Over the next two decades, the conditions of global cheap capital, low interest rates and gradual decline in commodity prices will either be reversed suddenly or seesaw violently according to McKinsey’s research report.

While companies do not have any choice, except to learn to navigate the volatility of the business cycle, we seem to be allowing the economy and the business to drift, by either delaying decisions or by reversing some decisions with retrospective amendments — in the process increasing the uncertainty and ambiguity.

Moving out

As growth slows and reforms falter, economic activity is slowly shifting out of India. Dabur which makes herbal soaps, oils and creams, runs its international arm from Dubai. Colombo is a vital port and about 30 per cent of containers bound for India go via intermediate hubs fed by small vessels, either because big shipping lines do not want to deal with India’s customs regime or because their ships are too big for India’s ports. About half of this transhipment happens in Colombo.

Service industries do seem to be shifting their focus from India. India’s balance of trade in business and financial services has slipped into a modest deficit, from a surplus five years ago.

The number of corporate legal cases at the Singapore arbitration centre has grown. While policy statements in recent years argue that India should become a global hub for aviation, legal arbitration and international finance at the ground level, the progress is extremely negligible.

While our wish is to deepen the bond market and the currency market, half of the rupee trading seems to be taking place offshore.

In the five years to March 2012, for every dollar of direct foreign investment in Indian Manufacturing, Indian firms invested 65 cents in manufacturing abroad. An investment bank recently helped finance a $800-million fertiliser plant which would be built in the UAE by Indian firms that will then re-export much of the output back home.

The Gulf’s cheap power and planning regime make this more feasible and attractive than setting up a plant in India.

infrastructure woes

The biggest worry is that heavy industry is getting itchy feet. Coal India, in spite of sitting on the world’s largest reserve, plans to spend billions of dollars buying mines abroad. It finds it difficult to expand production at home.

We should be conscious of the fact that we do not have adequate resources to build our infrastructure.

While savings over a period of five years have come down from 36.8 per cent in 2007-08 to 30 per cent in 2012-13, even the composition of savings has significantly changed in the past two years from cash to physical assets.

Only around 50 per cent of our savings is in the form of cash, the balance is in the form of physical assets.

While the RBI’s recent measures to attract inflow from foreign banks and NRIs would help bridge the gap in the current account deficit (CAD) and stabilise the rupee, if the amount received is not put to productive use, history will repeat itself.

Debt always matters. Either it must be repaid out of the proceeds of the investment that was funded by the debt or – if the debt funded consumption or was misallocated into insufficiently productive investments – it must be repaid by transfers from some other sector of the economy. These transfers reduce growth by reducing real demand.

Infrastructure development is a critical enabler to sustain economic growth. Going ahead, some critical sector-specific issues need to be focused on. It is impractical to assume that PPP documentation is ‘cast in stone’ and any unforeseen development will not require to be addressed in public interest. An ideal contract for a long-term transaction is impossible to achieve as it would require perfect foresight, while human ingenuity can forecast only a limited set of possibilities.

Prices need to be flexible because of major commodity price shocks, exchange rate crisis or any external event beyond the control of the project owner. We need to set up ‘Independent PPP Commission’ with authority and jurisdiction to renegotiate terms of contract in the best interests of the country.

The Government has to ensure that all projects are awarded to the private sector after securing key sovereign clearances. The CII has been recommending creation of Business Trusts (BT) that allow assets to be managed only by professional OEM (original equipment manufacturer) operators.

The underlying ownership remains with BT whose units gets subscribed. Sectoral regulatory authorities need to be developed into truly independent bodies that are free from political and bureaucratic interference.

A ‘National Business Facilitation Grid’ must be set up consisting of all the business regulations and procedures across the country along with a Business Regulatory Governance Catalogue to choose appropriate regulatory alternatives. This will serve as a one-stop shop for much needed information for both policy makers and businesses.

Cluster approach

Industrial clusters are increasingly recognised as an effective means of industrial development and promotion of small and medium-sized enterprises.

To improve the effectiveness of Cluster as a tool for promoting industrial growth, a Central Cluster Cell (CCC) at an apex level could be set up to monitor the performance of clusters and share best practices.

The CCC can also develop cluster manuals to facilitate state governments in creating new clusters and cluster development.

The micro, small and medium enterprises (MSMEs) are often handicapped by obsolete and inefficient technologies and therefore imposition of standards on them must be accompanied by institutional support.

Issues around credit and finance should be solved through scaling up operations of SME exchanges and enhancement of credit guarantee schemes. The scope of the Credit Linked Capital Subsidy Scheme for supporting technology acquisition and upgradation of production facilities should be enhanced.

A more effective procurement policy for goods/services from MSMEs by Government Departments and Central PSUs and better management of Defence Offset Policies for MSMEs will strengthen the sector. Creation of Technology Fund for usage in areas such as technology upgradation, waste management recycling programme and funding for R&D has to be explored.

Predictability and certainty should be the foundation on which we should build our taxation policy, while tax evasion has to be firmly handled. Introduction of transfer pricing between two domestic companies where there is no tax arbitrage can only lead to needless litigation.

We sometimes enter into a free trade agreement with other countries which enable them to import products into India with tax advantages which results in disturbing the level playing field of companies in India. Consultation with stakeholders may be improved while preparing FTAs and reforms.

Tapering of quantitative easing by the US Federal Reserve is bound to happen sooner or later and Europe has got its own issues to grapple with, after setting up a $500-billion exchange stability fund.

It is, therefore, essential that internally we make India an attractive destination to do business. Fortunately, we have a huge potential.

While we have a strong vision to grow, our execution seems to be faltering. Our vision will remain a mere dream unless we act on it to make it a reality.

(The author is President and Group CFO, TAFE Ltd. Views expressed are personal.)

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