The governance style and ethos of a country are often more important than the physical infrastructure for trade and investment.
India has been positioning itself as an attractive investment destination for manufacturing, now for a few decades. The story has been sold aggressively though not as effectively as policymakers would have liked and there is little doubt that we are some distance behind the other big hitters in this space. Meanwhile, there are ambitious targets of achieving $ 1 trillion in annual exports and $ 5 trillion in GDP within the next few years.
Amongst the examples held up before India for pursuing growth through trade and investment are some countries of East Asia who have grown rapidly in the past three decades. It is notable that some of these countries are not democracies and a few of them are held by many to be non-market economies. Besides, it would not be out of place to remind ourselves that one often hears of the predictability and decisiveness of the regulatory authorities and officials in these countries. This is then contrasted with the lack of predictability and speed of policy, executive action and even judicial authorities in India. Quite obviously therefore, India is held by many to be a complex jurisdiction to deal with. The governance style and ethos of a country are often more important than the physical infrastructure for trade and investment. They go a long way to contribute to the confidence of the external as well as the internal participants in the economy, who need to put up their capital for investment.
Nonetheless, the governance structure and ethos of India can be the differentiator that attracts and promotes external as well as internal investment in India, that is, if they are operated closer to theory than the aberrations that have proliferated through practice. India is a democracy with its governance system premised upon rule of law. The Chief Justice of India, N.V. Ramana has very aptly emphasized, in writing and action, upon rule of law as one the foundational principles of our society and polity. Thus, in theory, the implementation of laws, rules and regulations and dispute redressal systems are dependent only to a certain extent upon persons.
Whereas, this leads to long drawn out resolutions, the businesses impacted by laws, rules or executive action, can seek legal remedies against actions of the state. Such a system thus gives assurance of a law driven rather than person driven resolution of regulatory issues faced by businesses. Contrast this with an authoritarian system wherein a local, state or federal official can take a quick decision in a matter affecting a business, can even get written policies amended in less than a day, but there is little legal recourse available against such a decision if the business wants to contest the same.
This does not mean, however, that the governance systems in India are not in need of significant improvement. Two important aspects of rule of law are stability and predictability. This is an area in which much progress needs to be made as policy unpredictability does not allow long term commitments by businesses. A case in point is instances of retrospective legislation in matters of taxation which have in the past heavily dented India’s image as an investment destination. Retrospective legislation is not in violation of the law, but stretches the concept of rule of law almost to breaking point.
Businesses have to often deal with authorities like Customs, Indirect and Direct Taxes, Departments of Trade and Commerce, Bureau of Standards and the like. Officials in these departments are vested with executive as well as quasi-judicial authority. A common grievance of many who deal with these departments, is that decisions are often taken by authorities without sufficient appreciation of facts or rigorous legal position.
The underlying premise followed by officials is that those affected can anyway get relief in appellate forums like Tribunals, High Courts or the Supreme Court. Such relief is, however, time consuming and such an attitude getting ingrained in lower level judicial or quasi-judicial forums goes against the very concept of rule of law. Similar is the case in many executive actions wherein officials at times go far beyond the written rules leading to situations which finally are resolved only by judicial intervention. Such cases happen in other countries as well, but their profusion in India does not bode well for predominance of rule of law.
Another pertinent aspect of rule of law for trade, is the international sphere. Governments enter into agreements and implement internationally applicable rules in their trade and tax governance. Examples are the agreements forming the basis of WTO, regional/bilateral trade agreements and tax treaties. It not only is a requirement, rather sine qua non of international rule of law, that governments implement the agreements/treaties which they are signatories to and take reasonable interpretations of clauses therein which are commonly accepted across signatories. Not doing so would contribute to a chaotic world order, sully the country’s reputation and in some cases invite retaliatory action by other nations. Undoubtedly, this too is an area in which India can do better than the present and showcase itself as a model jurisdiction inspiring confidence in domestic and international businesses.
Deepening the ethos of rule of law in overall governance is by no means a short-term project. However, in matters relating to trade and investment, a few measures could lead to early results. Firstly, the accountability of officials in relevant departments should be based on their rigorous application of the law rather than on their taking decisions that favour the state in the short term. This seemingly simple remedy can vastly improve the quality of administrative and quasi-judicial decisions. Secondly, a sufficient number of competent legal experts could be appointed in departments of the executive to guide administrative actions.
In sum and substance, while India, with its market and talent potential, can indeed become a favoured destination for trade and investment, strengthening both its internal and external operation of the rule of law can become its strategic differentiator, changing the course of its economy.
(The writer is Partner – Trade and Customs, KPMG in India)