Retrospective changes

Changing policy midstream turns off investors

Government attempts to micro-manage the economy are always vulnerable to capture by special interests, and may well turn counter-productive. This is especially true when there is no consistency in policy across time — which is sadly not uncommon in India. Consider the efforts made of late to indigenise the production of electronic items that are commonly imported — particularly mobile phones. The phased manufacturing programme (PMP) of the government wanted to force mobile phone companies to start local manufacturing of components any time in the coming financial year of 2019-20. However, this has now been changed by an order issued earlier this month, which said that mobile phone companies should comply by February of this year, or face an import duty of at least 10 per cent. Even companies that had sought to comply with the earlier PMP order, such as Samsung, are now reportedly thinking of scaling back manufacturing in India because of the change in policy.

 
Midstream changes in policy are not only unfair, they reduce investment in the long run. India is already seen as a risky location for investment precisely because of a lack of policy clarity and because there seems to be no appeal against arbitrary government moves of this sort. Samsung may be willing to give up on whatever investments it has already made because of this unexpected policy change; other manufacturers will learn from the experience and avoid trusting the Indian government because of fears that they too might lose their investments because of a policy change that is made once the money has already been spent. Nor is this the only sector in which the government has been guilty of midstream policy changes. There is also the high-profile e-commerce sector, which is already subject to unnecessary and crippling government regulation. Even that was tightened recently, when the government said this month that online marketplaces — such as amazon.in — which are funded by foreign direct investment cannot be more than just “platforms” connecting buyers and sellers. In particular, they cannot aid with inventory management.

 
Restricting foreign investment to just marketplaces was in any case overly harsh, reducing the benefits to consumers and suppliers. Now the government has, midstream, made the rules even harsher. It has also forbidden exclusive merchandising deals — in other words, Amazon India, for example, cannot tie up to exclusively sell a particular smartphone. This had enabled cheap and promotional roll-outs, which benefited consumers. Here, again, the government waited for big investments to come in before changing the rules — changing the return on capital and ensuring thereby that investors feel cheated. Walmart has just put billions in Flipkart, for example. Only days after the government’s policy change, Reliance Retail and Jio announced they would roll out an e-commerce venture. In order to insulate itself from charges of favouritism, the government should not only rethink its ham-handed attempts at protection, which will always be seen as favouring big business, but also seek to avoid changing rules in this unfair and retrospective manner.