January 12, 2020
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"Even Botswana Gets More Foreign Investment Than Us"

Joydeep Mukherji, director, Standard & Poor's, minces no words in an e-mail interview with Arijit Barman on why he downgraded India's rating. Excerpts:

"Even Botswana Gets More Foreign Investment Than Us"
Would you say that the pace of reforms has been inadequate to address the deep fiscal problems?
Yes. The fiscal problem is outstripping the pace of reform. The budget deficit is growing at all government levels. The deficit that is hidden off the budget, such as the government's oil pool account, is also growing (but conveniently excluded from the budget deficit figure to disguise the true extent of the fiscal problem—it would add another 0.5 per cent of gdp to the deficit). Actions to bail out financial institutions, be they public sector banks, ifci, or the uti's US-64 scheme, are simply off-budget fiscal activities that the government forces on to other public sector entities. They raise the contingent liability that the financial sector poses to the government, reshuffle the bad assets and delay the day of reckoning. State government deficits are even worse. The picture is clearly unsustainable.

While investing in a country like India, to what extent do foreign investors take into account the fiscal picture of the country?
Investors want to know if they can make money and if they can do so without enormous hassle. If the country's fiscal picture points to economic instability, potential investors become cautious. Issues such as infrastructure, regulations, and the quality of governance are also very important. On paper, India has liberalised its investment policies a great deal. In practice, it has not. Attitudes have barely changed. The visible barriers to foreign investment have been reduced but not the 'invisible' ones. The hassles, time-consuming procedures, and petty licence and permit-raj that thrives at the local level are still a huge obstacle. India has made some progress towards "one-window approval" but there is no "one-window bribe" that can finally clear a project and allow the promoters to proceed without repeated requests for more bribes, and unlimited delays. Foreign investment is seen by local officials and politicians as one more source of illegal income and thus receives all the attention that predators give to easy prey.

Why is India's share of global FDI investment shrinking?
Botswana gets more foreign investment than India. In a competitive world, you have to meet global standards to win. Indians are not ready to accept this. They are used to inferior Indian standards developed over 50 years of economic isolation. It does not matter if policies toward foreign investment are better today than they were a decade ago in India. What matters is how they compare with policies in other countries. Politicians in other countries take credit for bringing in foreign investment because it creates jobs and wealth. Which Indian politician is willing to publicly defend a foreign investment project in India when it comes under attack from the swadeshi and the leftist crowd? They are happy to seek bribes from foreign projects but will not speak in their favour when needed. It is not just cowardice but also the reality that India is still in two minds about dealing with foreigners. Other countries have made up their minds, which is why they are getting more foreign investment.

Disinvestment: is it politically impossible in India?
The public sector has become a milch cow for politicians, bureaucrats, and corrupt businessmen. It collects money from the country at large through taxes and distributes a growing share of it to these three groups. This unholy trinity is blessed by ideologues of the Left and the Right, allegedly because it is good for the poor or good for India's soul.Privatisation threatens the core of this system, which is why it has been successfully delayed and now made almost irrelevant.

Are you saying that overt politicisation of the economy is the main evil?
In India, it often serves as a substitute for development. It would be difficult to imagine that a country facing growing power shortages could become so adept at losing the few foreign investors who put money into the energy sector. It is even more difficult to imagine that many educated Indians who read your magazine, and who will suffer from a power cut tonight, could support their expulsion based on misguided notions of nationalism. How do more power cuts make India a stronger country?

Full text of the interview
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