India: A shaky republic?

Wed, 27 Jan Pre-Open

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Newspapers reported the chief minister of Orissa rushing out to meet the South Korean President after India's Republic Day celebrations. The act was not that of mere courtesy. The minister had to resolve the issues regarding South Korean Posco's steel manufacturing unit in the state.

Posco, the world's fourth-largest steelmaker by capacity has been trying to set up a plant in one of India's richest mineral endowed states. However, since 2005 the US$ 12 bn project has been hit by protests from local tribes unwilling to sell their land. Besides, environmental and regulatory hurdles have also held back the project. The central government has had little role in sorting out such issues. Singur being a case in point. State governments in turn do their best at lobbying for the projects. Posco's recent announcement of US$ 325 m steel plant in Karnataka left the Orissa government worrying.

On the 61st anniversary of the Constitution coming into force, India seems to be battling issues graver than those of half a century back. Some with little success.

Poor governance and corruption are only a few of the country's inherent growth obstacles. Acute inadequacy of energy, infrastructure, healthcare spending and trained manpower are amongst others. Without denying some crucial milestones crossed through liberalisation, there is a lot left to be desired.

Consider the country's financial markets. Debt markets have no identity outside government and corporate bonds. Despite having one of the most vibrant equity capital markets in the world, FIIs continue to call the shots. Most new IPO listings end up with promoters making a killing for their stakes.

A year back, the massive corporate fraud at Satyam Computers added a new dimension to India Inc's poor corporate governance practices. However, while markets recovered from the shock, little was done to bring in more credibility to Indian businesses. In particular this creates problems for minority investors in the family-owned businesses that are so common in India.

For example, controlling shareholders can strike deals even when conflicts of interest are readily apparent. By comparison, in Hong Kong and Singapore, companies making sizable deals need the approval of independent investors. Promoters buying stocks at below-market prices through the use of preferential warrants is another loophole. Supposedly to raise funds, the move nevertheless erodes minority ownership.

Company boards, meanwhile, continue to remain conflict-riddled. Leading real-estate firm DLF came under scanner because 3 of the company's 12 directors belonged to the Singh family and were members of the audit committee. DLF is not alone in facing this criticism. India's real-estate companies are often picked on by governance advocates who raise problems with everything from lack of disclosure to revenue reporting.

Instances of such malpractices ail the country's basic avenues of progress. The 61 years of being a republic have certainly won India many accolades. Being a well sustained democracy with one of the highest GDP growth rates being foremost amongst them. However, we believe that the next 60 years may be riddled with uncertainties unless the key socio-economic ailments are cured.