Costing policy paralysis PDF Print E-mail
Tuesday, 17 April 2012 00:00
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RBI study says ‘govt effect’ lowers FDI by 35%
While most routinely use the term ‘policy paralysis’ to describe what’s happening in the government, from time to time the government has reacted with a flurry of meetings and decisions to show this is not quite true—so you have the PMO asking Coal India to sign fuel supply agreements with power generators and even following this up with a presidential directive when CIL’s directors demurred, and you have a package for Air India’s revival coupled with a likely decision to allow foreign airlines to invest in Indian ones … Whether the flurry of decisions, such as on GAAR or the Vodafone retrospective tax amendment are to be seen as investor-friendly—certainly they suggest there’s no policy paralysis on certain matters!—is of course a different matter.
But even if you agree on whether there is policy paralysis, how do you quantify its impact?Anecdotally, this is easy if investment levels in other emerging markets are rising while those in India are stagnating or falling, but how much of this is due to India’s slowing growth and how much is due to policy paralysis? A study by RBI’s division of international trade and finance in the economic and policy research department gives this a shot—to be sure, it is not an RBI position, but the fact that it is on RBI’s website does give it some credence. What the study does is interesting. It looks at FDI flows into India and various emerging markets over a period of time, and tries to rank India on various parameters—FDI caps in different sectors vis-a-vis other countries, time taken to start a business, to get land, and so on. India does better than China when it comes to the time taken to start a business (46 days versus 99 in China) but it doesn’t do as well when it comes to time to lease public land (295 days versus 129 in China) which is probably what matters a lot more. Having done this scoring, the study constructs an econometric model linking FDI to openness of an economy, wages, relative size of FDI inflows and so on—the largest weight accrues to, the model shows, the index of government effectiveness. A one point hike in government effectiveness raises FDI-to-GDP by 4 percentage points. This done, the study compares India’s potential FDI with the actual for each year; for 2010-11, it keeps the government score at what it was in 2009-10, and finds this increases the gap between the potential FDI levels and the actuals by as much as 25%—that’s the cost of policy paralysis. Another way of putting it, “had there been no amplification in policy uncertainty over the preceding year’s level, FDI inflows to India would have been more than 35 per cent higher than that was actually received.”

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