Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

What to do about the heavy cost of doing business in India

Note4Students

From UPSC perspective, the following things are important :

Prelims level : EoDB

Mains level : Paper 3- Reducing the cost of doing business in India

Context

The controversy over Ease of the Doing Business (EoDB) notwithstanding, India must now sharpen its focus on the Cost of Doing Business (CoDB).

Cost of Doing Business in India

  • India has made considerable progress on EoDB rankings since 2016.
  • While the Centre’s focus on EoDB has been commendable, several state governments have also made efforts to improve business conditions.
  •  India must now sharpen its focus on the Cost of Doing Business (CoDB).
  • India lags behind other countries in terms of CoDB on several counts.

Two key factors influencing CoDB — energy costs and regulatory overload

  • High fuel costs: Diesel prices in India are 20.8 per cent higher than those in China, 39.3 per cent higher than in the US, 72.5 per cent higher than Bangladesh and 67.8 per cent higher than in Vietnam.
  • This is largely because of heavy taxation — total taxes on diesel account for over 130 per cent of the base price in India.
  • High power costs: In the case of electricity, prices for businesses in India were higher by around 7-12 per cent vis-à-vis those in the US, Bangladesh or China and by as much as 35-50 per cent as compared to those in South Korea or Vietnam prior to the recent coal/energy crisis.
  • Coal, which accounts for more than 70 per cent of electricity generation in India, is also pricier vis-à-vis other countries leading to higher electricity prices.
  • Like in the case of the petroleum sector, government levies account for nearly half of the prices paid by coal consumers.
  • And coal producers cannot claim input tax credit because electricity is not under GST.
  • Further, coal freight costs are amongst the highest in the world as high freight rates are used to cross-subsidise passenger fares by the railways.
  • Regulatory overload: Outsized regulatory levels also pose a significant burden on businesses.
  • A Teamlease report highlights that a small manufacturing company with just one plant and up to 500 employees is regulated by more than 750 compliances, 60 Acts and 23 licences and regulations.
  • A mid-sized manufacturing company with six plants spread across different states is regulated by more than 5,500 compliances, 135 Acts and 98 licences and registrations.
  •  Keeping track of such a large number of regulations along with the changes thereof, imposes huge operational and financial costs on businesses, particularly the MSME segment.

Way forward

  • Including fuels under GST would lower costs for businesses owing to input tax credit even if taxation levels continue to remain high.
  • Cleaning up the power distribution sector, which is largely state-controlled, could potentially lower electricity prices for businesses.
  • Fiscal incentives by the Centre: A majority of the compliances stem from the states and reducing this burden would require a significant push on states to act on this front.
  • The Centre could leverage the “carrot and stick” framework — using fiscal incentives to nudge the states to act and disincentivise them from maintaining the status quo.

Consider the question “What are the factors affecting the cost of doing business in India? Suggest the measures to reduce it.”

Conclusion

The Government must prioritise reducing the cost of energy and compliances for businesses rather than focusing on de jure measures to boost ease of doing business. These will boost India’s manufacturing competitiveness significantly and further increase formalisation in the economy.

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