Written by Pravakar Sahoo.
High inflation, dwindling growth, low investor confidence, and policy paralysis in the years before the 2014 general election resulted in high expectations from Indian industry, investors and the people at large: everyone looked to the new government, led by Prime Minister Modi, to ease their pain and bring the economy back on track. Since coming to power, the NDA government led by Modi has taken several important steps to revive domestic investment, ensure ease of doing business and attract foreign investors, so as to enable the success of the ‘Make in India’ initiative for manufacturing-led job creation and growth.
Ease of Doing Business: The government has taken many steps to ease doing business in India – not an easy endeavour, as reflected by India’s rank of 142 among a total of 160 countries (information published in the global competitive index 2014). The 2015-16 budget proposed many improvement measures, including the setting up of an expert committee to get rid of multiple prior permissions, commitment to Goods and Services Tax (GST), abolishing wealth tax, reducing corporate tax rates from the present 30% to 25% over the next four years, an e-business portal which merges into one place 14 previously separate regulatory permissions applications, a proposal to introduce a new bankruptcy law for easier exit of investors, a proposal to bring a public contracts bill for dispute resolutions, deferring general anti-avoidance rules for two more years and the creation of dedicated branches in courts for early resolution of commercial disputes.
These measures are all directed towards improving the business environment. The commitment to implement GST from 1 April 2016, and the phasing out of tax exemptions and concessions to corporates (which lead to innumerable tax disputes) are designed to create a transparent and more rationalised tax structure. Furthermore, getting rid of the distinction between foreign direct investment and foreign portfolio investment, and merging Forward Markets Commission with the Security and Exchange Board of India for market regulation, is intended to reduce multiplicity in administration and regulations and bring transparency in doing business. These steps are all directed towards reducing red-tape and procedural delays, improving enforcement of contracts, and facilitating quick dispute resolution.
The Finance Minister also renewed the commitment towards the enactment of the Goods and Services Tax (GST) Bill, which is heralded as a landmark business-friendly reform. The GST requires a Constitutional Amendment by both houses as well as by a majority of all state assemblies. The government demonstrated its commitment to the cause by periodically addressing states’ concern, handing out olive branches to stubborn opposition parties, and eventually getting states and opposition parties on board. The GST Bill, with some amendments, was passed in the Lok Sabha on 6 May 2015. This bill seeks to implement a uniform, comprehensive tax on manufacture, sale and consumption of goods and services. The GST will subsume a range of indirect taxes currently levelled at centre and state levels.
Many of the procedural and administrative hurdles that businesses face in India have also been tackled, or are set to be tackled, and many of these hurdles pertain to the complexity and multiplicity of paperwork, which is one of the major causes of red-tape in India. The launch of the eBiz portal for businesses is one of the technology-enabled e-governance efforts. The portal is an online single-window system which allows firms to navigate the documentation-related formalities of setting up and managing a business in India. As of today, eleven services can be availed online end-to-end 24 / 7 on the G2B eBiz portal. The government aims to integrate 26 central government services across nine departments on the platform.
The reduction in the number of documents required in order to import and export goods to and from India has been reduced to three from ten, thus substantially cutting transaction costs – one of the banes relating to trade in India. Security clearances for Foreign Investment Promotion Board (FIPB) investment proposals will now be cleared in 30 days, down from 90 days. The states have also been pitching in – for example, the time required for a new electricity connection in Maharashtra has been reduced from 67 days to 21 days, while the number of procedures involved for the same has been cut down to 3 from what was previously 7.
In terms of the broader governance architecture, the government has sought to streamline the regulatory regime by merging implementing authorities (for example, the proposed merger between Forward Markets Commission (FMC) and Security and Exchange Board of India (SEBI),) combining multiple and overlapping laws such as the proposed five-pronged labour code, to replace the 44 laws governing labour relations now. These mergers will help to improve compliance, while contributing significantly to the ease of doing business in the country. The much awaited labour reforms necessary for mass manufacturing in India were finally initiated at central government level by Prime Minister Modi on 15 October 2014. Any efforts to rationalise labour rules (around 250 altogether both at the central and state level), are a welcome step for the industry. The two key areas of reform announced are the ‘Unified Labour and Industrial Portal’ and the ‘Labour Inspection Scheme’. The objective criteria and transparent processes for labour inspection would be a relief for industry, more so for SMEs, which have allegedly been victims of the arbitrary use of labour rules by labour inspectors. The introduction of Labour Identification Numbers (LIN) and the implementation of the inspection process via a unified portal will go a long way in executing transparency in the use of labour rules. To undo the malady in India’s labour market, some changes have recently been initiated in the three acts that largely govern India’s labour market: the Factories Act (1948), the Labour Laws Act (1988) and the Apprenticeship Act (1961). Amendments to some restrictive provisions within all of these acts have been cleared by the cabinet, and are set to be tabled in Parliament. This is a crucial step and will help to prevent unnecessary procedural delays – an inordinate feature of doing business in India.
Infrastructure, Manufacturing and Investment
Boosting the manufacturing sector is imperative for the Indian economy. Around 1 million people enter the workforce every month, and unemployment hovered around 3.7% in 2013. At the same time, education and general skills are in short supply. As a result, low-skilled manufacturing jobs provide the highest chance of abating underemployment and unemployment. However, the contribution of the manufacturing sector has languished at about 15% of GDP for years. The NDA government has rightly identified the problem, and has therefore focused on the manufacturing sector; the government’s ‘Make in India’ scheme essentially announces to the world that India is a better place to invest in than before, that the government is doing what it can to ease the rules and simplify procedures, while investing in physical infrastructure. With the aim of making India a production hub for global manufacturing companies, the government has promoted the scheme extensively within and outside India. The focus sectors include mining, telecoms, textiles, automobiles, biotechnology, chemicals, construction, defence, food processing, leather, pharmaceuticals, and railways. Additionally, the government has placed more focus on ‘ease of doing business’ and in boosting physical infrastructure. Since taking office, the government has made elaborate plans to spend on infrastructure, mainly focusing on connectivity. As a result the government has made it a priority to provide timely environmental clearances for projects.
One of the most noteworthy steps of the Modi government is the focus on infrastructure development, both in terms of allocation and policy measures. The 2015-16 budget allocates a whopping US $79 billion of public investment (capital expenditure both by government and public sector undertakings) compared to US $57 billion in the financial year 2014-15 for infrastructure investment. The budget has increased the allocation by US $11.5 billion for roads and railways, provided US $16.5 billion for setting up of 5 Ultra Mega Power Projects, US $3.4 billion has been allocated to the National Investment and Infrastructure Fund and computerisation of ports and tax free bonds for infrastructure; these are just a few measures among many that are intended to provide quality infrastructure to help reduce trade and transaction costs of doing business. The overall objective of these measures is to improve competiveness and attract investment.
Further, the NDA government has taken number of measures to revive Special Economic Zones (SEZs), attract FDI and pursue reforms in important sectors like defence. The 2015-16 budget has taken effective steps to revive SEZs including giving investment allowance at 15% for 3 years to a manufacturing company which invests in plant and machinery and announcing special SEZs for women in 100 districts.
The hike of FDI caps in insurance and defence sectors to 49%, the sharp decrease in retrospective taxes and the raising of FDI limits in e-commerce, insurance, defence, and health insurance are all signs that the government is headed the reform way to attract FDI, which is necessary for manufacturing-led growth and subsequent job creation. Over all, the economic policy of the NDA government in its first year has been focused on reform, infrastructure, a focus on ease of doing business and reviving investment in the manufacturing sector and growth for job creation and improvement in the standard of living. Though it’s too early to measure the outcomes of these policies, the future of the Indian economy certainly looks bright.