Importance of Reforms
Economic reforms that countries undertake are aimed at changing the structure as well as overall direction of the economy. Reforms can significantly affect the amount of resources at the disposal of a country. These reforms can ease the obstacles in the way of attaining growth and productivity besides realising the economic potential of a country.
Reforms of the Past: New Economic Policy of 1991
July 24, 2021 marked the 30th anniversary of the historic economic reforms of 1991 in India which ushered in an era of high growth, reduction in poverty, a burgeoning and aspirational middle class, and the arrival of India on the global stage. The reform programme soon became wide-ranging and opened up the Indian economy to the world, setting India on a course to becoming the world’s sixth largest economy in nominal terms three decades later. The reform programme secured for the country a significant global recognition as key industrialised nations found a growing and extremely large middle-class market for their goods in India. The country soon started moving along the growth trajectory and started witnessing rapid advances in different sectors of the economy, including the services sector.
Framework Reforms
Since 2014, the government has ushered a series of economic reforms aimed at improving the basic framework of the economy. These have been termed as ‘framework reforms’. These reforms include the introduction of the Jan Dhan-Aadhaar-Mobile (JAM) framework aimed at ensuring universal access to banking facilities for every household in the country using the mechanism of JAM trinity; Monetary Policy Committee (MPC) framework for better effectiveness and regulation of monetary policy in the economy; the Insolvency and Bankruptcy Code (IBC) to provide an effective legal framework for timely resolution of insolvency and bankruptcy cases in the economy; labour law reforms wherein the government proposed to replace 29 existing labour laws with four labour codes to simplify and modernise labour regulation in the country; and agricultural reforms to make agriculture a viable profession.
Nuts-and-Bolts Reforms
The recent set of reforms undertaken in the country have been termed as ‘nuts-and-bolts’ reforms. They are what may be called microeconomic, very targeted and sector-specific in nature as each of them is concerned with a specific sector to bring about the intended changes in the regulatory framework with respect to that sector. They can also be aimed at improving the ease of doing business in the country in general.
The set of measures aimed at reforming the regulatory framework pertaining to the specific sector include Simplification of the Other Service Provider (OSP) Rules for the business process outsourcing (BPO) sector; relaxing the regulations pertaining to geospatial maps and data in the country; amendment to the Factoring Regulation Act, 2011; and Bilateral Netting Law, among others.
Under the new OSP rules, the government has drastically simplified the OSP guidelines of the Department of Telecom with an aim to qualitatively improve the ease of doing business of the IT Industry, particularly BPO and IT-Enabled Services (ITES) in the country. (OSPs are BPO organisations giving voice-based services, in India and abroad.) Under the liberalised guidelines, distinction between domestic and international OSPs has been removed. A BPO centre with common telecom resources will now be able to serve customers located worldwide including in India. EPABX (Electronic Private Automatic Branch Exchange) of the OSP can be located anywhere in the world. OSPs apart from utilising EPABX services of the telecom service providers can also locate their EPABX at third party data centres in India. with the removal of the distinction between domestic and international OSP centres, the interconnectivity between all types of OSP centres is now permitted.
With respect to the regulations pertaining to geospatial data and maps in the country, the government has relaxed the guidelines that have liberalised the collection, use and dissemination of geospatial data and maps, and removed all requirements of licences, permissions and clearances except for certain limited categories. There are no restrictions on the export of geospatial data and maps which are within the prescribed threshold values. The availability of data and modern mapping technologies to Indian companies is also crucial for achieving India’s policy aim of Atmanirbhar Bharat. India presently relies heavily on foreign resources for mapping technologies and services. Liberalisation of the mapping industry and democratisation of existing datasets will spur domestic innovation and enable Indian companies to compete in the global mapping ecosystem by leveraging modern geospatial technologies.
The Factoring Regulation Act, 2011 seeks to help the micro, small and medium enterprises (MSMEs) by providing additional avenues for getting credit facility, especially through the Trade Receivables Discounting System. The amendment is aimed at widening the scope of entities which can engage in factoring business. Factoring business is a business where an entity (referred as factor) acquires the receivables of another entity (referred as assignor) for an amount. Receivables is the total amount that is owed or yet to be paid by the customers (referred as the debtors) to the assignor for the use of any goods, services or facility. Factor can be a bank, a registered non-banking financial company or any company registered under the Companies Act. The amendment seeks to widen the scope of factors that can engage in factoring business. This will increase the amount of working capital available to MSMEs, which will help them grow as well as boost the employment prospects in the economy.
The Bilateral Netting of Qualified Financial Contracts Act, 2020 provides a regulatory framework for offsetting claims between two parties to a financial contract in order to determine a single net payment obligation due from one counterparty to the other. Bilateral Netting means combining all the individual swap agreements between the two parties into a master agreement. This consolidates the rights and liabilities of different contracts under one legal instrument. This will ensure competitiveness and financial stability in the Indian financial market.
The other component of the nuts-and-bolts reforms comprises those reforms that aim at improving the ease of doing business in the country. These include amendments to the Insolvency and Bankruptcy Code (IBC), 2016; amendments to the Limited Liability Partnership Act, 2008; and Taxation Laws, among others.
Insolvency is a situation where individuals or corporations are unable to repay their outstanding debts. The IBC provided a time-bound process for resolving the insolvency of corporate debtors (within 330 days) called the corporate insolvency resolution process (CIRP). The debtor himself or its creditors may apply for initiation of CIRP in the event of a default of at least one lakh rupees. Under CIRP, a committee of creditors is constituted to decide regarding the insolvency resolution. The amendment to the IBC, 2016 introduced an alternate insolvency resolution process for MSMEs, called the pre-packaged insolvency resolution process (PIRP). Unlike CIRP, PIRP may be initiated only by debtors. PIRP is a timely effort to protect viable MSMEs.
Another very significant reform has been the Taxation Laws (Amendment) Act, 2021 which amended the Income-tax Act, 1961 and plans to do away with the retrospective tax provision and end all retrospective taxes imposed on indirect transfer of Indian assets made before May 28, 2012. The aim of the amendment is to bring tax certainty and consistency in the economy so as to enable businesses to move forward. This amendment was timely as India wanted to portray herself as an attractive investment destination for the global community.
Way Forward
The above set of reforms undertaken are encouraging, but there is room for further reforms to be carried out in sectors untouched so far. These include the following:
Although the debate has moved from food security to livelihood security for farmers as evident from the government’s aim of doubling farmers’ income by 2022, much more needs to be done in the agriculture sector to realise its potential.
With the government lacking the resources to build a 21st century infrastructure, there is a compelling need to involve the private sector in infrastructure development in the country through proper policy initiative. The recently announced National Monetisation Pipeline (NMP) is a step in the right direction.
The foundations of all infrastructure creation and manufacturing is land. It is an economic factor of production that has become a highly politicised and emotive subject. India’s land need clear titling. SWAMITVA is a recent government initiative towards the need for maintaining clear land records in the country. More is needed to be done, especially in the area of land acquisition for various projects.
The recent codification of labour laws into four codes consolidating disparate laws on labour seems encouraging. But there is room for more. The abuse of ‘Inspector Raj’ in the current system (the multiple visits by inspectors), especially in the MSME sector, should give way to a consolidated, risk-based digital system that will reduce corruption and harassment.
The need for a direct tax code in the country has been a longstanding demand. With a population of more than 130 crore, only around 1.5 crore people pay their income taxes. Clearly, there is a need for reorganising the current tax infrastructure through proper legislation.
Conclusion
In essence, the so-called nuts-and-bolts reforms seem incremental yet transformational. The list is not exhaustive. Though these will go a long way in improving the regulatory framework as well as streamlining the procedures for doing business in India, there is clearly room for more reforms in the economy. Moving along the reform roadmap will yield significant returns to the economy in the times to come.
© Spectrum Books Pvt Ltd.