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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

India Inc has a whiff of the licence Raj

  • With biz rule changes every day, one pandemic side-effect is that license raj of the 1970s is back with a vengeance

BENGALURU : These are especially grim days for small and medium-sized enterprises across India. Exporters are facing orders being cancelled or being diverted to Vietnam and China because of India’s lockdown, even as they seek clarity to restart business operations in the wake of local and state governments’ bewildering array of ever-changing rules and restrictions.

Against this backdrop, on 4 May, Christine Rai, chairperson of the Indian Buying Agents Association (BAA), received good news. After two months of petitioning India’s Directorate General of Foreign Trade to allow the export of sleep masks—airline-styled eye patches—the government clarified this week that the items should not be subject to the export ban meant for medical masks.

But Rai sounds disillusioned by the experience. The battle will be fought all over again over exports of face masks, a new market in which India is well-positioned to be a big global supplier. “The whole world is going to be wearing masks. People want stylish, funky masks. All of Jaipur and Tiruppur is sitting on an excess of fabric," says Rai.

In Tamil Nadu, V. Elangovan, who heads a regional buying agents group in Tiruppur, sounded similarly despondent after a meeting in the district collector’s office. The district collector ruled that factories could reopen on 6 May but only if they operated with local labour. Even inter-district movement of labour is not being allowed as covid-19 cases in Tamil Nadu continue to rise. While adhering to such regulations, ensuring that factories reach a staff strength of even 30% would “be a great achievement," Elangovan said.

From New Delhi to Tiruppur, one of the principal side-effects of the pandemic is that the licence raj of the 1970s is back with a vengeance. The partial relaxation of rules this week and the division of the country into red, orange and green zones—depending on the levels of infections in different areas—will ease business conditions somewhat. But if the experience of companies in essential services, such as those producing food or herbicides, over the past few weeks is any indication, fighting the bureaucracy promises to be as much of a challenge as coping with the slump in demand and the shortage of labour.

What’s more, the creeping socialist statism of the Modi government that has grown by leaps and bounds in recent weeks may be here to stay. This week, Union minister Nitin Gadkari said that the government was mulling a ratcheting up of import substitution—after four budgets that have raised duties.

Covid-19 is providing cover for more—likely permanent—encroachments into the way businesses are managed, often at such speed that the communication channels from the government cannot keep up. This week, the Apparel Export Promotion Council pointed out that the central labour department had communicated neither its position on variable dearness allowances during the lockdown period nor whether the government’s direction to companies not to cut staff or wages was an “advisory or an order".

The confusion

Calibrating exits from a lockdown is complicated anywhere in the world, but interpreting often poorly-worded central and state government directives on everyday aspects of business and physical distancing appears to have already unnerved India’s district magistrates and collectors.

Uday Anand, director of the domestic business of insecticide and herbicide producer Parijat Industries, recounts that even though his company’s Ambala plant was allowed to continue business as an essential service in the weeks after the lockdown was announced on 24 March, the company was told by the local collector: “Paste the notification outside your factory, but I can’t guarantee you are allowed".

He empathises with the predicament local administration often finds itself in: “Notifications are contradictory. When these overnight firmans come, you wonder whether they attempted to think about the consequences. At the end of the day, the local administration does what it sees fit."

Across India, the past few weeks have been the trailer of a horror film that doubles as a case study on how to throttle business in the midst of a once-in-a-century depression.

Sajjid Chinoy, economist for JP Morgan, observes that of the 730 districts in India, 130 have been labelled red districts or hotspots with high numbers of infections. This sounds like a small swathe of the country where business is still severely restricted, but these are typically urban areas with a disproportionately high share of India’s gross domestic product (GDP). Accounting for these areas being under continued lockdown restrictions, Chinoy estimates that only about 55%-65% of India’s economy will be back in action in the next fortnight and cautions that even that might be an overestimate.

April’s Purchasing Managers’ Index numbers released this week, a timely manufacturing sector pulse check, showed an economy on life support. An Oxford University study confirms that India has the strictest government lockdown in the world coupled with the stingiest relief package as a percent of GDP. Manufacturing PMI has dropped to a historic low of 27.4 (out of 100). By contrast, during the financial crisis of 2008, its worst reading was in the mid-40s.

The grey zones

The problems of managing business operations, navigating supply chains and obtaining permissions that cross state borders—not to mention red and orange zones—will lead to multiple “grey zones," says Rahul Khanna, co-founder of Azure Hospitality, which owns restaurants such as Mamagoto and Dhaba.

Some of his housekeeping staff, who were helping out when the restaurant chain joined hands with the National Restaurant Association of India’s effort to deliver 5 million meals to migrant workers in Delhi, Mumbai and other cities, are traumatised after being beaten up by the police despite having passes.

BAA’s Rai, meanwhile, is waiting for a local administration’s verdict this week on what factories can reopen in outer Moradabad as she races to meet deadlines for serving platters and decorative lighting for Christmas that must be shipped by June. Buying agents typically work with artisans based in inner Moradabad, which is expected to remain under strict lockdown. Rai worries that the Christmas export orders that her firm has received, valued at about $13 million, hang precariously in the balance.

In an inversion of the much-quoted title of VS Naipaul’s India: A Million Mutinies Now, companies across the country find themselves petitioning 1000 de facto fiefdoms run by district collectors. Yamini Aiyar, who heads the Centre for Policy Research (CPR), observes that these administrative problems have been made much worse because they are occurring along a principal “faultline" of the reforms of 1991: the lack of civil service and administrative reform. “The tonality is always about penalties. It always uses sticks, not carrots," says Aiyar.

A tragicomic example of this came late last month with a notification that employers would be held liable if, through their “cognisance" or “negligence", an employee was found to have contracted Sars-CoV-2. It is hard to understand how negligence could be established in a court of law and, equally illogically, why it should not also apply to the government of India and state governments. Despite the ministry of home affairs subsequently tweeting that it had been “misinterpreted", a flurry of hard-to-interpret covid-19 notifications have rained down like an unseasonal monsoon downpour. According to PRS Legislative Research, a think-tank, the central government has issued almost 600 notifications and state governments a further 3500.

On Sunday, for instance, the home ministry issued a clarification intended perhaps to limit the numbers of those who would be allowed to travel to their villages to a category called ‘genuine’ stranded migrants. The letter from the Centre to chief secretaries in the state administrations reads: “The facilitation envisaged in the aforesaid orders is meant for such distressed persons, but does not extend to those categories of persons, who are otherwise residing normally at places, other than the native places for purposes of work, etc. and who wish to visit their native places in normal course."

The clarification is akin to a Rubik’s Cube in words. “This is a legalistic bureaucracy…the culture is to write to obfuscate," says CPR’s Aiyar.

At this moment of crisis, sloppy communication from the bureaucracy ought to be a punishable offence because it is handcuffing business and markets in a manner not seen for several decades. Not enough has changed since the 1970s, let alone the 1990s. Writing about New Delhi in 1975, the writer Jan Morris encountered this bureaucratese on a tourist handout. “This map is published for tourists as a master guide and not as legal tender," Morris recounted observing that, “there, in its mixture of the interfering, the pedantic, the unnecessary and the absurd, speaks the true voice of Indian officialdom."

The competition

Sanjay Jain, who heads TT Ltd, which makes vests and other innerwear, says that although stand-alone shops have in theory been allowed to do business for several days now, the shops that sell his company’s innerwear across the country have not reopened.

He blames “miscommunication" and “everyone wanting to be on the cautious side." Ordinarily, the summer months would see a spike in demand for innerwear and clothing as men buy vests and the Muslim community buy new clothes ahead of Eid. This year, domestic sales have collapsed forcing TT Ltd to sell innerwear at “atrocious prices" to export the product. Jain blames the government for mishandling the migrant situation and contributing to an exodus 40 days after the lockdown began by arranging trains and buses just as factories are negotiating permissions to reopen. “How are we going to revive production without workers," he asks.

Jain and others are also impatiently awaiting the government’s long-promised financial relief package for small-and-medium-sized enterprises. He points to the Bangladesh government’s recent decision to offer loans at 2% interest rates to apparel firms for two years. By contrast, his firm borrows money at 10-14%. Banks remain unwilling to extend credit. Data from the Reserve Bank of India (RBI) on Tuesday showed that banks have parked surplus funds of 8.42 trillion with the RBI, a record.

Jain suggests that businesses must have the right to appeal decisions made at the local level and offer anonymous feedback about district magistrates: “You need a third umpire."

In Bengaluru, Nagaraju Siddappa, one of the directors of Precision Sheet Metal Works, complains that officials in Tumakuru in the past few weeks made it impossible for a downstream supplier to his firm to open up. This affected his company’s ability to meet orders from GE Healthcare for parts that would be variously used in incubators and even in ventilators needed for serious covid-19 cases, the very definition of an essential product. Instead of relief from the government, Nagaraju says he has received threats of legal action from the state’s electricity company.

Exporters are especially vulnerable as this depressing saga of threats to businesses and misconstrued messaging within the government apparatus plays out. Many exporters were already weakened by the complications of the goods and services tax regime. Now, with China, Vietnam and Bangladesh running factories at close to normal levels, the risk of losing business permanently looms large.

Oblivious to this challenge, the Modi government has instead been arguing that the covid-19 crisis will allow India to position itself as a manufacturing alternative to China. Tiruppur-based Elangovan has heard such predictions before. For the past couple of decades, companies in the West have been looking to diversify their outsourcing requirements and pursuing a China+1 strategy.

“India has never been a candidate; the ecosystem is not there. We cannot replace China for 50 years to come," he told a roundtable organized by Apparel Resources, an online trade publication. Impressed by how well the finance ministry in Dhaka works with garment manufacturers and exporters in Bangladesh, Elangovan had a more realistic goal for India: “Let’s compete with Bangladesh."

Rahul Jacob is a former Hong Kong bureau chief for the Financial Times, who covered the post-1991 reforms as a writer for Fortune and Time magazine.

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