Better global rankings underline India’s potential
The World Bank has placed India twelve notches higher than last year in its Ease of Doing Business rankings for 2016. This comes close on the heels of the country’s sixteen place leap on the World Economic Forum’s Global Competitiveness index. These rankings underline the impact of the recent spate of reforms, which have come to bear fruit. Notwithstanding the debate on whether a push up in these rankings could have been far better, the outcome is encouraging and signals a trend reversal of sort.
A number of measures—at the policy and administrative levels—have contributed to this development. Amongst key investment reforms a few initiatives which stood out include liberalisation of Foreign Direct Investment (FDI) norms including permitting composite caps, efficient processing of approval permitting investments, executive’s intervention to pre-empt tax controversies and abstinence from retrospective tax legislations.
Besides, the government’s commitment to undertake significant tax policy reforms, such as tax rate rationalisation to make India a more competitive investment destination vis-à-vis BRICS and other emerging economies in Asia, enhancing efficacy of dispute resolution forums and a constitutional amendment to facilitate Goods & Services Tax (GST) have contributed to revitalising investors’ confidence. Improving macro-economic fundamentals such as moderate inflation and a relatively stable currency have brought the sheen back to investors’ money. Till June 2015, FDI flows recorded a year-on-year growth of 30 percent.
At an administrative level, speedier decision making, clamp down on disruptive practices such as retail corruption and a behavioral shift in the government’s functioning to result orientation are other positives that drove the change. Push for competitive federalism initiated a unique movement of sorts, as states are beginning to realise their potential by pitting themselves against each other and taking measures to build attractiveness for investments. State level land and labour reforms will further hasten growth in investments.
A slew of major policy reforms, which have the potential to sustain investment momentum, are in the making. Amongst these, two critical reforms which are hung primarily due to the lack of political consensus are land reforms and the introduction of the unified national GST law. In times when global economies are progressively slowing down and India is reaping the benefits of low crude and commodity prices, India has a unique opportunity to add a couple of percentage points to GDP growth by implementing the GST regime and thus setting in motion state-level efficiencies for doing business in India. Pending land reforms tend to cause more collateral damage to untapped investment potential for infrastructure development across the country, though progressive states are likely to drive the agenda. That these policy reforms can open the flood gates for foreign and domestic investments, is a no-brainer. I reckon it is in the overall interest of state governments to allow convergence of their ideology and let GST and land reforms see the light of day.
Amongst others, unveiling of bankruptcy legislation will catalyse growth of the ‘startup’ economy which requires easier norms for not only entry but investment exit as well. The Bankruptcy Law Reforms Committee has recommended legislating a unified Insolvency Code for all entities, which must replace existing disparate legislations pertaining to insolvency and liquidation of registered entities. Further, fine-tuning of the Prevention of Corruption Act shall address the menace of retail corruption, by encouraging transparent and bold decision by civil servants.
A case for impending reforms in labour laws presents itself, since such reforms could well be the inflection point in reviving the languishing growth of the manufacturing sector which far from leading, contributes less than a quarter of the country’s GDP. Again, states like Rajasthan and Madhya Pradesh are driving such reforms at the state level.
Financial sector reforms continue to hold the key. While the merger of market regulator Sebi with the Forward Markets Commission is a significant action emanating from recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), major initiatives are required to realise the objective of an integrated financial sector regulatory framework. Proposals to enact a unified Indian Finance Code, and constituting a Monetary Policy Committee as the custodian of decision making in monetary policy matters are significant developments, and will trigger modernisation of monetary controls.
Major breakthroughs have been witnessed on the fiscal policy front in the past twelve months. India becoming a signatory to the multilateral agreement on automatic exchange of information showed the way for embracing best practices in tax administration. To ensure compliance with Foreign Account Tax Compliance Act (FATCA), India is adopting inter government agreements, in tandem with revised disclosure norms prescribed by the department of revenue to track reportable transaction of financial institutions. Enhanced rigour on disclosures in tax matters is bound to promote governance standards.
Continued focus on law making through consultative processes bodes quite well from investors’ standpoint. More recently the government having embarked upon simplification of income tax laws through a comprehensive review by an expert group, is yet another instance of progressive policy thinking. The outcome of OECD and G20-led BEPS Project has received a lion’s share of government attention. The finance minister has hailed BEPS works as a stepping stone to the rapidly emerging new era of tax policies. It wouldn’t be far from mark to anticipate major tax policy announcements in the Finance Bill 2016 to embrace some of BEPS recommendations, which have assumed immediate significance. An ordinance to amend the Arbitration Act can facilitate speedier resolution of commercial disputes in a time-bound manner.
To sum up, optimism over the Indian growth story is growing. What is needed is a continued policy push to unleash reforms, lest India’s growth pattern is held ransom to hostile politics.