Investment and corporate governance in India
Vinod Anand | 29 May 2012

The corportae world gathered in Davos in the year 2001 to be enlightened about the state of the world economy. They were not there just to hear ministers from developing countries make speeches about the inequities of globalization, but also to scout for the best investment prospects among the emerging economies.

AGAINST THE backdrop of a global slowdown starting with the United States as announced by the World Bank and the IMF, the investment scene seem to, have changed in 2001. Strangely enough, when viewed against the rest of the world, India, despite a series of disasters, can be viewed as an attractive and safe destination for foreign investment. It is not because India has improved spectacularly overnight, but because the rest of the world has not done much better in the last one year.

While India has slowly and steadily gained ground on many fronts, others have visibly slipped. India has been able to maintain an average growth rate of above 6 per cent per annum over the last decade, a rather rare feat in the global context. In fact, more and more foreign investors are finding India to be ?satisfactory?.A survey by FICCI of 400 foreign-controlled companies based in India revealed that most of them were happy with their operations here. Since economic reforms were initiated, India has not reversed the process of globalization. -Despite many changes in the Government at the Centre, all reforms that were promised to the World Bank and the IMF are being carried out.Political compulsions, however, have made gradualism the chosen mode for each successive Government. A step forward has usually been met with criticism as a result of which many economic reforms have not been completed.

But, it is widely acknowledged that it is gradualism rather than opening up fast ? especially the capital account ? that has enabled India ?to survive- the financial turmoil which rocked Southeast Asia in 1997. On many other fronts, India has made significant progress. Recent reports from the United Nations, International Labour Organization and the World Bank have - praised India?s progress in the Information Technology sector. The huge size of the country and the large internal market also cushioned producers from falling world commodity prices. The external debt has remained manageable because a large proportion of external debt is multilateral or bilateral and long-term.

There has been a big .all in short-term debt also,-making our country less vulnerable to sudden capital flight. The external debt to GDP ratio as well as debt to current account receipts ratio have steadily fallen since 1992-93. Export growth is in double digits making debt servicing easier. In software and diamond exports, India has remained at the forefront. Inflation is not high and was below 10 per cent.Financial sector reforms have progressed and the insurance sector has been opened up. The capital markets are deep for a low-income country and improvements have been made in the stock exchange with the creation of an electronic national stock exchange and a depository. These have reduced transaction costs by 'dematerializing' an increasing number of shares.

The foreign exchange regulations have been liberalized and trading in derivatives will be allowed?. India has also passed legislation to protect trademarks. Privatization has, however, progressed slowly. But restructuring of public sector banks will be on track after some time because of the phenomenal response to their offering of Voluntary Retirement Schemes. Likewise, other public sector enterprises may be successful in shedding surplus labour and solving their financial problems which would raise efficiency and competitiveness.Trade sector reforms are also in place and Quota Restrictions will go in two months? time and import duties will be further reduced.

The trade regime will soon be freer than in many other emerging markets. By contrast, sub-Saharan Africa has been in a mess in recent years with Government revenues falling on account of terms of trade losses from lower commodity prices worldwide and the increasing expenditure on HIV/AIDS prevention. Latin America has had very low growth and future instability cannot be ruled out on account of high Indebtedness and the fragile state of economic reforms. The region has, as a result, become more vulnerable to a rise in international interest rates.Southeast Asia is also going through a difficult phase, even though many countries in the region have tried to bounce back- riding on - high export growth. But if the American economy slows down sharply - the import demand for Southeast Asian goods will fall, landing them in trouble.

Oil exporting countries which may have experienced a temporary surge in oil revenues could also suffer from a reform fatigue and slow down. As compared to the rest of the world, a GDP growth of 8 to 9 per cent is indeed achievable in India.The main problem has been fiscal indiscipline. If this is taken care of by the Fiscal Responsibility Bill, there wilt be better allocation of funds for education and health. Since the demand for skilled manpower will grow in the future considering the mass exodus of software engineers to industrialized countries. More IT training institutes will be needed along with better centers for basic education.

The minus points of investing in India - are common to many other developing countries. Poverty, however, is disproportionately high, as it still claims one-third of India's population in its ambit. Visible and abject poverty is a big deterrent to foreign -investment and vast inequalities of incomes create insecurity among investors as the crime rate usually climbs up.Infrastructure is also poorer than in many neighbouring countries and the old labour and bankruptcy -laws continue. They need .to be amended to allow for quick liquidation which is attractive to investors because it opens up options.Red tape, however, continues to be a strangler because the bureaucracy is still big and powerful. Whether India is perceived as safe and attractive destination will ultimately depend on the quality of corporate governance and the quickness with which the Government promotes it.