[Editorial Analysis] Clearing the way for an investment uptick

Mains Paper 3: Economy

Prelims level: Ease of doing business

Mains level: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment. Inclusive growth and issues arising from it.

Context

• The World Bank Doing Business (DB) rankings for 2019 bring timely relief for the Narendra Modi government.

• The government’s various skirmishes on the political and economic fronts, India has climbed 23 spots to rank 77th globally.

• This is a substantial jump in the rankings for the second year running; last year, India jumped 30 notches.

• The government deserves credit for this sustained progress.

• That said, it is also important to remember precisely what the rankings mean and what they don’t.

What government has achieved so far?

• India registered improvement in areas like starting a business, dealing with construction permits, getting electricity, getting credit, paying taxes, and trading across borders.

• It has undertaken targeted efforts to address shortcomings in these areas.

• The National Trade Facilitation Action Plan (NTFAP) 2017-2020 made for increasing the efficiency of cross-border trade.

• The architecture for decreasing border and documentary compliance time, permitting exporters to electronically seal their containers at their own facilities, and reducing physical inspections to up to only 5% of all shipments.

What government must think about?

• There has been stagnation or regression.

• The Insolvency and Bankruptcy Code (IBC), as critical a reform as any in recent times. India’s rank dropped from 103 to 108 here; its overall score did not decline significantly, but that is not something to celebrate.

• The sluggish rate of resolution of cases that have come under the IBC is becoming a major roadblock.

• The 212 cases that have ended in liquidation and in almost 80% of those that have completed the IBC process.

• The resolution value was greater than the liquidation value in 30 cases that ended in the latter anyway.

• Creditors choosing to take a deeper haircut, and the small percentage of companies going the resolution way, imply kinks in the resolution process that need to be worked out.

Impact of GST

• Then there is the goods and services tax (GST), perhaps the Modi government’s biggest achievement.

• There has been an improvement in India’s “paying taxes” score.

• The decline in its relative rank on this front notwithstanding but it remains below 100.

• The number of hours taken in a year to file taxes rose to 275.4 from 214 last year.

• There are other hitches with knock-on effects as well.

• Delays in GST refunds have constrained working capital for exporters.

• The Federation of Indian Export Organisations has stated that the process of input tax credit refund being partly electronic and partly manual has been the main impediment here.

• The World Bank’s deadline for tax-related reforms was 31 December 2017, only six months after GST was introduced.

• It remains to be seen if next year’s report will show follow-through in addressing these flaws.

Way forward

• Such reforms are also important as a signalling exercise.

• The DB rankings have their limitations, as this paper has noted.

• They are restricted to findings in two cities Mumbai and Delhi and reflect the de jure state of affairs.

• Research in recent years shows that the de facto reality at the enterprise level may be significantly different and vary across states depending on governance quality and state capacity, among other factors.

• What the rankings do, however, is give investors a yardstick by which to measure government commitment to reforms.

• Such messaging is important; sentiment, not just fundamentals, matter for investment, particularly foreign direct investment.

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