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Sustaining India’s growth story requires consistent policies

By Arun Muthirulan, Director, AcceleratorIndia.

The widely accepted view is that since liberalisation of the Indian economy in 1991, successive governments have implemented the right policy frameworks to support a fast-growing economy. However, this view is now under serious threat due to a number of recent major policy reversals by the current Indian government. These policy reversals have been across sectors such as telecoms, retail and exports, in an environment where the economy is experiencing slow growth and falling investments.

A case in point is the much anticipated retail industry reform, announced in November 2011, that would have allowed foreign retail firms such as Walmart, Carrefour and UK’s own TESCO to own 51% of an Indian multi-brand retail vehicle. After vigorous opposition from both from the public and legislators across party lines, the policy was put on hold, hardly two weeks after being announced with much fanfare. The saving grace was that a parallel reform allowing single brand foreign retailers such as IKEA of Sweden to fully own ventures in India was not suspended.

In early March 2012, the Indian government unilaterally banned the exports of cotton outside India. The justification? To protect the supply of cotton for Indian textile mills, in the face of increasing domestic demand. This ban created a furore both at the national and international level, ranging from Indian farmer groups and cotton exporters to major importers like China. Totally unprepared for such an onslaught, the Indian government quickly withdrew the ban, within a week after the initial announcement.  

The most recent example is the India Budget 2012 announcement on March 16th 2012, that proposed an income tax on investments in privately held Indian companies by Indian residents, such as Angel investors. The start-up circles in India are up in arms, some have even labelled it as the death knell for Indian entrepreneurship. Dr Saurabh Srivastava, co-founder of the Indian Angel Network and Head of the International Advisory board of AcceleratorIndia, commented to the Indian press: “An angel investor may invest Rs 1 crore in a company that has no revenues and no profits and the tax official, unless otherwise 'persuaded', would tax the company at 30 per cent for no reason at all and convert an investment into income.”

The motives behind such policies may be noble, to protect small retailers and the domestic textile industry and to regulate the flow of money between the shadow and the real economies. However the Indian government, its legislators and policy makers need to ascertain the full impact of major policy decisions on stakeholders before announcing them. They should also involve stakeholders in the policy development process and get their buy-in to avoid hasty retreats in the face of opposition. Only this approach will ensure that the India growth story continues and will demonstrate clearly that the Indian democracy works.

Published on 20 March 2012

Last updated: 23 Mar 2012