The objective of the cut was to attract foreign players to invest in India, but the unfortunate truth is that no meaningful investments are likely to come in.
A good many businessmen were in the news in 2019 for all the wrong reasons, but one gentleman who deservedly made the headlines was Rahul Bajaj. At an event in Mumbai last month, the veteran industrialist spoke out saying businessmen were not confident the ruling establishment would appreciate any criticism; the environment, he said, needed to be more conducive. Bajaj was spot on. One is not sure if it was Bajaj’s remark that prompted the prime minister to initiate a series of meetings with businesspeople—the first of which was held last week. But, no businessman or CEO is expected to criticise the government.
According to media reports, the PM is reportedly asking India Inc for suggestions on how to revive the economy. That in itself is surprising because countless suggestions have already been put forward to the government. But, assuming some new ideas are thrown up, will the government listen to businessmen and act on these suggestions? Today,the perception in India Inc, and outside of it, is that the current establishment ‘favours’ a few business houses that have its ear, and is willing to help them even if it is at a huge cost to others. This may or may not be true, but this perception is widespread. And, so far, there are no signs the government wants to change this perception.
The other perception is that the government is fearful of being labelled a suit-boot-ki-sarkar and, therefore, refrains from showing open support for industry. So far in the last six years, there has only been talk of reform and very little action. But, the government has just given away a bonanza of Rs 1.45 lakh crore to companies—by way of a cut in the corporation tax rate to 22% from 30%—at a time when an individual earning an annual income of Rs 10 lakh-plus must pay tax at 30%
The objective of the cut was to attract foreign players to invest in India, but the unfortunate truth is that no meaningful investments are likely to come in. After the Vodafone episode—with Kumarmangalam Birla saying it would need to shut shop unless there was some relief on the AGR payments—global corporations cannot be blamed for being wary of investing large sums in India. And, at some point, this could tell on FDI inflows; between April and October, 2019, the flows of $40 billion were up only about 8% over the corresponding period of FY19. To be sure, there will be investors—Lakshmi Mittal’s Arcelor Steel has brought in some $7 billion to buy EssarSteel. But, by and large, it is the services sector—e-commerce, banking, insurance—that have attracted FDI flows rather than defence or manufacturing.
And, it is hard to see global multinationals betting big on India in the near-term. For one, the country’s large addressable consumer market—which is the biggest draw—doesn’t look like such a big catchment with the economy in a rut and threatening to stay there for a long time. Private consumption has been slowing—as seen in the sales trajectories of homes and cars—even as household savings as a share of GDP have been coming off sharply to about 17% from the peaks of 26% in 2010. Indeed, with a growth rate of 5% or thereabouts, and the spectre of a prolonged slowdown, India is no longer such an attractive economy.
Also, merely cutting the corporation tax rate isn’t enough. Even before doing that, the government needed to have improved the business environment in terms of the ease of doing business; never mind the jump in rankings, the reality on the ground is that it is very difficult to do business in India given the red tape, and corruption. In fact, after promising reform in labour laws, all that the government has done is to say it would support state governments in their efforts to ease the rules. The biggest problem, of course, is the government’s approach to policy—in the telecom sector, the rules have been framed in a manner that it doesn’t provide a level-playing field and endangers one set of players. Even in the e-commerce space, the government should desist from favouring local players who believe they have the right to control the business even if they are not the majority shareholders. Capital—whether local or foreign—needs to be respected, and rules, once framed, should not be changed later, after investments have been made. To be sure, corporate India hasn’t covered itself with glory these past few years; the loan losses at banks, of rS 10 lakh crore or more, are evidence of that. But, Bajaj is right when he says the environment isn’t friendly. The government needs to demonstrate—with policy action—that it is unbiased, and willing to reform. It may feel it can do all the heavy-lifting, but it is clear even from the current year’s finances that it cannot spend as much as it wants to on capex. Given that the state of the economy doesn’t seem to be a big factor with much of the electorate, the NDA may come back to power in 2024. Whether India Inc will support it is the question.