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June 13, 2014

India Woos Investors with Promises to Transform Business Environment

by Anjana Pasricha

India’s new government has promised to transform the country’s business environment as it woos investors in a bid to revive the stalled economy. Investor interest in India has declined in recent years because of the tough challenges of operating in the country.
 
New Delhi-based Orient Craft is one of India’s largest apparel exporters, employing over 20,000 workers.
 
Its commercial head, A.K. Jain, can reel off any number of hurdles to doing business in India - whether it is cumbersome regulations, inflexible labor laws, or erratic power supply. He cites one example: all fabric he imports must go through a test known as the hazardous chemical users test to make sure it is safe for human beings. He said this test is not mandatory in other apparel exporting countries.
 
Jain said he wants to see India’s new government cut through the maze of archaic rules and "red tape" that deter businessmen.
 
“We want to enjoy the freedom like we are working in free zones of UAE or other countries where we don’t have any bureaucratic red tapism - it’s very important, number one, the conductive atmosphere in the government machinery. That’s big headache. You are creating barriers with the notional fears. They are non tariff barriers,” said Jain.  
 
India’s new, pro-business Prime Minister Narendra Modi has promised to make the going easier for foreign and domestic investors, and emulate the business-friendly policies of Gujarat state that he governed for 12 years.
 
The example often cited is that of a factory set up by the Tata company to produce the Nano car. After the company had to abandon its factory in West Bengal state due to farmers’ protests at the takeover of their land, Modi sent a text message to the then chairman, Ratan Tata: “Welcome to Gujarat.”
 
Land, power and loans for the car plant were arranged in three days. The factory was up and running in Gujarat in less than two years - a record for India. Today the Nano car plant employs about 10,000 people.
 
Optimism has swept the business community on hopes that the same administrative efficiency will be replicated in other places.
 
A beginning has been made. The new buzzwords in New Delhi’s corridors of power are transparency and faster decision making. Several related ministries, such as road transport, highways and shipping, which used to be separate portfolios, are now under one minister to improve efficiency. The government also has signaled broad economic reforms, such as opening once-protected sectors like defense production to foreign investors.
 
In an address to parliament, President Pranab Mukherjee spelled out the government’s intentions.
 
“Efforts will be made to eliminate obsolete laws, regulations, administrative structures and practices…. It will strive to move to a single window system of clearance both at the center and at the states,” said Mukerhjee.
 
Implementing new policies, however, may not be easy. Although Modi’s Bharatiya Janata Party has won a majority in the lower house of parliament, it does not have control of the upper house. And many investment-related decisions rest with states where his party is not in power. 
 
But change is urgently needed in a country whose ranking in the World Bank’s “ease of doing business” survey is 134 among 185 nations -- lower than emerging economies such as Brazil and South Africa. And whereas other Asian countries such as Malaysia have steadily improved their position, India slipped last year.
 
The evidence for this: some 250 stalled projects, estimated at over $200 billion, are tangled in a mix of bureaucracy, corruption allegations or lack of clarity on policy. Many are in crucial sectors such as coal, steel and power.
 
The chief economist of the ratings agency CRISIL in Mumbai, D.K. Joshi, said the government must ensure speedy clearances for these stuck projects to send the right signals to investors.
 
“We all know that the power projects are not doing well because there is not enough coal available. So if coal is debottlenecked even a little bit, that is going to have a positive effect. There are many other such low hanging fruit, which only require administrative efficiency or quick decision making to sort out. First of all you need to improve the efficiency of the existing investment,” said Joshi.
 
Foreign investors say India’s big market is a huge draw, but the hurdles are too many. From getting land and energy, construction permits or enforcement of contracts, they say operating in India is hugely cumbersome. Archaic labor laws discourage labor-intensive manufacturing industries. Two years ago, foreign investors were spooked by retroactive changes in tax laws that imposed an unexpected burden on many businesses. India fell off the map of many potential investors.
 
“They want to put money in India, but money in India subject to many things. They understand this is going to be a huge story, but they get stumped by this stuff that goes on, on the ground problems. We really need good execution skills, moving the bureaucracy, simplifying the rules,” said Girija Pande, chairman of Apex Avalon Consulting, a Singapore-based company which advises foreign investors exploring opportunities in India. 
 
Pande said the next few months will be crucial as investors wait to see if the government will "walk the talk" on its business-friendly intentions.