Business liquidity must be next reform priority

This article is authored by Ashish Kapur, CEO, Investshoppe.

India’s ambition to become a global manufacturing powerhouse depends not only on attracting investment but also on creating an environment in which businesses can use their capital efficiently. Over the past decade, reforms have transformed taxation, digital payments, infrastructure and the formal economy. Yet as India moves into its next phase of growth, attention must increasingly turn from introducing major reforms to improving how existing systems work on the ground.

Business

One of the most important issues is liquidity. For any business, access to cash is essential for everyday operations. Companies need working capital to purchase raw materials, pay employees, maintain machinery, invest in technology and expand production. When money becomes tied up because of delayed payments, regulatory processes or unusable tax credits, businesses may appear financially sound on paper while struggling to fund their immediate needs.

This challenge is particularly significant for micro, small and medium enterprises (MSMEs). These businesses form an essential part of India’s economic backbone, supplying larger industries, creating employment and supporting local economies. Unlike large corporations, however, smaller enterprises often operate with limited financial reserves and narrow margins. Even temporary disruptions in cash flow can force them to delay investments, reduce production or rely on expensive borrowing.

Tax policy has an important role to play here. The introduction of the Goods and Services Tax (GST) was one of India’s most significant economic reforms, replacing a complex network of indirect taxes with a more unified system. A central idea behind GST was that taxes paid by businesses during production should generally be available as credit, preventing taxation from becoming an additional cost at every stage of the supply chain.

Yet certain structural issues can still leave businesses with accumulated tax credits that they cannot easily use or recover. This is particularly relevant in sectors where companies pay higher taxes on some of their purchases than they collect on the products they ultimately sell. While refund mechanisms exist, limitations can mean that portions of legitimate tax credits relating to services and investments remain locked.

This may sound like an accounting technicality, but its consequences are very real. A manufacturer today does not operate on raw materials alone. It pays for logistics, warehousing, insurance, technology, telecommunications, repairs, professional services and manpower. Many of these are essential costs of doing business. If taxes paid on such expenses accumulate without being effectively usable, capital that could otherwise circulate through the business remains idle.

The same concern arises when companies invest in expansion. Building a new factory or modernising an existing one requires spending on machinery, equipment, technology and other capital assets. If a significant portion of the tax paid on these investments becomes difficult to utilise, the effective cost of expansion increases. Businesses may then need additional borrowing to compensate, adding interest costs to investments that are supposed to strengthen productive capacity.

This creates a wider policy question at a time when India is seeking to expand domestic manufacturing through initiatives such as Make in India and Atmanirbhar Bharat. Encouraging companies to invest is only one part of building a competitive manufacturing economy. The financial and regulatory environment must also allow those investments to operate efficiently.

Labour-intensive sectors such as textiles and footwear demonstrate why this matters. These industries support extensive supply chains involving manufacturers, small enterprises, traders and workers. India possesses significant advantages in areas such as raw materials, labour availability and domestic demand. But competing globally also requires continuous investment in technology, modernisation, productivity and scale. Capital unnecessarily tied up in the system is capital unavailable for these priorities.

There is also a larger lesson for economic policymaking. Regulations designed for legitimate administrative or revenue considerations can sometimes produce unintended consequences when applied across a complex economy. A rule that appears manageable for a large corporation may create considerable pressure for a small manufacturer with limited working capital.

This is why the next generation of reform must increasingly focus on implementation and refinement. India does not always need entirely new policies to improve economic outcomes. Sometimes, significant gains can come from identifying friction within existing systems and removing it.

Technology can help make this process more efficient. Better integration of tax data, faster verification and automated risk assessment can allow legitimate refunds and credits to move more quickly while still protecting government revenue against misuse. Regulation need not involve a choice between strict oversight and ease of doing business; well-designed digital systems can support both.

The broader principle should be simple: productive capital should remain productive wherever possible. Money legitimately belonging to businesses should not remain idle for prolonged periods because systems have not kept pace with economic realities. Unlocking such capital can reduce borrowing needs, improve financial resilience and encourage businesses to invest with greater confidence.

India’s journey towards becoming a global manufacturing hub will ultimately depend on thousands of investment decisions made by businesses large and small. Taxation, credit, infrastructure and regulation all influence those decisions. As the country looks towards its next phase of economic growth, reform must therefore be measured not only by new announcements but by how effectively existing policies enable businesses to operate, invest and expand. Sometimes, unlocking growth begins simply by unlocking the capital that is already there.

(The views expressed are personal)

This article is authored by Ashish Kapur, CEO, Investshoppe.