Has weak governance played havoc with the Indian business environment? ~ K M Birla.

In an interview with Bloomberg TV India, Kumar Mangalam Birla used a personal example to highlight the difficulties of doing business at a time of policy confusion. The chairman of the Aditya Birla Group spoke about how one of his companies had begun work on a $2 billion investment project after a coal mine was allotted to it. But the mine was taken away when the project was already under construction.
Birla later spoke about his experiences in Brazil. The team in charge of a project there gave him a precise time when they would commission the project, down to the hour. “The kind of certainty and comfort it gives you is a completely different feeling,” said Birla.

India has never been an easy place to do business, as the annual rankings provided by the World Bank show. But the recent policy uncertainty has made matters worse. Any project with a long gestation period needs minimal policy uncertainty. It is very difficult for a business to get a firm sense of project economics if policies keep changing unexpectedly.

What makes matters worse is that many policy swings in recent years have been because of the whims of individual ministers who seem to operate independently of the Prime Minister. Birla said that the mine was taken away suddenly because of a change in the environment ministry; the new minister changed the rules of the game.

Such concerns are voiced by many business leaders, often in private. Foreign investors are not amused either. Last month, Vodafone Group chief executive Vittorio Colao and General Electric Co. CEO Jeff Immelt spoke out against the Indian regulatory maze. And at the annual banking conference hosted by this newspaper on 27 February, senior bankers pointed out that one reason why loans were going bad was because of policy uncertainty in areas such as mining. Rules were changed after banks had lent money.

Weak governance has played havoc with the Indian business environment. Private sector investment activity has collapsed, and policy uncertainty is surely as important as other explanatory factors such as the state of the global economy or interest rates. Reviving private investment is central to any strategy of reviving economic growth. A March 2012 study by Kiichi Tokuoka of the International Monetary Fund showed that improving the business climate will play a key role in reviving corporate investment in India.

The government has set up a cabinet committee on investment to quickly clear large projects—with 15 members and four invitees, not exactly the optimal size for quick decisions. It may provide some temporary succour. But far more important is putting an end to the sort of whimsical policymaking that we have seen since 2004.

Source : Live Mint.

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