Global Insight

August 3, 2014 2:15 pm

Hope grows that Modi will cut bureaucracy to foster business

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Bureaucrats tend to view private enterprise with suspicion and contempt

In 2006, India’s state-owned National Thermal Power Corporation awarded a $55m contract to the Hindustan Construction Company to work on the Loharinag Pala hydropower plant in the Himalayas. Three years later, the government suspended the project indefinitely, after protests from environmentalists.

After HCC sought costs and compensation, arbitrators ruled in its favour and awarded the company $15m plus interest. But instead of paying, New Delhi appealed to the country’s overburdened court system, leaving HCC facing a decade-long wait for payment.

HCC is not alone. According to India’s Construction Industry Development Council, about $22.5bn in contractors’ claims from various government agencies are stuck in disputes. While many of these cases have been through arbitration, officials’ almost reflexive response to an unfavourable ruling is to appeal, delaying settlement for years.

Protracted payment disputes are one symptom of Indian officialdom’s typically adversarial relationship with private business, which bureaucrats tend to view with suspicion and contempt.

Now, as Narendra Modi, prime minister, seeks to reinvigorate India’s faltering economy, tackling the bureaucracy’s notoriously obstructive approach to private enterprise will be crucial.

“Historically, the bureaucracy has never seen it as their role to nurture or help business,” says Rajiv Lall, executive chairman of the Infrastructure Development and Finance Company.

Antagonism between India’s officialdom and the capitalist class has tangled roots. In part it is a legacy of the policies pursued by Jawaharlal Nehru, the first post-independence prime minister, and his daughter, Indira Gandhi, who believed state enterprises should lead the quest for economic development.

Mr Lall suggests bureaucratic indifference, if not hostility, to business may have deeper origins in the colonial era, when the role of Indian Civil Services – the precursor to today’s powerful Indian Administrative Services – was primarily to maintain law and order, and collect taxes.

Bureaucrats’ anti-business sentiment also reflects traditional Brahmin prejudices. Members of the priestly caste at the pinnacle of Hinduism’s rigid hierarchical order, Brahmins typically disdain money and commerce, an attitude that seeped into the elite civil services they dominated for decades. More recently, some business people suggest, bureaucrats have developed a personal resentment at the large gaps in pay between the public and private sector.

Whatever the causes, the consequences are clear: India remains a notoriously difficult place to do business. In the World Bank’s most recent ease of doing business survey, India ranked 134th out of 189 countries.

Tax is another major area of conflict. According to Arun Jaitley, India’s finance minister, tax demands of more than $66bn are currently being disputed through the court system, as companies and individuals resist what they see as excessive and unreasonable claims by tax officials driven by the quest to extract maximum revenues from India’s narrow tax base.

Step forward Mr Modi, who in his 13 years as chief minister of Gujarat state gained a reputation for slashing red tape and fostering a bureaucratic culture of promoting job-generating businesses.

It seems a tall order for the prime minister to mimic this at a national level. Yet there are grounds for optimism. Bureaucracies are known to respond to strong signals from top leaders. And speaking in New Delhi last week, Jim Yong Kim, president of the World Bank, said if India’s position in the ease of doing business survey was determined exclusively by indicators from Gujarat, the country would be 57 places higher in the rankings.

Indian and international companies are now waiting to see whether Mr Modi can have a similar effect on the mandarins of New Delhi.

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