Cost of Doing Business

Synopsis: Governments must focus on lowering prices and reducing regulatory constraints rather than focusing on ease of doing business.

Introduction

Recently, the IMF’s executive board expressed confidence in the leadership of Kristalina Georgieva in the Doing Business survey controversy that raised doubts over the integrity of Ease of the Doing Business (EoDB) rankings.

What are the efforts made by India in improving ease of doing business?

India has made considerable progress on ranking since 2016.

For instance, the cut in corporate tax rates, the launch of Gati Shakti, the sale of Air India as part of an aggressive asset monetisation plan, the scrapping of retrospective taxation, the PLI scheme and labour reforms are likely to provide a boost to the manufacturing sector.

Why India should focus on cost of doing business?

Focus on the Cost of Doing Business (CoDB): the pandemic has made countries inward-looking in terms of their supply chain and domestic capacities. This may affect global trade and growth over the medium term and make countries extremely selective on costs and competitiveness.

Energy 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.

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 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.

This, in turn, leads to a competitive disadvantage for sectors such as auto, durable goods and construction, which consume these intermediate goods.

GST regime: 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.

Outsized regulatory levels: 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. Hence, most of them choose to remain in the informal sector.

What is the way forward?

First, cleaning up the power distribution sector, which is largely state-controlled, could potentially lower electricity prices for businesses.

Second, 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. It must prioritise reducing the cost of energy and compliances for businesses.

Source: This post is based on the article “Cost of Doing Business” published in Indian Express on 27th October 2021.