The undoing of doing business in India

If the Bharatiya Janata Party were to lose its majority even as the principal opposition, the Indian National Congress, doubles (at the very least) its Lok Sabha tally in the 2019 general election — both scenarios that look terribly likely as of now — one would have to unhesitatingly look back at the ill-fated, primarily because it was remarkably ill-thought out, announcement of demonetisation of 86 per cent of India’s currency exactly two years ago. It was a secular disaster in that it did not distinguish between one Indian and another. But this only made the move quite regressive because it hit the poor far more than it hit the rich or indeed whoever was guilty of hoarding black money. And for what? The massive exercise extinguished barely Rs 110 billion after demonetising about Rs 15.5 trillion. The proportion of fake currency too is equally embarrassing. 

In the final analysis, there’ll be very few in this country who would say that the demonetisation of 2016 left them better off. By the way, I am one of those rare beneficiaries since, thanks to the sudden flood of bank deposits, interest rates fell and my creditor knocked off by around three years from my home loan tenure — that’s 36 EMI less in one fell swoop. Readers who have paid an EMI would know my joy knew no bounds. I was grateful to the government at a personal level but as someone observing the economy, it was a horror story unravelling out there.

Over the past two years, it has become increasingly clear that small businesses, often designated as the medium, small and micro enterprises (MSMEs) — that reportedly employ most people after agriculture — have been the worst sufferers of demonetisation. A survey by the All India Manufacturers’ Organisation (AIMO) conducted across 25,000 units, comprising nearly 50 per cent of micro and small industries and 25 per cent each of medium and large firms, found a sustained blow to the bottom line. According to a report in Business Standard, this survey, which was released on the second anniversary of demonetisation yesterday, also found 32 per cent job losses in the MSME sector, with over 86,000 of the total of 270,000 employees losing their employment in the aftermath of demonetisation. The president of AIMO has been quoted as saying: “You are either already sick or are in the process of becoming sick.” Some of the worst news is coming from the prime minister’s home state Gujarat, where MSMEs involved in textiles, diamonds, tiles and sanitaryware are in severe stress even two years later. In fact, since demonetisation, the turnover of these industry clusters has either plummeted or, at best, remained stagnant. 

What is most unfortunate, and rather ironic, is that such MSMEs continue to trade in cash. Champalal Bothra of the Federation of Surat Textile Traders’ Association says that “the government’s intention to promote digital payments through demonetisation and later though GST has been a pipe dream.” While digitalisation has struggled at the MSME level, corruption seems to have survived the intended reform. Raja M Shanmugam, president, Tamil Nadu’s Tirupur Exporters Association says “corruption is still at peak levels… [and demonetisation was] negated because the loopholes were exploited by manipulators”.

This worsening state of doing business in India actually explains why the central government has even risked souring relations with the country’s central bank. Indeed, after failing to get the Reserve Bank of India to ease up on its prudential norms and allow banks and non-banking financial companies to lend to these struggling businesses, the government has now decided to do it all by itself, promising loans within an hour to all MSMEs. The essential point is that the government cannot allow this distress to carry on like it is until the election season. Not unless it fancies sitting in the opposition benches. 

And yet, just in these two very years, India’s ranking in World Bank’s Doing Business index has shot up over 50 rungs. This is not to denigrate India’s achievement in Doing Business rankings but to just put it in perspective. These ranking are based on specific changes in Mumbai and Delhi. It is, in a very real sense, a misnomer to call them a ranking for “India”. In reality, they are, at best, rankings for Delhi or Mumbai. The ease of doing business could be plummeting through the floor in the rest of the country — as indeed it has done — and yet one could end up shooting up in Doing Business index.

There is another way to understand what I am saying. Let me lean on the magical oratory of our PM. On Thursday, most people revisited PM’s speech two years ago. Let me go a step further and reintroduce readers to a speech made exactly three years ago. On November 6, 2015, the PM inaugurated the Delhi Economic Conclave. It was a heady time for his government. The economy was fast benefitting from falling crude oil prices and improving global growth and, barring the Delhi debacle where the Aam Aadmi Party gave the BJP more than a black eye, Mr Modi was leading one election victory after another. Before you ask: Bihar Assembly results, where the BJP were to get stunned again, had not yet been declared. In many respects, it was a crucial speech as it showcased what many of us admire about Mr Modi: His clarity of thought.

“I would like to raise two issues. The first is: Reform for what? What is the aim for reform? Is it just to increase the rate of GDP growth? Or is it to bring about a transformation in society?… The second question is: Reform for whom? Who is our target audience? Is our aim to impress groups of experts and score points in intellectual discussions? Is it to achieve ranks in some international league tables? Again, my answer is clear. Reform is that which helps all citizens and especially the poor achieve a better life.”

This explains the true state of doing business in India and the real reason for it.