Perspectives from ISB

By Prof Rajesh Chakrabarti and Dr Kaushiki Sanyal, Bharti Institute of Public Policy, ISB

It was reassuring to hear the Union finance minister Arun Jaitley emphasize the government’s commitment to reforms across a range of sectors at the World Economic Forum’s recent India Economic Summit in Delhi. These include labour laws, land acquisition and foreign investments.

Jaitley is undoubtedly taking steps in the right direction but a lot needs to be done to make India investor-friendly. Earlier in the year, India’s position in the World Bank’s 2015 Ease of Doing Business rankings slipped to 142 from an already low 134 (out of 189 countries). A closer examination of the ranking shows that India has slipped on all parameters except in protection of minority investors (where it has gained by 14 points aided by the new Companies Act). The other parameters include starting a business, dealing with construction permits, getting electricity, registering property, trading across borders, and resolving insolvency. India continues to remain at almost the bottom of the pile in enforcing contracts.

Jaitley’s chosen reforms—particularly labour and land—are critical for the economy but will probably leave these rankings largely unaffected. It is not clear that the ongoing review of laws will fix many if not all of the problems identified in the rankings themselves. The finance minister’s other comment about choosing reforms that will benefit India is an equally valid one. While the World Bank indicator has, over the years, gained in popularity and reference, its methodology of ascribing scores to arguably complex economic aspects and its choice of elements has been questioned. In a longer scheme of things, one would argue that labour and land reforms should matter more. But as far as foreign direct investment (FDI) is concerned, recent research establishes the link between doing well on these indicators and attracting FDI. One can, however, argue that such results may well be driven by differences of changes in ranking among countries that have got the basics right i.e. labour regulations.

The new government’s focus on labour reforms which will provide a single window where employers can submit one compliance report for 16 labour laws and a new Web-based labour inspection system that will curb the inspector raj is a step in the right direction. However, the biggest issue that the Union government needs to tackle is the problem of skill gap. About 60% of India’s population is within the age group of 15 to 59. Further, between 2011 and 2016, there will be approximately 63.5 million new entrants in this age group, the bulk of the addition being in the relatively younger age group of 20 to 35 years. In order to take advantage of this demographic dividend, India needs to focus on generating productive and gainful employment and increasing access to quality education to enhance the employability of this age group. Fixing the arcane labour laws will clearly improve business ease.

Land acquisition is an equally important and complex area. Jaitley has pointed out that although the law has increased compensation it has made the process more complicated and does not provide exceptions for important sectors such as defence and urban infrastructure making it difficult to acquire land for affordable housing, hospitals, private schools and industrial parks. While these amendments are important, there are other more pressing issues with the law that can have implications for private investment. For example, the requirement of a Social Impact Assessment for every acquisition without a minimum threshold may lead to delays.

The government’s focus on labour and land is a welcome feature, but overnight changes here are unlikely.

This article was first published in Live Mint on November 24, 2014

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“The views expressed in this article are personal. Prof Rajesh Chakrabarti is a faculty and Kaushiki Sanyal is Sr. Analyst at the Indian School of Business.”