Bureaucratic hurdles dampen investors in India

Inter-ministerial programmes have run into obstacles as rules written by bureaucrats hamper rather than promote investments.

Before 2016 is in, the Gujarat International Finance Tec-City (GIFT City) was supposed to host its first anchor tenant: Lloyds, of London.

India wants to position itself as the reinsurance bazaar of South East Asia and Lloyds, with its army of members, would be ideal to signal that intention.

But, the Insurance Regulatory and Development Authority of India (Irdai)'s inability to write a clear set of rules for the re-insurance sector, almost a year after Parliament cleared the decks for higher foreign direct investment in it, has hampered the move.

This is not an isolated case.

The Department of Industrial Policy and Promotion (DIPP) recently allowed 74 per cent foreign equity in companies offering ground handling services at airports.

Less than a month after it was announced, the civil aviation ministry has turned the clock back on the sector.

It has reversed a policy to promote specialised services in the sector, which was introduced in 2007.

Instead, the new rules allow all domestic airlines to set up their own ground services, cutting back on the role of specialised companies. 

As the executive tries to step on the accelerator to attract investors into multi-departmental projects, the rigidly compartmentalised management style of the bureaucracy is hindering quite a few of those.

Inter-ministerial programmes like 'Make in India', 'Smart Cities' and 'Digital India' have run into obstacles as rules written by bureaucrats hamper rather than promote investments.

There are plenty of examples, but each only underscore the lack of communication across the Bhawans, even though new programmes demand a lot more of such contact.

This is particularly surprising as the coal auctions last year were a great example of inter-departmental coordination, between the coal and power ministries, which had been at loggerheads for most of the past two decades.

In October this year, the Department of Heavy Industry came out with a capital goods policy that will be the frame for the Make in India project.

Its key recommendation for tax treatment is "To introduce a five year policy to increase investment allowance from 15 per cent to 25 per cent."

Ministry mandarins did not notice that within a month the finance ministry had decided to phase out investment-linked tax sops for both corporate and non-corporate tax-payers.

How is an investor supposed to reconcile the two documents?

The lack of consultations has affected workings within departments too.

Revenue secretary Hasmukh Adhia recently discovered that bureaucrats working with the empowered group of ministers to frame the goods and services tax have not allowed business to take a look at the clauses.

Since there is going to be little time left between when the bill comes to legislators and gets passed, many in industry have been asking that they be consulted at the drafting stage, to avoid glitches. It wasn't happening till he intervened.

Investors are not keen to come on record on these issues. But concerned about the differences, the government is planning to make the role of the Prime Minister's Office stronger to nip these early on.

The insurance regulator, for instance, knew for years that it was supposed to write rules for the re-insurance sector, but it has issued the third exposure draft only recently.

The latest versions make it even more difficult for foreign re-insurers to garner business from India.

"We find that the new insurance Act has given a lot of rule-making onus on to us; it is a challenge," said a top official at the regulator about the reasons for frequent changes.

Similarly, the heavy industry department has demanded more space for Indian capital goods manufacturers by cutting back on that of foreign investors.

It has said the government must "define specific Indian standards and (insist on) local certification for foreign players to participate in Indian bids."

This is exactly the opposite of what Prime Minister Narendra Modi has been telling investors abroad.

GIFT City is, consequently, only able to talk about real estate development plans like the setting up of a World Trade Centre, a business club and an affordable housing project, but has no financial powerhouse to showcase immediately.

Kaushik Dutta, chief of Delhi-based Thought Arbitrage Research Institute, has prepared a report on 'Make in India' for DIPP.

He agrees there is a gap between what the policies state and interpretations of the rules.

"The essence of these principles gets lost in translation by the bureaucracy. We have seen this in policies on capital goods, civil aviation, company law, insurance laws, etc," he said.