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

Political consensus? Celebrations, with over 5,000 plus post-vaccine deaths in India

By Rosamma Thomas*  As India fully vaccinated nearly 20% of its population and celebrated the “milestone” of administering one billion (100 crore) Covid-19 vaccine doses, it was time to remember those who died shortly after vaccination . By October 20, 2021 Twitter handle C400T, tracking deaths reported to have occurred after receiving the Covid-19 shot in India, updated the 5,134th death.

Is sacrilege charge against Punjab Dalits any different from Pak blasphemy cases?

Lakhbir Singh, his wife By Vidya Bhushan Rawat*  There is no doubt that Sikhism actually was a revolt against the Brahmanical system and superstition. Guru Granth Saheb is perhaps the only Holy Book which contains matters from different religions as well as those of various Sufi saints, including Kabir, Ravidas, Baba Farid and others. The aim of Sikhism was to create an egalitarian society, and, definitely, Punjab that way is far better than many other States in India, where violence against Dalits is rampant.

Billion vaccine doses? Devil is in details: 70% haven't got 2nd jab; numbers jacked up

By Prof Ujjwal K Chowdhury*  India has reached the one billion Covid-19 vaccinations milestone. It is indeed a great news and a big salute to the less paid ordinary health-workers in interiors of India for this feat. The government wants all of India's 944 million adults to get vaccinated this year. Around three-quarters of adults in the country of 1.3 billion people have had one shot and around 30 percent are fully vaccinated, the government says.

Savarkar 'criminally betrayed' Netaji and his INA by siding with the British rulers

By Shamsul Islam* RSS-BJP rulers of India have been trying to show off as great fans of Netaji. But Indians must know what role ideological parents of today's RSS/BJP played against Netaji and Indian National Army (INA). The Hindu Mahasabha and RSS which always had prominent lawyers on their rolls made no attempt to defend the INA accused at Red Fort trials.

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".

Uttarakhand, Kerala disaster due to policies favouring India's developmental mafia

By Vidya Bhushan Rawat*  Two of India’s most beautiful regions where thousands of people go to watch and feel the wonders of nature are suffering because of the extremely disastrous rains and floods. The pain that the rains brought to Kerala and Uttarakhand is a warning to all of us. It's nature’s warning to us to mend our ways.

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Religious mobs replicate blasphemy laws, 'threatening' liberty in a free country

Nihangs, Lakhbir Singh By Ajit Singh*   A Dalit man, Lakhbir Singh, was mercilessly beaten up and lynched to death near farmers’ protest site in the State of Haryana allegedly by Nihang Sikhs. It was alleged that he committed blasphemy by desecrating the Holy Book Guru Granth Sahib.

Shabana Azmi joins Pak physicist Hoodbhoy to condemn B'desh anti-minority violence

By Our Representative  Several well-known South Asian activists and public figures of India, Pakistan, Bangladesh, Sri Lanka, Afghanistan and Maldives have expressed “deep distress” by the spate of violence and killings in Bangladesh on the occasion of Durga Puja and Vijayadashami. “Attacks on minorities are a sign of injustice and a matter of shame for any society and bring a bad name to the Government”, they said in a joint statement.

March opposes Sabarmati Ashram renovation: 'Mahatmaji had kept open for access to all'

Counterview Desk A Sevagram to Sabarmati march, which began on October 17 from Wardha (Maharashtra) and will end on October 24 in Ahmedabad (Gujarat), has demanded that the Sabarmati Ashram, the government should not impose "the fashion and glitz of a shallow modernity" at the cost of Rs 1,200 crore, in the name of renovating the Ashram founded by Gandhiji.