Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE
Vol. 2 :: No. 1 :: March 1998
A Glimpse of the Divine
D. Sampathkumar
Promoters setting up a project in India cannot be faulted if they find the process a bit like worship at a Hindu temple. Devotees have to cross a multitude of thresholds in a long passage which leads to the innermost recesses of the temple if they wish to worship the Lord from close quarters. The thresholds become progressively darker and head clearances shorter as they thread their way to the sanctum sanctorum. Leading a project through the thicket of regulatorial clearances in the Indian context is no different. There are any number of approvals and clearances that a project has to get past -- each one more difficult than the previous one -- before the final output rolls out of the factory gates.
The analogy is appropriate from an another perspective as well. The bliss that a devotee experiences in the communion with the Lord from such close quarters is what makes all the hardship worthwhile. Similarly, for the entrepreneur wishing to set up a project in the country, there is reward at the end of it. Overcome the procedural hurdles, the innumerable clearances, and your entrepreneur can look forward to riches beyond the dreams of avarice.
The perception of a somewhat hostile bureaucratic environment is particularly strong among managers of foreign enterprises. At an informal briefing to a group of visiting journalists some time ago, Mr. Von Pierer, the Chief Executive of Siemens, the German multinational corporation, was asked how he rated China and India as business destinations for his company. While conceding that these two destinations did pose enormous challenges for Western businesses, he nevertheless refused to be drawn into any candid assessment of relative merits claiming that his company needed to do business in both these countries. But he did however make the point that in India, the nature of bureaucracy simply overwhelmed him. He was, of course, not alone in this perception. Foreign businesses seeking to set up shop in the country, be they from the West or the Far East or any other part of the globe, perceptions remain the same.
Foreign investors concede that there can be no total license for foreign capital seeking an entry into the local economy. They are even willing to grant the host nation a long lead time for arriving at a decision on their proposal. But they expect that once an in-principle approval comes through, the project should have a smooth sailing thereafter. But this does not happen in India and a typical multinational corporation is mystified at the turn of events. In their experience, despite initial approval, the project encounters innumerable road blocks in the form of additional approvals and procedural formalities to be complied with, all along the way, before commercial operations could begin.
In a sense, they have been accustomed to doing business in emerging market economies where the engine of approval once suitably cranked (usually in the form of a customary tribute to the chief ruler or someone in the family), the project begins to fire on all cylinders. But that does not happen in India. The result is disenchantment all around. The foreign investor thinks he has been led along the garden path only to be badly let down. On the other hand the policy makers in the Government feel disappointed that the promised level of investments have not materialised.
What is it about Indian bureaucracy that makes foreign businessmen feel so intimidated and conveys an impression of being present at every twist and turn of business activity? And even more importantly, why does China score over India in this respect? At a macro level, both India and China may represent a somewhat hostile environment for foreign investments. But on the ground, they differ in their response to individual investment proposals.
In China, the initial approval for a specific project may be very slow in materialising. But once this is obtained, the project may not face any hurdles thereafter. In contrast, the initial approval rarely if ever, poses a problem for an entrepreneur wishing to set up a project in India. But the project may have to fulfill a host of other criteria which results in the project remaining on the drawing board for an inordinate period of time. Of course, the differences in the political system, the nature of social policy objectives, are factors which have a bearing on this question. But an understanding the problem does not make the experience any more palatable.
Very few people inside, and perhaps none outside the country, can appreciate in full measure the extent and nature of controls built up assiduously over a period of time. The control system has been characterised by an interlocking and mutually reinforcing set of internal and external controls. They owe their origin to a belief that economic growth can be specifically planned for, and what is more, can be actually made to happen. This assumption was reinforced by an additional premise that there was a general scarcity of capital for investments thus necessitating a judicious allocation of available resources.
Consequently there was an attempt at laying down the kind of capacities that would have to be created and the specific sectors. Once such a decision was taken in favour of an entrepreneur, it followed that others must be prevented from entering it. For a failure to do so would result in denial of resources that should ideally have gone to finance other projects which have passed the regulatorial clearances. Any delay in the commissioning of capacities for want of finances would then undermine the larger policy objective of planned accretion in output across the economy as a whole.
It is easy to see how such a policy on domestic capacity creation creates the environment for control of imports. For having allowed additional capacity to come up in some specific sector, it is only logical that the Government must be seen as being fully committed to ensuring that goods from outside the country do not pose a threat in the domestic market place. Thus not only was internal competition expected to be regulated but the external competition as well.
To compound matters, the control system was created with a multiplicity of social objectives. Thus, there was the objective of prevention of concentration of economic power, promotion of small scale enterprises, price stability, preventing regional disparities in industrial growth and so on. Of course, a fundamental fallacy in all this is that while policy makers factor all these specifications into the final decision, the economy does not move from one level of equilibrium to the next higher level in a continuous and orderly fashion. The economy, in fact, lurches from one level of disequilibrium to the next.
This meant that at any point of time, there were shortages in some areas and excesses in some others. Shortages implied some form of allocative mechanism and excesses meant added protection or incentives to boost consumption. They supplemented controls on product diversification, a regulatorial system to penalise unauthorised expansion of capacities, to allocate and prevent reallocation of imported inputs. Taken together they constituted a bureaucratic oversight mechanism whose complexity rivaled that of the famous maze at Hampton Court near London.
It would be tempting to conclude that with the onset of a policy of economic liberalisation, bureaucracy has become irrelevant or that it has lost much of its earlier sting. The new economic policy which did away with industrial licensing, abolished monopolies legislation, and liberalised the import policy, has led many to believe that the bureaucracy no longer matters. But that is not true. What has been achieved is the loosening up of some aspects of internal control, such as licensing of fresh investments or controls aimed at preventing growth of monopolies etc. But a whole lot of other controls are very much in place. For instance, the import policy may have been liberalised, but a whole range of external controls on proof of end use, remittance of foreign exchange etc. continue to remain in vogue. So it is futile to expect that bureaucracy can now pack its bag and go home and not come to office even to collect to the monthly pay check as the electronic payment system has made it unnecessary. The policy on Independent Power Producers is a case in point.
In 1991, the Government took a policy decision to permit private investment in power sector. Many thought that with the announcement, the decks had been cleared for the private sector to assume commanding heights of power generation in the country. No doubt there had been a rush of proposals. But this did not mean that private entrepreneurs could just go ahead and start producing power or sell it to anyone who was in a position to pay for it. The policy announcement was only in the nature of an enabling provision. It did not signal the waiver of any legal or other regulatory requirements in this context. The project still required a techno-economic and commercial clearance from the Central Electricity Authority -- a body created to ensure proper functioning of the industry -- under the relevant legislation on power utilities.
Then, if the project involved inflow of foreign capital it required a clearance from the Reserve Bank of India / Central Government in the context of foreign exchange. Again, if the project does not conform to the equity ownership pattern permitted by the Government, the project requires a fresh round of approvals. If the project envisages mining of coal then the project must conform to the relevant policy on coal mining. Clearance from an environmental angle is, again, something that is above all other clearances. And of course, if the contract had not been entered into in a transparent manner such as awarding it on the basis of an open competitive bidding, the allegations of corruption and judicial scrutiny of these contracts can stall these ventures. So, the charge of bureaucratic obstructions is, in effect, a catchphrase covering a whole gamut of regulatorial and public clearances.
There is considerable disappointment in industry and elsewhere that the concept of a `single window' of clearances hasn't really taken off in the country. As someone remarked, the `single window', far from being a substitute for the multitude of windows, soon became yet another window. The concept of a solitary route of entry is alien to our culture. The notion that a devotee can make an entry from the side, to be near the idol in the temple in one short hop-step-and-jump as it were, is alien to the Hindu concept of worship. In much the same way, the expectation that a project should be subjected to just one preliminary scrutiny and should be flagged off for final commissioning thereafter, is foreign to the Indian way of conducting business.
So when foreigners demand a single window or when the Government claims that it has given them one such, the reality is something different. The multitudes of thresholds have not actually been eliminated. It is just that the promoter is not exposed to their hidden presence. It is as though the project promoters are presented with what is not one physical, single window for entry right into the sanctum sanctorum, but a window that is in `virtual reality' for a multitude of thresholds that lie between the outer wall and the inner sanctum. In retrospect, it would seem that the concept was introduced without a change in the mindset. The expression `window' is singularly inappropriate for the occasion. It invokes images of a fortified and barricaded structure and the window enables a sentry to screen visitors as they file past the turnstile. If we are at all interested in easing the path for foreign investors, we should have a `single door' concept rather than a `single window'!
Does all this mean bureaucracy cannot be managed? It has been done in the past and the celebrated example has been the use of fiscal devices in the early eighties, to favour the polyester industry to the detriment of manufacturers of other types of man- made fibres. A succession of changes in tariff favoured polyester consumption to the detriment of viscose fibre. Again, it favoured domestic manufacture of the raw material used in polyester to the detriment of imports through punitive duties on such imports. The duty structure on import of car components in the eighties, is yet another example.
The lesson from these examples is this. The bureaucracy is a hurdle no doubt. But then if the enterprise in question is the corporate equivalent of an Edwin Moses it can overcome the hurdles with relative ease and win in the market place.