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'There Is No "One-Window Bribe" That Can Finally Clear A Project'

Corrupt and insincere politicians are squarely to blame for ratings downgrade of India, says Standard & Poor's Joydeep Mukherji, in one of the harshest indictments of India's economic policy failure

Arijit Barman INTERVIEWS | 17 August 2001
'There Is No
'There Is No "One-Window Bribe" That Can Finally Clear A Project'
outlookindia.com
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Joydeep Mukherji, director, Standard & Poor's, minces no words as he tells Arijit Barman on why he recommended the downgrading of India’s rating from Stable to Negative. Excerpts from an e-mail interview that is remarkably open in its indictment of India’s politicians as the principal barrier to economic growth.

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 levels of government. 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 US-64 scheme of UTI, 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, re-shuffle the bad assets and delay the day of reckoning. State government deficits are even worse since they simply borrow by setting up public sector companies and guarantee the new debt that they raise through them. Such borrowings are not shown in their fiscal deficits. The picture is clearly unsustainable. That is what we are signaling by changing the outlook on India's ratings to Negative from Stable.

What about tax revenues? 

They are clearly insufficient. The combined tax revenues of India's central and state governments are below 17 per cent of GDP, which is slightly lower than they were before the reforms began a decade ago. The fault lies in the tardy pace of tax reform. Collections from direct taxes (personal and corporate income tax) have increased marginally as a share of GDP but they have been overwhelmed by the fall in indirect tax collections (customs, excise, sales). The lessons learned in reforming direct taxes, namely that collections increase if the rates are lowered and the system simplified, have not been applied adequately to indirect taxes. Despite annual announcements of plans to simplify indirect taxes, and reduce the number of tax rates, the system is in a mess. Corruption is another factor (but note that corruption did not block an increase in direct taxes). The other problem is that the tax system was designed for an economy that no longer exists. Over half of India's GDP arises from the service sector but the tax system remains geared towards the industrial sector. Services are barely taxed in India. The biggest example is the IT sector, a fast-growing profitable sector that pays no income tax.

While investing in a country like India, to what extent do foreign investors take into account the fiscal picture of the country? And to what extent do other issues like infrastructure costs, labour issues, security, regulatory issues, market size drive decision making?

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 very important. For example, one reason why India gets a falling level of foreign investment is that investors who want to make products for export, such as toys, televisions, cell phones, largely shun India as the ports, roads, and highways are clogged. They cannot produce things in time to meet deadlines. That is one reason they go to China. 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 license 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?

Argentina, Brazil, even Egypt are way ahead, and let’s not even talk about China.  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 from global currents. 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. The ghost of the East India Company is alive and well in modern India, which still has a schizophrenic attitude towards opening up to foreigners. Politicians in other countries take credit for bringing foriegn investment to their country 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 favor 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.

Would you then say the overt politicisation of the economy is the main evil behind the declining FDI figures?

There are many factors. Politics is a fact of life everywhere. 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?

Do you think there has been no policy focus to attract foreign investments in specific sectors or specified regions or even specific companies?

There are many sincere attempts but they are overwhelmed by failures elsewhere. Many foreign companies once had interest in putting money into India through the privatisation programme. Hardly anyone is still interested today, having seen how the programme has been systematically gutted by vested interests. Investment in the service sector, such as IT, call offices, biotech, and back offices has been successful and should continue to rise. The visible and invisible obstacles facing foreign investors elsewhere are less in these sectors. Also, India's infrastructure problems can be largely avoided in these sectors and political interference is minimal.

Some people feel that the investors are dissatisfied due to the drastic and frequent policy changes in sectors like aviation, telecom, power… 

Policy changes hurt foreign sentiment and create expectations of more changes.  

Disinvestment: is it politically impossible in India? Or do we lack the will? 

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.

You have talked about the recent political scam --are you hinting at the tehelka episode?  

I mean the whole series of financial and political scandals in 2001 (lost count of them). They have undermined the ability of the government to implement the policies announced in its last Budget.

You have also said that politicians in India do not hesitate to get domestic political mileage out of any issue, regardless of the damage it may do to the country. Can you give examples?  

Dabhol, going back to the beginning.

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