The Hindu Business Line : `Faulty regulation, infrastructure dog TN growth'

"Accelerating economic growth will require sound policy, institutions and infrastructure development to support private sector development," it has said in a chapter on `Improving investment climate for manufacturing and services,' in a recently released publication.

As a footnote to its point about regulation and inadequate infrastructure, the World Bank report - Economic growth and poverty alleviation in Tamil Nadu - refers to a survey conducted by World Bank and the Confederation of Indian Industry.

According to the survey, 41 per cent of respondents identified infrastructure as a severe bottleneck to improving the investment climate as compared to say 25 per cent in Gujarat, 47 per cent said power was a severe bottleneck while 43 per cent felt transport was a bottleneck (second highest after Karnataka's 50 per cent).

According to the World Bank, senior management in the survey reported spending 13 per cent of their time dealing with regulations as opposed to say 10 per cent in Haryana. Tamil Nadu's manufacturing establishments reported an average of 11 official inspections a year against five in Maharashtra and six in Karnataka.

The survey found that 14 per cent of respondents (second highest after Gujarat's 21 per cent) in Tamil Nadu felt constrained by overstaffing, 42 per cent reported corruption as a growth bottleneck, better than Karnataka's 65 per cent, but worse than Andhra Pradesh's 10 per cent. The World Bank report lists areas for reform - labour market flexibility, a more responsive urban land supply system, more efficient tax policy and administration, streamlining regulations over entry, exit and operation, power sector reform and scaling up of public private partnership for sustainable infrastructure development - as steps to improving the investment climate in the State.

Although several important issues are under the Centre's purview, the State can still explore reform opportunities within the federal framework, the report says.

It classifies regulatory framework under three categories: factor market regulations, which refers to regulation of labour, capital and land markets; tax and customs administration; and regulations of entry, exit and operation through regulation requirements and bankruptcy laws.

On labour regulations, the report says the regulatory maze is complex, leading to high compliance cost and rent-seeking. There are 23 Central Acts and seven State Acts and rules that are enforced by the State's Labour Department.

Many regulations are excessive and outdated, the report says and adds that rigid labour regulations deter greater employment generation. Stringent labour institutions tend to benefit a narrow segment of the population comprising the organised and unionised labour, intermediaries in the labour market, and corrupt officials, at the expense of a much larger segment of the labour force comprising the unemployed, those in the unorganised sector and agricultural labour.

The World Bank says that the experience of Maharashtra and Andhra Pradesh in attempting a more flexible interpretation of the Central regulations may be of relevance to Tamil Nadu and suggests that the State explore ways to rationalise and consolidate the rules.

On the sales tax system, the report says that the existing system is inefficient with multiple rates and non-standard classification of goods, and concentration of taxation on certain sectors.

It has a relatively high tax burden on inputs, with the effective tax rate on inputs at 6.7 per cent and taxation on inputs accounting for 32 per cent of the total collection.

The complex structure induces high compliance costs while frequent changes in the tax regime generate uncertainty for businesses.

The report calls for greater public private participation to remove infrastructure bottlenecks. Close to 40 per cent of managers contacted in a survey and about 50 per cent of exporters in the State view infrastructure as a major impediment to investments and growth.

Infrastructure constraints are across the board, including power, transport, ports and water. High power tariff to industries and poor quantity and quality of power supply reduce competitiveness of the State's industries; captive generation sets in operation as a share of total electricity sold in Tamil Nadu has reached 15 per cent with a state-wide average captive plant load factor of 25 per cent.

"Like many other States, Tamil Nadu will need to find a political solution to the metering of agriculture pump sets and reduction of cross subsidy to improve the competitiveness of industry and services," the report says.

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