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Much Ado About Nothing

Reading the business press in India can be much like reading a Shakespearean tragicomedy. I recently came across a news item that talked of the agriculture ministry’s efforts to set up two billion rupee poultry venture capital fund. According to an agriculture ministry official, capital subsidy, in the form of venture capital, was better than providing interest-free loans to farmers in the poultry sector.

Elsewhere, an article published on the same day by a business newspaper spoke of how Intel’s latest Xeon processor was designed completely at the company’s Bangalore research center. Noshir Kaka, director at consulting firm McKinsey, says none of the major product companies who have an R&D presence in India can do without these development hubs. In fact, conducting cutting-edge research and expanding product development in India is high on the agenda of companies such as Google, Cisco Systems, DuPont, Renault and General Electric.

Such is the dichotomy of the Indian growth story. On the one hand, the government appropriates the vocation of venture capital to provide capital subsidy for the poultry sector, and on the other hand talented Indian engineers are noted to be busy at work developing next-generation technology for global corporations.

Indians create the fundamental technology for global firms which is re-imported back to India as a finished product, and the benefits of which are reaped in the long-run by the foreign shareholders of the companies, not Indian citizens. The global firms are enticed to set up shop in India usually with a slew of tax breaks, possibly contributing less to the government exchequer than Indian firms of a similar size.

Shakespeare would smile at this comedy of errors.

Not to be protectionist or to blame India’s engineers, because they are merely responding rationally to incentives. India has the capacity and talent to compete with the world’s technology leaders, but the government disincentivizes entrepreneurship.

Even though the Finance Minister acknowledged in his budget speech that the growth from 2004-2008 was driven by private investment, there was precious little to reward that achievement in what is considered to be the government’s economic policy statement.

It’s anything but easy being an entrepreneur in India, which ranks 122 on the World Bank’s Ease of Doing Business Index, behind both Serbia and Pakistan. Starting a business in India takes on average 12 procedures and 34 days costing 47% of per capita income, the World Bank says.

The average medium-sized company in India also has to pay some 60 different kinds of taxes. Many people would probably throw in the towel just picturing the administrative burden of the paperwork. The effective total tax rate on profit, including central sales tax, corporate income tax, social security contributions and excise duty, amounts to 71.5%, the World Bank notes.

Indian labor laws are antiquated, and continue to be a serious impediment to the growth of industry and manufacturing. Companies having over 100 employees can only retrench with government approval.

The Indian banking sector remains dominated by government-controlled banks, and financial sector reforms have been long overdue. The bank nationalization of July 1969, praised munificently by the Finance Minister in the budget speech, politicized control over credit and loans and cemented the government’s grip on the economy, strangulating entrepreneurs.

Despite the impressive growth of the IT sector and emergence of major manufacturing firms such as automotive components maker Bharat Forge Ltd., the stark reality is that the agriculture sector continues to employ 60% of the workforce while generating just 16% of GDP.

Six decades of socialist economic policy have kept farmers in a time warp. The more the plans fail, the more the planners plan. A country that creates cutting-edge microprocessors prays for sufficient rainfall every year, and political parties craft populist policies precisely because of the disproportionate number of people dependent on agriculture. Not that these policies really help the intended recipients, if history is any guide, but populism usually never fails to win elections.

One has to ask the question whether this condition is inescapable or self-inflicted. Is there a way to break this vicious cycle?

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