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Well begun but half done

The current spate of reforms will benefit industry. But more needs to be done, writes Chandrajit Banerjee.

india Updated: Oct 25, 2012 21:22 IST

The industry wholeheartedly supports the recent renewed push for economic reforms by Cabinet approvals of key legislations. In the long term, new policies are likely to spur all sectors as well as improve the climate for doing business.

Given the notable deceleration in industry and services, continued liberalisation of the business environment and strengthened domestic markets are important. In the last three quarters, the Indian manufacturing sector has barely moved, registering a rate of growth of half a per cent. Exports growth, too, has become negative, while FDI inflows have come down by two-thirds in April-June this fiscal over the first quarter in 2011.

The Companies Bill is particularly relevant for industry. It would delete archaic compliance norms and facilitate responsible self-regulation, with disclosures and accountability. The provisions are welcome, as they will strengthen and modernise corporate regulation. However, the Confederation of Indian Industry (CII) is concerned that the provision for mandatory expenditure of 2% on Corporate Social Responsibility (CSR) for companies over a prescribed turnover — the first such mandatory provision in the world — would dilute the intentions of the Bill.

As per a recent CII survey, structured CSR activities have intensified over the last decade, as companies recognise that inclusive and sustainable growth is possible only by expanding partnerships with the community. Companies are targeting areas such as education, maternal and child health and water and environment through voluntary efforts. CII recommends that corporate engagement in CSR is best left to voluntary efforts, perhaps incentivised through tax benefits, awards and recognitions. The ministry of corporate affairs has suggested voluntary efforts through the publication National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, which should be more widely disseminated.

The government has also made amendments to the Competition Act 2002, which will iron out some anomalies and are tailored to facilitate mergers and acquisitions. These would be beneficial to the overall business environment.

The proposed amendments to the insurance laws are also welcome. For one, the insurance sector in India is in dire need of funds estimated at over R60,000 crore for the next five years. The infusion of these funds will enable a larger pool of citizens to access better products and services, providing stronger cover for different needs. FDI at 49% will encourage foreign participation in terms of know-how and sophisticated services. This is a much-needed reform for the financial sector. Finally, it will be easier to get long-term investments for roads, highways, power and urban amenities.

In the pension sector, only a small percentage of workers are currently covered under pension schemes. The amendments to the Pension Fund Regulatory and Development Authority Bill 2011 allow for minimum assured returns along with the flexibility for part withdrawals. Prudent management of pension funds is necessary to ensure benefits to subscribers and for maximum impact in infrastructure.

Despite 20 years of economic liberalisation, India falls far behind comparable economies when it comes to the ease of doing business and market competition. Deficiencies in its financial sector have deterred sophisticated financial engineering by companies as well as the entry of FDI. Foreign investment will bring in funds and infuse greater competitiveness in the system through new technologies and managerial practices, which will help elicit new ideas from Indian companies as well.

The current spate of reforms is aimed at encouraging this process. While a lot more needs to be done to further ease controls on industry, the recent progress is encouraging and we hope more such policy measures will be taken by the government in the coming months

Chandrajit Banerjee is Director, Confederation of Indian Industry
The views expressed by the author are personal