Streamline rules to attract foreign investors

Sushma Ramachandran

Senior Financial journalist

An improvement in the investment climate and an upturn in the ease-of-doing business ranking have been the stated achievements of the present government. But there is no getting away from the fact that some foreign companies are making a quiet exit from this country. The reasons cited are varied, but it is apparent that the intrusion of the government in business and the disputes over many issues have prompted quite a few of these departures.

An article published recently on American political website The Hill claims the US must be worried by the spate of foreign companies leaving Indian shores, given its interest in building up this country as a counterpoint to China. The premise may not be entirely correct as innumerable foreign companies are not only remaining in India but also thriving here. And whether the US administration is concerned over the departures has not been voiced explicitly on any forum.

Yet, the article does turn the spotlight on the phenomenon of recurrent spats with foreign concerns as well as excess regulations and red tape despite avowed efforts to improve the ease-of-doing business. And some of these have caused multinationals to leave the country owing to their intractable nature.

The overall climate for investment does not appear to be improving with the new atmanirbhar or protectionist approach that has led to higher import tariffs. This, coupled with fast-changing regulations that are difficult to navigate, is a big hurdle for new entrants to the country. No wonder, the preferred investment destinations for companies seeking to exit China in recent times have been Vietnam, Thailand, Taiwan and Indonesia, rather than India.

Among the companies that have left India in recent times are Cairn Energy, Holcim, Docomo, Lafarge, Carrefour and several automobile companies like Ford, General Motors, Man Trucks and Harley Davidson. Some banks like Barclays and the Royal Bank of Scotland have also reduced the scale of their operations here and moved towards wholesale rather than retail banking.

An indication of the extent of departures was given by the data presented by Commerce and Industry Minister Piyush Goyal to Parliament last year. He said as many as 2,783 foreign companies had shut operations here since 2014, leaving behind 12,458 active foreign subsidiaries in the country.

At the same time, it must be conceded that all the exits were not due to government policies or the difficult regulatory framework. Several entities have moved out in line with their own global strategies. For instance, Switzerland-based major Holcim decided to reduce exposure in the carbon-intensive cement sector globally and increase environmental, social and governance credentials (ESG). Similarly, Citibank moved away from retail banking all over the world, not just in India.

The shift of auto giants like Ford and General Motors, too, has much to do with flawed sales and marketing strategies in a price-sensitive market. Suzuki and Hyundai are thriving in the same competitive environment, but others could not replicate their success and adapt to the needs of an emerging economy’s market needs.

There remain many others, however, who have been stymied by the regulatory tangles created by a bureaucracy reluctant to shed its powers despite new policies aimed at making life easier for the investors and entrepreneurs. The case of Pernod Ricard was highlighted recently as media reports said that it was grappling with a three-decade long tax dispute that may have hindered fresh investments. Cairn Energy has also often been cited in this context as it had to deal with the contentious levy of retrospective taxes. The subsequent battle is well known, but the ultimate resolution came only after the government decided to drop the retrospective tax law.

The decision to abandon the misconceived legislation took many years to be taken and was symptomatic of the long delays usually taken in resolving most government-corporate disputes.

Other irritants include business laws plagued with outdated imprisonment clauses. A report by the Observer Research Foundation says that there are 26,134 imprisonment clauses in the country's corporate laws. In this backdrop, it is clear that India may have jumped in the global ease of doing business rankings from the 142nd spot in 2014 to the 63rd currently but it is still not easy to set up a business or operate it efficiently without getting into a regulatory logjam.

No doubt, efforts are being made to digitise processes but the actual implementation is not up to the mark. A simple thing, for instance, like making tax returns online will not work if the system is simply inoperative when businesses try to log in. The net result is that physical interaction with officials becomes inevitable.

Foreign direct investment inflows which have been buoyant in recent years seem to be stagnating now. It could be in response to the failure to implement reforms effectively. Fiscal 2021-22 witnessed inflows of $58.77 billion, slightly lower than the $59.64 billion in the previous year. This could be attributed to the pandemic but for the fact that the country is now seeing an economic recovery even if it is fragile and uneven.

The solutions to attract more foreign investors and prevent the exodus of existing players are ultimately simple ones. And they are well known even to the policy-makers. The first is to cut back on regulations that are not absolutely essential. The second is to avoid human interface and resort to online processes as far as possible. The third is to have stability in the policy regime without too many rapid changes, especially those that can alter the viability of projects. And finally, maintain tariff levels at a consistent level.

Protectionist attitudes need to be avoided as far as possible, otherwise it will become difficult for this country to become a part of the global supply chains.

India needs to take a lesson from many smaller Southeast Asian economies that have managed to streamline procedures and create a business-friendly climate for new entrants. Its large domestic market may be a huge lure for many potential investors, but it can only retain their presence by carrying out more effective reforms to prune the regulatory maze in this country.

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