The Govt Urgently Needs To Wipe Out Risks Associated With Investing In India

India needs a stable business environment to prosper. Here are some steps we hope they will take, and why a focus on manufacturing is key to economic growth

Despite India’s consistent rise in the ‘ease of doing business’ ranking (from 100th to 63rd now) in the last three years, the country is facing economic slowdown as lack of investment (investments fell five percent from the last quarter and 70 percent from last year), lack of production (dropped nearly four percent in Sept 2019), and stalled business growth have surfaced as threats.

Current scenario

Although India was expected to match and eventually surpass 7 percent or even 8 percent GDP growth only a couple of years ago, this figure now stands at 4.5 percent. The global trade dilemma, the twin blows of demonetisation and the new indirect tax regime, the collapse of shadow banking credit, and now interruptions in global (the US, South Korea, Australia) manufacturing pace have created a whirlwind of issues for India to gain stability.

One of the remedy for this has to be undivided focus on creating an efficient business environment. Fortunately, the government of India has announced corporate tax cuts, welcoming businesses and investors. Although this will aid India in stabilising the economy, proactive policy action is needed to remove hurdles in the path of business growth.

Regulatory and administrative uncertainty in the country is scaring away investors. The government desperately needs to wipe out the risks associated with investing in India. For example, India is ranked 163rd out of 190 economies in the ‘enforcing contracts’ category. This means investors in India would have to go through delay and cost overruns to complete projects. Needless to say, such bureaucratic hurdles have to be removed if India has to become a thriving business environment.

India has made incredible progress in the FDI space due to liberalised norms. However, similar reforms have to be made on improving ease of doing business and simplifying tax administration through GST.

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Road to growth

Transparent rules on the ground to promote efficient markets, boosting the development delivery mechanism, can help change perceptions and investor sentiment.

Reforming banks is also a necessity. Public sector banks (PSBs) are overburdened with bad loans (Rs 8.64 trillion) and showing hesitance over lending. Non-banking financial companies (NBFCs) are also facing challenges as they borrow short term to lend long term, creating a mismatch. And their inability to take deposits from the public makes them dependent on banks and mutual funds, thus stranding them and collapsing the money lending system in India. Better governance should be implemented with the recapitalisation of PSBs. And for NBFCs, the government should work towards restoring confidence among NBFCs facing a liquidity crunch.

India’s exports are way behind its imports (in FY 19-20 April-Oct, import expense $284 billion, revenue from exports $185 billion) leading to a deficit of $99 billion. India needs better export strategies focusing on offering incentives, prioritisation of industries and products, promotion in targeted countries, protecting domestic manufacturing and so on. Additionally, the credit flow to exporters in India has reduced by 50 percent in 2019. And Reserve Bank of India needs to ensure timely and less expensive credit for the exporters to encourage better business.

Skill development is also extremely important; for this, India needs to invest in domestic manufacturing as it promises to create jobs (100 million new jobs by 2025). Also, identifying promising sectors like solar can help India create a huge number of (2 lakh jobs by 2022) jobs to facilitate economic growth.

Corporate tax on businesses is necessary. It is how a country grows and increases its capability to offer a better business environment, developing industries, creating jobs, and improving quality of life. However, it is also important to note that allowing businesses tax relief to a percentage can act as an encouragement to the industry, increasing FDI inflow and facilitate technological upgrade in industries.

Being appreciative of the recent tax cuts, I believe, India should continue to look into reducing interest rates, business income tax rates, tax on buyback, triple tax on dividend, progressive taxation with GST, and tax on securities transactions further to support new and existing domestic/foreign businesses.

Additionally, investing to build the required infrastructure and making labour laws flexible would also ensure investor interest in India.

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Focus on manufacturing

Investing and protecting the manufacturing sector can lead to technological up-gradation, resulting into an increase of manufacturing capacity, reduction of import expenses, a better position in the export market, higher revenues, and as a result, economic growth.

This paints a clear picture of how manufacturing creates a cycle that runs on its own. India has taken initiatives like Make in India that are working towards creating a conducive environment for manufacturing growth. Such initiatives have brought $76.82 billion investment from FDI in the manufacturing sector during April 2000-June 2018. And the Indian manufacturing sector has shown 4.34 percent CAGR growth from FY 12 to FY18 due to these initiatives.

Therefore, the government of India needs to focus on increasing investments towards manufacturing (there is a 1.2 percent decline in private investment in FY 18-19). Supporting exports through favourable policy implementation and supporting manufacturing units to build scale can bring forth private investment that India desperately needs.

solar-panel-manufacturing

The goal is in sight, and the path is laid. Now is the time for the Government of India to make the right decision and lead us towards a progressive future.

This opinion article by the Author Mr Gyanesh Chaudhary was published in Forbes India on 20th January 2020.

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