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In Washington last week, Indian Finance Minister Pranab Mukherjee attempted to dispel a growing sense of gloom about the country’s prospects in the business community. “I can only state the fact that there is no vacuum in the leadership of the union government,” declared Mr. Mukherjee in response to a question. “And there is a very powerful, strong, acceptable prime minister.”
Mr. Mukherjee was trying to mollify unhappy businessmen, but, predictably enough, he hasn’t paused to ask why he’s facing this level of discontent. The concerns about a leadership vacuum Mr. Mukherjee hopes to dispel were first expressed last week in a leaked letter to the White House from Terry McGraw, outgoing chairman of the usually bullish U.S.-India Business Council. The absence of a firm hand at the top, said the letter, “is allowing forces in government to move on issues that are harmful to India’s investment climate.”
That follows dozens of complaints by foreign investors about New Delhi’s often erratic policies. Over the past decade, many businessmen had begun to see India as “the next China,” but now the country is one sharp disappointment away from being relegated again to underachiever status.
Finance Minister Pranab Mukherjee makes his case in Washington.
Many observers trace the present malaise to either the nature of Indian democracy or proximate political events. They blame the pulls and pressures of coalition politics, or the electoral setback for the Congress Party last month in the populous Uttar Pradesh state. These may indeed have contributed to a sense of inertia so strong that even the country’s chief economic advisor, Kaushik Basu, admitted in Washington that fresh reforms were unlikely before 2014, when the next national elections are due. (He has hurriedly backtracked since then.)
But the real problem runs deeper. Simply put, India is ruled by a group of leaders whose political instincts were shaped by the notorious license-permit Raj. Under it, bureaucrats penalized companies for being too productive, and the highest marginal income tax rate touched 97.5%.
India has dismantled the worst of government controls since then, but its leaders’ thinking hasn’t changed. Take 76-year-old Mr. Mukherjee, whose last stint as finance minister was under Prime Minister Indira Gandhi between 1982 and 1984. This was an era when the Indian economy would have been more familiar to a Soviet apparatchik than to a free-market capitalist. The brightest Indian businessmen, such as textile and palm-oil tycoon Aditya Birla and steel baron Laxmi Mittal, chose to build their fortunes overseas rather than battle a hostile government.
True to form, in Washington last week, Mr. Mukherjee stoutly defended a decision to amend the law and impose a retroactive tax on British telecom multinational Vodafone, overturning a landmark Supreme Court decision earlier this year. The new law will only allow India’s tax inspectors to reopen cases going back six years, said the minister, rather than 50 as feared by some. For good measure, he also invoked the principle of retroactiveness in an obscure piece of British legislation, and laid out a history of relations between India’s parliament and its judiciary.
But a potted history lesson hardly reassures rattled investors. The revised tax law may net the government the $2.2 billion it feels owed from Vodafone’s 2007 purchase of Hutchison Whampoa’s Indian assets from a Cayman Islands subsidiary. But over time the damage done to India’s image as an investment destination, and as a country grounded in British traditions of rule of law and separation of powers, will cost it inestimably more.
This government-knows-best attitude isn’t a one-off. In March, India’s patent office revoked pharmaceutical multinational Bayer’s exclusive right to market its cancer drug Nexavar. A local generics company will now sell the drug at a fraction of the price Bayer charged, effectively ignoring the costs sunk into research by the foreign company. And the country’s largest private oil producer Cairn India, majority owned by London-listed Vedanta, faces an arbitrary 80% hike in taxes that may cost it an additional $2.5 billion over the next eight years.
Step away from foreign investment and it’s the same story. Education Minister Kapil Sibal’s “reforms” swathe private schools in miles of new red tape. And on Monday Health Minister Ghulam Nabi Azad announced that doctors who want to study in the U.S. will have to sign a bond promising to return to India, a throwback to an era when India fretted about a brain drain from its stagnant economy.
To sum up, India’s problems stem less from the nature of coalition politics and more from the political class’s bankruptcy of ideas. Unlike former Soviet bloc countries, India has never faced its Berlin Wall moment, a stark ideological reckoning with a failed past.
The 1991 reforms did not sweep out a generation of discredited leaders. In the ruling Congress Party in particular, figures such as Indira Gandhi continue to be held in awe and reverence. In fact, with her record of nationalizing companies and curbing civil liberties, she counts as among the worst rulers in postcolonial Asian democracies.
So while the worst excesses of the country’s socialist past may be behind it, that’s not enough. Excessive faith in government and excessive mistrust of the market remain the norm. For real change, India needs fresh faces and fresh ideas.
Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for WSJ.com. Follow him on Twitter @dhume01
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