Business Today

Capacity Building Is Crucial For India

The gap between what the authorities deliver and what follows in terms of investment can affect the speed and depth of policy implementation
Katsuo Matsumoto | Print Edition: August 11, 2019
Capacity Building Is Crucial For India

One of the policy priorities of the current Narendra Modi government is the continuation of high economic growth. Further vitalisation of economic activity is essential to become a $5 trillion economy by 2025 and grow into one of the largest economies on the same scale as Japan. Infrastructure development and improvement of the business environment are critical challenges to achieve this target, and no further delay in policy implementation should be allowed.

Over the past 20 years, Japan has been the third-largest investor in India in terms of cumulative FDI, with about 1,400 companies, mainly manufacturing firms, currently operating across 5,000-plus bases. The number of Japanese companies entering the Indian market has increased 2.5 times in the past 10 years, and over half of them plan to expand their businesses here. Most companies focus on fully internal sales as they wish to leverage the humongous consumer demand potential of the Indian market. According to recent surveys conducted by a Japanese government agency, the country's investment in India will continue to rise.

But it is also true that the lack of infrastructure, uncertain operation of law (including taxation) and delay in land acquisition are major obstacles for investors to start their businesses or expand their corporate activities. We have often heard of companies having trouble to deliver precision machinery due to poor road conditions or lack of adequate power supply to industrial parks even after factories have been set up.

On the other hand, Indian authorities seem dissatisfied with the relatively low pace of investment from Japan in spite of their consistent efforts to improve the business environment. This leads to a 'recognition gap' between players of demand and supply - the gap between delivery by state authorities and the following low growth of the investment.

This recognition gap in the business environment can affect the speed and depth of policy implementation. In our view, state government officials in charge of commerce and trade tend to be confident about the current business climate in their respective states. On the other hand, according to our survey of industrial estates in India several years ago, out of some 200 sites, there were only a few five-star industrial parks like those found in the ASEAN. In fact, there is only a limited number of excellent sites with all-in-one services such as packaged infrastructure (logistics, electricity, water supply, telecommunications and waste treatment facilities), a sound incentive system (tax exemption/reduction) and other one-stop services, including customs clearance and placement of skilled labour.

Also, there exists another recognition gap between the set of promises offered by the states and the actual realisation of those. For example, even when a newly established factory does not get 100 per cent power supply as required and promised, it is requested by the authorities to commence operations. It is difficult for the company to do so as it is a breach of obligation. This kind of trouble, caused by a recognition gap related to fulfilment of promises, will continue unless the authorities thoroughly imbibe a customer-first policy.

The Japan International Cooperation Agency (JICA) will continue to contribute towards the improvement of business environment as well as infrastructure development under the Indo-Japan co-operation framework. As for investment promotion, policy-based lending that facilitates priority actions (necessary for a better investment climate) has been provided to Tamil Nadu and Gujarat. These priority actions include transparent investment procedures, reformation of vocational training and development of high-priority infrastructure that directly contributes to commercial and industrial activities. In this context, we will play an important role to shrink the recognition gap through the realisation of policy actions.

The writer is chief representative, JICA India

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