Geopolitical dividends: No substitute for real reforms

The high-speed rail corridor that will connect Mumbai and Ahmedabad is obviously an exciting development for India’s rail sector—Narendra Modi has presented Japanese support for the $17 billion “bullet train” project as a major achievement for his government. Last month’s inaugural ceremony, though, made it perfectly clear that Modi and Japan’s Shinzo Abe have more than just infrastructure on their minds.

Tokyo has offered India a generous arrangement, financing 80% of the project with some $14 billion in 0.1% interest loans and sharing the costs of overruns. This generosity has much to do with geopolitics. Tokyo’s commitment to India’s growth is best understood as part of deepening strategic cooperation to contain China’s regional economic clout. In fact, political and economic ties between Japan and India have been growing since 2000. In that time, India has benefited from more than $25 billion in multi-sector Japanese investment in everything from metropolitan restoration projects to the Delhi-Mumbai Industrial Corridor.

The dynamic applies on all sides: Beijing’s One Belt, One Road (OBOR) Initiative bypasses India and focuses squarely on Pakistan, Bangladesh and Nepal, with $62 billion in investment going toward the China Pakistan Economic Corridor (CPEC) alone. Japan and China may both have ulterior motives, but that does not make infrastructure a secondary concern. The joint developmental venture between Japan’s Shinkansen Technology and Indian Railways could fundamentally transform the economic and demographic makeup of Mumbai, Ahmedabad, and all points in-between.

The partnership is lucrative for India, but relying on geopolitics for generating foreign direct investment (FDI) cannot fund the infrastructure needed to sustain growth. Attracting additional FDI means wide-ranging structural reforms. ‘Make in India’ has already gradually rolled back restrictions on foreign investment in industry and infrastructure, and FDI jumping to a record $46.4 billion last year. However, two other red flags remain for foreign investors—inadequate regulatory frameworks and systemic graft.

The transport sector illustrates how these factors feed into one another. India’s efforts to promote regional connectivity have been hamstrung by corruption. Ten years ago, Transparency International India prepared a landmark report exposing the seedy underbelly of the trucking industry. At the time, TI India found bribery and violations at every level. Lorry drivers reported paying from Rs 211 and Rs 266 in bribes to police and transit officials at checkpoints, toll plazas, and state borders daily. At the time, TI India estimated the overall cost of unnecessary delays at over Rs 1130 crore per year. There are other obvious drawbacks—when regional transport officers (RTOs) take bribes instead of enforcing safety requirements, overloaded lorries and unfit drivers become a threat to everyone on the motorway.

The government is perfectly aware that foreign investors distrust corrupt business climates, but poor regulatory environments can be just as damaging. The corruption that has plagued India’s trucking sector is the result of a system that placed costly, inefficient checkpoints to collect state border tax in the first place. The old system is so convoluted that companies warehouse in multiple locations to avoid crossing state borders. After 17 years of trying, the goods and services taxes (GST) finally removed many state tax barriers and eliminated opportunities for bribery. The problem, though, will take time to address completely.

Just this year, an assistant RTO was caught overseeing an elaborate scheme that let thousands of overloaded trucks bribe their way past controls. The transport officer somehow amassed a real estate empire that included a hotel and a shopping complex. How many more opportunities for this kind of graft will crop up if India is to spend at least $1.5 trillion on upgrading and expanding transportation, telecommunications, water and electricity networks?

The need for rational regulations and tax structures also applies to India’s neighbours. Bangladesh, in particular, has cause for optimism, thanks to the support and financing from both Beijing and New Delhi, but Dhaka is at risk of repeating India’s mistakes and hamstringing its own initiatives. Earlier this year, investors pressured the government to increase infrastructure investments and focus on energy, especially in terms of electricity transmission—one estimate from the Dhaka Chamber of Commerce and Industry put the needed sum at $300-$320 billion through 2030. Public investment in infrastructure currently stands at less than 2% of GDP; the World Bank says this needs to rise to 10%.

Like India and Japan, Bangladesh is largely turning to China to meet this need. Last year, a Chinese delegation led by Xi Jinping signed off on a $13.6 billion investment package that includes road, rail, and power system projects. Domestically, the government has moved $2 billion into a sovereign wealth fund set up to fund infrastructure projects—a fund which economists have warned must be managed prudently and shielded from undue political influence. Investors (and ratings agencies) are also demanding the government reduce bottlenecks and bureaucratic hurdles. This applies to not only to transport and power but to telecommunications infrastructure as well. The ‘Digital Bangladesh’ initiative, for one, is intended to bring together state-backed digital initiatives and telecommunications infrastructure development under a single vision, but a volatile regulatory framework has repeatedly stymied progress in the ICT field.

Dhaka’s plans to expand mobile coverage fit this same mould, hindering the transition to a digital economy. The upcoming 4G auction has triggered concern amongst Bangladesh’s telecommunications companies. Chief among those concerns is the sentiment Bangladeshi regulators are overcharging for the 4G spectrum on offer, using the auction as a means of raising extra funds. Indian regulators watching the process should instantly recognise a mistake they themselves made last year: because it overcharged for frequencies, the government raised just $9.8 billion while 60% of its bandwidth went unsold.

Worries over the auction should serve as a reminder for Bangladeshi leaders that convoluted regulations will frustrate even the keenest of investors. For both Dhaka and New Delhi, the lesson is the same. To attract the investment they need to advance development, there is no substitute for transparency, ease of business, and a stable regulatory environment.

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