What the budget must really do to boost investment sentiment

2 months ago

In the past, the annual budget speech was such a momentous occasion that senior management gathered to watch the speech with considerable anxiety. By the stroke of a pen or turn of a phrase, entire industries could be significantly disadvantaged by their competitor lobbies.

Fortunately, budgets are moving from annual exercises in suspense and trepidation to their real role, an annual report card of the nation’s financial position. And fortunately, like mature economies around the world, our governments are taking decisions throughout the year and not waiting for one big-bang unveil.

But old habits die hard. We are all still writing pre-budget articles and will be watching budget speeches and multi-city, multi-anchor panel discussions that generate much heat and noise.

Fund of funds – A transparent process of fund allocation

Private equity and venture capital investing is a specialised field, full of risk and fraught with having to predict the future. Even experienced private equity investors discover that they are not guaranteed success and every deal is a new trial. By nature, this profession is the polar opposite of what a government babu does. So, the government should desist the temptation to be a direct investor. It will inevitably lead to politically influenced decision making, the very anti-thesis of good risk capital investing. The government would be best served by acting as a fund of funds – and investing, via a transparent process, into existing Indian fund managers, of which there are many.

National Missions – Go beyond policy frameworks and get the job done

Concentration of effort and a razor-sharp focus through the creation of empowered national missions is the only way that the government can break through the shackles of the bureaucracy and vested polity to create transformative change. Creating these national missions, drawing on the best from private and public sectors and ensuring that they are allowed to do their work, free of political and regulatory interference. It is a shame that we have just the Aadhaar example to quote in a nation that exports management talent to the rest of the world and has a well-established track record of delayed and shoddy execution.  

Administrative reform

One had hoped that Prime Minister Narendra Modi’s aversion for the bureaucracy would have made him prioritise administrative reform over everything else. One had hoped that the giant killer Modi with his mandate would be able to loosen the stranglehold bureaucracy has over every facet of our lives. But unfortunately, administrative reform has seen little progress and I am reminded of the British TV classic “Yes Minister” that explains the near impossibility for the political class to master and reduce the bureaucracy.

Level the playing field and be consistent

Private equity investors do not need anything more than a level-playing field and some consistency of policy. Any PE investor who wants more than that is not doing the job he was paid to do. Let me explain. Private equity investing is typically made after the investor assesses the potential scope and future attractiveness of a company within a sector. The government can do little to insulate industry from a future in which it is increasingly risky to forecast anything over a four- to five-year horizon, the average holding period for a typical PE investment. However, the government can certainly ensure that its policy actions are not arbitrary or ad hoc and done only after evaluating all the intended and unintended consequences of its actions.  

Creating a level-playing field will ensure that the most efficient and customer-focussed businesses will survive and thrive. Policy or regulatory biases that serve to tilt the playing field must be avoided and removed where existent. The denial of FDI in multi-brand retail while turning a blind eye to the structural sleight of hand used by e-commerce companies to decimate their brick-and-mortar rivals using the same FDI is an example. The unintended consequence – the potential loss of thousands of good retail jobs being substituted by dead-end delivery jobs.

Ease of doing business is much more than a rank. The extortionist nature of state and city-level regulators and inspector raj has shown no sign of diminishing, despite the Modi government having made some laudatory changes at the highest levels. Brazen corruption continues at the local level and a complex and overwhelming set of rules, procedures and filings—overseen and made ever more complex by a callous and rapacious bureaucracy—needs urgent surgery. Administrative reform has found no takers in several governments but ease of doing business is inextricably linked with simpler procedures, more transparent regulations and a smaller and more accountable bureaucracy.

Consistency of policy is a key need for anyone trying to outlook a period of five years. Arbitrary changes to taxation, regulation and other policies must be avoided. Thankfully, successive governments have become increasingly more consistent and one looks forward to the budget continuing to ease the angst of doing business by levelling the playing field and ensuring we can all move to a fairer and more prosperous tomorrow.

Jacob Kurian is partner at private equity firm New Silk Route Advisors Pvt Ltd.

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What the budget must really do to boost investment sentiment

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