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?”
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.”
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.”
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.”
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.”
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