India’s slow moving bureaucracy and legal system came out as its biggest disadvantage relative to China, executives of American firms in Bangalore told a visiting Senator in 2007.
The cumbersome nature of carrying out development work, including slow moving legal challenges and overall decision making, was keeping India back from developing critical infrastructure like roads, compared to competitors like China, they said.
“[A] key theme the Senator heard from U.S. and Indian company executives, AmCham members, and NASSCOM officials was the sorry state of Bangalore’s infrastructure, in particular its roads. The Senator experienced several hours of Bangalore’s traffic first-hand, and saw some signs of tentative improvement..
“Building a new road (or expanding an existing one), for example, generally requires the acquisition of land, which inevitably results in lawsuits launched by those who do not wish to sell their land or who argue that they have not been offered a high enough price.
“These lawsuits often stretch on for years in India’s sclerotic legal system, resulting in delays for almost every major infrastructure project. One member of a committee working on Bangalore’s new international airport said that the airport would be ready well before it had a proper road to it because of a lawsuit involving a piece of land at a key junction.
“Several of the Senator’s interlocutors noted that “China wouldn’t have such problems,” but all seemed to accept these hindrances as a necessary cost for the maintenance of India’s democracy,” noted a cable on the visit of Senator John Ensign, member of the Senate Science, Technology, and Innovation Sub-Committee, in 2007.
Senator Ensign had decided to visit the city, whose name instills fear in some in the US IT industry, after reading Thomas Friedman’s writings on India and a personal charitable interest in a South Indian orphanage.
The slowness of Indian bureaucracy made doing business tougher here, pointed out Frank Jones, the then president of chip-maker Intel India — one of the largest employers in the tech city. He pointed out that the slow systems made it impossible to move executives to India quickly in response to business needs.
“Jones complained about the visa process for Americans coming to India, especially for business visas. He said that the Indian system is slow and restrictive, making it impossible for his company to send quickly an American to India to solve problems that his Indian staff were unfamiliar with.
“He also said that renewing a residence permit in person — an annual requirement — is a notoriously laborious, old-fashioned, and
paper-and-rubber-stamp intensive process that could be held up by a single bureaucrat. He urged the USG to advocate for India to adopt a more modern approach that made better use of the country’s IT skills,” the cable quoted.
He also heard Jones’ warnings about a move by the Indian government to raise taxes on their units in India. Taxes have to be paid in India on basis of the deemed value addition (contribution) made by their Indian units to their overall products and revenues.
While American companies were more or less free to come up with a value for the work done by their Indian units (called Transfer Price), Indian government has increasingly been insisting on higher valuations. The process is still on.
“[Jones’] said that Indian tax authorities are planning to increase by two to three times the prices they estimate the subsidiaries of multi-national companies pay for goods and services from their parent companies.
“This increase, he said, will raise significantly the taxes these subsidiaries pay in India. Calling this decision “very surprising and very arbitrary,” Jones said that his company is challenging this case in India’s courts.
“He emphasized, however, that India’s decision would not affect his company’s overall bottom line because it would deduct its increased taxes in India from the taxes the company paid in the United States — a shift that would hurt the U.S. tax base,” the cable noted.
On a positive note, company executives dismissed the notion that they were in India due to the lower cost of Indian engineering talent. Rather, they said, the number of engineers they wanted could not be had in the home market (US.) Then, as now, there were many complaints in the US about jobs being shipped to India (or ‘Bangalored’.)
“Senator Ensign heard several common themes throughout his visit. One of the most common was that high-tech companies continue to scale up their operations in India not because of the low cost of engineers (although this helps), but because India is one of the few places in the world that is producing engineers in the numbers needed.
“Intel, TI, and GE all touted their Indian subsidiaries’ or divisions’ technological contributions to products and services marketed worldwide and emphasized the key role that these divisions played in the company’s overall strategy,” the visit report noted.