India’s raj of regulators

By Quentin Peel

Financial Times

Published: March 17 2005

Sometimes it is worth stating the obvious, at the risk of seeming simplistic. Thus it was last week in New Delhi, when some 200 Indian and foreign investors gathered to assess the state of economic reform and the latest Indian budget.

Clearly this is an "India moment" for global investors and there is a buzz in the air. There was a broad welcome for the package of tax and import tariff cuts proposed by Palaniappan Chidambaram, the finance minister, although some disappointment at his slow progress in cutting the budget deficit and opening the banking sector.

It sounded good, too, that three new sectors are being added to the list where foreign investment is welcome: construction, mining and pensions. That was until a blunt Australian mining man stuck his oar in.

"Why is it that when you want to attract mining companies to go prospecting, you still ban aerial geophysical surveys?" he asked. "There is zero value to unknown resources. If you do not know it is there, it does not exist." It sounded like an existentialist view of economics.

But answer came there none. Presumably it is something to do with an ancient obsession of Indian national security, although quite why it persists in this era of satellite spying no one seemed able to say. It is a classic example of the sort of arcane regulation that still bedevils investors, both Indian and foreign, and acts as a drag on a faster take-off for the mighty Indian economy.

Red tape is one thing. Slow decision-making is another. The most headline-catching announcement last week came from Kamal Nath, the minister of commerce and industry, who promised a new law to be tabled in parliament shortly on special economic zones, where tough labour laws and other restrictive regulation can be relaxed for new investors. The trouble is that the same announcement was made by his predecessor in 2000, and again in 2003.

The dilemma of India's economic revival is that, while the country boasts a "dream team" of economic reformers in government - Manmohan Singh, the prime minister, Mr Chidambaram at Finance, and Montek Singh Ahluwalia at the Planning Commission - they are still hamstrung by the dead weight of Indian bureaucracy and the minefield of Indian politics.

The prime minister insists that reform of public administration is now his top priority, both in Delhi and in the states. But progress is hard to see. The problem is both political and bureaucratic, a compound of vested interests, jobs for the boys, excessive attention to detail and opportunities for corruption - although at 25m the bureaucracy is not that large for a country of more than 1bn.

It is further complicated by the well-intentioned quota system that reserves jobs in the administration for the lower castes - untouchables, tribals and so-called "backward" classes, in India's politically incorrect jargon. Almost 50 per cent of administrative jobs are reserved, effectively preventing the emergence of any merit-based system.

If the bureaucracy is one nightmare for Mr Singh, the other is the federal politics of India. It makes the complex consensus-building of European Union politics seem positively benign. He depends in his coalition on the support of several state parties, which promise their votes only in return for cabinet seats and more cash for their constituencies. Yet many are notoriously inefficient and corrupt.

That is where the special economic zones come in. They are intended by central government to call the bluff of the states, forcing them to compete with each other to attract investors, and deregulate as they will.

A far better solution would be to scrap more red tape across the whole economy, not just in special zones, but Mr Nath admits the plan is a Trojan horse to get the states moving on liberalisation. Yet if the record of India's states is anything to go by, SEZs may only reinforce the present divide. The less populous and more prosperous states will win the lion's share of new investment, leaving the poorest - also the most corrupt and inefficient - out in the cold.

The greatest challenge of all is to ensure India's growing prosperity at the top trickles down to the poorest. On that front, foreign investors are not really rushing to help.