T Thomas: An appraisal of reforms in India

Reforms have been very effective, and they deserve acknowledgement and support, especially from intellectuals

One of the endearing characteristics of a cultured Englishman is his ability to poke fun at his own country and people. Many Indians have imbibed this habit. In many ways it is a good thing. However, sometimes this can be carried too far. For instance, the FT recently had an article by an Indian intellectual from one of the think tanks in Delhi, on how India has "lost the will to reform" and how the ruling party has not made out an "intellectual case" for reform or built a coalition around it""as if an intellectual case has to be made for it!

It is a healthy activity to criticise the performance of our country and its government. But such criticism has to be based on facts and preferably accompanied by suggestions on how things can be improved. It is also necessary to acknowledge the benefits of the reforms already implemented.

If we were to evaluate the reform process in the Indian economy over the last decade or so, the results have been nothing short of dramatic. Those of us who have managed businesses in India before the 1990s realise this only too well. The abolition of industrial licensing, dismantling of price controls, dilution of reservations for small-scale industries and virtual abolition of the monopolies law, relaxation of restrictions on foreign investment, lowering of corporate and personal tax rates, removal of restrictions on managerial remuneration, etc. were very bold steps, all of which have enabled industry to blossom. Today's younger generation of business managers cannot even believe that we had such an array of restrictions and handicaps.

The reform process has released the entrepreneurial instincts in our country and many honest professionals have been able to set up their own enterprises. The removal of restrictions and abolition of licences have also resulted in a dramatic reduction in corruption and political patronage. Today's businessman does not have to make frequent visits to the various Bhavans in Delhi. Instead, he is free to travel abroad with adequate foreign exchange to expand his market reach.

The real issue now is: what more can be done in the reform process? One way to identify this is to compare the position of an Indian entrepreneur to that of an American one. If I want to start a business today in India, the first step is to identify a sufficiently attractive area of business and evaluate the opportunity. With an economic growth rate which is double that of the US, the opportunities in India are at least as good. An evaluation of the opportunity and its financial implications is no more difficult in India than in any other country. In fact there are some advantages, e.g. competition is relatively limited; and foreign investors are still by and large shy to enter India, and therefore the field is more open.

The next step is to choose a location. Here again, there is no fundamental difference in the choice of location to be made by an Indian or an American businessman in his respective country. However, when it comes to the next step of raising the capital required for the business, the Indian businessman is at a disadvantage. The possibility of recourse to venture capital is very limited. Most of the banks and financial institutions are owned by the government and they are not inclined to take the risk of financing a start-up. They may give working capital, against the pledging of assets and even a personal guarantee. So one of the areas where the reform process can proceed further is to facilitate and arrange more funds to be available as venture capital. This is a gap in our reform process.

Having arranged for financing, the next step is to acquire land for the project and to secure supplies of water and electricity. Here the Indian entrepreneur faces obstacles that his counterparts in the US and Europe do not have to face. Land and water are scarce commodities in most parts of India. The laws relating to ownership of land in India are archaic and therefore procurement of land can be a nightmare. But fortunately many state governments have set up industrial zones and parks where the entrepreneur can take land on long-term lease. In most cases all the services, like water and power supply, drainage, etc. come as part of the package. In fact today several states compete with one another on the quality of this input that they can provide, and their speed of action. This is one of the potent forces released by the reform process. For instance, the West Bengal government, which has been under Communist control for a long time and is ideologically opposed to the private sector and foreign investment, is one of the most eager in providing such facilities for the private sector.

Who could have imagined a few years ago that the Communist government in West Bengal would declare the IT industry as an essential service in which strikes are prohibited? It is not a coincidence that ever since the economic reform process started, trade union power has been on the decline and strikes are far less frequent. Even a strike-prone state like Kerala, which has been only marginally impacted by the reform process, has begun to attract investors in select sectors like IT and export-oriented manufacture.

The other major incentive is the tax exemption offered in "backward areas" in each state, e.g. Hosur in Tamil Nadu, Jammu in J&K, Haldia in West Bengal""all of which have become industrial hubs. It is possible to have a payback period of less than three years for investment in such areas. There are very few countries in the world which offer such substantial tax concessions. The states concerned had the wisdom to realise that although initially it may look like a "loss of revenue", once the industries are established they become tax-generating zones.

When it comes to running a business, there are still some disadvantages in doing so in India. Power supply is uncertain and expensive; it takes too long to get goods from and back to ports; and the labour laws do not allow you enough flexibility in manpower planning. These are important issues that remain to be addressed.

Nevertheless, it is obvious from the above analysis that the reform process in India has been very effective, that it is a continuing process and that it deserves acknowledgement and support, especially from intellectuals.