The ease of undoing business in India
In recent weeks, the government of India has received external vindication from the World Bank's "Doing Business" survey and from Moody's Investors Service. The former showed that India's ranking improved by 30 places and the latter upgraded India's sovereign credit rating. The World Bank's ranking was based on surveys of business conditions in Delhi and Mumbai for a typical medium-sized firm. It is good in a way that the survey was done before Delhi's air quality deteriorated. If it is difficult to breathe, it will not be easy to do business. Ease of living in India, something that Prime Minister Narendra Modi touched upon in a recent speech, matters for the ease of doing business.
Also, if the survey included the Indian movie industry, it might be a different story and script. Their unease of doing business has grown. It is one thing to boycott a work of art if one does not agree with it but it is another thing to put a price tag on the limbs of artists and directors. There will be great unease of pursuing their vocations under such circumstances. The short point is that there is a long way to go for business conditions to become genuinely easier in India.
In the US, in the last one year, according to The Wall Street Journal, the Federal Register stood at 45,678 pages in October 2017. It stood at 67,900 pages at the same time last year. The Federal Register in the US is equivalent to the official gazette in India. It contains all the rules and regulations passed by the government. The Donald Trump administration has reduced the size of the Federal Register by 32%. It took years even for the Ronald Reagan administration to achieve a one-third reduction in the size of the Federal Register.
It should not be a surprise that job creation remains strong in the US and capital spending is now picking up. Orders for non-defence capital goods excluding aircraft have been rising since December 2016 while they had contracted in the previous two years. This is not due to zero interest rates and quantitative easing that have been pursued in the previous eight years. They only helped form asset bubbles. Businesses are responding to deregulation. The ranking of the US "doubled" (worsened) from 4 to 8 during the Barack Obama years. In 2017, it improved to 6 from 8 in 2016. India may have jumped 30 places but what its customs officials are doing in the last few months to solar panel importers provides little on-ground support to the improved rankings.
I am a director in a small company based in Chennai that installs rooftop solar panels for industrial users. During a recent board meeting, they told me of a new classification that the customs department at the Chennai port had begun resorting to, all of a sudden. The customs authorities in Chennai have classified solar panels as "DC generators" and have begun slapping an import duty of 7.5% from around the beginning of September. Hitherto, solar panels attracted zero import duty. But, even now, there is no official change in the import duty on solar panels. They are being classified as power-generating equipment (which they are) of a different nature and are being subject to duty.
It is one thing to announce an official imposition of duty on solar panels and it is another thing to classify it as something else and charge duty on it. The former is transparent and the latter is stealthy-exactly the sort of thing that one does not want to see happen if the intent is to ease business conditions. It adds to uncertainty. It holds back investments. Even though, in this particular instance, the imposition of duty may be considered a protectionist measure and, hence, a boost to the domestic manufacturers of solar modules and panels, such arbitrary and whimsical reclassification in the middle of the financial year will not generate confidence to make in India for India.
To compound matters, the Chennai port is insisting on either payment of duty "under protest" or a bank guarantee for the release of imported panels, whereas, in Mumbai, the customs authorities let the panels leave the port on the furnishing of a provisional duty bond. Further, the problem that started in Chennai has spread to all ports nowa clear indication that the reclassification enjoys official sanction.
If India is to genuinely improve business conditions, the government should accept a suggestion made in the second volume of the Economic Survey, published in August.
In a speech made in January 2016, S. Mahalingam, former chief financial officer of Tata Consultancy Services Ltd and member of the Tax Administration Reforms Commission, made the important point that in many cases, tax compliance would improve if taxpayers understood their obligations. Making laws, rules and regulations easier to find and read facilitates that.