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Business News/ Opinion / The growing trust deficit in India

The growing trust deficit in India

Indian policymaking is trapped between what the government is promising investors and what it is implementing

Illustration: Jayachandran/MIntPremium
Illustration: Jayachandran/MInt

The measures to liberalize foreign direct investment (FDI) this week aim to attract money from overseas at a time when the rupee remains weak. But raising FDI caps and hardselling India though roadshows does not address the gaping trust deficit about Indian policy and its implementation.

The once celebrated Indian growth rate has plummeted to the lowest ever in a decade. The twin deficits—fiscal and current account—have registered alarming increases while a nose-diving rupee has earned itself the brand of the “worst performing Asian currency", having depreciated 11% since April. Dwindling FDI inflows and the threat of a credit rating downgrade to junk status added fuel to the fire. This catalyzed the United Progressive Alliance (UPA) government in September last year to go on an overdrive with a series of policy measures, a bulk of them focused on liberalizing investment norms.

The government’s steps this week make it appear to be convinced that a better FDI regime is indeed the silver bullet for India’s economic woes. Evidently, the government is fire-fighting, but is it fighting the right fires (or fears)?

Foreign investors are in no hurry to make a beeline for investing and are instead closely waiting to see if the government will follow through on its promises. For these investors a dominant concern across sectors is whether India is veering against foreign investment, given its reluctance to clarify policies. There is a growing perception that India’s political and regulatory climate has turned hostile to foreign investors. Clearly, there is a deficit of confidence.

There are at least four issues that undermine investor confidence.

1) Impractical guidelines that render policies meaningless: Sectors that were opened up to foreign investment in last year’s reforms spree such as multi-brand retail have failed to attract investors. In multi-brand retail, the complexity of guidelines and fears of policy roll-back have kept foreign retail chains at bay. Higher education, another sector where 100% FDI is permitted, has seen no considerable investment with the crucial Foreign Educational Institutions Bill, 2010, stuck in Parliament.

2) Unclear guidelines that come back to bite: Investors who entered India hoping to leverage its potential as an “emerging economy" find themselves on a slippery slope with little clarity on policies and regulations. To take an example, the government, until recently, had no uniform guidelines for the computation of indirect foreign investment. The 2009 definition by the department of industrial policy and promotion (DIPP) took four years to receive the Reserve Bank of India’s legal sanction, leaving companies that legitimately entered the country in the interim, on the edge.

3) Inadequate guidelines that leave gaps in the system: The recent Merck Sharp and Dohme (MSD) vs Glenmark case highlights an important regulatory gap between India’s drug licensing authorities and its patent offices. The Drug Controller General of India at the national level and the food and drug administration at the state level are not mandated to look into the patent status of a drug while granting the manufacturer marketing approval, in effect “defeating" valid patents. While establishing a linkage between the two agencies is a point for the government’s long-term legislative agenda, simple and quick administrative mechanisms in the near term can considerably boost investor sentiment.

4) A muddled implementation regime: The price of impractical, unclear and inadequate guidelines is that the implementation of reform policies devolve to the judicial system, creating an environment marred with pervasive litigation and costly project delays. Again, the recent cases of Novartis and MSD, taken together, provide a classic example of this.

In the former case, Novartis was refused a patent for a new version of its cancer drug Glivec under section 3(d) of the Indian Patents Act which treats a salt or other derivative forms of a known substance as the same substance unless the two differ significantly in efficacy. While the reactions have been mixed, many feel the judgement has catapulted India into the position of a thought leader on intellectual property rights. At the very least, the judgement affirms the functioning relationship between our legislature and our judiciary.

However, in the latter case, MSD was denied an injunction restraining Glenmark from infringing on MSD’s patent for sitagliptin. Sitagliptin is the active ingredient in MSD’s diabetes formulations, Januvia and Janumet, a variant of which Glenmark now uses in its diabetes generics Zita and Zita-Met. The rationale behind denying the injunction seems to be that while MSD has a patent for the base compound sitagliptin, the salt variant used by Glenmark has not been patented by MSD—a deliberate action on its part in view of India’s position under section 3(d). Frankly, the same section 3(d) which worked against Novartis’ Glivec should have granted MSD immunity from infringement for all sitagliptin salts. In fact, on a positive note and reinforcing the logic, MSD, very recently, was awarded an injunction by the same court for the same compound in an identical case against Aprica Pharmaceuticals, leaving one guessing as to how India implements IP laws.

With the lure of better FDI policies on the one hand and the threat of loose regulations on the other, “policy paralysis" seems to have given way to a new “policy schizophrenia" with a startling schism between what the government is promising investors and what it is implementing.

Pramath Raj Sinha is the founder and managing director of 9.9 Media and senior director with the Albright Stonebridge Group, a global commercial diplomacy firm.

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Published: 18 Jul 2013, 06:14 PM IST
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