also notice that once the laws are in place, the so-called “rules” framed under the laws provide another opportunity for further anti-citizen mischief.

11. The solution to all these systemic obstacles that have become embedded in our country through colonial times and through six decades of misplaced admiration for the Kremlin, does not lie in appointing another Administrative Reforms Commission. It lies in the ability and willingness of each of your ministers to grapple with detail and to start with the working assumption that it is the objective of the bureaucracy to resist and derail any reform which is business-friendly.

This is not an easy task. There is a need for regular and detailed reviews each month of what actions were taken to reduce the environment of hostility to business, whether these actions were really taken or only symbolically taken and then sabotaged in the fine print, whether “prior sanctions” are being removed at the rate of one a week, whether inter-departmental disagreements are being really closed as opposed to kicked down the road to another committee, also at the rate of one a week, whether ambiguities in laws and regulations are being removed at the rate of one a week and finally whether each of these actions actually counts in improving India’s ranking as a place to do business.

12. Having looked at the dark and difficult gridlock that the nation has got into, let me draw your attention to some things that have worked well. In 1940, as a temporary war-time measure, the then British rulers created the institution of the Controller of Capital Issues. The war ended. India became free. This Controller however continued to Control till the mid-1990s.

This worthy official and his/her minions successfully decimated a capital market that had been working reasonably well (many forget that the Bombay Stock Exchange is as old as the Tokyo Stock Exchange—but of course, there the resemblance ends). Our capital market got stuck with an insidious cartel, with absurd pricing of capital allocation, dismal liquidity and much more. Luckily, after our liberation by Narasimha Rao, the CCI was abolished (possibly one of the few instances in our history of a redundant department actually being closed down) and the SEBI was established as an independent body and was headquartered not in imperial Delhi, but in commercial Mumbai.

Although by no means perfect (which businessman will concede that a regulator is perfect?), SEBI has discharged its responsibilities well. Our capital market is in pretty good shape and the allocation of scarce equity capital is being done pretty sensibly and rationally. Around the same time, two extraordinary institutions, the NSE and the NSDL also got going in Mumbai and today we can proudly say that we are in technological terms ahead of most capital markets of the world.

Some residues of erstwhile socialism and xenophobia remain. This has resulted in markets in several Indian instruments migrating to places like Singapore. In the recent Budget, your Finance Minister has cottoned on to the fact that silly taxation measures encourage financial firms to move away from India. He has tried to stem this flow. But as always, the bureaucracy has its revenge. There is enough lack of clarity in our laws to dissuade people coming back from Singapore to Mumbai or even to the new GIFT city. A concerted effort needs to be made to have absolute clarity so that your intentions and those of your Finance Minister get translated into ground reality.

13. The location of the IRDA in Hyderabad rather than in Delhi was a masterstroke. Again, despite some marginal criticism that may be justified, the IRDA has worked relatively well and our moribund insurance industry is well-positioned for growth. Of course, your efforts to increase FDI in insurance have been cleverly stymied (why should we expect anything else?) by arguing that Indian partners who have foreign institutional holdings are also foreigners. This is a needless and stupid contention and all it generates is a lot of correspondence between the exalted FIPB, the more exalted RBI, the hapless IRDA and the puzzled SEBI, besides providing comic relief for our otherwise unfunny business papers.

You may want FDI; your cabinet may want FDI; the people of India may want FDI. But until the all-important legislative/regulatory conundrum as to which company is actually domestic and which is foreign is resolved by various Committees and Commissions that are yet to be appointed, we can rest assured that FDI will not take place. Here is an example of how legislative and government intent can be trapped by a semantic traffic jam!

14. It is a universally acknowledged fact that free India has done relatively well in the areas of atomic energy and space research. If one looks at what is common between these two departments, one finds something interesting. Both these departments have always had non-ICS/ IAS secretaries. Both these departments are headquartered outside Delhi, one in Mumbai and one in Bangalore. Both these departments have always reported to the Prime Minister.

I think it is not proper to build a Theory of Government based on two anecdotal data points. Nevertheless, this is worth thinking about. One could make the case that when telecom was deregulated, not only should the DoT have been abolished (just like the CCI was), but if we had headquartered the TRAI in Hyderabad or Bangalore or Gandhinagar, we might have had a better outcome. The locational decision, combined with a focus on specialist rather than bureaucratic leadership, may be something we should consider. The simultaneous abolition of a controlling entity while setting up an independent agency needs to be considered. Not every department can report to the Prime Minister. But the PM can conduct detailed monthly and quarterly reviews of each department. And conducting these reviews outside the hot-house atmosphere of Delhi may by itself provide much-needed oxygen to the system.

15. While there is much that your government can do to make India business-friendly by taking on the bureaucratic gridlock that has been built up over time, quite frankly, in most cases the rubber meets the road in the states. Every state and for that matter now every municipality and every panchayat is riddled with hurdles and obstacles to business. Tackling these are not easy. Over the years, vested interests have developed which now have a positive gain from these hurdles. Their opposition to change will be cleverly disguised in pro-poor leftist rhetoric. They are also masters at delay and procrastination.

There are only two ways that you can deal with this difficult situation. Firstly, the NDA-ruled states need to commit to real on-the-ground reform and must submit themselves to monthly and quarterly audits. The questions many times should not be as to what they have done, but why they have not done what they can and must do.
Examples: Every NDA-ruled state needs to explain why they are not implementing Gujatat’s Jyotigram; every NDA-ruled state needs to explain why they are not implementing the digitized town-planning approval system that is in place in Indore; every NDA-ruled state needs to explain why they have not abolished FSI and substituted it with a setback and height rule as Andhra Pradesh has done; every NDA-ruled state needs to explain how it is reducing or dismantling monopolistic situations in mandis backed by the APMC Acts; every NDA-ruled state needs to have a disinvestment/privatization plan and needs to demonstrate progress against that plan.

For the NDA-ruled states as well as other states, we need to develop an incentive system in order to encourage them to become business-friendly. This can be done through national recognition awards as well as through specific financial incentives. The human body cannot be healthy if some limbs are sick. Our country will reflect the weakest of its limbs. It is imperative that we get the states on board.

Let us not forget that 80 years after its founding, the United States had a civil war where apart from slavery, the divergent economic growth rates of the north and the south ended up becoming a fundamental issue. Let us not ignore the fact that a small country like Britain is facing secessionism largely on account of divergent growth rates.

I have deliberately stayed away from some of the matters which you are already grappling with. I wish you luck with the GST, hopefully with minimal (or need I dream, with no) exceptions and no silly inter-state taxes. I wish you luck with reversing the silly Land Acquisition law of the previous government. I wish you and your Finance Minister luck in getting around the clever bureaucratic saboteurs who do not buy into your vision of a State that does not indulge in tax terrorism. I wish you luck in getting rid of the FIPB’s absurd definition of a foreign company. I wish you luck in actually bulldozing through an action plan apropos of the Indian Railways.

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I would just like to close with asking you and your ministers to look closely at our bureaucratic systems, not from a top-down perspective, but in excruciating detail, and ensuring that the anti-development colonial and Stalinist legacies are methodically removed and checked again and again, in order to ensure that reform does not get stymied or sabotaged. A tough task, but well worth doing. The American President Franklin Roosevelt, when faced with obstructions to his New Deal, took on the battle in detail. He did not hesitate. He saved the US and modern capitalism. Your task is even more onerous and your reward will be to go down in history in the company of Deng and FDR.

With regards
Sincerely yours

This article was part of our July 2015 issue. Subscribe today to receive 12 print copies for just ₹1500.

The author is the former CEO of MphasiS, and was head of Citibank’s Global Technology Division. He is currently the Chairman of Value and Budget Housing Corporation (VBHC), an affordable housing venture.

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