Undertaking reforms in key aspects of doing business in India critical to restoring growth trajectory: CII-KPMG Report on Ease of Doing Business in India.

CII released a report titled “Ease of Doing Business in India” in partnership with KPMG, India in Chennai today. Despite being one of the fastest growing economies in the world and potential investment hub, India lags behind in terms of ease of doing business. Taking cognizance of this anomalous situation, CII and KPMG have jointly prepared a report aimed at improving India’s position in the World Bank’s Ease of Doing Business rankings, where India has repetitively been ranked India low compared to 184 other economies. 

The report identifies key areas for reform which will enable doing business in India, including setting up of business, land acquisition, taxation and contract enforcement.

According to the report, despite two decades of economic reforms, 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. In fact, the latest rankings place India 134^th among 185 countries; lower than all its BRIC counterparts. Therefore, there is an urgency to focus on improving the business environment and arrest the decline in relative performance against various determinants of investment attractiveness. 

On release of the report, Mr Chandrajit Banerjee, Director General, CII said, “CII hopes that the findings of this report would help bring the issues to the fore and also serve as a reference point for the imminent need to pursue reforms in business practices and processes. Indian industry hopes that the new Government would accord due importance to this extremely important and urgent agenda that would help churn the wheels of investment and growth.” 

The report is based on a survey conducted amongst Indian industry followed with extensive primary and secondary research to assess the prevailing business regulatory environment in the country. Key issues highlighted include lack of an effective land acquisition process, unfavorable taxation regime, high cost of starting a business, complicated and time consuming contract enforcement process. 

Commenting on the findings of the report Richard Rekhy, Chief Executive Officer, KPMG in India said, “Having an environment that facilitates entrepreneurship, promotes investments productivity and growth is critical for improving business climate in India. The ease with which this is achieved can be a source of strategic advantage. The vulnerability of our country’s current standing in the Doing Business index means that reforms in these areas have become critical.”  

Key issues and recommendations 

Survey identifies key issues against the four parameters studied, and suggests recommendations to arrest the rapid decline in ease of doing business. 

Parameter Studied	Issues	Recommendations
Land Acquisition Process	Average time taken to acquire the land is 14 months and often        could take longer 58% of the respondents feel the number of visits made to each department to obtain the permission pose major obstacles in the approval process 69% of the respondents feel that there is a lack of effective land acquisition process 83% of the respondents feel that unsecured land titles generate uncertainty Land mutation process is considered complex and time-consuming Setup large designated industrial zones with pre-clearances and ready to move in Single window registration and mutation process Move from a deed based registration to Title based registration(Torrens System) Streamlined process for land use conversion A market-based pricing system, where price is determined by an independent body
Starting a business	Approvals related to environment clearances, land procurement, construction permits, industrial safety permits and power connectionare top five obstacles in starting a business 85% of the respondents feel that the time required to obtain such clearances is not reasonable 78% of the respondents who feel the number of windows/ministries one has to visit is not reasonable Reduce approval turnaround – make eBiz portal more effective Wider and effective adoption of Deemed approval principle Automatic approval for power, water and sewerage Moving away from Department centric approach to Business centric approach Labor reforms Continuous skill development Access to funds for Micro Small and Medium Enterprises (MSME)
Taxation	90% of the respondents are in favor of reduction in tax rates. 92% of the respondents feel that there are challenges in transfer pricing assessments relating to distribution / agency 90% of the respondents believe that the tax authorities are not proactive in promoting investments 60% of the respondents feel that the neutralization of tax decision by Supreme Court through retrospective amendment has had damaging effect on investment sentiments More than half the respondents have faced delays in obtaining service       tax refund	Implement Goods & Service Tax (GST) Reduce the number of taxes and the ambiguity / discretionary nature of taxes, especially in Transfer pricing cases Efficient, effective and time-bound taxation related dispute resolution Ensure taxation does not hinder free flow of goods Implement independent Grievance Redressal Cell Operational reforms required to get the tax base right Administration reforms required for consistency and increased efficiency in approach to taxation
Contract enforcement	Time taken from filing to final judgment seems unreasonable to most of the respondents and poses major obstacles Costs involved (costs for engaging and retaining lawyers, miscellaneous costs, during the interim stage, enforcement costs) also pose significant obstacles 84% of the respondents have indicated that a review of laws & regulations needs to be taken up urgently Create a centralized contract repository with Non-repudiation Effective implementation of e-courts Increase number of courts and tribunals More international treaties for increasing “reciprocative territories” Update antiquated laws Recognize and update laws keeping in mind the trends of higher technology updation, greater trade based on IPR and greater global trade

 

CII Proposes 100-Day Agenda for New Government

Unveiling the CII action theme for the year as ‘Accelerating Growth, Creating Employment’, Mr Shriram noted, “With slowing growth and high inflation adversely impacting employment, CII will urge the nextGovernment to focus on reviving growth and generating new jobs.”

In his press conference, Mr Shriram added that CII has proposed a strong 100-day action agenda for the new governmentto boost growth. “A strong economic revival package and right implementation of policies by a fresh Government can help create as many as 150 million jobs in the next ten years,” he stressed. “Industry is looking for top policy steps such as introduction of GST, easing of interest rates by 100 bps, keeping subsidies at 1.7 per cent of GDP, and restructuring of labour laws to promote mass manufacturing.”

CII further stated thatwithcontinuing robust reforms, GDP growth could be taken back to the 8 per cent level in the next three years. “Amarket-friendly environment is required that would proactively promote investments, business and entrepreneurship,” said Mr Shriram. Mass manufacturing sectors and labour-intensive services sectors need to be encouraged, he continued.

Key priorities for CII in the coming year will be in the following ten areas: education, skills, economic growth, manufacturing sector growth, investments, ease of doing business, export competitiveness, legal and regulatory architecture, labour law reforms and entrepreneurship.

CII has strongly called for implementation of the following policies, among others, in the first 100 days by the next Government:

–          Introduction of GST

–          Containment of subsidies and fiscal consolidation

–          Monetary easing – reduction in the repo rate by 100 bps

–          Maintenance of a competitive exchange rate

–          Fast-tracking stalled projects and increasing public capital investments

–          Timely implementation of DMIC and NIMZs

–          Setting up of state level mechanisms similar to Project Monitoring Group which will review and monitor projects at state level

–          A strong inter- Ministerial co-ordination group to resolve sticky issues like mining, raw material securitisation for sectors like Steel, etc

–          An institutional mechanism to renegotiate the terms of concession in Public Private Partnership Contracts to salvage stranded investments

–          Expansion of e-governance & technology based initiatives to simplify processes and online monitoring of application forms

–          Time-bound approvals by introducing ‘deemed approvals’ in case of delays beyond prescribed limit

–          Restructuring labour laws including introduction of Fixed Term Employment for industry to hire manpower on short term assignments

CII would continue to provide inputs in the areas of direct and indirect taxes to help India emerge as an attractive destination for business.

In agriculture, CII’s Food and Agricultural Center of Excellence (FACE)is studying the impact of Agricultural Produce Marketing Committee Act (APMC) which needs to be revamped to delist perishables. CII will also undertake a study on gas pricing and its impact on end-users, macro-economic indicators and the investment environment.

In manufacturing, it will work with concerned Ministries and State Governments on delayed projects and also on specific policies, particularly for labour-intensive sectors. CII has called for quick implementation of the National Manufacturing Policy and would bring out a report on Mass Manufacturing policy.For MSMEs, CII plans to launch a Finance Facilitation Centre and initiatives to link Indian SMEs with global value chains.

In services, CII will constitute National Services Competitiveness Council and develop a sectoral strategy for doubling of services export by 2025. It has targeted several sectors such as Tourism and Hospitality, Financial Services, Telecommunications and Professional Services for export promotion.

For better quality higher education, one of the CII interventions will be to launch the 100-100 program where 100 CII member companies will create 100 Faculty Sabbaticals who will spend two/ three months in industry to explore multi-level partnerships like research, curriculum, and skills development. In skills, CII will help implement the National Skill Qualification Framework (NSQF) and continue to work on Sector Skills Councils.

In labour laws, CII will create platforms for sharing best practices from industry which have helped in fostering better industrial relations within the current framework. In addition, it will work with its membership, Trade Unions, Central and State Governments for creating consensus on various issues.

To improve the ease of doing business in India, CII will present to the government best practices in the states which can be emulated in the areas of land acquisition, contract enforcement and taxation. CII has been strongly underscoring the need for a reduction in transactions cost of exports to overcome difficult business conditions abroad. In this context, CII has constituted a task force on transactions costs which proposes a framework for building an efficient trade facilitation mechanism in India.

In order to support entrepreneurship, CII will significantly expand its PPP initiative “India Innovation Initiative” to select the most innovative entrepreneurs through a pan-India competition. 

CII Business Confidence Index Indicates Turnaround Index Attains Highest Value in 5 quarters

In an indication of early signs of revival in business sentiments, CII Business Confidence Index (CII-BCI) rose sharply to 54.9 in the third quarter (Oct-Dec) from 45.7 for the July-September 2013 quarter. The pick-up in BCI for the current quarter comes as a major relief for the economy which has been braving the onslaught of the slowdown for the last several quarters and awaiting the return of growth. However, the survey also strikes a note of caution as the downside risks to growth have still not abated and supply side bottlenecks continue to pose a problem.

“With some positive signals emanating from the global economy, which finds a resonance in our improved export performance and is causing our Current Account Deficit to decline, we believe that the slowdown in the domestic economy may have bottomed out in the second quarter and the trend could reverse henceforth”, observed Mr. Chandrajit Banerjee, Director General, Confederation of Indian Industry.

The 85^th Business Outlook Survey is based on the responses from over 174 industry members. Majority of the respondents (63 per cent) belong to large-scale firms, while 12 per cent are from medium-scale firms and 25 per cent were from small-scale. Further, 65 per cent of the respondents were from manufacturing sector while 35 per cent were from services.

Despite the fact that subsidies are likely to cross the budgeted target by a wide margin, and the impending Lok Sabha elections pose upside risk to government expenditure, as much as 53 per cent of the respondents expected fiscal deficit to remain below 5 per cent mark, broadly in line with the government’s target. While welcoming this, Mr Banerjee cautioned that “we need to be careful about the upward risk to fiscal deficit amid the scenario of weak economic growth translating into sluggish tax collection and the growing chances of disinvestment falling well short of target”.

The survey reveals that 58 per cent of the respondents expect an increase in their sales in the third quarter of 2013-14, much higher than 45 per cent who witnessed the same during the previous quarter. As regards the input cost in the current quarter, majority of the respondents also expect it to increase. The silver lining, however, is that the percentage of respondents who expect expenses on raw materials, electricity, and wages & salaries to increase has declined significantly from the last quarter. 

Against the backdrop of an expected improvement in sales growth and moderation in inputs cost, majority of the respondents (43 per cent) expect an increase in their pre-tax profit margin in the third quarter, much higher than 31 per cent in the previous quarter.

Another positive signal emerging from the survey is that an improvement in capacity utilization is expected in the current quarter.  As compared to 56 per cent respondents experiencing less than 75 per capacity utilization in the second quarter, only 45 per cent respondents expect capacity utilization to fall below 75 per cent in the third quarter. Underlining the need for continuing policy intervention to step up investment, 53 per cent of firms did not expect their capacity to expand in the current quarter.

What is also encouraging is to note that the export prospects look positive in the current quarter whereas imports are seen to be restrained. 53 per cent of firms expected their exports to increase in the current quarter, up from 49 per cent in the previous quarter. Similarly, 56 per cent of the respondents didn’t expect their imports to increase during the current quarter.

There are some areas of concern emanating from the survey. Majority of the respondents (42 per cent) felt that GDP growth in the current fiscal would settle in the range of 4.5-5.0 per cent, whereas only 28 per cent expected it to be in the vicinity of 5.0-5.5 per cent.

High inflation is another major area of concern which is exerting a downside risk to growth,. The largest proportion (41 per cent) of respondents expected inflation to cross 7 per cent mark during the current fiscal, which is a matter of serious concern. Mr. Banerjee suggested that “Given that inflation is primarily being led by food products, the solution needs to be sought in the supply side in agriculture sector rather than tightening monetary policy. The expectation of a healthy growth in agriculture output in the current fiscal offers a great opportunity for managing the inflationary tendencies”, he added.

Even though the current account deficit (CAD) moderated sharply to 1.2 per cent of GDP in second quarter, the final figures may be higher. Around 63 per cent of respondents expect CAD to settle in a range of 3.5-5.0 per cent of GDP in 2013-14 and only 7 per cent expect it to fall below 3.5 per cent in the current fiscal.

In the 85th Business Outlook Survey, domestic economic/political instability, slackening consumer demand, high level of corruption, persistent high inflation and risk from exchange rate volatility emerged as the top five current concerns in order of severity to most firms.

India must attract more FDI

Author: S Gopalakrishnan, President, CII and Executive Vice Chairman, Infosys

The cabinet has recently approved proposals raising FDI caps in several sectors and permitting higher limits in others after approval from the Foreign Investment Promotion Board. More sectors were brought in under the automatic route which requires only notification to the RBI. The enactment of a contemporary Companies Bill would also attract FDI.

These steps are timely and would help contain the current account deficit that has gone up to 4.8% of GDP. But FDI in India should not be viewed merely through the narrow prism of foreign exchange. Foreign companies add to investible resources, bridge the gap between domestic savings and investments, provide jobs and contribute to tax revenues. Importantly, FDI brings in technology and best management practices, often slotting into global supply chains with a demonstration impact on Indian companies.