DOING BUSINESS-1
A subpar ease of doing business environment continues to erode competitiveness of Indian business and muddying economic prognosis. EPISODE #76
Dear Reader,
A very Happy Monday to you.
Last week iSPIRT, the Bengaluru-based tech evangelicals, published a study on 90 Indian unicorns (a private start-up that is valued at over $1 billion). Its findings will surprise most of us. iSPIRT found that despite the rapid improvement in the ease of doing business the ground reality is that the ecosystem continues to be subpar.
Precisely for this reason, the study found 38% of these Unicorns “are not quite Indian as they are domiciled outside of India.” Serious food for thought. Because it is not just about national pride. It also means loss of crucial economic value.
Coincidentally, a fortnight ago I attended a town hall style conversation between industry representatives and the Niti Aayog CEO Amitabh Kant. The event hosted by the Public Affairs Forum of India (PAFI) was, like the iSPIRT study, an eye opener on how red tape is continuing to trip up business, especially in states.
Connect the dots and you have India’s challenge: competitiveness of domestic industry continues to be under the siege of red-tape. If left unresolved it could stymie India’s last chance of avoiding a middle-income country trap—wherein declining competitiveness prevents a country transitioning to a higher income bracket.
This week I explore this challenge of doing business in India. In a first, this episode is in two parts—watch out for the concluding part next Monday.
Do read both parts and share your feedback. The cover picture is sourced from Unsplash and taken by Matt Seymour. Thank you Matt.
A big shoutout to Debu, Balesh, Preeti, Kapil, Gautam, Vandana and Premasundaran for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
RED TAPE
Last week iSPIRT, the Bengaluru-based tech evangelicals, published a study on 90 Indian unicorns (a private start-up that is valued at over $1 billion).
The findings were a rude wake-up call to a country which just celebrated its 100th unicorn and has been scaling the ease of doing business rankings with amazing alacrity in recent years.
“However, it is still not as smooth a ride for the Indian start-ups as it is for startups in the advanced economies of say, the USA, Singapore, and China.
Our “ease of doing business” is yet to be on par with the developed world, especially given the high taxation, onerous compliance requirements, inadequate and cumbersome legal protection of IP, as well as time-consuming and expensive processes to access capital and secure exits.”
The study maintains that the best dip stick of this unfortunate state of affairs is the preference for companies to locate their headquarters abroad.
“It isn’t a surprise therefore that many companies are shifting their primary legal location to foreign jurisdictions like the USA, and Singapore.”
Effectively these are not ‘Indian unicorns’ as they are domiciled abroad. The graphic below captures this geographical spread as these unicorns work to de-risk from the perils of a bad business environment.
Indeed this revelation comes as a shocker, especially since India is in the midst of celebrating 100 unicorns. Worse, as the study argues:
“Moreover, these 34 unicorns have raised approximately $30 billion. This large (sum of) money could have been but hasn’t been invested into an India domiciled entity.”
Further, now startup founders are beginning to migrate either to the UAE or Singapore. The lure, as the study argues, is:
“Lower taxes, easier access to capital, government support, simple compliance, and better quality of life while being just a short flight away from India make the UAE and Singapore rather attractive to founders.”
Clearly, the loss is more than just national pride. India is leaking economic value, including the ability of the government to tax profits. I am not even talking about intangibles like the inspiration that such home grown startups provide to grow another million entrepreneurs.
More Evidence
The thing is that the study by iSPIRT is not a one-off discovery.
Indian industry has been constantly complaining about the reform initiative not percolating to the ground. They are particularly unhappy about the prevailing environment of red tape in some states.
Worse political grandstanding between the centre and states—in one instance threatening to throw the Goods and Services Tax under the bus—only further undermines investor confidence in the Indian business environment.
About a fortnight ago I attended a PAFI town hall with Niti Aayog CEO Amitabh Kant. The session was an eyeopener. If a vote had been conducted, the entire hall would have spoken in one voice about the challenge of ease of doing business and how it was tripping up the best laid plans.
As a result most questions to Kant were about what the government can do to overcome this challenge of red tape.
For instance, Freddy Svane, the Danish Ambassador to India, put it politely yet firmly. Pointing out that he is an old India hand and was convinced about its potential, he said:
“We all believe in India; and we had your prime minister recently visit Denmark. Still we find our companies are struggling to transfer technology in wind energy, green hydrogen and so on. They still encounter bureaucratic hassles.”
And then added:
“I have been here nine years now and my optimism is still very, very strong. But my companies might not support my optimism endlessly.
So what can we do and how can we tackle these issues?
I agree India needs to press the accelerator for the future, but we also need to walk and not just talk.”
Ouch!
The Legacy Challenge
Several others echoed the concerns of the Ambassador. Some were particularly critical about the challenge the faced at the level of state governments.
While the solution is obvious it will be worth the while to ask the question: Why is this happening?
In my view this is largely a legacy problem. The decades of licence raj has painted business as a bad-word. If you recall, till as late as the 1980s, pop culture often characterised business as the villain; and implicitly suggested the rich come with vices. This rhetoric unfortunately has become part of public policy and has eroded the trust quotient between the government and business.
Arvind Subramanian, the former chief economic advisor, summed up this phenomenon the best. In his exit interview while leaving North Block he told us (at that time I was working at Mint, the business daily of the Hindustan Times group):
“My hypothesis is that India is affected by stigmatized capitalism, where there is not enough trust in the private sector or in the ability of the state to regulate the private sector. It is making it much more difficult to give the private sector a bigger role.”
Worse, the relationship, given this skewed narrative, between the government and business became covert. Previously politicians would be loath to meet business in public. A perfect ecosystem that stoked toxic crony capitalism.
Though over the last few decades public policy has undergone a recalibration. In fact it is to the credit of the Bharatiya Janata Party-led National Democratic Alliance that they withstood the barb of “suit-boot ki sarkar” jibe and actually celebrated business. In fact, Finance Minister Nirmala Sitharaman, explicitly identified business as a key stakeholder of the Indian economy in her presentation of the Union Budget on 1 February.
Indeed you may recall that I recently wrote about the positive transition in the ease of doing business environment. Sharing the link below in case you would like to re-read it.
My limited point is that all this is good, but the fact is that mindset reset is a work in progress. Worryingly, the problem as articulated by iSPIRT and PAFI shows us that the tail is still wagging the dog. The message of change has not percolated to the grassroots.
To top that, growing polarity of views and political insecurities means that opposition parties will not hesitate to target corporate interests to score a point—it is like cutting your nose to spite your face.
This the moment to pivot to a bottoms-up approach to governance reform. Time to heed Ambassador Svane’s warning. But for this to happen political consensus is a precondition and no longer an option.
(The concluding part will be published next Monday)
Recommended Viewing
Keeping with the theme for this week I am sharing the entire video of the PAFI event. It is an hour long but worth it.
Till we meet again next week. Stay safe.
Percolation of bureaucratic hassles in citizens' lives seems to have increased with increased digital penetration. It's probably is a sign of less innovation or apathy towards it, less afinity towards dynamism and uncertainty that entails entrepreneurship, business et al. India's loss is world's gain, sooner the bureaucracy realizes it (which they won't) better it is for India. However, the government of the day, should catch the bull by their horns. Scrapping PSCs is a good step to ensure that, or hire and fire policies. There's also judicial reforms. All of these depends on how society perceives business, risk management. The exodus of Indians to developed nations is linked primarily to such apathy. Hopefully, it'll change (doubtful with this bureaucratic structure). Bureaucracy, by nature, is status quo, politicians need not be, especially when voters are interested in giving the parties clear majority to govern. If fruitful employment, businesses and an environment for the same is not a priority of the governments, then polarisation will rise. Waiting for the concluding piece of the series, Anil ji!
Dear Anil,
Interesting, crisp and very well researched article on the bitter truth of our economy. The hurdles are too many and the common man keeps going in circles.Getting any clearance , license or no objection certificate is still a herculean task.We need to remove the bottlenecks and red tapes in the system.
Looking forward to the conclusion next Monday!!