Skip to main content

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

 
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?”
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

TRENDING

Dalit rights and political tensions: Why is Mevani at odds with Congress leadership?

While I have known Jignesh Mevani, one of the dozen-odd Congress MLAs from Gujarat, ever since my Gandhinagar days—when he was a young activist aligned with well-known human rights lawyer Mukul Sinha’s organisation, Jan Sangharsh Manch—he became famous following the July 2016 Una Dalit atrocity, in which seven members of a family were brutally assaulted by self-proclaimed cow vigilantes while skinning a dead cow, a traditional occupation among Dalits.  

Boeing 787 under scrutiny again after Ahmedabad crash: Whistleblower warnings resurface

A heart-wrenching tragedy has taken place in Ahmedabad. As widely reported, a Boeing 787 Dreamliner plane crashed shortly after taking off from the city’s airport, currently operated by India’s top tycoon, Gautam Adani. The aircraft was carrying 230 passengers and 12 crew members.  As expected, the crash has led to an outpouring of grief across the country. At the same time, there have been demands for the resignation of Prime Minister Narendra Modi, Home Minister Amit Shah, and the Civil Aviation Minister.

Global NGO slams India for media clampdown during conflict, downplays Pakistan

A global civil rights group, Civicus has taken strong exception to how critical commentaries during the “recent conflict” with Pakistan were censored in India, with journalists getting “targeted”. I have no quarrel with the Civicus view, as the facts mentioned in it are all true.

Whither SCOPE? Twelve years on, Gujarat’s official English remains frozen in time

While writing my previous blog on how and why Narendra Modi went out of his way to promote English when he was Gujarat chief minister — despite opposition from people in the Sangh Parivar — I came across an interesting write-up by Aakar Patel, a well-known name among journalists and civil society circles.

Remembering Vijay Rupani: A quiet BJP leader who listened beyond party lines

Late evening on June 12, a senior sociologist of Indian origin, who lives in Vienna, asked me a pointed question: Of the 241 persons who died as a result of the devastating plane crash in Ahmedabad the other day, did I know anyone? I had no hesitation in telling her: former Gujarat chief minister Vijay Rupani, whom I described to her as "one of the more sensible persons in the BJP leadership."

Why India’s renewable energy sector struggles under 2,735 compliance hurdles

Recently, during a conversation with an industry representative, I was told how easy it is to set up a startup in Singapore compared to India. This gentleman, who had recently visited Singapore, explained that one of the key reasons Indians living in the Southeast Asian nation prefer establishing startups there is because the government is “extremely supportive” when it comes to obtaining clearances. “They don’t want to shift operations to India due to the large number of bureaucratic hurdles,” he remarked.

Guha plans book to counter Dalit, Marxist, and right-wing critics of Gandhi, recalls Modi’s 'pernicious lie' on Patel

Let me first confess: writing about an event three weeks after it has taken place is no good, especially for a newsperson. However, ever since I attended the public lecture by well-known historian Ramachandra Guha on May 18, organised by Sarthak Prakashan for the release of the Gujarati edition of his book monumental book "India After Gandhi", frankly, I kept wondering if he had said anything newsworthy apart from what had already appeared in the media ever since the book's first edition came out in 2007. Call it my inertia or whatever.

Unchecked urbanisation, waste dumping: Study warns of 'invited disaster' as khadi floods threaten half of Surat

An action research report, “Invited Disaster: Khadi Floods in Surat City”, published by two civil rights groups, Paryavaran Suraksha Samiti and the People's Union for Civil Liberties, Surat, states that nearly half of Gujarat's top urban conglomerate—known for its concentration of textile and diamond polishing industries—is affected by the dumping of debris and solid waste, along with the release of treated and untreated sewage into the khadis (rivulets), thereby increasing the risk of flood disaster.

Two decades on, hunger still haunts Gujarat: Survey exposes stark gap behind poverty claims

A Niti Aayog report , released about two years ago, estimated that in Gujarat — which our powers-that-be have long considered a model state — 11.66% of people are "multidimensionally poor," a term referring to an index that seeks to estimate "multiple and simultaneous deprivations" at the household level across three macro categories: health, education, and living standards.