Wanted: Ear to the ground

The government needs to listen to business

Investment, domestic or foreign, has been a key concern of Indian governments since economic liberalisation. Yet successive regimes appear to have a tin ear for the concerns of businesses. From telecom to e-commerce and automobiles, New Delhi’s actions consistently appear to work at odds with their stated objectives. The latest example was the statement by Shekar Viswanathan, vice-chairman of Toyota’s India unit, explaining how the levies on large cars had prompted the Japanese car maker to cancel an expansion programme in India. In an interview last month, Volkswagen India chief Gurpratap Boparai made roughly the same point. Mr Boparai pointed out that the differential tax between small cars (which attract goods and services tax or GST of 29 per cent) and the large ones (above 4 metres attracting GST of 45-50 per cent), which largely replicate pre-GST excise structures, were distorting investment decisions in favour of the former. But as Mr Boparai pointed out, small cars account for just 7 per cent of the global market, and that share is shrinking steadily.

As a result, global automobile companies operating in India create capacities almost exclusively for the domestic market instead of investing in global-scale facilities to serve the world markets. In other words, the taxation structure for automobiles hinders the government’s aim of making India a competitive global hub for exports. Instead, the government has chosen a unique route to promoting its Make in India agenda by offering foreign consumer electronic and mobile phone manufacturers the protection of high import barriers on finished products and inputs as an incentive to manufacture in India. No country has succeeded in becoming a global manufacturing giant in this way.

The size-based differential in car taxes has its genesis in domestic lobbying against foreign entrants with competitive products and cutting-edge designs some decades ago. But successive regimes have yet to learn that establishing asymmetric playing fields for domestic and foreign entities achieves little: It has created few world-class domestic businesses, nor has it made India the go-to destination for foreign investment in greenfield projects. Rules related to e-commerce and retail, among India’s most dynamic businesses, are another case in point. After initially restricting foreign investment on artificial distinction (single-brand, multi-brand), then deciding local sourcing rules for single-brand retailers on a case-by-case and stipulating only greenfield investment in warehouses and cold storage for foreign multi-brand retailers, the government succeeded in impeding the growth potential in this employment-intensive sector.

In e-commerce, the government has introduced inexplicable rules that restrict foreign majors to serve only as online marketplaces, meaning sales on their platforms sourced from companies they own are restricted. Similar restrictions do not apply to domestic players, however. Thus, the possibility of deep-pocketed global e-commerce players making large investments in local suppliers and manufacturers has been limited at a time when India needs to create jobs on a large scale. The problems have hit some domestic businesses too. In telecom, for example, the stiff deadlines for spectrum dues come at a time when unmediated price wars have brought incumbent operators to their knees. Representations on all these issues have been made to Raisina Hill several times over the years, mostly to no avail. The Narendra Modi government has made foreign direct investment a key element of its economic agenda. If it wants to fulfil those objectives, it needs to listen to business, not hinder it.