India Reforms Scorecard 3.0 (2024-29)

Inverted duty structure refers to when intermediate goods have higher customs duties than finished goods. This incentivizes import of final goods, and hampers domestic manufacturing competitiveness. The problem is especially pertinent in cases of FTAs. In December, 2023 the Ministry of Commerce and Industry submitted a list of 14 products with inverted duty structures to the Ministry of Finance.

Businesses with operations in multiple states are often audited by multiple state agencies creating operational inefficiencies. There are over 11,000 cases of duplicity of audits.

Central Board of Excise and Customs launched the Single Window Interface for Facilitating Trade (SWIFT) in 2016 to get online clearances. This does not include exporters. Additionally, different ports, Directorate General for Foreign Trade (DGFT), banks, and shipping companies have separate procedures for document submission, and clearances.

Banks are required to direct loans to "priority" sectors, including agriculture, small businesses, education, and housing. The Reserve Bank of India (RBI) has reduced the stipulation to below 40%, but stopped short of abolishing the practice entirely, or allows more flexibility in the discharge of these obligations. This slows growth by reducing capital available for the fastest-growing industries.

India's FDI data currently shows only the last point of departure for FDI (usually Mauritius or Singapore), and the city foreign investment applications are filed in (Delhi or Mumbai). Getting more accurate data will improve India's ability to attract greater FDI.

While FDI was opened in September 2012, restrictions such as minimum investment size, sourcing rules and location limitations have precluded investment in this sector.

Sending cases that can be resolved through out-of-court restructuring rather than to the NCLT will ensure the resolution process remains timely and effective. The Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, gives Indian banks the discretion to refer defaulters to NCLT on a case by case basis.

The long-standing 10% limit on single institutional investors hinders investment in high-growth Indian companies. SEBI raising this threshold - even to 20% - will unlock significant liquidity for listed Indian companies.

According to the World Bank's Ease of Doing Business Report 2019, it takes 17 days to start a business in India, more than the average of 13.7 days in South Asia. In 2020, the government announced plans to slash this to 5 days.

While nearly 1300 goods and 500 services are covered by the GST, there are notable goods and services such as electricity, oil & gas, real estate, and alcohol, that are exempted from the tax, but should be included under the tax regime.

For FY 2022-23, 57 out of 254 operating CPSEs posted a net loss of ~$3.4 billion (INR 28,827 crores) up from a net loss of ~$1.7 billion (INR 14,610 crores) in FY 2021-22. Between 2017-18 and 2021-22, loss making CPSEs cumulatively raked up losses of more than $18 billion.

While the government has taken steps to introduce profit-sharing in natural gas production, it still implements price ceilings on natural gas maintaining control of pricing. Deregulating Natural Gas pricing will encourage the expansion of private hydrocarbon production.

The Insolvency and Bankruptcy Code left financial institutions out of the ambit of the law due to the government's own recommendation that a separate law be passed for such bankruptcies. The Ministry of Corporate Affairs notified the Insolvency and Bankruptcy Rules 2019, allowing an interim framework for Financial Service Providers (excluding banks), to file for insolvency proceedings on a case by case basis, as notified by the central government.

India's Industrial Relations Code, 2019 gives firms with up to 300 employees flexibility in hiring and firing. Industrial Disputes Act also allows firms to hire and fire up to 100 workers without government permission. Some firms choose to remain below this level, giving up growth opportunities to retain flexibility.

While FDI is allowed in business-to-business e-commerce and in e-commerce that uses a marketplace model, the sector is still closed to FDI when companies sell directly to consumers.

Indian firms are allowed to raise capital in foreign exchanges through American Depository Receipts (ADR), and Global Depository Receipts (GDR) given that they first make a secondary listing on the domestic equity bourses or first go for a domestic float. Indian startups have a significant opportunity to raise capital from foreign exchanges if the process is simplified. In 2023, the Ministry of Corporate Affairs amended Section 23 of the Companies Act, 2020 to allow "such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed" with the aim to allow listings through GIFT City's IFSC exchange. However, the Ministry has not yet notified rules governing the same.

India currently has over 50 million pending cases across various courts. With about 21 judges per million people, it could take an estimated 300 years to clear the existing backlog. Introducing Online Dispute Resolution will allow for speedier resolution and reduce burden from the judicial infrastructure. In 2021, NITI Aayog released a report framing recommendations for an ODR policy in India.

India has a myriad of regulatory compliances at the center and state level, non-adherence for which can lead to imprisonment. This can be a hindrance for businesses, and also take up valuable legal state capacity. The government released the Jan Vishwas Act in 2023 rationalizing 183 provisions in 42 central acts. The government can further rationalize over 26,000 imprisonment clauses that hinder ease of doing business.

Taxation in India is regulated by the Income Tax Act, 1961, and the Wealth Tax Act, 1957. The acts have several contentious points pertaining to brackets of taxation, corporate rates, and tax deduction at different sources. UPA II government introduced the Direct Taxes Code in the Parliament in 2009, followed by a Revised Discussion Paper and a Standing Committee on Finance to discuss the code, however, this was never passed. A revised DTC was released in 2014, and the government set up an expert committee to draft a new version in 2017.

Indian Mutual Funds have over $563 billion assets under management as of August, 2023. A fifth of these are debt schemes. Currently, while government bad banks acquire bad assets, Asset Reconstruction Companies (ARC) are not allowed to purchase distressed assets from mutual funds or alternative investment funds. Allowing ARCs to operate would accelerate the debt recovery process, and free tied up capital.

India's agricultural market is heavily controlled by the national government, and doesn't allow for effective private competition. The Economic Survey, 2019-20 states that the lack of the private sector’s presence in the agro-commodity market leads to abysmally low long-term investments in procurement, storage and processing of these commodities in the sector. The government previously introduced the Indian agriculture acts of 2020, however, rolled them back after widespread opposition. The Essential Commodities Act, 1955 (ECA); and the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980 (PBMMSECA) enable government's tight control over the supply of food items in the marketplace through quota limits, and single-buyer marketplace procurement.

Land acquisition in India is a concurrent list subject. The land acquisition process is complicated and requires developers to work with multiple small-holding owners, and navigate varying land use policy. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation, and Resettlement Act 2013 states that private businesses are responsible for acquiring 80% of land (70% in case of PPPs) on their own before the government steps in to support land acquisition.

The Factories Act, 1948 has several restrictive measures on labor including limited daily, and weekly hours; overtime hours; and permissible time in factories. Several countries like Vietnam, China, Thailand, and Bangladesh allow for greater flexibility, and therefore can be more competitive in securing manufacturing investments. Since Covid-19, several states like Karnataka, Tamil Nadu, and Uttar Pradesh have released ordinances, and amendments easing labor laws.

E-commerce exports in India amount to $2 billion as of 2023, and form a small percentage of total merchandise exports. Customs clearance for exports in India can be a long process including processing of shipping bill, inspection of goods at docks, system appraisal of shipping bills, customs examination of export cargo, and loading. Easing e-commerce exports is important to achieve the government's plan of increasing merchandise exports to $1 trillion by 2030. To increase e-commerce exports, the Parliamentary Standing Committee on Commerce report suggests establishing dedicated customs clearance lanes for e-commerce exports.

India has 12 central public sector banks down from 27 in 2017. Fixing public sector banks and adequately capitalizing them is crucial for long term growth. While bank mergers offer balance sheet rebalancing, they do not resolve personnel and other institutional problems. Various different governments including the Narasimha II Committee set up by United Front government in 1998, and Yashwant Sinha led Finance Ministry under Vajpayee I government, have proposed reducing the government stake in public sector banks to 33%, thereby giving them management control, while opening up corporate participation. In recent years, SEBI guidelines to have 25% publicly listed shares have incentivized government disinvestment from public sector banks.

Covering over 1300 goods and 500 services, GST currently has 4 slabs-5%, 12%, 18% and 28%. In practice, there are over a dozen different rates, as well as a zero-rate on certain items. GST rates are further complicated by Central GST (CGST), and State GST (SGST). The government previously constituted a "Group of Ministers" on GST rate rationalization with leaders from various states to examine the issue of complicated slabs and propose reforms, however there has been no change.

There are over 23.4 million registered Micro, Small, and Medium Enterprises (MSMEs) on the Ministry of MSMEs' UDYAM portal. Several MSMEs have to interface with multiple central and state agencies to acquire and renew licenses, and permissions. The rules for licenses are varied across different states, which can be especially problematic for MSMEs with operations in multiple states.

According to the Parliamentary Standing Committee report on Performance of Rail Land Development Authority (RLDA), the Indian railways owns 62,068 hectares of vacant land, out of which 783 hectares has been encroached.

Regulatory impact assessment (RIA) is a systemic approach to critically assess the positive and negative effects of proposed and existing regulations and non-regulatory alternatives. While several government bodies in India have sectoral assessment procedures, RIA is neither mandated nor widely applied.

The Bar Council of India Rules for Registration and Regulation of Foreign Lawyers and Foreign Law Firms in India, 2022 allow foreign firms and lawyers to provide legal advice in non-litigious matters on a reciprocal basis. However, regulatory ambiguity persists, and DPIIT has not included "legal services" under the FDI ambit.