Where’s the reforms momentum?

The Hindu Business Line, July 24, 2015

By Pradeep S Mehta
There’s been a communications failure. States do not as yet understand the synergies such moves will create

The word ‘synergy’ is derived from a Greek term ‘sunergos’, which means working together. It was brought into local parlance by Aristotle, who used it to indicate a situation when combined effect of interaction between two or more units was greater than the sum of their individual effects. Note that ‘interaction’ between units is the key here.

The NDA government has been trying to push several key reforms for some time now. These include attempts to simplify establishment and operation of business, introduction of Goods and Service Tax (GST), reforms in land acquisition and operation of agriculture markets, among others.

Having launched multiple programmes, the government is struggling to make an impact on the ground. Stiff resistance from the opposition and vested interests has not helped.

It seems that the government has not been able to explain the common underlying theme between the proposed reforms and the synergy these initiatives are likely to achieve, once adopted.

This, unfortunately, has given an impression that the government is long on intent but hamstrung on execution. In fact, one is compelled to wonder whether the government itself is aware that synergy exists between these initiatives? The answer seems to be in negative. Let me explain why.

Establishment of business

The central government is working with States to improve performance on indicators of doing business, and making establishment and operation of businesses easy.

While some legislative changes have been introduced, discussions with industry reveal that a lot has not changed on the ground. They have been advised patience, which is becoming increasingly scarce.

One understands that the Centre has shared a list of around 90 indicators with States for tracking the regulatory environment of doing business. The States are expected to improve and report on these indicators.

Most Sytate governments are considering this as an extra burden, one amongst the many top down directives from Delhi, which does not understand the ground realities in States.

It seems the Centre has not been able to communicate to the States that this initiative is important for increasing transparency in governance, improving competitiveness, and enhancing confidence of industry.

Transparency and predictability in governance will improve competition, attract industries and investment, and have positive impact on infrastructure, employment, and growth of the state. It will also have spillover effects on the common people to make their life easier.

Goods and Service Tax

GST is being pitched as a game changer taxation reform. It will replace all indirect taxes levied by the central and state governments. While apparently beneficial, the government has made insufficient progress in getting relevant stakeholders on board to ensure its adoption.

This is as a result of excessive focus on loss of revenue to States, which has overshadowed other benefits the States are expected to garner from GST, especially when linked with other reform initiatives of the government (such as ease doing business).

The underlying theme of GST is introducing transparency and clarity in governance structures. With reforms in business regulatory governance, it is expected to minimise the discretion currently exercised by government agencies and consequently is expected to reduce corruption.

It aims to do away with the artificial segmentation of markets, and facilitate evolution of a single national market, thereby enhancing competition, and growth.

GST seamlessly integrates with the reforms on doing business, and together, both are expected to facilitate predictability, competitive neutrality and avoid policy induced distortions to competition and regulation.

As a result, the cost of doing business is expected to reduce, attracting more industries and investment, thereby generating revenues for the governments. Alas, these reforms are not being pitched together.

Competition impact

One understands that the Competition Commission of India (CompCom) is considering the possibility of conducting competition impact assessment (CIA) of proposed economic legislations, at the Centre and states’ level. The objective is to prevent policy distortions to effective competition and enable a level playing field for the market players.

Again, if not properly communicated and presented by CCI, there is a possibility that this reform is considered by law makers at Centre and State level, as a roadblock in law making. It might be alleged that CompCom is encroaching upon jurisdiction of law makers.

However, a closer look reveals that the objective of CIA resonates with the underlying objective of GST and ease of doing business, i.e. creating predictable and transparent conditions for market players to operate efficiently. As a result, the economy is expected to benefit from increased investment, improved infrastructure, and employment generation.

Clear the roadblocks

These are just some examples of reform initiatives being implemented in silos. There are several similar initiatives which seem to lack broad support, on account of limited understanding about their comprehensive impact and the synergy which could be created. Consequently, there is a need to link all the reform initiatives and highlight the common principles on which such initiatives are based.

The draft National Competition Policy (NCP), prepared by an expert panel after comprehensive consultations with stakeholders and States, contains such overarching vision, capable of binding all the reform initiatives together. It incorporates the principles of transparency, accountability, predictability and favours assessment of impact of policy interventions on competition and market forces. The NCP is sitting on the website of Ministry of Corporate Affairs since November 2011.

Adoption of an overarching competition policy and reforms has resulted in significant benefits across jurisdictions. It typically creates synergy among different reform initiatives and aids in achievement of their underlying objectives.

India should also move fast towards adoption of NCP. It is a non-legislative instrument and the government should not face any bottlenecks in its adoption. Only when NCP is adopted will the government be able to showcase the synergies which could be created.

The writer is the secretary general of CUTS International. With inputs from Amol Kulkarni

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