The Prime Minister says ‘India can emerge as the global nerve centre of complex modern multinational supply chains in the post Covid-19 World.
The immediate cost of the lockdown was borne by the most vulnerable people in the society and therefore government’s focus was to reduce pain for this segment. But now economy is our focus.
Companies are looking for shifting their production base from China. The world finds India as an attractive alternative, but the government needs to address many challenges. Rebuilding and catalysing growth has to be in an unprecedented manner.
Protectionism, competition and level playing field have to be carefully balanced. It is essential for India to build on its own manufacturing facilities and make it more competitive. People expect the government to formulate a new National Manufacturing Policy for this.
There are many bottlenecks that need to be removed; the cost of acquiring land and legal and procedural delays is a big challenge. Similarly is the case with reforms in the labour sector. The cost of doing business is quite high. Our global ranking on ease of compliances, particularly tax, both direct and indirect is low. We need to rationalise expense incurred on power and logistics also.
All these challenges have the potential to be converted into opportunities, once the government embarks on the process of reforms and the industries shifts their focus from demanding protectionism to an ecosystem of level playing field.
Contribution of logistics share to GDP is about 13 to 14 per cent in India, whereas global benchmark is 9 to 10 per cent. Industries have to bear heavy cost on transportation of goods, raw material and services. 65 per cent of our transportation is by roads, being more costly in comparison to railways and waterways. Globally, industries dependence on road transport is of 25 per cent. A National Logistics Policy is in the pipeline, seeking reduction in logistics share in GDP to 10 per cent by 2022. Investments into railways, roadways, waterways and airways will help in creating demand in the economy and employment and also help in meeting the target set above.
India is moving from the regime of high interest rate to lowering of interest rates. RBI is continuously reducing both repo rate and reverse repo rate, but the transmission is not at the desired pace. Over the period the risk premium in the financial institution has been reduced due to advent of IBC, NCLT etc. but again the risk has increased. If it is left to the banks to bear them, it will be unworkable. Neither, banks are willing to expose themselves nor borrowers. Particularly small and medium segment have weak balance sheets.
Labour being one of the most crucial factor of production, has always been a contentious issue, the time is ripe for a balanced approach. Social and economic welfare of labour has been usually equated with the number of laws dealing with the subject. The net result is that labour market is characterised by extreme rigidities while over 90 per cent of the labour force is outside formal protection. Centre has consolidated labour laws into four codes and since labour is in a concurrent list, some states have gone ahead and amended the labour laws in order to revive and attract industries. Coordinated approach is advisable.
The cost of land in India is quite high. Thus for any greenfield project the this cost is a deterrent, especially if it’s a small project. State governments must pool in its land holdings and make land banks available. Local authorities for cluster development and special purpose vehicle with joint participation are the raodmap ahead. States have major role in solving this contentious issue.
Any laxity on contract enforcement and judicial intervention on administrative decisions is a big deterrent for businesses. India’s contract enforcement ranking remains low. The Commercial Courts Act of 2015 is welcome. Setting of commercial and district level courts will expedite mercantile dispute resolution. Fast tracking, New Delhi International Arbitration Centre Act in NCR will bring India to the global stage.
Reduction in compliances and transparency are a big boost for ease of doing business (EODB). A stable policy regime, has a positive attribute for attracting global players. Thus stability and predictability in laws and policies is a value to be imbibed by the Government at all times. GST with its online registration, filing of returns, assessment and refund is helping but GST network (GSTN) remains a pain. Moving towards e-assessment and virtual taxation regime will remove harassment in due course.
India’s FDI policy is quite attractive, with maximum sectors falling under automatic route and only some of them having sectoral caps. Repatriation of profits and royalties are allowed and we have current account convertibility. Section 92 of the Income Tax act on transfer pricing, profit shifting and base erosion has defined agencies working in India as permanent establishment (PE) for foreign companies and place of effective management (POEM) for Indian companies having foreign establishment, for checking tax evasions by multinational companies (MNC),
I believe that India has a fair chance to attract global manufacturing capital and emerge as the world’s factory. Facilitating setting up of manufacturing base in India does not fall within the exclusive jurisdiction of either the Centre or the State and the Government at all the levels will have to work collectively to be successful.
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