Not so easy to improve ease of doing business

Subir Roy

Senior Economic Analyst

THE Japanese are perturbed by their economy’s trajectory. Multilateral agencies have forecast that by 2025, in terms of GDP, Japan will be pushed down to the fifth position, trailing the US, China, Germany and India.

Interestingly, the Indians are not feeling that they have arrived. Like the Japanese, they are also concerned, but about Southeast Asia. Countries like Vietnam, Malaysia and Indonesia are together getting a major share of cross-border investments. One part of this is the investment that global manufacturers are undertaking to derisk their business by seeking new locations under the ‘China plus one’ policy. The other is to serve this emerging market.

The Japanese angst is a bit emotional. Until not so long ago, after Japan made its striking post-war recovery and forged ahead, the Japanese model was considered the one to follow. South Korea, Taiwan and, to an extent, China did so and prospered.

The Japanese are not worried about their standard of living or the state of their country’s infrastructure. In fact, their biggest issue is ageing and a declining population, which have led to inadequate consumption expenditure and deflation. To overcome this, the Bank of Japan had gone in for negative interest rates (in effect the lender, not the borrower, pays). An upshot of this has been yen depreciation (if Japanese bonds give you nothing, international investors will park their funds elsewhere). It is yen depreciation vis-a-vis the euro which has caused the German GDP to forge ahead.

The negative interest rate regime is now over. The major task that still remains ahead is to downplay their focus on social consensus that was at one time lauded across the world but is now realised to have hurt innovation and business competition. In India, in the auto sector, Korean Hyundai is seen to be much more fleet-footed than Maruti Suzuki. Despite beating Japan in terms of size of the economy, what India has to strive for by learning from the Japanese is to have a well-educated and trained workforce covered by an elaborate social security system.

As to why global investors find it more promising to invest in Southeast Asia (Singapore, Vietnam, Malaysia, Indonesia, Thailand), the foremost reason is the far greater ease of doing business that prevails there with business-friendly regimes in place. Plus, they have a growing middle class willing to spend, and an educated and trained workforce. The region has been traditionally receptive to Western business, China is now frowned upon by Western powers, and India is considered a difficult hurdle to get over. So, the choice is Southeast Asia.

Apple, Microsoft, Nvidia and Amazon recently sent their leaders to the region to look for opportunities and promise investment. The region’s 675-million population is embracing video-streaming, online shopping and generative AI in a big way. All this will need enormous data centre capacity, and global leaders are ready to invest $60 billion in new data centres.

The foremost agenda before the Indian government by looking at Southeast Asia is to improve the ease of doing business and strive for a healthy and trained workforce. It goes without saying that the healthcare and education systems will have to be transformed. The budgetary allocation for these has to be sharply hiked. A consensus has to be built in favour of this by adopting the talking points of social sector activists. This will not just be good but vital for business.

Where India can go forward by exploiting its strength is by giving even more emphasis to the use of information technology in people’s lives and equipping them to make more and more use of it. For this every youngster needs to grow up with school-leaving levels of literacy and cognitive skills. And of course, everyone needs to have his own smartphone. The most encouraging sign of this is to see even those selling wares on pushcarts willing to accept online payment with the help of the QR code.

The biggest challenge for the Indian system is to improve the ease of doing business. This will require a national culture change and a new kind of politics. Its leitmotif will have to be Centre-state cooperation, which has been achieved in a small way through the functioning of the GST Council, which runs the GST system through consensus.

A case in point is the MGNREGA programme, run by the states but funded by the centre. Tamil Nadu leads in securing the largest share of man-days nationally generated, although it does not have the largest number of rural poor. In contrast, West Bengal generated zero man-days last year because the Centre had cut off funds as proper procedures had not been followed. There are reports of acute rural distress and migration from West Bengal villages in search of some means of livelihood.

The state needs to ensure that procedures for Centrally funded projects are strictly followed and that political rivalry is not allowed to play spoilsport. Tamil Nadu and the Centre are on opposite sides of the political fence, but this does not interfere with the running of MGNREGA in the state.

There should be no illusion among India’s leaders that just because its GDP is set to cross Japan’s soon, it is economically at the same level as Japan. In terms of per capita income, India is and will remain far, far behind for a long time. Japan is not a totalitarian state but has managed to achieve broadly accepted social goals through a system of building social consensus. A degree of social consensus on indisputable national goals will help India move forward in a comprehensive way, not as is happening now. The growing GDP is being very unequally shared, with poverty, deprivation and malnutrition existing side by side with the prosperity of a few.

The lesson that India can learn from Southeast Asia is to move forward with its own type of consensus which considers it wise to spend less time fighting internal political battles and focuses single-mindedly on improving overall economic functioning and attracting more investment.

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