REFERENCE NOTE

No. 44/RN/Ref/November/2016

For the use of Members of Parliament NOT FOR PUBLICATION1

Promoting Business Environment in India:

Impact & Challenges

Prepared by Smt. Rachana Sharma, Additional Director (23035491 ) and Smt. Rashmi Kapoor, Joint Director of

Lok Sabha Secretariat under the supervision of Smt. Kalpana Sharma, Joint Secretary and Smt. Anita Khanna,

Director.

The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not for publication. This Service is not to be quoted as the source of information as it is based on the sources indicated at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information or views contained in the note/collection.

MEMBERS' REFERENCE SERVICE LARRDIS

LOK SABHA SECRETARIAT, NEW DELHI

PROMOTING BUSINESS ENVIRONMENT IN INDIA :

IMPACT AND CHALLENGES

Background

Business is the core activity in any economy. Business provides the path of progress

for the economic development. It creates employment, generates opportunities for the

entrepreneurship, contributes to the manufacturing process, provides base for the foreign

trade. A favourable business environment is essential for smooth functioning of business

operations.

Indian government has promoted the business in the country by facilitating

favourable business environment since independence. Adoption of liberalisation process in

1991 gave a big boost to the Indian business but still India remained one of the less

preferred countries in the world as far as business environment is concerned. Therefore, to

further enhance foreign investments in the country, the Department of Industrial Policy and

Promotion has advised Ministries and State Governments to simplify and rationalize the

regulatory environment through business process reengineering and use of information

technology.

The initiatives that have been taken in this direction are as follows:-

I. 'Make in India’ Initiative

Make in India programme has been designed to promote the environment for

industrial growth of the country and was launched by Prime Minister Shri Narendra Modi

on 25 September 2014. The major objective of this programme is to make the Indian

industrial sector more vibrant by facilitating domestic and foreign direct and indirect

investment, promoting innovation, increasing skills among work force, protecting

intellectual property rights and creating a growth-oriented manufacturing scenario. Make in

India includes 25 sectors of the Indian economy.1 This campaign has the target of

providing employment to 100 million people by 2022 in the manufacturing segment.

1 These sectors include automobile, bio-technology, electrical machinery, defense, leather, aviation, construction,

chemicals, electronics, information technology, food processing, ports, roads, space, energy, textiles, thermal

power, tourism, media, entertainment, mining, oil and gas, pharmaceuticals, health and railways.

2

II. Liberalisation in Foreign Direct Investment (FDI)

India has one of the most liberalized FDI policy regimes in the world. Government

has put in place an investor-friendly policy on FDI which permits up to 100% investment

under the automatic route in most sectors/activities. Key FDI reforms have been announced

in the defence and railways sectors.2 To boost infrastructure creation and to bring

pragmatism in the policy, the Government reviewed the FDI policy in the construction

development sector also by creating easy exit norms, rationalizing area restrictions and

providing due emphasis to affordable housing.

To give impetus to the medical devices sector, a carve out was created in FDI policy

on the pharmaceutical sector and now 100% FDI under automatic route is permitted. The

Government, in order to expand insurance cover to its large population and to provide

required capital to insurance companies, raised the FDI limit in the insurance sector to

49%. Pension sector has also been opened to FDI up to the same limit. The FDI policy

provisions pertaining to NRI investment have also been clarified by providing that for the

purposes of FDI policy, investment by NRIs on non-repatriation basis under Schedule 4 of

FEMA (Transfer or Issue of Security by Persons Resident Outside India) Regulations will

be deemed to be domestic investment at par with the investment made by residents.

Country-wise FDI Equity Inflows from October 2014 to May 2016 is indicated in

Annexure –I.

III. Ease of doing business

In the current global environment, where capital is scarce and there are numerous

countries competing for attracting the same capital, the Government of India has taken up a

series of measures to improve Ease of doing Business. The emphasis has been on

simplification and rationalization of the existing rules.

2 The entire range of rail infrastructure was opened to 100% FDI under the automatic route, and in defence, sectoral

cap was raised to 49%.

3

Some of the key initiatives that have been taken by the Central Government are:

Investor Facilitation Cell established to provide primary support for all investment queries

Government lanunched an online portal Shram Suvidha to ease of reporting at one place

for various labour laws

Allotment of Labour Identification Number (LIN) to units to facilitate online registration

and filing of returns

Curbing the need of Consent to Establish/No Objection Certificate (NOC) letter for new

electricity connections.

Simplified forms for obtaining industrial licence and Industrial Entrepreneurs

Memorandum (IEM)

The Companies Amendment Act, 2015 has been passed to remove requirements of

minimum paid-up capital and common seal for companies and certificate of

commencement of business for private companies

Single process for incorporation of company, allotment of Permanent Account Number

(PAN) and Tax deduction Account Number (TAN)

Central Board of Excise and Customs (CBEC) has implemented Single Window Interface

for Facilitating Trade (SWIFT) (online single window for clearance of goods) on the

ICEGATE portal by integrating FSSAI, Animal Quarantine, Plant Quarantine, Drug

Controller and Wildlife Control Bureau for imports.

The limit on the number of consignments released under direct delivery has been removed

facilitating prompt delivery of goods.

Filing of import and export declarations and manifest has been made online with digital

signature.

24x7 customs clearance facilities have been extended to 19 seaports and 17 air cargo

complexes.

Documents required for export and import has been reduced to three.

Constitution of National Company Law Tribunal and National Company Appellate Law

Tribunal has been notified.

The Arbitration and Conciliation Act has been amended to reduce the time taken in

arbitration proceedings and grounds on which an award may be challenged.

In Delhi, all sub-registrar offices have been digitized and Sub-registrar’s records have been

integrated with the Land Records Department.

In Maharashtra, all property tax records have been digitized.

SARFAESI (Central Registry) Rules, 2011 has been amended to record security interest

created on all types of property viz. movable, immovable as well as intangible.

101st Constitution Amendment Act has made India a single market place as it confers

powers on Parliament and State Legislatures to make laws for levying GST on supply of

goods and services. GST seeks to simplify and harmonise the indirect tax system by

subsuming existing indirect taxes. The four GST slabs have been set at 5%, 12%, 18% and

28% for different items and services.

4

Moving in line with the Central Government, the State Governments have also taken

various steps to ease the governance to attract investment in their states as highlighted in

Annexure II. The assessment reveals that States are at different levels of implementation.

The implementation status of each State has been converted to a percentage, and, on the

basis of this the State rankings have been calculated as shown in Annexure-III.

IV. New Foreign Trade Policy

With an aim to make India a significant partner in global trade by 2020, the

government unveiled a new Foreign Trade Policy (FTP) to boost India's exports. 'Make in

India' and 'Digital India' have been integrated with the new Foreign Trade Policy.

This Policy introduces two new schemes, namely "Merchandise Exports from India

Scheme (MEIS)" and "Services Exports from India Scheme (SEIS)"3

which is for

increasing exports of notified services. Incentives under MEIS & SEIS are to be available

for SEZs also. e-Commerce of handicrafts, handlooms, books etc., are also eligible for

benefits of MEIS.

The Government is also implementing the Niryat Bandhu Scheme for, inter alia

mentoring new and potential exporters on the intricacies of foreign trade through

counseling, training, and outreach programmes.

V. Industrial Corridor

Government of India is building a pentagon of corridors across the country. The

project seeks to create a strong economic base with a globally competitive environment

and state-of-the-art infrastructure to activate local commerce, enhance investments and

attain sustainable development. A model Industrial Corridor of international standards is

being developed with emphasis on expanding the manufacturing and services base to

create a “Global Manufacturing and Trading Hub”. This Delhi Mumbai Industrial Corridor

3 MEIS and SEIS replace multiple schemes that were in place earlier, each with different conditions for eligibility

and usage.

5

(DMIC) runs across the six States of Uttar Pradesh, Haryana, Madhya Pradesh, Rajasthan,

Gujarat and Maharashtra and majority of projects4

in DMIC are envisaged to be

implemented through Public Private Partnership.

VI. Modified Industrial Infrastructure Upgradation Scheme (MIIUS)

In July 2013 on the basis of evaluation of Industrial Infrastructure Upgradation

Scheme (IIUS)5, Modified Industrial Infrastructure Upgradation Scheme (MIIUS) was

notified with an approved outlay of Rs.1030 crore for the 12th Five Year Plan period. Out

of this, Rs. 450 crore are for committed liability and the remaining Rs. 580 crore are for

taking up 14 to16 new projects. This modified Scheme will aim at upgradation of

infrastructure in existing or greenfield industrial clusters to develop better common

infrastructure, common facilities including skill development centers at the selected

industrial clusters to create better employment opportunities.

The Cabinet Committee on Economic Affairs (CCEA) further approved that at least

10 percent outlay will be set aside for the minimum two projects in the North Eastern

Region (NER). Although all States are covered under the scheme, however projects are

likely to be undertaken in only 14 to 16 States/Districts due to limitation of outlay in the

12th Plan.

4 Initially, the following eight investment regions/industrial areas have been taken up for development as Industrial

Cities: i.Ahmedabad-Dholera Investment Region, Gujarat; ii.Shendra-Bidkin Industrial Park city near Aurangabad,

Maharashtra; iii. Manesar-Bawal Investment Region, Haryana; iv.Khushkhera-Bhiwadi-Neemrana Investment

Region, Rajasthan; v.Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh; vi.Dadri-Noida-Ghaziabad

Investment Region, Uttar Pradesh; vii.Dighi Port Industrial Area, Maharashtra; and viii. Jodhpur-Pali-Marwar

Industrial Area, Rajasthan.

5 The IIUS was launched in 2003 as a Central Sector Scheme to enhance competitiveness of industry by providing

quality infrastructure through a public private partnership in selected functional clusters with central assistance upto

75 percent of the project cost subject to a ceiling of Rs. 5 crore. The Scheme was recast in February, 2009 based on

the recommendation of an independent evaluation. Central assistance was retained upto 75 percent and assistance

upto 90 percent of the project cost introduced for NER/Hill States with a maximum ceiling of Rs. 60 crore (with 15

percent minimum industry contribution and 5 percent in case of NER/Hill States). In 2013, it was converted into

Modified Industrial Infrastructure Upgradation Scheme (MIIUS).

6

VII. Facilitation of Intellectual Property Rights (IPR) including design

In May, 2016, the Union Cabinet approved the National Intellectual Property Rights

(IPR) Policy6 that will lay the future roadmap for Intellectual Property in India. The

National IPR Policy is a vision document that aims to create and exploit synergies between

all forms of intellectual property (IP). It aims to incorporate and adapt global best practices

to the Indian scenario. The Policy recognizes that India has a well-established Trade-

Related Aspects of Intellectual Property Rights (TRIPS)-compliant legislative,

administrative and judicial framework to safeguard IPRs, which meets its international

obligations while utilizing the flexibilities provided in the international regime to address

its developmental concerns. The National Intellectual Property Rights (IPR) Policy

endeavors for a “Creative India; Innovative India".

Government Initiatives Outlined In The Union Budget 2016-17 For Promoting

Business Environment in India

Several measures have been outlined in the Union Budget 2016-17 that aim at

reviving and accelerating investment which, inter alia, include fiscal consolidation with

emphasis on expenditure reforms and continuation of fiscal reforms with rationalization of

tax structure.

The Government has announced several schemes to improve the extent of financial

inclusion. The Prime Minister has launched the Micro Unit Development and Refinance

Agency (MUDRA) to fund and promote Microfinance Institutions (MFIs), which would in

6 The Policy lays down the following seven objectives: IPR Awareness: Outreach and Promotion - To create public

awareness about the economic, social and cultural benefits of IPRs among all sections of society; Generation of

IPRs - To stimulate the generation of IPRs; Legal and Legislative Framework - To have strong and effective IPR

laws, which balance the interests of rights owners with larger public interest; Administration and Management - To

modernize and strengthen service-oriented IPR administration; Commercialization of IPRs - Get value for IPRs

through commercialization; Enforcement and Adjudication - To strengthen the enforcement and adjudicatory

mechanisms for combating IPR infringements; and Human Capital Development - To strengthen and expand human

resources, institutions and capacities for teaching, training, research and skill building in IPRs.

7

turn provide loans to small and vulnerable sections of the business community and

Pradhan Mantri Mudra Yojana which funds small entrepreneurs.

The Government of India has launched an initiative to create 100 Smart Cities as

well as Atal Mission for Rejuvenation and Urban Transformation (AMRUT) for 500

cities with an outlay of Rs 48,000 crore (US$ 7.47 billion) and Rs 50,000 crore (US$ 7.34

billion) crore respectively. Smart cities are satellite towns of larger cities which will consist

of modern infrastructure and will be digitally connected. The programme was formally

launched on 25 June 2015.

Impact

The impact of Government's initiatives to promote business environment in the

country has been that India has improved its rank from 142 in 2014 to 130 in 2016, up 12

spots this year in the World Bank's index of Ease of Doing Business, a little closer to Prime

Minister, Shri Narendra Modi's promise of entering the top 50.

According to World Bank’s Doing Business 2016 report, days needed to start a

business in India have also reduced from 32 in the year 2014 to 29 in the year 2016. “India

has accelerated efforts to improve the business climate in the country during the past year.

This year’s improvement in ranking marks a significant shift in trend after several years of

decline.”

Challenges Ahead

1. The overarching theme in terms of ease of doing business has been to minimize

government and maximize governance. With that focus, the government has constituted a

task force for rationalizing human resources in the government and in autonomous bodies.

Clearly, accelerating investments in infrastructure, both hard infrastructure and soft

infrastructure, stands out as a key priority for the budget. This is also a critical enabler for

ease of doing business.

8

2. Unfortunately, the banking sector is laden with bad loans, and the private sector’s

balance sheets are stressed in this direction. The move to recapitalize banks with a total

budgetary outlay of Rs. 25,000 crore to some extent would help enable the financial

institutions to support infrastructure growth. In addition, the amendment to the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

(SARFAESI) Act would help banks recover loans from defaulters more efficiently.

3. The other key pre-requisite for infrastructure growth is enabling public-private

partnerships (PPPs) and the steps taken to strengthen PPP through a proposed dispute

resolution mechanism and provision for renegotiation of PPP contracts would help bring

back pure PPP as a potential mechanism for funding large infrastructure projects.

4. Coming to corporate entities, the Companies Act is being proposed to be further

amended to improve the ease of doing business and also to make the business environment

for start-ups more conducive. It proposes to enable registration of companies in a single

day. Industry has raised several issues in the context and these issues may be addressed

through amendments to the Companies Act.

Summary

The road ahead still remains challenging. Experts suggest further digitisation of

processes, updates to the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest (Sarfaesi) Act, and passing of the Arbitration Bill will aid

India in climbing up the Ease Of Doing Business index further and promote the business

environment in India.

9

Sources consulted

http://www.ey.com/Publication/vwLUAssets/EY-doing-business-in-india-2015-16

India. Ministry of Commerce and Industry, Department of Industrial Policy &

Promotion: Initiatives for improving easy of Doing Business in India

India. Ministry of External Affairs, Investment & Technology Promotion Division:

India is business

Make in India and Business Environment, Naib Singh: International Journal for

Research in business, management and accounting, Vol 2 issue 6, June, 2016

PIB Release dated 11.07.2013

Economic Times Dated 01 April, 2015

PIB Release dated 31.07.2015

Rajya Sabha Unstarred Question No. 1761 dated 05.08.2015

Forbes India dated 03.12.2015

www.livemint.com dated 03.03.2016

PIB Release dated 13.05.2016

The Asian Age, New Delhi dated 04.11.2016

Annexure-I

COUNTRY- WISE FDI EQUITY INFLOWS FROM OCTOBER 2014 TO MAY 2016

Source: Lok Sabha Unstarred Question No. 2530 dated 01.08.2016

ANNEXURE II

State Government Initiatives

Source:http://www.ey.com/Publication/vwLUAssets/EY-doing-business-in-india-2015-16

Gujarat Online consent system for environment clearances

Geographic Information System (GIS)-based land identification system

Maharashtra Unified process with single identification for Value Added Tax and

Professional Tax registration

Time required for getting an electricity connection has been reduced to 21

days from 67 days and procedures involved has been cut down to 3 from

existing Commercial benches established in Bombay High Court to settle

high value commercial disputes

Punjab

Creation of “Invest Punjab”, as a one-stop clearance system for

investment projects

Exemption to 131 industries from consent requirement by Pollution

Control Board

Delhi Real time allotment of Tax Identification Number (TIN)

Procedure and time required for new electric connection reduced.

Online portal for construction permits for residential, industrial,

institutional and commercial buildings

Chhattisgarh Online consent and monitoring system to obtain environmental clearances

Validity of consent obtained also extended

Puducherry Green industries exempted from inspection by Pollution Control

Committee

Karnataka Checklist for 86 government services and delivery timelines across 23

departments/organizations made available on Karnataka Udyog Mitra, an

online portal to facilitate investment in the state

Uttarakhand Replacement of static check posts established by the commercial tax

department for checking of the goods at the point of their import into the

state with mobile squads.

Annexure-III

Final Ranking of the States as on 30 June, 2016

2016

Rank

State Score% 2015

Rank

2016

Rank

State Score% 2015

Rank

1 ANDHRA PRADESH 98.78 2 19 DELHI 47.62 15

1 TELANGANA 98.78 13 20 KERALA 26.97 18

3 GUJARAT 98.21 1 21 GOA 18.15 19

4 CHHATTISGARH 97.32 4 22 TRIPURA 16.67 26

5 MADHYA PRADESH 97.01 5 23 DAMAN & DIU 14.58 -

6 HARYANA 96.95 14 24 ASSAM 14.29 22

7 JHARKHAND 96.57 3 25 DADRA & NAGAR

HAVELI

1.79 -

8 RAJASTHAN 96.43 6 26 PUDUCHERRY 1.49 20

9 UTTARAKHAND 96.13 23 26 NAGALAND 1.49 31

10 MAHARASHTRA 92.86 8 28 MANIPUR 1.19 -

11 ODISHA 92.73 7 29 MIZORAM 0.89 28

12 PUNJAB 91.07 16 30 SIKKIM 0.60 27

13 KARNATAKA 88.39 9 31 ARUNACHAL

PRADESH

0.30 32

14 UTTAR PRADESH 84.52 10 31 JAMMU & KASHMIR 0.30 29

15 WEST BENGAL 84.23 11 31 CHANDIGARH 0.30 24

16 BIHAR 75.82 21 31 MEGHALAYA 0.30 30

17 HIMACHAL

PRADESH

65.48 17 31 ANDAMAN &

NICOBAR ISLANDS

0.30 25

18 TAMIL NADU 62.80 12 31 LAKSHADWEEP 0.30 -

Source: India. Ministry of Commerce and Industry, Department of Industrial Policy and Promotion.

Assessment of State Implementation of Business Reforms 2016