Daily Answer Writing
27 October 2021

​​​​1. The cost of doing business in India has remained high despite various efforts. In the light of this statement suggest measures to reduce the cost of doing business. (250 words)

  • Source: The Indian express - Page 8/The editorial Page - cost of doing business
  • GS 3: Economy

 

Approach Answer:


Introduction: India is said to have a potential for a double digit growth. However in the last two decades despite good growth and various efforts, this has not happened. Poor Ease of doing business has been one of the major reasons behind this which stands at 63rd in the world in 2020.

 

Various efforts taken by the government to ease doing business:

    • Cut in corporate tax rates: lowering the base corporate tax rate to 22% from 30%, and to 15% from 25% for new manufacturing companies.
    • Insolvency tax Code: Recovery rate in resolving insolvency has improved significantly from 26.5% to 71.6%. Time taken for resolving insolvency has come down from 4.3 years to 1.6years
    • GST reform: All the indirect taxes except tax on fuel, electricity and alcohol have been included in one single tax structure.
    • Labour reforms: All the complex labour laws have been compiled into four labour codes.
    • Digitalization of government processes: Enabled post clearance audits, integrating trade stakeholders in a single e-platform & enhancing the electronic submission of documents.
    • Improvement in infrastructure: Significant progress in highway construction, dedicated freight corridor(DFC), UDAN scheme, the launch of Gati Shakti, inland water way etc.
    • Direct Tax reforms: Faceless assessment scheme, Double taxation avoidance agreement, Scrapping of retrospective taxation and wealth tax.
    • FDI reforms: allowing 100% FDI under automatic routes under most of the sectors.
    • Subsidies: Various schemes such as Startup India - Stand up India, Make in India, PLI scheme etc. support doing business in India.

 

Despite this cost of doing business had remained high due to various factors:

    • High cost of transport: Indian diesel prices are higher than most of the developed & developing nations. It is 20.8% higher than China, 39.3% higher than the US and 72% higher than Bangladesh. This is largely due to heavy taxation. The total taxes on diesel account for over 130% of the base price in India.
    • Logistics Costs: due to time taken in transit due to poor infrastructure and poor storage facilities. This leads to loss on perishable items.
    • High cost of power: Power cost for commercial sue are higher by 7-12% vis-a-vis the US, China or Bangladesh and as much as 35-50% when compared to South Korea or Vietnam. This is because coal that accounts for 70% of electricity generation in India is also pricier vis-à-vis other countries resulting in higher electricity prices. High cost of fuel and power alone account for 25-30% costs in steel and cement industry.
    • High corporate tax: Even though the corporate tax is lowered in the recent years, the surcharge remains in the range of 7-12% for most sectors.
    • High Taxation on raw material: such as 28% tax on various petroleum derivatives like plastics, adhesive, paints etc. being used for apparel industry, on raw material important for construction such as cement and steel etc. This also leads to a situation of inverted tax duty too.
    • Regulatory overload - cost of compliance:  Outsized regulatory levels pose a significant burden on businesses. As per a report, a small manufacturing company with just one plant & up to 500 employees is regulated by more than 750 compliances, 60 Acts & 23 licences & regulations.
    • Cost of contract enforcement: Due to weak contract enforcement legal costs are high in India. This is partly due to huge vacancies in courts, tribunals and regulatory agencies.
    • Cost of raising capital: Interest rates in India remain high due to inefficient banking. The quantities easing done by the RBI is not passed on to the consumers.

 

Measures to improve ease of doing business in India: 

    1. Contract enforcement: The law and order situation must be improved including Judicial reforms for better protection of business interests.
    2. Rationalization of Taxes:
      • Lowering of GST: Currently various important items such as chemicals like adhesives, metals, cement etc. come under 28% GST rate which make Indian material uncompetitive in the international markets.
      • Brining Fuels under GST: Fuel is not only used for transportation, but various petroleum products are also used as raw material for manufacturing of chemicals. Brining it into GST would create a great chain of input credits lowering the effective taxes for the industry.
      1. Bringing electricity under GST: This would lower the rate of electricity for the MSMEs.
    1. Ease of doing business: Promoting the ease of doing business by following ways:
      1. Single window clearance: for various permits such as construction department, labour department, pollution departments etc.
      2. Easing Border compliance for exports as well as imports.
      3. Ease of establishment: land conversion, getting electricity, water and sewerage connections should be eased.
    2. Enhanced Government incentives: Currently, various sectors are covered under the Production linked Incentive(PLI) scheme in India. These must expand to as many sectors as possible
    3. Easing Labour laws: Quick implementation of new labour codes and the Establishments to be visited by an Inspector should be decided through a computerized random allotment.
    4. Easing Agricultural Markets: These can be improved by implementing the farm laws passed by the Parliament after adequate consultation with the stakeholders.
    5. Capacity Utilization: Government and the Industry has many resources which are underutilized. The Government can monetize its resources with effective utilization, whereas, the private sector needs adequate resources to invest into its resources effectively.
    6. Increasing the Investment expenditure: This would lead to higher gross capital formation and thus higher growth.
    7. Effective Implementation of Insolvency and Bankruptcy Code (IBC): filling up of vacancies, adhering to timelines, allowing promoters into the process etc.
    8. Decriminalisation under Companies Act, 2013: The move seeks to remove criminal penalties from all provisions of the Companies Act, except provisions dealing with fraudulent conduct.

 

Conclusion: Under the Atmanirbhar Bharat abhiyan, the government has taken up the improvement of important supply chain as a whole. This is a step in the right direction. Along with creation of infrastructure for better evacuation of goods, this can make India integrated with the global supply chain networks which can push India into the global economy.

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