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Businesses and the nation

Businesses and the nation
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First Published: Tue, Dec 14 2010. 09 31 PM IST
Updated: Tue, Dec 14 2010. 09 31 PM IST
Will a surfeit of corruption scandals, growing activism from the environment ministry and renewed corporate wars harm the investment climate in India?
Senior business leaders seem to be worried that the endgame of the current controversies is a dread of corporate investment in India. There are fears that Indian business houses will prefer to invest abroad rather than at home. And foreign multinationals will become more wary of allocating capital into India despite its dynamic economy.
Foreign direct investment (FDI) emanating from India has been growing by leaps and bounds over the past 10 years, and has often been close to $20 billion a year of late. The gap between inbound and outbound FDI has been narrowing, although India continues to be a net importer of capital because of its current account deficit.
Companies from any country tend to globalize (among other factors) after the home market has been exhausted. That is hardly the case in India. By that measure, Indian companies seem to be going global prematurely. One common explanation for this paradox is that the biggest companies are fed up of local restrictions and prefer to invest in developed markets despite slower growth and lower return on equity on offer. “The big boys are looking outside because it is much easier to do business,” HDFC chairman Deepak Parekh told The Indian Express editor Shekhar Gupta in a weekend interview.
These fears seem overblown. First, the $20 billion or so that Indian companies invest abroad every year is a small drop in a $1.4 trillion economy with an investment rate of 35%. Second, the jump in outbound FDI began long before the current controversies broke out. Third, the reasons why Indian companies have bought assets abroad varies almost from case to case—from acquisition of technology to jumping regulatory walls in developed markets to accessing raw materials to moving up the value chain. Investment restrictions in India and the virtual absence of reforms over the past six years could be one reason, but it’s not the whole story.
Yet, the issues that the likes of Parekh have flagged off are important. The reaction of Indian business groups and lobbies to the current upheavals will thus be very important. Petulant responses will not help their case, since India could be at an ideological turning point thanks to the leftward shift in the Congress over the past year. Business needs to be realistically engaged with the nation on what lies ahead. Being grouchy or holier-than-thou will just not do.
Let us consider two scenarios.
The pessimistic scenario is as follows. Growing evidence of cozy links between political parties and large business houses could lead to a backlash against business. I doubt we are about to slip back to the dark years of Indira Gandhi, when no business could survive without the blessings of the political establishment. That was the era of crony capitalism disguised as socialism.
But it is hard to believe the recorded conversations suggesting that entire ministries such as civil aviation and petroleum are being run for the benefit of select businessmen will not shake the legitimacy of Indian capitalism. More intrusive regulation of business activities is one possibility. This has happened before. After all, ample evidence of the ability of select business houses to corner licences in the 1960s and the diversion of funds from private banks to fund businesses controlled by their promoters helped create the mood for the insanely anti-business 1970s. Those were India’s lost decades.
The optimistic scenario is as follows. The government actually stirs out of its stupor and takes charge of the situation. The power of big business houses is broken or diluted through rule-based regulations, transparency, greater competition, lower import tariffs and removal of FDI restrictions in several oligopolistic industries. Look at what happened after the Harshad Mehta scam in 1992. It led to a clean-up of the securities system, greater power to the Securities and Exchange Board of India and the creation of the National Stock Exchange. There is no doubt that the Indian securities market became less of a gamblers’ den after these reforms.
Enlightened self-interest dictates that Indian business should align itself with the second possibility (though the way it torpedoed the new Direct Tax Code does not inspire confidence). Neither lobbying nor rent seeking will suddenly vanish into thin air. But a further dose of market reforms and rule-based regulations will help correct some of the worst mistakes of the past five years. A cleaner regime in sectors such as land, telecom, mining, power generation and petroleum will reduce the extraordinary profits available in these activities right now.
There could be an unexpected consequence of this clean-up. With the excess profits of crony capitalism whittled down, large business groups will hopefully try to invest more in competitive industries—such as consumer goods and textiles—that they have more or less abandoned in recent years.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Dec 14 2010. 09 31 PM IST