Dealing with government, a big hurdle for India Inc

Reforms may have removed many controls on industry, but the need to deal with the government or its civil servants has not declined.

About two decades have gone by since the economic reforms of 1991 unleashed the so-called animal spirits of Indian entrepreneurs.

There is a long list of companies that took advantage of the dismantling of the licence permit regime. Over the years, these companies grew at home and abroad.

A recent book, titled The Big Leap - How Indian Companies Leveraged Reforms for Success by Sharmila Kantha recounts the story of how 10 Indian companies changed in the last 22 years to become more efficient and profitable, even as their consumers had more choices and benefitted in many cases from lower prices. 

What helped this transformation? The book lists five major reasons: leadership, building outstanding employees, a focus on quality along with efficiency and productivity, stress on innovation and, finally, ensuring that corporate goals are not in conflict with society’s concerns.

Nobody can possibly quarrel with the criticality of these factors in helping Indian companies scale new heights in the post-reforms period. And we are not here to expand on the importance of these five factors.

…

The purpose here is to understand the key additional factors that could have made a bigger difference to India Inc’s ability to achieve greater freedom and higher growth in the last two decades. 

Note that all five factors that helped the transformation were products of the companies’ individual efforts in response to the liberalisation of policies governing trade, industrial licensing, exchange rates and the financial sector.

Indian companies, used to years of physical controls and a non-transparent discretionary policy regime, took their time to adjust to the new policy framework that sought to rely in principle on fiscal controls and a rule-based regulation.

It was a different matter that in practice these principles were not strictly followed in many sectors and indeed continue to be flouted in some areas even today. But there is no doubt that whatever changes happened did make a difference.

…

So the question is: would those changes have been faster and more sustainable if the policy framework had been eased in some other areas? And if so, which area? 

It seems that one area where some more change would have gone a long way pertains to the task of dealing with the government. The industrial licensing regime was dismantled, trade policy was simplified and financial sector deregulation made substantial headway, but the government has not really shrunk.

Its size over the years may have been capped somewhat, but its influence on India Inc has hardly been on the wane. After the low-hanging fruits of early-reform initiatives were plucked, which no doubt gave a lot of breathing space for companies to operate freely and efficiently, the government agencies succeeded in enforcing controls of a different type.

These were related to environment, land acquisition, rehabilitation of displaced persons, rationalisation of labour forces or even urban land use. 

…

It almost seemed that, although the government might have lost its levers of control over industry through the conventional instruments of trade and industrial licensing policies, it had compensated for that loss by extending its controls through a host of other laws that escaped the reforms agenda.

Indeed, even 22 years after the initial burst of reforms, the government’s policies on each of those new areas continue to be plagued with problems and lack of clarity, even though many attempts at reforming the laws and procedures have been made. In short, the government did not go away from the lives of India Inc.

More worryingly, dealing with the government continued to be as daunting a task as it used to be during the pre-reforms era, though for a different set of reasons. 

…

The need for India Inc to deal with the government remained critical for another reason.

With the dismantling of industrial licensing controls, new laws were framed to set up a host of regulators to ensure that new players in an industry did not collaborate or act in a manner that could undermine competition or the interest of consumers.

But in most cases, the new regulators became the favourite destination of retired or retiring bureaucrats.

In some cases, a secretary of a ministry, looking after a certain industry, would be appointed as independent regulator of the same industry.

…

You might argue that the government was trying to maintain continuity — but what about the important goal of getting fresh talent from industry to head these regulatory bodies and make them truly independent of the government? 

With former civil servants appointed as regulators and with no signs of this trend reversing, Indian companies saw the writing on the wall.

Reforms may have removed many controls on industry, but the need to deal with the government or its civil servants has not declined.

For that to happen, there is an urgent need for a fresh burst of reforms of the governance structure. Imagine the gains such reforms would yield for India Inc!