Do it yourself

The Economic Survey 2019 reminded us that India’s own thinkers since ancient times tied prosperity to rule of law (Dandaniti) and protection against arbitrary rule (Matsyanyaya). In modern terms, this means clear rules, consistent enforcement, and contract sanctity. Investors, entrepreneurs, and global partners all look for this.

Yet, over the past decade, India has repeatedly seen sudden policy shocks. These not only create losses for businesses and investors but also erode long-term trust between government and enterprise.

Case Studies of Policy Uncertainty

Maggi Ban (2015)

FSSAI imposed a sudden nationwide ban on Nestlé’s Maggi noodles citing excessive lead/MSG. Months later, the Bombay High Court lifted the ban after independent tests cleared the product.

·         Nestlé lost sales and investor confidence.

·         The episode became a global case study on India’s regulatory unpredictability.

Demonetization (2016)

The government invalidated 86% of currency in circulation overnight, citing black money, corruption, counterfeit notes, and digitization.

·         Micro and small enterprises faced an existential crisis.

·         Consumers struggled for months.

·         No credible outcome report has been released, and the ruling party no longer highlights this “reform”.

Amaravati Project Rollback (2019)

The new Andhra Pradesh government cancelled ongoing projects, reopened power purchase agreements worth 5.2GW, and lost World Bank/AIIB funding for Amaravati.

·         Contractors, lenders, and investors faced huge losses.

·         Political risk perception shot up.

·         Trust deficit between private capital and state deepened.

Online Gaming Ban (2025)

The government abruptly banned all real-money online gaming under the guise of protecting users from addiction.

·         Stakeholders were given no consultation or transition.

·         Just a year earlier, the government had legitimized the sector with a 28% GST.

·         The move exposed inconsistencies in governance priorities.

Frequent Tax Changes

Ad-hoc changes in taxation of capital gains, buybacks, and dividends have repeatedly disrupted long-term investment planning. Investors call this “taxation by surprise”.

Why This Matters

The Economic Survey 2019 itself warned:

·         Policy uncertainty raises systematic risk and cost of capital.

·         Higher uncertainty discourages investment due to irreversibility of capital decisions.

·         Predictable and consistent policy attracts investors.

Despite this, India continues to score high on unpredictability.

The Bottom Line

India has the scale, demographics, and entrepreneurial energy to attract global capital. But without policy stability and regulatory predictability, much of these potential risks being wasted.

A government that consults, provides forward guidance, and avoids sudden reversals can unlock enormous investor confidence.

Unfortunately, recent history shows that India is still far from that goal.

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In the past ten years, the policies followed by the PM Modi led central governments have stayed true to his reputation. For example—

·         The effective tax rates of the corporate sector have been reduced. This has resulted in the aggregate tax collection from individual taxpayers to rise higher than the tax paid by corporations.

·         It is widely believed that the demonetization of high value currency notes and the implementation of GST have also adversely affected the micro small businesses and favored the large business in the organized sector.

·         The schemes launched to incentivize the businesses to increase local manufacturing and exports, e.g., production linked incentive (PLI) scheme, also appear to be focused on medium and large enterprises.

·         The government has allowed the large domestic businesses to freely grow inorganically by acquiring smaller and medium sized businesses. Large global players are also encouraged to set up their local units and avail concessions. This budget also lowered the tax rates for the local businesses of the global companies.

·         The bankruptcy resolution process also allegedly favors large businesses subsuming the troubled small and medium businesses rather than making efforts for revival of the troubled business.

However, in recent months there are some indications that the government might be considering to reorient its policy direction. It might have something to do with the results of the recently concluded general election in which the performance of Mr. Modi’s party, the BJP, was much below expectations. But to me it mostly appears to be waning mutual trust between the government and the corporate sector.

The language used in the latest edition of the Economic Survey for the corporate sector indicates that all may not be well. For example, consider the following excerpts from the Economic Survey 2024.

·         Hiring not commensurate with the profit growth: In terms of financial performance, the corporate sector has never had it so good. Results of a sample of over 33,000 companies show that, in the three years between FY20 and FY23, the profit before taxes of the Indian corporate sector nearly quadrupled. Further, newspaper headlines told us that the corporate profits-to-GDP ratio rose to a 15-year high in FY24. BusinessLine reported, “The corporate profit for the Nifty-500 universe was up 30 per cent last fiscal to ₹14.11-lakh crore against ₹10.88 lakh crore in FY23. The nominal GDP grew 9.6 per cent y-o-y to ₹295-lakh crore (₹269-lakh crore)1”. Hiring and compensation growth hardly kept up with it. But it is in the interest of the companies to step up hiring and worker compensation.

·         Private sector capex lacking: The Union government cut taxes in September 2019 to facilitate capital formation. Has the corporate sector responded? Between FY19 and FY23, the cumulative growth in private sector non-financial Gross Fixed Capital Formation (GFCF) is 52% at current prices. During the same period, the cumulative growth in general government (which includes states) is 64%.

Private sector GFCF in machinery and equipment and intellectual property products has grown cumulatively by only 35% in the four years to FY23. Meanwhile, its GFCF in ‘Dwellings, other buildings and structures’ has increased by 105%. This is not a healthy mix. Second, the slow pace of investment in M&E and IP Products will delay India’s quest to raise the manufacturing share of GDP, delay the improvement in India’s manufacturing competitiveness, and create only a smaller number of higher-quality formal jobs than otherwise.

·         Low employment density of capex: In a recent article the Economist cites independent research that predicted a slow demise of India’s services exports over the next decade. While the boom in telecommunications and the rise of the internet facilitated business process outsourcing, the next wave of technological evolution might bring the curtains down on it. In this milieu, the corporate sector has a responsibility, as much to itself as it is to society, to think harder about ways AI will augment labour rather than displace workers. Hiring in the IT sector has slowed significantly in the last two years. We do not have a full picture of overall corporate hiring in the country on a regular basis. In any case, deploying capital-intensive and energy-intensive AI is probably one of the last things a growing, lower-middle-income economy needs.

…the enlightened self-interest of the Indian corporate sector, swimming in excess profits, to take its responsibility to create jobs seriously.

…another article4 in The Economist that hails the arrival of China as a superpower in science should be sufficient inspiration for the corporate sector and academia to get their act together on scientific research and development.

·         Nudge to banks: …just as corporate profits are booming, the net interest margin of Indian banks has risen to a multi-year high. It is a good thing. Profitable banks lend more. To sustain the good times, it is important not to forget the lessons of the last financial cycle downturn. The banking industry must aim to lengthen the gap between two NPA cycles. It should also resist the temptation to pursue short-term profits at the expense of the customer. Product misselling is too rampant to be dismissed as an aberration of a few overenthusiastic sales personnel.

·         On pushing unhealthy food and bad habits: Social media, screen time, sedentary habits, and unhealthy food are a lethal mix that can undermine public health and productivity and diminish India’s economic potential. The private sector’s contribution to this toxic mix of habits is substantial, and that is myopic. The emerging food consumption habits of Indians are not only unhealthy but also environmentally unsustainable.

·         Final word: The tripartite compact that this country needs to become a developed nation amidst emerging unprecedented global challenges is for governments to trust and let go, for the private sector to reciprocate the trust with long-term thinking and fair conduct and for the public to take responsibility for their finances and their physical and mental health.

It would be interesting to see how the situation evolves in the next five years. Whether the government changes policy direction to promote MSME and impose additional taxes, duties and conditions on the large corporations or the corporations obey the government dictate and compromise their profitability to generate new employment and do CSR activities.