Sunday, May 29, 2011

How scandals affects India's image - Results from 'Indo-German Chamber of Commerce' Survey

We are still engaged in the circular controversies of corruptions and other scandals. Circular because, after moving forward for many days these cases will eventually go all the way back to square one. Majority of these cases are not reaching to any logical conclusion, but will show some sparks just before and after the elections.

For Indians it slowly but steadily become a regular event, something they are forced to take with breakfast. But in the days of Globalization, when news is circulating more faster than that of blood in human body, it is important to know how others are evaluating us? How Foreign Investors, Institutional Funds and other foreign government officials are considering/ reconsidering their investment options in India.Will they be ready to invest more in India (even if they, like their clients have the tendency of read news papers) or go for a better destination? Will they be ready to take the risk of investing in long term high risk projects? (like oil exploration, where policies as stables as international oil prices!!!) In fact for the last NELP auction major western oil explorers like Shell, Cheveron, BP, Exxon didn't even bother to turn up.

It is to be noted that, many resources in India are available in outside as well. We don't have huge petroleum reserves or any other highly exclusive (Which are not available in any other country) metals/minerals that are very much in demand. Even now many of the foreign FDI coming to India are revolving around these mineral deposits (depending heavily on the export of minerals is not a healthy trend). If consultancies are degrading the ratings of economic environment in India, it will not take much time for the prospective investors to move to other country.

There is no doubt that India can't remain as a favorite destination for cheap manufacturing in long run. Continuous wage rise - which is essential for the upward mobility in a society - will effectively remove the tag of cheap labor. We will be replaced - at least partially - by the other low cost manufacturing countries from South Asia, South East Asia, Mexico, African countries etc. This will force us to move rapidly in the manufacturing sector - from the status of a primitive manufacturer to that of a value added one. But the important question of the time is, will the political establishment will be able to move that much fast to ensure our position in the industrial world? or will they be paralyzed by the continuous sage of Corruption/ Caste/ Religious politics etc? Will the political establishment will be able to provide high quality infrastructure to the investors (of course keeping an eye on environment)?

It is in this situation we have to read the results of recent survey "IGCC (Indo-German Chamber of Commerce) Business Monitor 2011". This will not only give us an overview of how others are evaluating us, but where we are standing? Overall the survey highlighted the positive strengths of the economy and long term prospectus. As of now - even after the numerous scams and scandals - business is still optimistic about the future and ready to invest in India. But the disturbing question is how long? Will they have the same interest if the situation remains the same? 

The last three key findings in the survey is important not only politicians and policy makers but also for the common people. This is important to sustain (and improve) the growth, if we really want to offer a competition to China. Apart from the highly vocal and chest beating declarations we are not anywhere near to China in manufacturing.

This representative survey conducted by the Indo - German Chamber of Commerce (IGCC) among 175 German companies in India. According to the result, scandals are yet to affect the investment decisions, but the point is  - if we are not ready to control it, if we are not able to stop it and the answer for this 'if' is really important for 1.2bn people and for the future generations. Below mentioned are the last three key findings of the survey (copied as it is), which deals corruption and governance deficit.

1. Scams and policy drift hurt India’s image

Since last year, a significant rise in reported corruption scandals has attracted international attention to a perceived governance deficit in India. But while scams and cronyism ranging from Commonwealth Games to 2G Telecom Licenses may have damaged India’s international image, investor sentiment has hardly been dented.

An overwhelming majority (85%) of surveyed managers feel that recent revelations of massive corruption have sullied India’s international image in one way or the other. About one third (30%) judges the resulting reputation damage as high and 40% see it as medium. 15% each see low or no meaningful reputation damage.

An equally high number of investors (86%) deplore the effects of a deteriorating policy framework on India’s reputation as an investment destination. Asked if political deadlock, lack of reforms or regulatory uncertainty have hurt India’s image, 17% answer that “high damage” had been done. 47% note “medium damage” and 22% “low damage”. For a mere 14% the policy environment did not have any negative effects on India’s international image.

2. Investor sentiment and investment decisions still unaffected

Significantly, the negative image effects of a weak policy framework, cronyism, scams and corruption have not yet started to cloud manager’s overall assessment of India as an investment destination. The impact on actual investment decisions remains minimal: Only 7% of all respondents either have reduced or deferred investments due to these factors already or consider doing so. 93% do not consider reducing or deferring planned investments for these reasons. So far, perceived policy and governance deficits have a more subtle effect: Over a third of all respondents (37%) indicate they are currently re-assessing India’s investment risks due to these factors. This could mean that future investment decisions may be scrutinized more carefully if India does not manage to tackle these issues.

3. Infrastructure bottlenecks and corruption top investor concerns

Asked to highlight one single area where they see the greatest scope for improvement in India’s investment climate, managers indicate a clear favorite: 31 percent name infrastructure as the most important area where India should improve. Reducing corruption (19%) and taming bureaucracy (15%) are seen as the other two most significant ways to further improve India’s investment climate and to attract even more FDI from Germany. In the minds of German investors, these three top concerns dwarf all others, including FDI liberalization, tax reform, tariff & non-tariff trading barriers, regulatory issues, inflation and the quality of the education system . 4% named FDI liberalization; 6% tax reform;  9% import facilitation (tariff and non-tariff); 3% regulatory regime; 5% inflation; 5% education & skills development; 3% other factors.

It will be good for the policy makers to go back to the drawing tables, take a look at these type of surveys and decide what to do to improve the situation. In the long term tags like corruption free, efficient governance, fair competition, rule of the law, social equality will ensure the long term growth than engaged in never ending debates of majority/minority politics, corruption/favoritism etc. After all 'Action speaks louder than words'


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