Government Initiative on Ease of Doing Business

by K R Sudhaman

The make in India campaign, launched by Prime Minister Narendra Modi from the ramparts of Red Fort on Independence Day last year, will remain only on paper without government making concerted effort to improve the ease of doing business and justifiably this has received top priority of the NDA government during the last one year. India, which is among the bottom in World Bank’s index of ease of doing business, has dropped down two places to stand at 142nd out of 189 in World Bank’s latest ranking, underscoring the tough task that lies ahead of government. The NDA government, which wants to make India a business-friendly country, has therefore has initiated several steps in the last several months to put Indian economy back on rails.

In the ten metrics used to measure ease of doing business in the World Bank's 2015 report, which covers the period from June 2013 to May 2014 (when the UPA was in power), India came close to the bottom in two categories. It stood a wretched 184th in the category Dealing with Construction Permits, and 186th in Enforcing Contracts. On the bright side, India stood 7th, an improvement of 14 places, when it came to Protecting Minority Investors. It is the only category in which India has shown an improvement from 2013, when it was ranked 21 in this category and 140 in the overall ease of doing business.

India has a lot of potential of attracting international business but the 'ease of doing' business has to be improved, according to Bernhard Steinruecke, Director General of Indo-German Chamber of Commerce. German companies are very optimistic about India and it would be win-win for both the countries if only ease of doing business improved. India is setting up Industrial corridors like the Mumbai-Delhi , Chennai-Bengaluru, Chennai-Vizag and Ludhiana-Kolkata Several Japanese, German, British, French, US and Chinese companies are keen to set up manufacturing units in those industrial corridors. But procedural hurdles delayed the process and Modi government has taken the necessary major first steps that are expected to bear fruity in the coming months and years.

Steinruecke, who is not alone in voicing the concerns of both domestic and foreign investors, said India's place in the list of ease of doing business is still in the wrong place and a lot of improvement has to come, particularly the rules and regulations. The bureaucratic hurdles and harassment by revenue officials make investors wary. Despite the huge market foreign investors do not see India as top priority as a result.

With Modi Government coming to power things have changed for the good and this has been acknowledged by Steinruecke himself who said the approach of Modi to make things easier is the most important thing.

Tax rules are complex all over the world but the retrospective tax brought by the previous UPA government two years back following the Vodafone tax dispute caused more harm than good and NDA government particularly finance minister Arun Jaitley has given an assurance this would not invoked by his government in future.

Aware of the perception about India, Modi government has promised to improve India’s position 50th position by 2017 from present 142. The task is not going to be easy but the Indian Prime Minister has already taken big strides setting in motion several initiatives in this regard. The recent conduct of coal auction and spectrum auction in a transparent manner fetching government revenue over Rs 3 lakh crore is one such action. The insurance reform bill, that raised the FDI cap in the sector to 49 per cent has been passed in Parliament is another. The bill, which had been hanging fire for almost a decade has been passed and there are already forward movement by some of private insurers to raise foreign holdings. The reforms carried out by the Government since June one last year when considered for the doing business report next year will improve India’s ranking considerably, according to Minister of State for Commerce and Industry, Nirmala Sitharaman. World Bank President Jim Yong Kim too had said as early July last year after Modi government assumed office that India could jump 50 spot by just implementing the Gujarat Model of reforms.

The department of industrial policy and promotion has already taken number of initiatives to improve the environment for doing businesses.

They included simplifying the application form for industrial licences and making the process online through the eBiz website, exempting a large number of defence equipment from compulsory licensing, and extending the initial validity period of industrial licences from two years to three so that there is enough time to obtain necessary clearances from authorities. The government has also raised FDI cap for defence to 49 per cent and in hi-tech areas, it could consider up to 100 per cent on a case-by-case basis.

Apart from Insurance bill, the government has amended the companies act relax or drop some of the difficult provisions for business. It has raised FDI cap on pension funds to 49 per cent in line with insurance. The ordinance to allow e-auction of coal mines have been passed by Parliament and first set of e-auction of coal mines have already happened. The long awaited mines act too has been amended. The bill to amend land acquisition act, which was first brought in the form of an ordinance was recently passed by Lok Sabha. It could not be passed in the Rajya Sabha, where opposition parties are in majority as it had been referred to joint parliamentary committee and it is widely expected that it would get passed in the monsoon session of parliament after adopting some of the amendments of opposition. According to KPMG-CII survey on ease of doing business that lack of an effective land acquisition process is one of the key issues that came in the way of pushing projects. The survey also identified unfavourable taxation regime some of the other reasons high cost of starting a business. India continues to falter on various sub-indices such as starting a business, dealing with construction permits, getting electricity, registering property, paying taxes, trading across border, enforcing contracts or resolving insolvency and rightly Modi government has initiated steps to deal with these issues.

The Goods and Services Tax, first proposed in 2004-05 has been hanging fire and missed several deadlines since 2010. It goes to the credit of Modi government for GST bill getting through the first hurdle with its passage in the Lok Sabha earlier this month. But the bill has been referred to a select committee in the Rajya Sabha resulting some delay but just as land bill, the GST constitution amendment bill is widely expected to be passed in the monsoon session, well in time to enable rollout of the game-changing indirect tax reform measure from April one 2016. Once rolled out, this destination based tax will bring about single common market in the country besides getting rid of the present system of tax on tax. Apart from widening the tax base, this will reduce overall incidence of tax but at the same improve revenue collections of both states and the centre.

The Confederation of Indian Industry (CII) has already made certain recommendations to the Prime Minister's Office (PMO) on streamlining investment approvals and provision of utilities including an appropriate labour development ecosystem. The government has already moved on several issues and several states too have taken initiatives reform labour laws. The union government too is moving towards allowing unviable companies up to 300 employees to close down without permission. Recently government freed several PPP highway projects by providing exit route for some of the stuck projects. This has freed Rs 40,000 crore of stuck investments in highways for deployment other highway projects. Also government has taken several steps to get several stalled projects in the power and other infrastructure sectors get them going by clearing them at the highest PMO level. The Modi government has taken several steps to put the creaking railway back on track by adopting innovative funding and signing MOU with LIC for lending up to Rs 1.5 lakh crore for railway projects in the next five years. Also FDI up to 100 per cent is allowed in some areas of railways. The government has taken the bold, though unpopular, measure of raising passenger and freight fares, with the plan to deploy the additional revenue to significantly upgrade safety, electronic signals and coach quality. Government has improved ease of doing business by clearing Rs 3.3 lakh of stuck infrastructure projects apart from Rs 6.6 lakh crore of projects cleared earlier.

The central government has decided to rank states on the basis of ‘ease of doing business.’ The system is expected to generate competition among the states and also help investors to choose the place to invest. The Department of Industrial Policy and Promotion (DIPP) has circulated 98 ‘action points’ to state governments on ‘creating an enabling framework for stimulating investments in manufacturing with specific timelines for each action.’ The ranking, to be done with the help of a consultative agency, is expected to be in place by June 2015.

The Union Budget 2015 too announced steps towards ease of doing business in India. The budget proposed to introduce a regulatory reform law that will bring about a cogency of approach across various sectors of infrastructure. This will help infrastructure companies that have multiple businesses like ports, power, roads and airports.

The budget further simplified the procedures for Indian corporate to attract foreign investments. It has done away with the distinction between different types of foreign investments, especially Foreign Institutional Investor (FII) that comes under portfolio investments, and Foreign Direct Investment (FDI).

Among the states, the Andhra Pradesh government has inked an MoU with the National University of Singapore (NUS) and Confederation of Indian Industry (CII) to work on 'Ease of Doing Business' in the state. Under the Make-in-Maharashtra campaign, Maharashtra Chief minister, Devendra Fadnavis, has also tabled a bill to amend the Maharashtra Municipal Corporation (MMC) Act to this effect. This means industries seeking expansion or new initiative in the Maharashtra Industries Development Corporation (MIDC) areas will not have to take permission from the local body or municipality in that district or town. Madhya Pradesh Chief minister, Shivraj Singh Chouhan, has claimed that the state will be made number one in ease of doing business. Rules, laws and processes in the state will be simplified to boost industry and business, while unnecessary permissions will be abolished.

At the central government level, India has also reduced the number of mandatory documents required for import and export of goods to three in each case. The move will lead to reduction in transaction cost and time. Presently, around 10 documents are needed to fulfil the official obligations. Other initiatives include digitising the process of applying for industrial licences. The new five-year Foreign Trade Policy unveiled in April also included ease of doing business as a key focus area.

Prime Minister Modi’s pragmatic governance approach has ensured that approvals for over 400 projects with investments over $70 billion have been expedited.This will help expedite the approval of more than 400 projects, with estimated investments exceeding US$70bn. A crucial administrative reform that has happened is to abolish 30 Groups of Ministers (GoMs) and empowered GoMs (EGoMs) set up by the previous United Progressive Alliance (UPA) government to tackle cross-jurisdictional issues involving more than one ministry. These GoMs and EGoMs only slowed down decision-making considerably. Administrative aspects of such issues are now tackled by Cabinet Secretariat resulting in speeding up of project clearance. Those issues that are related while those related to policy aspects are now dealt with by PMO

Another significant decision is to replace the Planning Commission, created in 1950 and inspired by Soviet-style central planning, with a think-tank of experts drawn from public and private sectors – one that is better aligned to meeting 21st century requirements. These are some of the positive steps taken government to improve ease of doing business and this would only improve further in coming months and years to get the Indian economy back on high growth path of 8-9 per cent annually to be fastest growing economy in the world in the next decade or two.

*Sh. K R Sudhaman is a senior business journalist and has served as Editor in Press Trust of India, TickerNews and Financial Chronicle (PIB Features)