Strained relations

Govt should realise it must engage with global business

A strange confusion reigns in the Indian government's interaction with global big business at the moment. On the one hand, India is more dependent on foreign investment, and the goodwill of multinationals, than it has been for a long time. On the other hand, it has gone out of its way to be an unwelcoming and difficult environment. It seems obvious that these two facts cannot go hand in hand for any length of time - something must give. And when it does, a crisis will be difficult to avoid.

The reasons why India needs multinationals on its side are easy to see. India's external account is worryingly weak, with the current account deficit at 5.4 per cent of gross domestic product in the second quarter of 2012-13; it might be even higher in the third quarter, and come in at five per cent of GDP for the entire financial year. India's reserves have not grown sufficiently, and they cover only about seven months of imports. The huge trade deficit, caused by a fall-off of exports and high fuel and gold imports, is essentially being financed by an increase in inflows from foreign institutional investors (FIIs). External commercial borrowing, too, has increased. These are notoriously volatile flows. To minimise the risk of capital flight, therefore, foreign direct investment (FDI), more stable than FII inflows, is needed.

On the other hand, the sources of FDI - big multinational companies (MNCs) - will see little reason to invest in India at the moment. India boosters have long spoken of its growth, its burgeoning market, and so on; but for MNCs, the truth is that you can participate in the India consumption story without suffering the high price and inconveniences of doing business in the country. India has always been difficult for new projects. It has grown even more difficult of late, as high growth in the 2000s directed attention to environmental hurdles, power supply constraints and land acquisition bottlenecks for manufacturing. These are some of the reasons why Indian business is investing abroad.

But the government has made it worse for MNCs in some other ways, just at the time it needs them most. Worries over the fiscal deficit mean the revenue department has a freer hand, and is levying assessment after harsh assessment on MNCs that are being challenged. Some of these may be justifiable. However, the reputation of India's tax department does not inspire trust in global business, and many will think that the department is in over its head when it comes to taxing complex pricing strategies, for example. In any case, companies will choose to avoid countries that are inconsistent on taxes. Meanwhile, steps taken to protect Indian manufacturing - which has fallen by the wayside in the past 10 years, and especially the past two years - have also caused outrage. For example, the government worried that too much of India's telecom backbone was being built by strategic rivals; but its consequent attempt to limit the procurement options of the private sector for security reasons will not have pleased global business. Similar objections will attend the special electronics clusters that many see as the only way to ensure that an Indian hardware industry develops.

The government must realise that it should engage with global business and prevent a feeling that nobody in the government is willing to address MNCs' concerns. While attending to the collapse of domestic manufacturing cannot be de-emphasised, it is crucial that global business gets, at least, a genuine hearing. Inconsistencies in the policy environment, especially on taxes, should be avoided at all cost. If not, the contradictions at the heart of the government's treatment of MNCs will bring a crisis ever closer.