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Business Commentary/ Dilip Thakore

Hidden costs of doing business in a land of million rackets

One of the major sticking points of the national development effort under the liberalisation initiative of 1991 is the trickle -- instead of a flow -- of foreign investment into the Indian economy.

While China attracts foreign investment estimated at between $ 45 and $ 50 billion per year, the corresponding figure for India in fiscal 1997-98 was $ 3.2 billion.

According to Percy Barnevik, chairman of Investor AB, there is an estimated sum of $ 45 trillion seeking investment in stable, high-potential economies around the world. In his opinion it is very much in the national interest of the underdeveloped nations of the Third World to create conditions to attract these funds into their economies as a means to the end of eradicating hunger and poverty in their societies.

One of the gains of the economic liberalisation and deregulation initiative of 1991 is that there is a virtual consensus within the political parties that the flow of foreign investment into the Indian economy should be encouraged. The differences of opinion among Indian political parties is on the issue of the terms and conditions which should be offered to foreign investors.

Unfortunately, a majority within the nation's political class has not got over a mental block aptly described as the East India Company syndrome that views foreign investment with extreme suspicion. And one cannot entirely blame them either because politicians are best aware of the vulnerability of their tribe to the blandishments and inducements of foreign merchant capitalists backed by favourable exchange rates.

However, the cash-strapped Indian economy needs an estimated Rs 250 billion per year by way of investment in infrastructure industries to maintain a 7 per cent annual GDP growth. To make this happen, neither politicians nor the public have any option other than to relax the terms and conditions for an accelerated flow of foreign investment into Indian industry, infrastructure and even agri-business.

It would be very much in the national interest if the standing committee of Parliament decides in favour of the insurance bill, so that the legislation can emerge as a model for encouraging the flow of foreign investment into the under-performing Indian economy.

Yet it is important also to appreciate that the inhibitions of politicians cutting across all party lines are not the only impediment to broader flow of foreign investment -- especially capital-intensive long-term investment -- into India. A major contributory cause is the high hidden costs of doing business within the politician/bureaucrat-driven Indian economy.

Most of these high hidden costs of doing business in India flow from the endemic corruption that permeates the government and monopoly service industries owned and/or managed by the government. Ill-informed and cynical intellectuals tend to rationalise the open, uninterrupted and continuous corruption that is part and parcel of doing business in India, by arguing that such official corruption compensates the low emoluments of government servants and helps to grease the machinery of government.

But such rationalisation is misconceived as the spread of corruption within the economy adds to the cost of doing business not only monetarily but also in terms of personnel stress and demoralisation. For example, the chronic power outages that characterise the Indian economy add heavy costs to capital budgets because of the need to purchase stand-by power generating equipment.

And it is pertinent to bear in mind that power shortages in contemporary India are as much the consequence of power theft (officially described as transmission and distribution losses) as of generation inefficiencies. Likewise, the poor quality railway and road transportation infrastructure adds to business costs by way of pilferage and breakage.

Therefore, the cost in terms of executive stress of doing business with officials of a predator state is undoubtedly an impediment to foreign investment. While indigenous businessmen are equipped to manage such stress because of their familiarity with the system, foreign businessmen and executives are in the unenviable position of being damned if they do and damned if they don't.

A fiercely free and somewhat self-righteous press tends to come down hard on foreign businessmen who, taking a cue from their Indian counterparts, play ball with officials of the Predator State.

Indeed it is difficult to enumerate the many hidden costs of doing business in India. Interest rates are more than three times higher than in the developed countries because crony and corruption-driven lending has lumbered India's dominant nationalised banks with non-performing assets which could be as high as 40 per cent of advances.

Pilferage of stamps and non-delivery of vitally important letters and documents is routine in the government-owned postal service; and line-tapping and inflated billing by venal personnel within the state-owned telecom service is spectacularly unpunished.

Underpinning the millions of rackets that characterise the Indian economy and jack up the 'hidden costs', is the steady erosion of the law and order and justice systems. Unfortunately, there is insufficient awareness of the vital connection between the maintenance of law and order systems and business development even within the intelligentsia.

Recently I was reprimanded by the editor of one publication for "harping on law and order" instead of focusing on business development subjects. Yet on reflection it should be self-evident that investment -- foreign or domestic -- is unlikely to be made in societies or geographical areas where the law and order machinery is on the verge of breakdown.

Indeed, the prime reason behind Bihar, eastern Uttar Pradesh and Kerala being unable to attract even domestic investment is the utter disrepair of the law and order and justice dispensation systems in these states of the Indian Union.

Contrary to the popular depiction of avaricious foreign investors caricatured by Marxists and Leftists, the great majority within this tribe is favourably disposed towards combining business with philanthropy. Provided the 'hidden costs' are minimised and reasonable safety is afforded to capital and personnel.

If the Union and state governments are really serious about attracting foreign capital, they should repair the law and order maintenance systems, mete out exemplary punishment to government officials who transgress the law, and rid India of the image it has abroad of being the land of a million rackets.

Dilip Thakore

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