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How India Plans to Recover its Economy After Lockdown and What it Still Needs to Do

Written by: Nishtha Yadav, India Briefing, Dezan Shira & Associates
Posted: 16th June 2020 10:27

Like most countries around the globe, India too, is experiencing a COVID-19-led economic downturn. The Indian economy has been severely impacted by the three-months-long lockdown imposed by the government to prevent the spread of the virus. Due to the lockdown, economic and industrial activity across the country has halted, leading to an increase in unemployment and a migrant exodus from major cities and industrial towns.

With estimates putting the Indian economy’s contraction by about five percent in FY21, Prime Minister Narendra Modi’s government is focused on developing incentives for foreign investors. Through various policy changes, the government wants to raise investor sentiment, as well as attract the attention of foreign firms looking to exit China.

For instance, India recently announced it is developing a land pool nearly double the size of Luxembourg.

Acquiring land for factories has been a major holdup for foreign firms since multiple stakeholders are involved, including farmers, administrators, local government, and activist groups if the land ownership is disputed or the area is in the green belt. However, information on where this land will be developed, when can projects commence, or if any specific incentives will be offered to firms who set up their operations in these areas is still awaited.

Along with the promised land pool, certain states in India such as Uttar Pradesh, Madhya Pradesh, Gujarat, Haryana, and Rajasthan, have introduced labor reforms – providing incentives to new companies that set up their operations in their respective states. Further, the central government is said to be working on ease of doing

business reforms specifically to make registration of property easier, speedy disposal of commercial disputes, and a simpler tax regime.

In this article, we discuss the reforms and incentives undertaken by the government, especially in the labor segment, and what India must do to attract foreign investment that is so key to the revival of the Indian economy.

Amendments to labor laws

In a bid to become a favorable investment destination, states across India have moved to suspend or amend labor laws. Some of the immediate implications include increasing work hours, exemptions from labor department inspections, removal of provisions on occupational safety and minimum standards of working conditions, and most importantly, exemption for businesses from the purview of most of the labor law provisions for the next three years.

The central government, on the other hand, has been considering modifying existing labor laws to ensure uniform regulations applicable across the country that will offer flexibility to existing as well as new businesses in India.

media report quoted a senior government official stating that, “This is needed as multinational companies looking at relocating from China to India would prefer flexible central laws over state laws for uniformity of operations across different locations.”

A few days later after this news came out, it was reported that the union labor ministry had reached out to a few states informing them that “labor laws cannot be abolished in the name of reforms”. This is because India is a signatory to the International Labor Organization (ILO), and proposed changes announced by states were against ILO conventions. The labor ministry did not disclose which states received this communication. But it indicates that states will have to revisit their proposed labor amendments.

For instance, the state of Uttar Pradesh withdrew the order of 12-hour shift for workers, after a notice from the Allahabad High Court. The state of Rajasthan also followed suit.

Regardless, foreign investors have always faced difficulty navigating India’s complex layers of labor legislation – there are over 40 national level laws and more than 100 state level acts and regulations. Therefore, streamlining labor laws is welcome news for potential investors. That does not equate with curbing worker rights and safety – merely abolishing certain provisions of the labor law for a few months (or in some cases, few years) cannot be termed as “reforms” and will likely dissuade future investors as they open up other liabilities.

Thus, the proposed changes to the labor laws have left investors with more questions than answers – which is not going to appeal to investors seeking to enter the Indian market.

Further, market analysts feel that labor reforms alone will not reap sufficient financial gains as the cost of starting up and formalizing a business in India are high. Hence, they suggest focusing on regulations that decrease the cost of setting up alongside labor reforms legislation.

It is also important that the government seek inputs from trade unions and companies to ensure they are solving actual issues faced by the firms and workers.

Reforms to improve ease of doing business in India

The government has decriminalized several offences under the Companies Act, 2013 to improve ease of doing business in India over the long-term. So far, the number of compoundable offences under the Act have come down from 81 to 31. More provisions are expected to be decriminalized except the ones dealing with fraudulent conduct.
The finance ministry is also working on introducing he next phase of reforms, such as easy registration of property, fast disposal of commercial disputes, and a simpler tax regime.

While these measures reduce compliance for corporates, they are not enough for foreign firms who are looking for an alternative investment destination.

For instance, even though the government has made it a bit easier to start a business by introducing a general incorporation form that combines multiple forms and made the registration process for goods and services tax (GST) faster, other countries have much simpler procedures to start a business.

India needs to continue tearing down its bureaucratic red tape, if the government wants to attract new businesses.
Further, industry experts believe that the government should put a mechanism in place for enforcing commercial contracts “by bringing in specialized commercial courts and establish a consultative mechanism for commercial/foreign exchange related laws.”

According to reports, enforcing a contract in India can take 1,445 days and 30 percent of claim value as cost.

Whereas, in countries such as Singapore and the US, contracts can be enforced between a week and a few months. Due to India’s slow judicial process, contract enforcement is a concern for businesses as breach or dispute in a contract can take years, disrupting the firm – and in some cases bankrupting the business. A specialized court can certainly help accelerate such cases, and help establish trust and credibility in the country’s business ecosystem.

Regional competitors

China will continue to remain a key player in the global supply chain system, and it is likely that foreign firms may continue or expand their operations in the country. However, events in recent years and China’s improving socioeconomic standards that have raised wage and living costs, have pushed many foreign firms to actively begin diversifying their investments in Asia. Given this scenario, India is competing with countries like Vietnam, Indonesia, Thailand, and Malaysia for foreign investors moving out of China.

Land, labor, and ease of doing business reforms are important, but India also needs to focus on the multiple factors that enable an economy to become a part of the global supply chain. These include lower electricity costs, logistics and infrastructure, and regulatory stability. While India is already working on building a local supply chain in some industries, it is nowhere near China’s standards – but that is pretty much the case in the rest of Southeast Asia as well, particularly Vietnam, which has nevertheless emerged as a leading destination for China-based investors.

India, on its part, needs to expand its local sourcing capacity and foster efficient distribution networks to enter the global supply chain system.

Moreover, experts say that when multinational companies look to invest in a developing market like India, the one factor that becomes critical is the “need for regulatory stability.” They add that while India’s governance structure is stable, its policy structure can be volatile. So, if India can create long-term regulatory stability for new businesses, that will strengthen its position as an investment destination.

In the past, firms have expressed interest in shifting their operations, but did not end up doing so. The change of plans is attributed to the Chinese government’s quick resolution to issues faced by the investors whether it is related to land, labor, wages, regulatory, or compliance. Further, given how the COVID-19 outbreak has now afflicted the world and its management in China, firms actively looking to exit China will now need more than vocal assurances.

Meanwhile, India will begin the phased suspension of its nationwide lockdown starting June 8, allowing shopping malls, restaurants, and places of worship to reopen in areas where virus infections are under control. In terms of growth after the lockdown, the states of Kerala, Punjab, Tamil Nadu, Haryana, and Karnataka are poised to lead economic recovery based on patterns of “power consumption, traffic movement, arrival of farm products at wholesale markets, and Google mobility data,” according to an assessment by Mumbai-based Elara Securities Inc.

This article was first published by India Briefing, which is produced by Dezan Shira & Associates.

The firm assists foreign investors throughout Asia from offices across the world, including in in ChinaHong KongVietnam, Singapore, India, and Russia. Readers may write for more support.  

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