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Threats to Investment: 4 December 2015

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Threats to Investment: 4 December 2015

After a wave of favourable and supportive commentary in the wake of the election of the Bharatiya Janata Party (BJP) in 2014, much economic policy commentary has turned more uncertain of late. There is considerable frustration at the central (federal) government's failure to enact certain policy changes.

The ratings agency Standard and Poors' recently threatened to downgrade its rating if economic reforms are seen to be "straying"; business leaders called upon the government to "press the pedal on reforms"; while practically every English newspaper has run editorials calling for the Modi government to show more "focus" and "courage." After the defeat of the BJP in the elections in the State of Bihar, such commentary has intensified.

However, most of this commentary focuses on a narrow range of policy instruments - especially the Goods and Services Tax, easier land acquisition, and the fiscal deficit. These measures do not take into account deepening trends that are likely to threaten India's eventual investment climate. The roots of these threats predate the present NDA government. But the NDA appears to be systematically exacerbating them.

 

1. Narrow and Incoherent Policymaking

Perhaps the most fundamental problem in the current situation is an overall incoherence of decision-making, where policies are laid out that actively undermine the government's own stated policy goals.

Critics of the present government have accused it of seeking, as former Finance Minister Arun Shourie put it, to "manage headlines" rather than managing the economy. However, this incoherence is not limited to an excessive sensitivity to media coverage. Instead, it appears to be rooted in the very limited set of prescriptions - and the very narrow social basis - that this government's "reform" agenda appears to reflect.

This narrow social basis leads to two problems. First, the policies in question are often not relevant to more fundamental economic problems. Second, they lack the political support necessary to be viable. In the remainder of this briefing, this tendency will repeatedly come to the fore.

2. Falling Demand and a Consumption Crunch

Which way now?

The first tendency is most visible in one area that is fundamental to all forms of economic policy - demand. Investment cycles in India are, despite the significance of exports, driven primarily by domestic demand. However, since the present government came to power, domestic demand appears to be stagnating. The largest component of domestic demand is rural demand, and this has been experiencing very low growth rates. Low rural demand has impacted everything from atomobile sales to consumer goods to poultry equipment.

This is not merely the result of monsoon fluctuations. Rather, as the charts in this Financial Express article show, the problem reflects specific policy decisions of this government - namely the decision to curb allocations to the National Rural Employment Guarantee Act and an effective freeze on hikes in the minimum support price (the price that the government pays for procuring crops for the public distribution system). These steps in turn have resulted in very low growth in rural wages and in agricultural incomes. Even as there is talk of reviving the corporate sector and the economy, these policies are undercutting the basis of recovery.


3. Encouraging Rent-Seeking Around Natural Resources

Last port in a storm.

A second critical area, one in which both of these tendencies are manifesting themselves, is policy-making around natural resources - namely land, forests and minerals. Both financial commentators and the new government's policymakers have been repeatedly claiming that easier land acquisition and faster environmental approvals are vital parts of "reforms." Indeed, India's environment ministry lists faster approvals among its major achievements under the new government.

The problem with this approach is that it does not take into account the reality of India's resource regulations, which encourage arbitrary, ad hoc and irrational resource allocations. The regulatory regime has little space for independent assessments of projects that would permit rational decision making. Rather, it depends almost entirely on administrative officials. The result is to encourage only those investors who can 'play the system', either through straightforward graft or securing the backing of powerful domestic and international interests.

The BJP government has advertised its auctions of coal mines as proof of its commitment to transparent allocation of natural resources. However, auctions only address one part of the decision making system around natural resources. They may reduce the element of arbitrariness at the stage of allotment of mining leases, but they do nothing to address the arbitrariness of other regulatory approvals. Moreover, it is not clear if the auctions have even achieved this limited result.

Moreover, the BJP government has systematically sought to remove spaces for public input in decision making around natural resources (see our briefing for details). This is perceived as a 'pro-investor' measure, since these spaces are blamed for "causing delays." Available data does not indicate that clearances are actually delayed. More importantly, by eliminating them, the government greatly reduces the transparency of the entire process. This once again privileges those who can 'play' the system.

In turn, the lack of political support that such policy measures attract was best illustrated by this government's failed attempt to convert an ordinance on land acquisition into a law. After repromulgating the ordinance several times, the government eventually allowed it to lapse in September, giving up on the single biggest "reform" attempt it had made since coming to power. The ordinance faced resistance from nearly every political party other than the BJP, as well as large protests from social movements and anti-displacement protesters.
Administrative Arbitrariness and Corruption

Both of these tendencies - a narrow basis to policymaking and resulting lack of political support - both reflect, and in turn reinforce, a strong tendency towards centralised, arbitrary decision making in the new government.

The United Progressive Alliance government, which ruled India from 2004 to 2014, was swept from office after a series of massive corruption scandals were revealed by the Comptroller and Auditor General (India's government auditor). The BJP-led alliance won the election partly on assurances that it would address the roots of this corruption.

But disturbing trends indicate that these underlying problems are in fact worsening. In our February thematic briefing on institutions, we highlighted a number of these trends, including:

4. Erosion of the Right to Information Act

This is a key piece of transparency legislation in the India. Leaving several accountability institutions - particularly commissions and boards of the Central government - without heads, and at times with many vacancies among their members.
   

  • Accusations of influencing investigative agencies - including the Central Bureau of Investigation and the National Investigation Agency - to drop cases or dilute evidence against ideological affiliates of the ruling party that are accused of serious crimes (including murders and extrajudicial executions).
  • Appointments of clearly inadequately qualified individuals to head significant institutions (a trend that is not limited to educational and social science bodies).
  • Centralisation of decision making powers in the offices of a few individuals.


As this briefing was being finalised, the former chairman of the Telecom Regulatory Authority of India wrote in an opinion piece that the media, Members of Parliament, civil servants and even industrialists have all been excluded from decision making by this government. He concluded that "dissent is construed as disaffection... honest disagreement is met with patent disfavour... discontent is disregarded... [and] differences are summarily dismissed."

From the point of view of investment, all of this indicates a worrying culture of centralisation and arbitrariness that does not bode well for a level playing field. Rather than addressing India's entrenched institutional deficiencies, the current government appears to merely be turning them to its own advantage, and doing so in a more severe manner than earlier.

5. Ethnic and Social Conflict

In sharp contrast to the incoherence of economic policymaking, the new government has followed a consistent, systematic policy of seeking to introduce Hindutva (an ideology that seeks to declare India to be a Hindu state) into multiple levels of policy and institutional decisionmaking.

Part of this strategy has been the continuous attempt to incite social and ethnic conflict in various parts of India by Hindutva organisations, a trend that was highlighted in our earlier briefings. These attempts at organised violence had, in turn, received the support of senior government Ministers and BJP party leaders. Further, the repeated attempts to introduce such themes into public discourse, including by the Prime Minister in his campaign speeches, had contributed to the message that India's relligious minorities and oppressed castes should be considered second class citizens. This was reflected in the killings of rationalist intellectuals and violent attacks on Muslims and Christians in several parts of the country.

Though there has been growing domestic protest against these trends and against these organisations, their activities are only likely to intensify in the coming years, particularly if there is a sense that the BJP government may not win the next general elections (scheduled for 2019).

If this does occur, it would pose two questions for long-term investment. The first is the direct impact that violence has on such projects, as social conflict imperils property and destroys markets. The second is the political impact - such incidents galvanise opposition to the government. This may take the form of parliamentary opposition, domestic protests, and international boycott campaigns (such as those that targeted apartheid South Africa, or the current Boycott-Divest-Sanctions campaign against Israel). None of these is likely to facilitate long-term or large-scale investment.

6. Conclusion

In sum, the combination of a narrow economic policy framework and a systematic sociopolitical offensive (around Hindutva) is not leading to a situation that is as positive as it is sometimes projected to be. As we have highlighted, this process produces three problems:

  • Policy measures are conceived in a manner that does not address broader economic issues, leave alone structural problems;
  • These policies prove extremely difficult to operationalise, as they lack the requisite wider political endorsement necessary for any successful policy;
  • The government's own internal decision making becomes compromised, losing the ability to reflect wider processes of consultation and consensus.

For these reasons, we find it hard to share in the optimism of those who claim that the current government is capable of leading India to a larger economic revival. It appears more likely that it will fail to address the structural problems in India's economy, while adding a new layer of social conflict and arbitrariness on top of these underlying issues.

 

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