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What’s holding India back?

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Ritu Bhandari
Ritu Bhandari
The author is Head of Research, Smahi Foundation of Policy and Research. She is based out of Mumbai. She tweets at @Ritu_twt Views are personal.

India has become the world’s back office due to its stellar performance in the services sector, but it is manufacturing where India woefully lags at a global level. Manufacturing capability and scale can only be improved if there is a friendlier and easier business climate in India which would in turn spur confidence and attract foreign and domestic investments to set up and expand businesses in India. Most countries – South Korea, ASEAN countries, China have grown their way out through exports. Unfortunately, in current times, that is tougher, since countries are looking inwards and there are already established supply chains, meaning that we need to put in more effort.

The nationwide roll-out of a Goods and Service Tax (GST) system in 2017, implementation of an effective Insolvency & bankruptcy code from 2018 and a large 8-15 ppt cut to corporate taxes in 2019 have helped businesses. While the Government has launched various structural reforms such as Production Linked Scheme (PLI), labour reforms, agriculture reforms, the next hurdle to overcome in improving the business climate is addressing pendency, delays and backlogs in the appellate and judicial arenas, complex compliance burden and improving the efficiency of logistics.

Slow Judicial Process

While there has been substantial progress, India still lags significantly in areas such as enforcing contracts (163rd India’s Rank in Doing Business 2020) and registering property (154th). It takes 58 days and costs on average 7.8 per cent of a property’s value to register it, longer and at greater cost than among OECD high-income economies. And it takes 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies. The study by the Administrative Staff College (ASC) observed that the High Courts (HCs) took on an average 5 years and 2 months to dispose of a case. As on December 31, 2015, the judge population ratio for all the HCs for all-India was 1:20,24,364 and average cases per judge for all-India was 2,948.

The objective of labour laws is to ensure socio-economic justice to labour. The three important shortcomings of adjudication in India are inadequacy of judicial institutions, lack of uniformity in awards and decisions and undue delays in delivery of justice.

India must address pendency, delays and backlogs in the appellate and judicial arenas. High pendency and delays have economic costs due to lost days and state of suspension of business. Apart from inefficiencies from government and public administration, the justice system also has a role due to laxity on contract enforcement.

The slow judicial process adversely impacts business confidence levels and hampers attracting foreign capital and investment into the country. Judicial efficiency is essential to firm productivity. Faster and cheaper access to justice reduces some of the obstacles faced by entrepreneurs. Efficient courts improve financial markets. India needs judicial reforms targeting the quality, speed and access of the judiciary, which would result in improvements in productivity and economic development.

Complex Compliance Burden

The Indian regulatory landscape has 1,536 Acts, more than 69,233 compliances and 6,618 regulatory filings across the Centre and states. 

The majority of the Acts, compliances and filings are related to labour. In addition, there are industry-related Acts and compliances that make up for the second highest compliance and filing requirements. Other compliances and filings include those dealing with finance and taxation, environmental, health and safety compliances, and other issues. 

According to an analysis done by TeamLease Compliance, there are a total of 677 Acts, 25,537 compliances and 2,282 regulatory filings at the central level alone for firms to contend with it. In addition, the states have their own Acts and compliances that have to be followed. All the Indian states put together have 859 Acts, 43,696 compliances and 4,336 filings. 

Among the states, Maharashtra had the most onerous compliance burden followed by Gujarat, Tamil Nadu, Uttar Pradesh and Karnataka. Maharashtra had 67 Acts, 3,657 compliances and 215 filings to be made. The number of statutory and regulatory filings was more than 300 in Tamil Nadu, and 287 in Gujarat. 

While not all compliances apply to one particular company, it becomes extremely difficult and complex for a company to keep a track of this maze of compliance. Attempts are being made to make all processes simple, transparent and online to the extent possible. Many antiquated Acts have been identified and repealed.

Inefficient logistics

India has poor logistics efficiency. According to the logistics performance index (LPI), India lags behind most nations in Asia and is ranked at 44. In India, the logistics cost as a percentage of its GDP stands at 14 per cent. This cost is high compared to the similar cost in the USA 9.5 per cent, Germany 8 per cent and Japan 11 per cent. India has around 750 last-mile links with less than 100 km distance connecting industrial belts, ports and distribution centres to highways and major long haul connectors. These links are crippled by poor infrastructure, road conditions and unskilled labourers bringing up mainly ‘indirect cost’ of last-mile delivery.

A recent Deloitte-Assocham study notes that the cost for coastal shipping is Rs 0.15-0.2 per tonne-km compared to Rs 1.5 for railways and Rs 2.5 for the road. Addressing these anomalies could alone provide a huge potential to lower logistics cost in the economy by Rs 21,000-27,000 crore by 2025. The draft National Logistics Policy envisages optimising the current modal mix (road 60 per cent, rail 31 per cent, waterways 9 per cent) to bring them at par with international benchmarks (road 25-30 per cent, railways 50-55 per cent, waterways 20-25 per cent). Considering the critical role of logistics in propelling India’s exports, Federation of Indian Export Organisations (FIEO) believes a reduction in logistics cost by 10 per cent could increase the country’s exports by about 5-8 per cent.

The construction of the Dedicated Freight Corridor, the national road network scheme (Bharatmala) and connecting ports to hinterlands (Sagarmala) are steps taken to improve logistics.

Dedicated Freight Corridor (DFC)

DFC is a Rs 81,459 crore mega infrastructure initiative of Indian Railways, which is crucial for decongesting the dense rail network and boosting goods loadings. Aiming to move 70 per cent of India’s goods train to these two corridors, the 1,468 km long Western DFC is from Dadri in Uttar Pradesh to Jawaharlal Nehru Port in Mumbai, while the Eastern DFC is 1,760 km long from Ludhiana in Punjab to Dankuni in West Bengal. Once fully operational, DFC will be running all the trains at 100 kmph on an automated signal system, and there will be 120 trains running each way a day with a total carrying capacity of 13,000 tonnes.

The overall physical, as well as the financial progress of these two corridor projects at present, is 70 per cent and 68 per cent, respectively. With 96 per cent land acquisition, Rs 64,000 crore expenditure has been incurred for the DFC project until now. Until now, a 351 km long track has been made operational in the Eastern DFC while 306 km track is being readied in the Western DFC. While about 1,500 freight trains have run in the Eastern DFC, about 600 goods trains have run in the Western DFC until now. It is expected that 2,000 km track will be operational with complete overhead equipment (OHE) and signalling system by March 2021.

Once commissioned, the DFC will offer freight rates that would be around 50 per cent cheaper compared with roads, and the time taken for delivery will almost be the same, further impacting the demand for heavy commercial vehicles.

Bharatmala

The government envisages building 34,800 km of highways at a cost of about Rs 5.35 trillion under the ambitious Bharatmala Pariyojna, which focuses on optimising efficiency of freight and passenger movement across the country by bridging critical infrastructure gaps through effective interventions like development of economic corridors, inter-corridors and feeder routes, national corridor efficiency improvement, border and international connectivity roads, coastal and port connectivity roads and greenfield expressways. Of the 34,500 km of highways approved under Bharatmala Pariyojana, 10,000 km pertain to residual highway stretches under the National Highways Development Project (NHDP).

A total of 322 projects with a length of 12,413 km have been awarded under Bharatmala Pariyojana till August, 2020. Further, 2,921 km has been constructed under the Project till then.

Roads built under Bharatmala programme will increase vehicle travelling speed by around 20-25 per cent, thereby helping reduce logistics costs.

Sagarmala

The Sagarmala program is the flagship program of the Ministry of Shipping to promote port-led development in the country through harnessing India’s 7,500 km long coastline, 14,500 km of potentially navigable waterways and strategic location on key international maritime trade routes. The main vision of the Sagarmala Program is to reduce logistics cost for EXIM and domestic trade with minimal infrastructure investment.

As part of Sagarmala Programme, more than 574 projects at a cost of Rs 6.01 trillion, have been identified for implementation, during 2015-2035, across the areas of port modernization & new port development, port connectivity enhancement, port-linked industrialization and coastal community development. As of September 2019, a total of 121 projects have been completed and 201 projects are under implementation.

Sagarmala has the potential to save around Rs 35,000-40,000 crores per annum by optimizing logistics flows for key commodities by 2025.

Conclusion

Economic activity benefits from clear, simple and concise rules. Government policy and regulation should be efficient, transparent, accessible and easy to implement so that businesses can thrive. Straight-forward and simple rules, preferably single-window clearances on online platforms, create an environment where new entrants with drive and innovative ideas can easily get started in business and where productive firms can invest, expand and create new jobs.

Unnecessary complexity and the tendency to micro-manage at operational level should be avoided and it should be best left to be managed at ground zero by the businesses themselves. Else the lengthy and complex regulation becomes cumbersome and burdensome. Instead of facilitating and empowering business, it becomes a deterrent and hindrance for the business to initiate, grow and thrive.

As one study of the Index of Economic Freedom finds that, “Those countries with the most economic freedom have higher rates of economic development than those with less economic freedom”. While India’s business climate has been continuously improving since 2014, India must study and bring new reforms to overcome its slow judicial process, complex compliance burden and inefficient logistics, to become an economic force to reckon with.

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Ritu Bhandari
Ritu Bhandari
The author is Head of Research, Smahi Foundation of Policy and Research. She is based out of Mumbai. She tweets at @Ritu_twt Views are personal.
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