Tuesday, June 28, 2005

India tries to tame its red-tape jungle

Nachammai Raman
The Christian Science Monitor

As India races China to draw new business in the globalization sweepstakes, it is hobbled by the grinding bureaucratic legacy of 1950s socialism. Foreign businesses must navigate a gantlet of clerks, codes, and certifications to garner the 70 separate approvals needed for setting up shop here. It usually takes at least three months. But this infamous bureaucracy is getting a makeover. A new law that creates special economic zones, or SEZs, aims to streamline the process and lure foreign investors away from a booming China. The law follows a growing body of evidence that links a reduction in red tape to increased economic growth, experts say.
"I don't see why we can't achieve a seven-day clearance time [for businesses to open]," says Sreekumar Chatra of PricewaterhouseCooper, Bombay, who was an adviser to the Indian government on setting up the SEZs.
So far, 11 SEZs have been set up in places like Bombay, Ennore, and here in Madras. The zones are acres of land set aside by the government on the outskirts of cities. They're walled off and have comprehensive facilities, including their own utility services, banks, and government offices.
Fifteen-year tax breaks are given to foreign investors and many regulations, such as export tariffs, are removed from international trade. In fact, SEZs are treated as foreign territories for purposes of trade operations, duties, and tariffs.
The government's loss of taxes and tariff revenue from the zones was one of the main concerns of the finance department prior to their creation, according to Mr. Chatra. But the government realized, "If you don't do this, you won't get the [many times] larger investments," he says.
But tax breaks are on the bottom of investors' wish lists, according to Chatra. "More than anything else, what Indian and international companies want is a high degree of speed, a one-stop clearance," he says.
Now a zone commissioner gives just one approval that is tantamount to the 70 outside of SEZs. How fast things get done will ultimately depend on individual commissioners' turnaround time, but officials claim the market itself provides checks and balances. "If you delay [the investor's] papers, he has the option to go to another place. So, this must be investor friendly," says Ramesh Ram Mishra, secretary of the department of industries in Tamilnadu.
Chatra says the next thing investors look for is "plug and play" infrastructure. This includes good buildings, roads, easily available utilities, transportation facilities, offshore banking, and even a special court to resolve economic disputes expeditiously.
Since the Indian government is cash-strapped, private players are persuaded to develop infrastructure in the new zones, says P.V. Jaganmohan, joint commissioner of the Madras Export Processing Zone, now upgraded into a special economic zone. "Once they create the infrastructure, administration and monitoring will be [our responsibility]."
Investors seem willing to fork out money to build their own premises-related infrastructure because it gives them control over how things are constructed. Also, the advantages of being in a SEZ with reliable infrastructure and uninterrupted power supply may offset the extra cost, say business executives here, many of whom did not want to speak on the record.
The creation of the SEZs is India's effort to comply with new World Trade Organization directives against protectionist markets. Recent studies by organizations like the World Bank link a reduction in red tape to economic expansion, including foreign investment. And India has reason to move fast. Right now, Asia's giant sucking sound is foreign dollars heading to China. In 2003, foreign direct investment to China was $53.5 billion, compared with $4.3 billion to India, according to business analyst AT Kearney.
For now, the zones are being run in small designated pockets. Chatra explains that SEZs are a way of testing out deregulation "in a controlled environment" and then phasing in liberal policies across the country. "There are too many rigidities in the system. All of them cannot be removed in one go," he says. "That would require a revolution."
Chatra says the new SEZ law will be a big step toward dispelling the fear among foreign investors that it's difficult to do business in India. "It will establish a perception that India has a very strong, competitive manufacturing base," he says.
The law is geared primarily toward the manufacturing sector, which is trammeled by far more regulatory constraints than information technology, for example. Because IT is a late arrival to India, it escaped many of the bureaucratic regulations governing manufacturing.
"The [information technology] sector has grown because of one thing: no interference from the government. It created the right climate," says K. Subrahmaniam, president and chief executive office of Covansys, a US software development unit located in the Madras Export Processing Zone.
By boosting the manufacturing sector, India isn't necessarily staking out a position on a par with China; its ambitions are more modest.
"India could be a manufacturing base for South Asia," says Mishra.

Email India Unlugged

Monday, June 27, 2005

Blast from the past: Big plans, little action

Published Sunday Express on Sunday, June 26, 2005
By Tavleen Singh

There is something about this government’s grandiose schemes to guarantee employment and improve rural India that bring back, at least for me, memories of central planning and Nehruvian socialism. These memories are nearly all depressing because of the second-rate, shoddy quality that nearly everything had. Roads were bad, telephones looked like relics, airports and airlines had the dead hand of government stamped all over them, electricity and water came and went at their own sweet will, shops stocked goods of such shoddy quality that the average Indian was crazy about all things foreign and everything was always in short supply. People waited decades for a telephone connection, and as for domestic gas almost the only people who got it were those who knew an MP. The reason for this sad state of affairs was central planning and big government, and something about the Sonia-Manmohan approach to governance has a worrying reek of the past. Last week, one of the financial newspapers reported that the ambitious Bharat Nirman programme was going to cost another Rs 70,000 crores. The five-year plan to build rural infrastructure already has a bill of Rs 174,000 crores and the plan is to spend this money on irrigation, roads, water, electricity, telecommunications and housing. Sounds wonderful? Only on paper.
This is the sort of grandiose plan that used to routinely emanate from the Planning Commission in those bad old days of yore. Highly educated mandarins would gather together and pore over maps of rural India planning which villages would get electricity, which ones would be blessed with roads, which deserved a bit of drinking water and which ones needed telephones. Allocations would be made and then the Planning Commission with its permanent air of smug satisfaction would go on to devise yet another grandiose scheme.
If all these schemes had worked, India would have been a developed country long ago. Sadly, they never did work then and they are unlikely to work now because rural India’s ground realities have proved stubbornly resistant to central planning.
Remember that it was the Planning Commission itself that gloomily concluded under the last government that the best way to help those living below the poverty line was to send each family a cheque of Rs 8,000 instead of spending thousands of crore rupees on more grandiose planning.
The reason why central planning does not work is because the central planners are usually oblivious to the degree to which the delivery system has collapsed, become corrupt or antiquated. So the money that Delhi so generously pours into rural development nearly always ends up in the wrong hands. In States like Uttar Pradesh and Bihar where rural poverty is at its grimmest, I have seen villages in which money meant for Dalit housing has been distributed by upper-caste sarpanches to Brahmin families. I have seen illiterate Dalits being forced to put their thumb impressions on papers giving them loans that they never get, and as for the BPL (Below Poverty Line) cards, they get used as prizes to be distributed only to those BPL families who cooperate and do not protest.
If Bharat Nirman is not going to be as easy to implement as its very grand name implies, then the Employment Guarantee Scheme is going to be even harder to implement. Who is going to ensure that the ‘‘employment’’ goes to those who are really below the poverty line? The short answer is: nobody.
If our Planning Commission mandarins travelled incognito into the wilds of rural India they would discover that the officials they entrust with their grand schemes rarely bother to step out of district headquarters. The collector usually lives in the largest house in the best part of town and when he travels in his car with its flashing red light it is generally not to some backward village. It is usually to meet the Chief Minister or some minister in order to pay court and thereby ensure that he is not transferred to some punishment post.
Instead of more grandiose schemes, what we need from the Planning Commission — if we need a Planning Commission — is a comprehensive plan of radical administrative reform. Why, for instance, do we continue having collectors? It was a colonial post that should have been abolished when the British left.
It is not just one post but the entire administrative structure that needs change, but all that has changed so far is that government offices in rural India have become more and more impressive and forbidding so that nobody living below the poverty line would dare enter their portals.
This is not to say that change is not coming to the villages. There is change but it is coming not through grandiose government schemes but through the arrival of modern technology. Mobile phones, television and, here credit can be given to government, the ubiquitous STD-ISD booths, these are the instruments through which the 21st century is slowly beginning to arrive in the villages. Sadly, those who live below the poverty line continue to be deprived of these things and something must be done to help them rise out of their poverty but massive schemes are not going to solve the problem unless radical administrative reform comes first. Meanwhile, just as we need to think seriously about abolishing collectors we need to think seriously about abolishing the Planning Commission. It is an institution that is a relic of central planning times and as long as it exists, governments of ‘‘socialist’’ bent will continue to be tempted to centrally plan.