India needs to build trust in the private sector
Capital is extremely mobile in today’s interconnected world and tends to avoid economies where it is not treated well
Arvind Subramanian has often said that India is affected by the problem of stigmatized capitalism. There is neither enough trust in the private sector nor in the ability of the government to regulate it. Political hyperbole only adds to the problem. Consequently, the government of the day is always worried that big reforms (privatization, for instance) would be seen as being pro-business and anti-poor. Against this backdrop, Prime Minister Narendra Modi has done well to make it clear that he is not afraid to stand with industrialists and they are as important as anyone else. This should inspire confidence among investors.
The importance of industrialists and entrepreneurs cannot be overstated in an economy like India. They take the risk to build businesses that produce goods and services, and jobs, which are essential for economic growth. Businesses also generate the tax revenue which is used to build bridges and schools. Therefore, a political environment that appears to be hostile to business does not augur well for the economy. Capital is extremely mobile in today’s interconnected world and tends to avoid economies where it is not treated well. If India’s political establishment is unable to trust domestic industrialists, attracting foreign capital will become difficult, which is needed to plug the savings gap. As things stand today, capacity utilization in the country is rising, and if investments are not made in time, inflation will shoot up and growth will become unsustainable.
Admittedly, even as the private sector has done well in a number of areas in recent years, such as aviation, telecom, information technology and financial services, the broader distrust has not completely receded. The Economic Survey 2016-17, for instance, noted: “All states, all societies, have some ambivalence toward the private sector. After all, the basic objective of private enterprises—maximizing profits—does not always coincide with broader social concerns, such as the public’s sense of fairness. But the ambivalence in India seems greater than elsewhere.” The distrust is a legacy of the licence raj, where businesses were seen making profits due to lack of competition and using the system to their advantage. Wealth and profits were bad words.
Even though India started dismantling the licence raj in 1991, and successive governments have taken the process forward, the pace of reforms has been slow and, in many sectors, reliance on the government did not end. The allocation of natural resources under the previous government and the accumulation of bad debt, particularly by public sector banks, are examples of this problem. Further, the fact that a number of industrialists made reckless investments and some even tried to game the system has not helped. Therefore, the distrust in the private sector, which is reflected by the political class, is understandable. However, the solution is more reforms, not less.
The Modi government has taken a number of steps in this direction. It has taken the auction route to allocate natural resources. The Insolvency and Bankruptcy Code (IBC) now enables creditors to take defaulters to the National Company Law Tribunal. Soon after taking over as the governor of the Reserve Bank of India in 2013, Raghuram Rajan had famously said: “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise...” The IBC has actually made it possible that promoters can quickly lose control of their business if they fail to repay loans. The implementation of the goods and services tax is making the economy more formal, which will improve tax compliance. Parliament also has passed legislation that empowers the government to confiscate properties of economic offenders who run away to avoid trial.
However, the laws themselves don’t solve the problem. The private sector also needs to rise to the occasion and help create an environment of trust. There have been governance lapses even in large corporations. Companies should avoid a “ticking the box” attitude to fulfilling regulatory requirements. The securities market regulator has done well by accepting a number of important recommendations made by the Uday Kotak committee on corporate governance. The government should also work on improving state capacity to be able to regulate and check excesses in the private sector. The possibility of quick enforcement of laws by itself will instil discipline in the private sector.
The government should constantly work to simplify rules and create a level playing field. There is always a chance that some entrepreneurs will take on excess debt or try to bypass regulations. The system should be in a position to check such excesses and, if necessary, quickly reallocate resources.
India has had a history of crony capitalism, but it should now move forward and embrace market economics to attain higher sustainable growth.
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