Investments are now flowing into Make in India and other flagship schemes of the Narendra Modi government. As the focus shifts towards how well these funds can be utilised, India Inc. takes an in-depth look at the implementation strategy and attempts at overcoming challenges.
First the good news: Foreign direct investment (FDI) inflows are up. India is once again the flavour of the season in the boardrooms of major companies in Europe, the US, Japan and South Korea. Foreign businessmen are particularly interested in Prime Minister Narendra Modi’s pet initiatives such as Make in India, Digital India, Smart Cities and Swachh Bharat, among others, as they offer opportunities that some estimates peg at about $1 trillion over the next decade.
The government has been clear about its goal: raise India’s GDP growth rate to 8 per cent-plus and then further to 9 per cent and, if possible, closer to double digits, create world class infrastructure, raise the share of manufacturing from 16 per cent of GDP now to 25 per cent over the next decade and create jobs for the one million youngsters who join the work force every month.
But, as several experts and economists have pointed out, India currently does not have the capacity to absorb the humungous amounts of investments needed to achieve this goal. For Make in India – and the other flagship schemes that are closely aligned with it – a lot of groundwork needs to be done.
Slight improvement, promise of more
One major initiative of the Modi government is the programme to improve India’s ranking on the World Bank’s Ease of Doing Business Index. Early stage reforms on this count have resulted in India improving its ranking from 142nd in 2014 to 130th out of 189 countries in 2015. This is expected to improve further when the current year’s rankings are released later this year.
The World Bank index ranks countries on 10 parameters (India’s rank in 2015)
Considerable progress has been made on several of these parameters. When the rankings for the current year are released, India is expected to show significant improvement on starting a business. The INC-29 form allows entrepreneurs to incorporate companies within 48 hours but some other related procedures still take about five weeks to complete.
But this is still a massive improvement from earlier procedures and further refinements that are in the works are expected to improve India’s ranking on this parameter even further.
On all the parameters ranked by the World Bank, India ranked worst on “dealing with construction permits”, coming in at a poor 183rd out of 189 countries. This is expected to improve significantly. Realtors needed 34 permits from various government departments that took anywhere between six months and three years to procure. Work in progress on streamlining these procedures is expected to cut this time to 60 days. Finance Minister Arun Jaitley’s third Budget, presented on February 29, will make this process easier by encouraging the digitising land record across the country. This will also make registration of properties easier, leading to a further improvement in India’s rank on this parameter as well as on the overall ranking.
Various initiatives taken by the central and state governments like online filing, reduction of human interface and computerisation of the entire process are also expected to reduce corruption and improve the ease filing taxes and trading across borders.
All these will, without a doubt, encourage entrepreneurs from India and across the world to Make in India.
The real problem areas
However, India will continue to languish because of its labyrinthine labour regulations and a judicial process that moves at a pace that would make a snail look nifty.
It takes, on average 1,420 days to resolve a dispute and enforce a contract and litigants have to spend an average of 39 per cent of the disputed amount on settling the issue. Resolution of insolvency procedures also take forever and creditors very often are forced to accept massive haircuts as delinquent promoters siphon out money, leaving all stakeholders in the lurch.
Not surprisingly, India ranks a poor 178th out of 189 countries on enforcing contracts and 136th on resolving insolvencies.
India has recently enacted the Commercial Courts, Commercial Division & Commercial Appellate Division of High Courts Act, 2015 to speed up the resolution of commercial disputes by setting up dedicated courts for the same.
But progress has been slow.
The states that are mandated by the Act to provide necessary infrastructure for these courts to operate, don’t have enough money for the task at hand. Then, there are largescale vacancies in the judiciary that need to be filled before the massive backlog of more than 30 million pending cases can be cleared.
Some high courts, like the Delhi High Court, have attacked the problem by designating six of its existing benches as commercial courts. This is commendable but given the severity of the problem, it has been compared to using a Band Aid to treat a life-threatening condition.
Resolving insolvencies, too, remain a difficult proposition in India.
Promoters and managements often resort to frivolous litigation to delay the process, which is complicated by political interference on behalf of trade unions in order to protect jobs. This results in good money chasing bad as the banking system keeps piling up bad loans, called non-performing assets (NPAs) in India.
A new Bankruptcy Code is in the works but given the logjam in Parliament, there is no saying when it will become law.
Labour laws the main culprit
The biggest impediment to the success of the Prime Minister’s Make in India initiative is India’s antiquated and notoriously rigid labour laws.
The Industrial Disputes Act, 1947, is a major roadblock to rapid industrialisation in India. Designed primarily to protect the so-called labour aristocracy – the 7 per cent of the work force that is employed by the organised sector – various provisions of this law, ironically, actually discourage employment generation among blue collar workers.
Chapter VB of the Act mandates employers to seek government approval before resorting to any layoffs, closure or retrenchment in any factory that employs 100 or more workers.
In practice, such approvals are seldom granted and even if they are, workers have multiple layers of hearings and appeals – to conciliation officers, conciliation boards, courts of inquiry, labour courts, industrial tribunals and the National Industrial Tribunal – before the matter reaches the high courts and finally the Supreme Court.
This provision alone is a huge disincentive for entrepreneurs to make largescale investments in manufacturing in India.
Then, Section 9 A of the Act says companies have to give 21 days notice before altering any established condition of service including “rationalisation, standardisation or improvement of plant or technology”.
A 2008 World Bank report says: “India’s labour regulations – among the most restrictive and complex in the world – have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labour regulations can attract more labour- intensive investment and create jobs for India’s unemployed millions and those trapped in poor quality jobs. Given the country’s momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the work force over the next decade.”
Gujarat, Rajasthan lead the way
A few states, most notably Rajasthan and Gujarat, have made a small start towards easing labour laws to make them more employment-friendly.
Gujarat was the first off the block, when, in 2004, under the guidance of then chief minister and now Prime Minister Narendra Modi, it amended the Industrial Disputes Act to allow companies within Special Economic Zones to lay off workers without government permission subject to giving a formal notice and the payment of severance compensation.
The Rajasthan government, too, has made considerable strides in amending India’s regressive labour laws. It has brought in employment-friendly changes to the Industrial Disputes Act, Contract Labour Act and Factories Act to encourage fast industrialisation and increased employment generation in the state.
As labour is on the concurrent list, both the Centre as well as individual states can amend labour laws. However, state-level amendments are applicable only in the concerned states.
Stiff opposition from trade unions, including from the BJP-affiliated Bharatiya Mazdoor Sangh (BMS), the largest trade union in the country, and the logjam in Parliament have prevented the central government from amending these laws and reducing the number of legislations companies have to comply with from 44 at present to just five.
The Centre’s ability to steer these labour reforms through the parliamentary process is debatable. It is the states that will have to show the way.
Here, the unveiling of the Ease of Doing Business Index for states has already generated competition among chief ministers eager to draw large investments to create jobs and prosperity in their provinces.
As the examples set by Gujarat and Rajasthan begin to pay off in terms of attracting higher investments and generating more jobs, analysts hope other states will follow suit.
“We just need about 10 large states to follow their example. That will be enough to push Make in India into a different orbit,” said a senior bureaucrat in an economic ministry.
And that gives hope.
by Arnab Mitra
Arnab Mitra is a Consulting editor, India Inc. He writes on business and politics.