Richard M. Rossow
SENIOR FELLOW AND WADHWANI CHAIR IN U.S.-INDIA POLICY STUDIES
Most analysts tend to judge India’s reform process based on whether the government proactively initiates new reforms. We at CSIS are no different, having launched our “Reforms Scorecard” last year, tracking progress on 30 major reforms pending from the day Prime Minister Narendra Modi took office in May 2014. However, beyond market-liberalizing reforms, businesses in India also face a fast-changing regulatory environment that makes long-term business planning a difficult task. The government has often articulated a goal of establishing a more thoughtful approach to regulation, but it is far from implementing a plan to achieve this. Given market access improvements, and an undoubtedly large market, regulatory transparency and predictability is garnering more attention as a precursor for even greater levels of investment.
Commerce activity can be found in practically any environment. But for investors to commit substantial amounts of capital to scaling up a business and hiring workers, the company’s leadership must have confidence in its long-range market forecasts. This allows executives to judge the true merits of investment in one market versus another, and includes three primary factors.
Market Access: Market access is an obvious precursor to investment, and the Modi government’s quick steps to liberalize foreign equity restrictions has made it easier for foreign investors in many sectors to invest in India.
Market Size/Growth: A business will assess a potential market’s size and growth rate. On these parameters, clearly no market offers greater opportunity for growth in the coming decades than India.
Stable Business Model: Third, the potential investor must determine if it can build out a relatively stable business model to tap into the opportunity, with particular features such as product approval, cost features, distribution channel, and tax treatment. India still presents formidable challenges to investors hoping that a business model will enjoy some level of regulatory stability. Regulatory stability as an economic axiom can be tough to measure. The world’s most prominent set of metrics for judging a country’s business environment is the World Bank’s landmark Doing Businessseries of reports. However, these studies do not directly capture the benefit of consistent regulation in their inventoried categories, which look at issues such as the number of permits to start a business, getting electricity, etc. Countries are understandably expected to attempt to reform their economies to meet these important criteria. Yet some areas where stability is valued by potential investors are not captured through these parameters.
Over time, various officials inside and outside the government of India have articulated the importance of regulatory transparency and consistency. In March 2013, the Financial Sector Legislative Reforms Commission (FSLRC) urged the government to establish mandatory notice and comment periods for regulations, as well as to conduct cost-benefit analyses. A year later the Ministry of Law pressed other ministries to offer draft laws for public consultation. Earlier this year, the Expert Committee on Prior Permissions and Regulatory Mechanismhighlighted the damaging impact of bad regulation and went so far as to call for a new “Standing Committee on Regulatory Affairs” to measure the impact of new regulations.
Apart from thoughtful regulation, businesses appreciate having a reasonable chance to react to new regulations. If we use a 30-day notice and comment period as a benchmark for a business to prepare a considered response, India’s regulators have a very mixed record. Looking at draft regulations or discussion papers issued in the first half of 2016 by the Reserve Bank of India (RBI), Insurance Regulatory & Development Authority (IRDA), Telecom Regulatory Authority of India (TRAI), and the Securities & Exchange Board of India (SEBI), we see differing levels of commitment to transparency. RBI and TRAI stand out, with an average of around 27 days for a notice and comment period in a sample of a half-dozen regulations. SEBI averaged 19.2 days for a response. IRDA, on the other hand, averaged only 13.7 days for a response. Sometimes the comment period was subsequently extended (TRAI is particularly open to extending the deadline for comments). Still, these short turnaround times for review underscore the feeling that some regulators are more interested in fast action than in stakeholder opinion.
Regulatory change is part of doing business in any market. But regulators should have a transparent process that balances the multiple goals of regulation. Consistency in regulation allows potential investors a better opportunity to judge the likely benefit of making a new investment over time, which is an important component of deciding where to invest. “Staying the course” on regulation is far less exciting than initiating major new reforms. But for many industries, consistent and transparent regulation is fundamental to making large investments.
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