What ails India Incorporated? In the 12 months of the last financial year, overseas investments by Indian firms touched a staggering $44 billion, an unprecedented 150% rise from $18 billion the year before. At the same time, inward direct investment from foreign firms was $27 billion, 25% less than that of the previous year. Indeed, it is strange for the world’s second-fastest growing economy to have disparately higher capital outflows vis-à-vis inflows. And it becomes even stranger when balanced with inward remittances of $55 billion that the 27 million Indian diaspora made last year – the highest globally.
Not strange so far? According to a report released by Global Financial Integrity (GFI) late last year, it is estimated that because of tax evasion, crime, bribery, kickbacks, and corruption, India has lost gross assets worth US $462 billion (adjusted) during 1948-2008, at the phenomenal average rate of $19 billion per year from 2004-2008. About 68% of this aggregate illicit capital loss occurred after India’s economic reforms in 1991, indicating that deregulation and trade liberalization actually contributed to/accelerated the transfer of illicit money abroad. And quite evidently, High Net-Worth Individuals (HNWIs) and private companies were found to be the primary drivers of illicit flows out of India’s private sector. India’s underground economy is also a significant driver of illicit financial flows. Without meaning to be an alarmist (or a pessimist), substantial as these outflows are, they are likely to be understated given that economic models cannot capture all channels through which illicit capital can leave the country.
So again – what ails India Incorporated? Faster rates of economic growth since economic reform started in 1991 led to a deterioration of income distribution which led to more illicit flows from the country. It was the unleashing of an economic barrage, pun intended, without the sluice of corporate governance. Moreover, this poor state of governance is more than aptly reflected in a growing underground economy which in turn has fueled more transfers of illicit capital from India, stagnating levels of poverty and an ever widening gap between India’s rich and poor. While in absolute percentages (and not numbers), overall poverty may have declined from 35.8% to 27.5% for the country during 1991–2008 , income inequity measured in terms of the Gini coefficient actually increased – from 0.303 in 1991 to 0.368 in 2008 (the last year for which statistics are available).
Despite this (or because of this), indeed the rate of return on investment in India is higher than abroad, so obviously this increasing global footprint is more than just “routine expansion of business”. Over the last year, Mukesh Ambani’s Reliance Industries invested $5 billion in Africa and the US, and now has plans to double its investment abroad in four years. Anil Ambani’s Reliance-ADAG has invested $3 billion globally in 2011, and also wants to double that to $7 billion by 2015. Ratan Tata (the Tata group has 65% revenues generated overseas) has invested more than $1 billion internationally this year. The Essar Group expects to invest $6 billion overseas by 2015. Sunil Mittal’s Bharti Airtel spent $8.2 billion acquiring Middle East-based telecom firm Zain’s Africa operations last year. Could it be that earlier, investing abroad was a risk diversification but the current impasse in governance makes it a necessary evil (sic) for companies to look elsewhere?
Yes I know, I haven’t answered the question at the crux yet, what ails India Incorporated. For that let’s glance at an “abbreviated to-do” list for the netas and babus.
Land acquisition and rehabilitation and resettlement bill: As a much-needed successor to the Land Acquisition Act of 1894, this Bill will ensure that the private sector directly acquires as much as 70% of total targeted land directly from farmers. Our farmers will get a better price, and the rehabilitation and resettlement provisions might even address opposition from those who resist selling out.
Mines (amendment) bill: With the insertion of a clause that will make it mandatory for mining firms to share profits and royalties with affected tribals, the Bill can remove the most significant hurdle to an expansion of mining activity. After much debate and an inordinate delay, it has been cleared by a GoM and awaits Cabinet approval.
Banking laws (amendment) bill: Introduced in Parliament in 2005, this Bill proposes to open up India’s relatively closed banking sector. It will give shareholders in banks the right to vote in proportion with their shareholding. Currently, shareholders have a maximum of 1% vote in a public sector bank and 10% in a private sector bank irrespective of actual equity holding.
Insurance laws (amendment) bill: On the table in Parliament since 2008, the Bill will allow up to 49% (up from 26%) FDI in domestic insurance companies.
Pension fund and development regulatory authority bill: First introduced in Parliament in 2005, the Bill will allow up to 26% FDI in pensions. It will also grant statutory status to the independent regulator.
Companies bill: A much needed successor to the Companies Act 1956, this will permit shareholders to file class action suits against fraudulent promoters. This amendment in company law is pending since the Satyam scandal broke out more than two years ago.
Direct taxes code bill: By lowering corporate and income tax rates, this should increase compliance and raise revenue for the Government. Most importantly, it will do away with the Government cashing in on its powers to grant exemption. But sadly (and predictably), the Government has failed to achieve consensus among stakeholders.
Constitution (115th amendment) bill (GST bill): It will overhaul India’s indirect tax system which in its current form imposes multiple, cascading taxes on the same good or service. Like the direct taxes code, it will abolish exemptions and lower rates, hopefully increasing compliance and revenue for Government. Again, the Government has failed to persuade all states.
Of course, there are many others in a long laundry list (the latest of which is the Lokpal conundrum), but I guess our netas and babus don’t want to wash dirty linen in public! This list is not a panacea, perhaps just Band-Aid on what appears to be a festering wound. Maybe the Government is “damned if it does, and damned if it doesn’t”. But someone needs to yell from the floor of the hallowed (hollowed?) House. Else I will. “Could I have the bill please?”