Focus on reducing cost of doing business

(Mains GS 3 :Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.)

Context:

• Among the key objectives of reforms, one has been to reduce the distortions generated by the earlier excessive micromanagement of the economy. 
• Thus, improving the ease of doing business continues to be a major priority but even more important to improve the cost of doing business. 

Competitive disadvantage:

• With internal economic liberalisation, openness to international trade and investment, an open free market economy has emerged. 
• To improve the cost of doing business action is needed to reduce government policy-induced pricing distortions which add to the cost of doing business. 
• In our open economy, these pricing distortions have become a source of competitive disadvantage to domestic value addition and job creation. 

Informed discussion:

•  As with all reforms, improving the cost of doing business would need leadership and investment of political capital in generating a consensus and steering change. 
• Reformers, who advocate that a crisis is the best time for difficult reforms, take an irresponsible undemocratic view and serve the political leadership poorly.
• The origin of government policy induced pricing distortions lie in the political need to find a way out for a cash-strapped government to raise resources.
• further, provide affordable goods and services to those in need through a cross subsidy within the sector without having to find money for direct subsidy payments. 

Pricing distortion in energy:

• Energy is the basic requirement of the modern industrial economy and the key to competitiveness.
• In the early days, cars were considered luxury goods and high excise duty was levied on petrol, but it was lower on diesel to make it cheaper for the essential needs of transport. 
• Thus, the price difference between petrol and diesel led to a surge in the supply and use of diesel cars and SUVs which led the government to increase the price of diesel gradually. 

Create dependency:

• The price difference of diesel and petrol has since been marginal but the exceptionally large revenues that came to the government from the high taxes on petrol and diesel created such a dependency that these have been kept out of GST. 
• More recently, the central government has been raising taxes on these to raise additional revenues to moderate the fiscal impact from COVID which has given an inflationary impetus. 
• But the real adverse impact is on the cost of road transport of goods which makes the cost of logistics about twice that of our competitors; therefore, petrol and diesel need to come under GST. 

Electricity sector: 

• Electricity pricing is also highly distorted as a cess of ₹400 per tonne on coal was levied to generate resources for promotion of renewable energy and decarbonisation of the economy. 
• When GST was introduced, the receipts from this cess were suddenly diverted for making good the shortfall in tax receipts of the States. 
• The present consumption of about a billion tonnes of coal generates revenue of around ₹40,000 crore and about two thirds of this additional cost is borne by the electricity sector. 

Cross subsidy:

• As the Railways have been unable to raise passenger fares to cover their costs, they need to cross subsidise passenger traffic from goods freight. 
• Therefore railways charge about twice the actual cost for carrying coal to thermal power plants and this distortion adds to the cost of coal for thermal power plants and further increases the price of electricity for the distribution companies. 
• Distribution companies in turn, cross subsidise most domestic household consumption by having higher tariffs for industrial users. 
• This increases the cost of industrial production vis-a-vis competitors in other countries and consequently loss of competitiveness results in lower manufacturing growth and the creation of fewer jobs.

User friendly processes:

• Not only is it difficult to get land for business enterprises, but prices are also higher than they need to be; thus, land use conversion and redevelopment processes need to be made user friendly.
• India has had a real estate asset price bubble with return on land assets by way of rents or returns on farming being around 2%, far lower than the cost of capital. 
• Combined with public provision and upgradation of quality infrastructure this would reduce supply side constraints and lower prices in real terms which helps in generating more jobs.

Conclusion:

• To realize the demographic dividend, India needs to start grappling with possible pathways for reducing the cost of doing business and getting a surge in private investment which creates jobs.