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In a welcome step, the Ministry of Corporate Affairs recently constituted a committee headed by former SEBI Chairman M. Damodaran to reform the business regulatory environment. The World Bank and the International Finance Corporation have ranked India 132nd among the 183 countries surveyed for conducive business environment.
The country’s business climate appears rather bleak going by the ranking, and serious intervention is needed to improve its standing as a good business destination. The committee is expected to draft a detailed roadmap to achieve the stated objectives.
The per capita income of a country is interlinked with efficient business regulation — this is amply evident from the list of top 20 countries rated on these two counts.
India’s growth story has taken a hit in the recent past, and bold initiatives are required to reinforce investor confidence. While there has been positive movement on several fronts, the pace as well as scope of change need to be augmented.
Liberalisation of procedures
The Government has taken a number of steps to keep pace with changing times. Recognition of electronic voting at board and general meetings of companies, providing annual reports to shareholders through email, and e-filing of forms and applications have had a positive impact on the business community. Significant relaxation in limits for managerial remuneration indicates a shift towards self-regulation.
However, there is ample room for improvement in employment, labour and safety laws that contain several archaic provisions. Other ills include multiplicity of records and compliances, limited access to regulations in the public domain, and focus on form rather than substance. Ambiguity in legislations provides scope for exploitation, litigation and labour unrest. Despite the recognition of electronic records under the Information Technology Act, ambiguity persists over physical records for want of clarity in labour laws. Some of the recent labour agitations could be partially ascribed to systemic inadequacies.
Certainty of law
In the Vodafone case, the apex court emphatically confirmed the nexus between foreign investment and strong governance infrastructure. Certainty is integral to the rule of law, and is the cardinal principle of any fiscal system. Predictability in business transactions inspires trust and confidence. The expansion of the Shome Committee’s scope to include retrospective amendments for taxing overseas transfers shows that the Government is awake to the discomfiture associated with backdated amendments in law. Certain sector regulators in India follow a democratic and transparent process by taking into account stakeholder feedback before enacting regulations. This needs to be replicated across board.
Contract Enforcement
Enforcement of contracts is another area where India performs poorly by global standards. Attempts to enforce contractual rights are marred by high costs and delays. Administrative measures coupled with judicial reforms are needed to address this malaise. Ineffective contract enforcement discourages formation of new business relationships, which in turn stunts economic growth.
Economic reforms
The slew of economic reforms initiated over the past few weeks have revived the “animal spirit” that the Prime Minister has referred to. Liberalisation in overseas investment, deferment of GAAR, and the positive intent on retail FDI have contributed to buoyancy in the business environment.
While the Government’s bold attempt at a mid-term course correction is welcome, the momentum and intent need to be sustained. While short-term measures are needed to lift business sentiment, structural and systemic reforms alone are the means to retain India’s position as a preferred destination for foreign investment. The old wisdom of focusing on efforts and processes rather than results holds good here as well. Ratings and grades are a reflection of the country’s economic environment. Once the reforms are implemented in letter and spirit, the ground situation will improve and ratings will take care of themselves.
Manpreet Singh Ahuja is Executive Director, and Pankaj Tewari is Senior Manager — Risk Advisory Services, PwC India
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