Skip to main content

India's policies 'erratic': Raghuram Rajan doubts WB's Ease of Business ranking

By Rajiv Shah
Top economist Raghuram Rajan, who resigned as Reserve Bank of India (RBI) governor in 2016 ahead of the Modi government’s controversial demonetization move, has taken strong exception to the World Bank seeking to show India climb up the East of Doing Business indicators, saying these do not match “the actual conditions in India” that “prevent businesses from working easily.”
In a lecture he delivered at the Watson Institute for International and Public Affairs, Brown University, US, Rajan, who is professor of finance at the University of Chicago, referring to issues of trade and investment, doubted if these have received the much-needed ease of doing business in India for firms that “produce both for the domestic economy and internationally.”
According to Rajan, “One would want a slashing in some of the old regulations that holdback firms and focusing on improving the ease of doing business. There's been some attention, but largely focused on the World Bank indicators of the ease of doing business, rather than the actual conditions in India on what prevents businesses from working easily.”
Rajan said this a fortnight after the World Bank announced its plan to come up with come up with its new East of Doing Business ranking three weeks later. On October 24, the World Bank declared, India “jumped” 14 ranks in East of Doing Business. A year earlier, it had found India leap-frogged 23 places. However, the noted economist, who predicted world economic slowdown of late 2000s, underlined, things did not ease in India.
He sid, “We haven't got significant boost so far in business opening because in fact it may not have become that much easier for businesses to operate in India”, insisting, “One of the recent concerns has been on tariffs and taxes. If you want more trade, you should bring down your tax, because today, the way trade happens is through global supply chains moving goods back and forth.”
According to Rajan, “In order to move goods back and forth across borders, you need low and stable tariffs. Instead, what we have is high in fluctuating tariffs in certain areas. And that becomes a concern for business.”
The “concerns”, he asserted in the lecture, include: “What will the tariff be next month? If in fact I open a business here, India is not part of any significant global supply chains and that makes it a problem if India wants to increase its exports.”
Commenting on the recent cut in corporate taxes against this backdrop, Rajan said, “The recent cut in corporate taxes is beneficial in attracting firms to India, but what firms worry about is not just the level but the changes. Is this going to change? Am I assured that when I put my investment in India, it will stay at 15 to 17 percent?”
Vietnam and Bangladesh are absorbing the textile market while we have plenty of people to work and we're not getting any of the textile market
Rajan said, “Unfortunately, in India, we have a history of going back and forth, some of which was reflected in the recent budget in taxes on foreign investors. So, we need to have a process where if we stabilise rules and regulations and taxes and tariffs, if we want to attract new companies into India.”
Noted the top economist, “That is one reason why if you look at the level of foreign direct investment in India, despite the emphasis on Make in India, you see in the last four years the level of foreign direct investment (FDI) hasn’t changed very much. We get about $40 billion. In comparison, Brazil gets $90 billion in FDI.”
Pointing towards major issues with Made in India, Rajan gave the example of India starting to assemble more cell phones, leading to imported cellphones significantly coming down, with their exports having gone up. “The problem, however, is”, he said, is “It’s not value-added assembly. It's basically importing the components and putting them together.”
Similarly, in textiles, while “China is moving out of textiles”, the noted economist said, “Who is taking its place? India has moved up from about 3 percent of world exports in textiles to 3.3 percent, but it’s over a period of nearly 20 years.” On the other hand, Bangladesh’s exports are up from 2.6 to 6.4 percent, and Vietnam’s from 0.9 to 6.2.”
Commented Rajan, “So, Vietnam and Bangladesh are absorbing the textile market while we have plenty of people to work and we're not getting any of the textile market. That suggests we are still not seen as an export friendly place. Our businesses are not doing as well as they should. What's holding us back? We don't have appropriate logistics, power, land, office space and qualified manpower relative to some of these other countries.”
In fact, Rajan said, while investment has been falling steadily in the Indian economy, consumption, which was relatively strong till now, has also been falling rapidly. Thus, commercial vehicles, a good proxy for industrial demand, and cars a good proxy for urban demand, are “tanking to the extent of 30-40 percent levels of negative growth.”
Among other reasons, said Rajan, is not just a shortfall in credit availability to households but also households themselves postponing consumption because of government policies. Thus, uncertainty about whether the value-added tax will be changed for these. Thus, while there have been changes in emission policy, consumers expect value-added tax to go down from 28 percent for cars.
Meanwhile, there is an overall setback to the purchasing power of the people, suggested Rajan, pushing business uneasy. He said, “Households are saving less. Savings are falling increasingly, you’re seeing that also reflected in higher debt levels. Household debt levels are increasing by about nine to ten percentage points of GDP over the last four or five years.”
He added, “Households are borrowing much more and saving less. That's not a good combination. That means, they did not have a whole lot of debt earlier, so they started from a low base but they've borrowing quite rapidly and that has to be an additional source of concern.”
Calling this an “emerging sign of distress”, Rajan said, even corporates are not excepted. “For example, on the corporate side, if you look at credit rating companies, credit rating companies will give you ratios of the number of credit upgrades to credit downgrades and so the lower this number is, the more stress your corporate sector has. This level of stress is at a six-year high.”
“In other words”, Rajan explained, “The upgrades to downgrade ratio is at a six-year low. Stress is piling up in the system probably as a result of ‘low demand slow earnings growth’ and difficulties in serving the servicing debt.”

Comments

Umesh Joshi said…
Well written. True picture of Indian Economy.

TRENDING

Economist-editor's allegations on Narmada defamatory, baseless: Medha Patkar

Counterview Desk  In a reply directly addressed to well-known economist, journalist and columnist Swaminathan S Anklesaria Aiyar’s two articles in the Times of India (republished here and here ), calling them defamatory and wondering whether they were borne out of “ignorance or a conspiracy through political alliance”, Narmada Bachao Andolan leader Medha Pakar has said that the Narmada Sardar Saravar Project and the people's movement by adivasis, farmers, labourers, fish workers, potters and all the generations’ old communities from the river valley have suddenly come to be focused on, since the Gujarat elections are in the doorstep. She believes that while the “defamatory accusations with baseless conceptions such as ‘urban naxals’ are to be laughed at as the electoral strategic moves, one gets shocked to read the articles by a known old columnist like Swaminathan Ankalesaria Aiyar, published in a reputed daily like the Times of India." According to her, Aiyar’s two articl

Hindutva groups threat to peace, freedom: US diaspora groups tell FBI, other govt depts

By Our Representative  The Islamophobic and neo-Nazi ideology of Hindutva is a clear and present danger to peace and freedoms in the United States, a coalition of civil rights organizations told key officials of the U.S. Attorney General’s Office, the US Department of Justice (DOJ), and the Federal Bureau of Investigation (FBI) at a recent event in Edison, New Jersey. At the event titled United Against Hate, activists from American Muslims for Democracy (AMD), Hindus for Human Rights (HfHR) and Indian American Muslim Council (IAMC) made detailed presentations on this ideology of Hindu supremacism that is committing mass persecution of India’s Muslims and Christians and is rearing its ugly head in New Jersey as well as across the US. Attending the event were David S Leonardis, Special Investigator from the New Jersey Department of Law & Public Safety; Michael E Campion, Chief of the Civil Rights Division for the US Attorney General's Office; and Jonathan R Norbut of the U.S. Dep

Facing tough times, Rajasthan's Raika herders hold first-ever camel cheese festival

By Rosamma Thomas*  During the pandemic, the annual Pushkar camel fair in Rajasthan did not occur for fear of contagion; in 2022, it was called off again as lumpy skin disease affected cattle. At Sadri in Pali district, however, festivity continues – a two-day Camel Cheese Festival was held on November 23 and 24, 2022. Visitors spent time with the camel herds and their Raika, drank camel-milk tea with the herders and then returned to lunch at the Kumbhalgarh Camel Dairy, from where the Kumbhalgarh Fort is visible, to taste camel cheese. The Raika herders have been facing a tough time – camels are no longer used as much for transport or agriculture in Rajasthan. The animals have limited utility, but their milk is prized. Camel Charisma, the dairy at Kumbhalgarh, sends camel milk across the country to people who use it in therapy – for autistic children, improved blood sugar levels, or even to treat cancer. It is believed that the health benefits of the camel milk is because the animals

As polls approach, electorate 'failing to realise': Gujarat model is in a shambles

By DN Rath*  Gujarat assembly elections, scheduled to be held on 1 and 5 December 2022, is viewed by many as dress rehearsal for the 2024 Lok Sabha elections. When the suffering people have been pointing towards redressal of some local issues like absence of cleanliness, sewage problem, shortage of water supply, troubles created by stray cattle, insufficiency of streetlights, etc., it is evident that they are not fully aware that assembly elections are being fought on ideological standpoints and policy decisions. Nor is there the realisation that the state is in a shambles and the much-trumpeted ‘Gujarat model’ of development has proved to be a hoax. Like other states, the people of Gujarat are also back-broken by steep rise in prices to the tune of 400% in last 20 years. It is not that the government cannot control the spurt in prices if it so wants. Apart from the fact that price rise is an inevitability in a capitalist economy, artificial shortage triggered by massive hoarding, b

Shedding Hindu-Hindi-Hindustan? New Modi-Shah love for Tamil Nadu 'ignores' Periyar

By Sandeep Pandey*   The Rashtriya Swayamsewak Sangh (RSS) or the Bhartiya Janata Party (BJP) have long argued for ‘Hindu-Hindi-Hindustan’, which into recent years has translated into a crisper English expression: ‘One Nation-One Religion-One Language’. Given this backdrop, it is curious that the BJP government has organised the Kashi Tamil Sangamam in Varanasi, the Prime Minister’s constituency. Why did the BJP and RSS feel the need for such an event? All Narendra Modi events are highly publicised and have multiple political objectives. It is never an innocuous religious/cultural event as it may appear from the face of it. Afterall, RSS calls itself a cultural organisation, but has never ceased to surprise us with its political designs. Tamil Nadu has a long history of opposing imposition of Hindi by Union governments. Periyar EV Ramasamy had opposed the idea of compulsory teaching in Hindi as far back as in 1937. The 1960s witnessed violent protests against Hindi in which a number

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

BJP poll gimmick? Bilkis Bano rape case 'pardon' vs Rajiv assassins' release

By Sandeep Pandey*  Supreme Court has released six convicts in the Rajiv Gandhi assassination case. This was bound to happen as earlier AG Perarivalan was released in the same case, setting a precedent. Even though four of them are Sri Lankans but a popular Tamil sentiment favoured the release of these convicts which is why Tamil political parties supported this and resolutions were passed by different governments in Tamil Nadu to his effect.  Rajiv Gandhi paid the price of sending Indian Peace Keeping Force to Sri Lanka where it got entangled with Liberation Tigers of Tamil Eelam and eventually the whole operation ended up is a fiasco.  However, most importantly Sonia and Priyanka Gandhi and probably Rahul too do not have any objections to the release of these convicts. In fact, Sonia Gandhi played an important role in getting the death sentence of the only lady among the convicts Nalini commuted to life term through the Tamil Nadu Governor. Priyanka visited Nalini in Vellore Jail and

GM mustard not swadeshi, it's a patent of MNC Bayer, GoI 'misleading' SC: Modi told

Counterview Desk  In a representation to Prime Minister Narendra Modi, as many as 42 farmers’ organisations though their representatives , backed by senior scientists and experts, have said that the Government of India (GoI) should stop misleading the Supreme Court “with untrue and incorrect” statements on GM mustard. Insisting that India does not need unsafe GM mustard, in their representation, they urged the Supreme Court to order immediate uprooting of GM mustard crop in various locations. The representation comes even as a penal of experts, coming down heavily on the GoI for refusing to see how in less than a week’s time the pollen from GM mustard will “start contaminating” non-GM mustard fields with transgenes, including male sterility and herbicide tolerant traits. Alleging that the GoI is actively misleading the Supreme Court with untrue and incorrect statements on GM mustard, Kavitha Kuruganti of the Coalition for a GM-Free India said, “We can list at least five areas where Gov

Never-ending saga of sin tax: What if murder is taxed at Rs 1 crore, rape at Rs 5 crore?

By Moses Raj GS, Sangeetha Thomas*  What should have ended by June 30, 2022 as a 5 year experiment has resurfaced. The government has extended the levy of GST compensation cess by another 4 years till March 31, 2026. This cess, dubbed as the sin tax imposed on sin(ful) goods, is double the highest slab on indirect taxes. But only a few pay for it and the majority benefit, unendingly. The year 2017 is a landmark year for indirect taxes. With the grand idea of ‘One Nation, One Tax’ as a fiscal slogan subsuming all State based taxes such as octroi /entry tax, Value Added Tax (VAT), sales tax, taxes on lottery, betting and gambling, luxury tax, purchase tax, entertainment tax, property tax, professional tax and central sales tax into a single framework of Goods and Services Tax (GST) changed the contours of revenue collection. Complicating it further, India, with each State having its own size and revenue problems, has the most complex and highly centralised indirect tax structure in the w

Muslims, Dalits off Bangladesh border 'don't have acess to' water, power, farmland

Counterview Desk  Kirity Roy, secretary, civil rights group Banglar Manabadhikar Suraksha Mancha (MASUM), in a letter to the chairman, National Human Rights Commission, has revealed how, even after 75 years of Independence, Muslims and Dalits living next to the India-Bangladesh border do not have access to electricity, drinking water, even to their own land. Stating that the “horrible situation” has due to “illegal restriction on the agricultural activities” imposed by the Border Security Force (BSF), plunging “farmers and their families into deeper poverty”, the letter, referring to the plight of 1,200 people reside in the Changmari village, states, There are about 200 acres of cultivable lands out of 3,500 acres is situated beyond the border fence. “The ingress and egress of the farmers to their own agricultural land through the fencing gates are regulated by the BSF. The soil and climate of this region is very suitable for jute and maize cultivation”, it adds. Text: This letter is