BackBusiness climate challenges hardest to overcome in India: David Wijeratne
The growth markets centre leader at PriceWaterhouseCoopers says businesses will look out eagerly for concrete signs that Modi has the ability to follow through on his promises
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Singapore: Enhancing the ease of doing business and contract enforcement will improve India’s attractiveness as an investment destination, said David Wijeratne, growth markets centre leader at PriceWaterhouseCoopers LLP (PwC).
In the short term, the Narendra Modi government can offer clarity in regulation, and in the medium term, an overhaul of the judiciary is needed to reduce the time taken to resolve disputes, and these measures will help improve the ease of doing business, Wijeratne said in an interview.
Edited excerpts:
As the growth market centre leader at PwC, how do you see India when compared with the other emerging markets—in the near- and long-term?
India has been an attractive market to foreign investors for a number of years, particularly since...the early 2000s. Its sheer potential as a very large consumer of goods, as well as a potential producer of them, together with the fact that it has a large and increasingly skilled workforce with a high proportion of English speakers, means that India is justifiably labelled as a market with huge potential. Until recently, countries like India were seen by companies as a cost proposition focused on low-cost service provision or low-cost manufacturing. The recent wave of interest is in tapping the growth and customer potential in these markets—making this a revenue proposition for companies.
However, there are challenges that currently constrain companies from fulfilling this potential, for example, nascent levels of infrastructure—most importantly, the production, quality and reliability of power—and the lack of universal primary and secondary education. In addition to (meeting) these specific challenges, improving the ease of doing business and contract enforcement will improve India’s attractiveness as an investment destination and increase confidence that companies can be profitable in India. PwC’s growth markets centre is very optimistic about India’s economic future. India is on a journey and if these aforementioned challenges and others can be addressed in the short term, with the support of the new Modi government, then long-term success and profitability is more assured.
In your recent report, “Presence to profitability" for companies, where you discuss several factors, one thing that is missing is the ease of doing business parameter. In a country like India, which ranks quite low on this metric, is this not as big a factor as some of the other issues that you have raised? What can the Modi government do to make it easier to do business in India?
There are a few things that the Modi government can look to address to improve the so-called ease of doing business in India, both in the short and long term. One would hope that in the short term we will see some clarity in certain regulations, particularly as regard to planning and licence applications, and then certainty when it comes to foreign direct investment (FDI), making more sectors more open and less risky for investment. It is key for investors to feel secure about their investment, which is where India has been found wanting in the past. For example, the retrospective taxation policy of the previous government sent waves of uncertainty to the FDI community.
If the Modi government can be clear about the regulations and the taxes foreign companies will face and assure that these will focus on future revenues, not those dating back 30 years, these measures will positively impact India’s ease of doing business ranking.
Furthermore, in the medium term, a much needed overhaul of the judiciary—reducing the time taken to resolve disputes and placing more emphasis on clear legislation or efficient litigation—will also increase India’s attractiveness. For the longer term, this new government needs to quickly start the process of not only investing in large scale infrastructure projects, but actually begin development as the benefits of these projects will take time to deliver.
When you talk about companies investing in growth markets, and with India being a growth market, do you see many of these firms investing to set up manufacturing firms in India—can manufacturing make a comeback?
India’s manufacturing sector will take time to mature, but it can begin to contribute to the country’s growth to a larger extent than today if the country begins to pick up some of the low-end manufacturing that countries like China are moving away from due to macro factors such as rising labour costs.
For example, there could be low-hanging fruit such as apparel manufacturing that India can target, which may not require very advanced skills and can create employment opportunities. High-end manufacturing—such as in the defence, technology and certain industrial sectors—requires a mix of highly skilled people who design and assemble, and also a supporting ecosystem to manage manufacturing plants and provide efficient supply chains and distribution channels.
Developing and perfecting this ecosystem will take time and so addressing the low-end manufacturing opportunity in the short-term will enable this sector to contribute to India’s immediate and long-term growth.
India’s manufacturing capabilities can be unleashed by removing certain systemic bottlenecks that hamper investment and delay projects.
The current government is moving in the right direction with its efforts to revamp land acquisition and labour laws. The manufacturing capacity can potentially address a combination of domestic demand and exports, while the jury is still out on which of the two will be dominant. Manufacturing’s contribution to GDP (gross domestic product) will be key to drive the next wave of growth in India.
When you talk to clients, what are their key concerns when it comes to doing business in India?
PwC’s growth markets methodology looks at the key challenges that companies face when entering growth markets such as India.
These include adapting or developing the right products for a different target demographic from the home market at a profitable price, establishing a modified or new supply chain and distribution system that works for the growth market, building effective local organizations and partnerships as well as navigating the complex business environment, including regulation, legislation and local customs.
In India, many of our clients see the business environment challenges as being the hardest to overcome when aspiring to become profitable, in particular contract enforcement and navigating the regulatory environment.
Protecting one’s IP (intellectual property) and avoiding corruption has become a greater concern with the passing of anti-corruption and bribery laws in developed markets, particularly in the UK and the US, which have raised the bar of culpability for foreign companies operating in the growth markets. The key is to create a stable and consistent regulatory and taxation environment where companies feel secure about their investment.
However, these issues are not specific to India and, as mentioned, the new Modi government has shown positive signs of looking to address these in the short term to alleviate the concerns of foreign companies currently present and those considering entering India.
As someone who has tracked India, what does the country need to do to raise investments?
For a long time, India has been seen as a country with immense potential that has not been realized fully. The new government, with its majority mandate, has a great opportunity to move the needle on growth and development. First and foremost, India needs to provide a stable and consistent regulatory and taxation environment for businesses to operate.
There have been issues on retrospective taxation in the past, which have negatively impacted the image of the country as an investment destination. Laws and procedures need to be simplified. For example, the single window clearance of projects can go a long way in making the approval process less cumbersome.
The government machinery has to display the necessary commitment to make changes happen on the ground. India needs a concerted effort and collaboration among the private sector and government to create an ecosystem for businesses to thrive.
PM Modi has for months been making big announcements about structural change, but not much appears to have moved on the ground. With oil dropping well below $50 a barrel, do you think some of the urgency to implement painful reforms is no longer there?
The falling cost of oil is an opportunity for all net oil-importing nations to reduce their fiscal deficits and, to reduce the cost of operations and living to businesses and consumers respectively.
With so much reliance on back-up generators in India, in particular within manufacturing, the cost of maintaining a regular power supply is a significant input cost for many businesses. If the reduction in the oil price is passed on quickly to key sectors such as transport, manufacturing and industrials, then lives can be improved across all segments of society and business, not just the more prosperous.
Modi’s government has already made a positive move to pass on these benefits by working with the Reserve Bank of India (RBI) to reduce interest rates, but he can go further still. The deregulation of diesel prices is a step in the right direction.
Modi’s wider reform agenda, for instance on divestment, reform of household subsidies and greater deregulation of the economy, will, of course, take longer to implement. We have not yet seen any sign that his determination or sense of urgency is waning but, of course, businesses will be looking out eagerly for concrete signs that Modi has the ability to follow through on his promises.
The forthcoming budget should be an interesting indicator of where Modi’s next steps will be, as will the progress on the introduction of the goods and services tax (GST).
From the perspective of corporate entities, what are the reforms and measure you would like to see in the upcoming Indian budget?
Companies expect the government to detail its economic agenda. Taxation reforms with focus on implementation of GST over the next one to two years. Comprehensive policy on manufacturing and measures to tackle inflation. Implementation of GST can be a game changer for the economy. Though the government is working on ironing out issues in GST framework, it is important that the process of building a consensus is expedited and the government is able to stick to the targeted date of 1 April 2016 for making GST operational.
‘Make in India’ is expected to get a thrust in the new budget as the government will look to give tax holidays and inform duty structure. FDI needs to be attracted across sectors through an enabling structure and provisions.
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