Kill Bill Attitude Will Scuttle Reforms

The stock markets have already achieved a new zenith till date with the sensitive BSE Sensex scaling 28,360 points on November 21 even as the Nifty jumped to an all-time high of 8,489 points. In fact ever since the BJP government has taken over the reins of India’s administration, the bourses are on a kind of rampage due to the government’s swift decisions on certain issues and the conviction with which the prime minister and his team have been trying to push holistic reforms in almost every sector. The opening up of various sectors such as defense, railways, real estate and infrastructure for foreign direct investments; the ordinance for cancelled coal block reallocation; diesel price deregulation; and an increase in the price of natural gas are some of the key reforms that the government has taken during its first six months in office to put the economy back into a driving mode.

However, after scaling new highs, the stock markets are now searching for the next trigger that will really give them an altogether fresh paradigm shift. This anticipation of the stakeholders in the equity markets has made them turn their attention to the winter session of the parliament that has started from November 24. It will have an elongated tenure of around 22 sessions and this time around each of this seating is going to be important since many crucial acts and bills are likely to be tabled for approval. The passage of these bills will have long-term bearing on the trade, economy and business environment of the country. Not surprisingly, financial experts are treating this session as the most important of its kind in recent years as the results thereof will decide the future fate of Indian economy. Out of as many as 67 pending bills, around 39 bills may come up for discussion and approval.

GST and Insurance: Key Factors for Economic Growth

Though the government has put all its efforts to provide a booster dose to financial reforms over the past six months, all its efforts to propel financial and business performance of the country have received big jolt due to the absence of adequate numbers in Rajya Sabha and in particular the non-passage of the insurance bill and introduction of the GST bill. GST alone can change the entire economic scenario of the country since it is believed that if GST comes into force then automatically India’s GDP will increase by at least 1.7 to 2 per cent. For this reason, the government is not leaving any stone unturned to somehow introduce this new indirect tax regime bill during this winter session.

In this respect, Finance Minister Arun Jaitley has reiterated that the revised constitutional amendment required for rolling out GST will be actively pursued in the winter session and the matter of the first tranche of compensation to states for revenue loss due to phasing out of Central Sales Tax will also be taken up. The complexity is that the states are demanding a five-year compensation mechanism and want that to be included in the bill while the centre wants to roll out GST form April 1, 2014. “Under the rollout mechanism the central government will have to compensate the states for the loss of revenue due to phasing out of CST and as on March 2010, the pending amount works out to Rs 13,000 crore,” informs a finance ministry official.

Meanwhile, Uttar Pradesh has forwarded various suggestions to deal with contentious issues for the rolling out of the GST regime such as the threshold limit, tax-free goods, dual control, tax rates, place of supply rules and revenue-neutral rates – calling for a consensus mechanism on these issues. These suggestions also include compensation for ten years for the loss of revenue incurred by states against the implementation of GST and a list of goods that will be kept out of GST’s purview. This is a big positive as it shows a softening stance from a non-BJP government. In a significant move, the government is also looking to set up a new finance commission ahead of its schedule that will look into various matters for the implementation of the GST regime.

Along with the bill for amending GST, the insurance bill remains a problematic area for the government as it was not able to clear the Rajya Sabha roadblock due to the absence of a majority of the parliamentarians during the monsoon session. This bill is quite important to push a reform-driven agenda and the government is keen on clearing this hurdle this time around. Meanwhile, the importance of the pension bill can be gauged from the fact that the PFRDA Act and the Insurance Amendment Bill are interconnected and the FDI limit of the PFRDA Act is governed by insurance laws. Despite the clearance of the PFRDA act, the government cannot increase the FDI limit in pension funds unless the Insurance Laws Bill is cleared.

Currently the FDI limit in the insurance sector is 26 per cent and the government wants to increase it to 49 per cent, which will subsequently lead to increase in the FDI limit of pension funds. This bill has already been passed by the Lok Sabha and is under consideration of a select committee of the Rajya Sabha, which is slated to give its report by the end of November. The presentation of the report was delayed due to the induction of two Rajya Sabha MPs, Mukhtar Abbas Naqvi and J P Nadda, into the BJP government as ministers. BJP has now proposed two new names so that the committee’s report can be filed and the bill can be passed in the Upper House.

Labour and Land Reforms: An Urgent Call

The government is anxious to remove the obstacles facing reforms in labour laws, an issue that has been pending for many decades. For this it has already cleared amendments in the Factories Act 1948, Apprentices Act 1961 and Labour Laws Act, 1988 - the last being in terms of exemption from furnishing returns and maintaining registers by certain establishments. In fact the proposed amendments were also tabled in the parliament during the monsoon session but couldn’t be cleared. The proposed amendments in the country’s various labour laws will surely bring about a sea change in the existing business environment of the country, primarily because they will help transform the employment scenario which will become beneficial for both employers and employees, particularly in the manufacturing sector.

On the other hand, the opposition including those from the Left have opposed the move of amending the labour laws on various grounds, in particular the issue of allowing women to work night shifts. Quite in line with its reform agenda, the government is also planning to amend the contentious Land Acquisition Law and amendment in this regard will come up during the winter session. Various state governments and business houses have complained about the impracticalities contained in the existing act. The government wants to make the act user-friendly and plans to dilute the provision of mandatory consent of at least 70 per cent locals for acquiring land for PPP projects and 80 per cent for private entities. Also it will make the acquisition of land easier but will not change the compensation clause.

The government is also mulling over softening the provisions of its social impact assessment study, which is regarded as quite cumbersome and time-consuming. What is important to note is that many states have complained about the land acquisition laws hampering the industrialisation process, thus calling for a quick change. “All these changes have been proposed by the rural development ministry and the amendments are now with the Union Cabinet. In all probability this bill may be tabled during the fag end of the winter session as the government wants to avoid any tussle over this controversial act with opposition parties in the early period of the session,” informs a senior government official.

Power and Coal Sector: Remove the Roadblocks

Though the government is keen on marching ahead with reforms in the coal and power sectors, the lack of numbers in Rajya Sabha and obligations regarding state elections are pushing it to somehow postpone the key process for reforms to either the budget session or even to the next monsoon session. Moreover, due the strained relationship with Shiv Sena, even the Coal Mines (Special Provision) Bill, which is due to replace the ordinance on the subject, is under threat even though the government wants to clear it anyhow. Importantly, this ordinance had been introduced by the government to tackle the situation arising out of coal block cancellations by the Supreme Court. This ordinance allows the firms to once again bid for captive mines, barring companies convicted of offences related to the allotment.

This bill along with the Textile Undertaking (Nationalisation) Laws (Amendment and Validation) Ordinance, 2014 is quite important for the reformist agenda of the government. The latter shields the National Textile Corporation (NTC) from rent control laws, which have been used to evict its sick textile units from prime land in several cities. In line with the ‘big bang’ reforms, the government is also pushing for power sector reforms by bringing in a bill amending the Central Electricity Act in the current session. Power Minister Piyush Goyal has already said that the government is quite serious about bringing in the bill to help the government take forward its campaign of “power for all”. This bill will improve the tariff policy and regulations in the power sector and also rationalise tariff structure in different areas. In fact the government is mulling over having different tariffs at different times of the day for easy availability of power for maximum hours in areas where power is in deficit. Discussions have therefore been initiated with various states on this subject.

As for the Electricity Act 2003, the government has sought feedback over certain proposed amendments. With fuel supply being the biggest worry in the power sector, the power ministry has chalked out a road map for the e-auction of coal blocks and price pooling to ensure smooth supply of fuel, including gas, to power plants. The government is also working to improve the transmission and distribution sector by separating the feeders for agriculture and households in rural areas and promoting ultra mega solar power projects. Under the reforms’ initiatives the government plans to provide financial assistance to improve power generation, transmission and distribution in the states.

The Goods and Services Tax

The most awaited and revolutionary, Goods and Service Tax (GST) Act would treat the whole India as one territory. It is all set to integrate state economies and boost overall growth as GST will create a single, unified Indian market to make the economy stronger. The foremost benefit of the GST for the Indian economy is that the entire structure of taxation will be simplified. The implementation of GST will lead to fall in costs making several goods and services competitive on global front. The GST is expected to increase the tax base by increasing the number of taxable goods and services.

The business fraternity has already signalled the adoptability of the GST earlier as the fraternity wants a transparent, clear and simple tax laws. More interestingly, after implementation of the GST, the Indian GDP expansion of approximately 1- 2 per cent is already anticipated leading to benefit greatly the domestic economy.

Prime Minister; Narendra Modi has already taken various steps to give impetus for economic reforms. Furthermore, the PM’s realistic track record, one can expect very soon the GST will be soon realistic. The major hurdle in the way of GST implementation is individual states’ fear about cut in their tax revenues. However, one can expect no problems in GST implementation; if Modi led government can address this major hurdle by discussing with the state governments.

The introduction of GST will lead overall higher economic growth, simplification of administration and improvement in compliance, a more secure and stable base for centre and state revenues, free flow of goods and services within the common market in India, and the removal of trade biases against goods manufactured in India. Further, the implementation of GST is expected to reduce the overall production costs by 10 to 15 per cent and benefit all sectors across the Indian economy.However, the significant benefit of GST implementation would be for freight and logistics companies and commercial vehicle manufacturers. The unified regime of GST across India is expected to reduce the logistics and distribution costs by more than 10 per cent of the one at present. Further, this will reduce the storage cost associated with state-wise storage and will help the companies to run their businesses from centralized storage hub due to removal of deferential tax regime. Further, the removal of octroi is expected improve the productivity of freight companies in big way. Progressively, the stock in transit will see a considerable reduction benefiting to reduce the transit time of goods and the loss of perishable goods.

Further, the implementation of GST will turn out to be modernization of trucking in India following global standards. The demand for longer vehicles will shoot up as increasing volume of road transport and shift towards faster and safer transit. Further, the commercial vehicle manufacturers have to offer efficient, reliable and powerful variants for the Indian economy.

INSURANCE:FDI In Insurance Will Spur Growth

There is no denying the fact that as national economies are growing bigger they are being weaved more and more with the global economy. In this situation one cannot ignore the linkage between the laws that govern the country and its economic growth. The law needs to keep abreast with changes lest there should appear inconsistencies and contradictions creating hurdle to growth and development. The Insurance Act of 1938, a 75-year-old Act that governs the insurance industry in India is one such law that has outlived its utility and is inadequate in its current form to deal with the burgeoning sector.

The insurance sector was first opened up for the private sector after the enactment of the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act, 1999), which permitted 26 per cent shareholding in insurance companies by a foreign partner. Even after 14 years the limit has been capped at 26 per cent despite knowing that the insurance sector requires huge capital to grow and therefore increasing the cap on foreign ownership is one of the ideal ways to pump in more money into the Indian insurance sector. The proposal to raise FDI cap has been pending since 2008 due to opposition from several political parties, including the BJP.

Nonetheless, the new government at the centre has full majority and that raises the hope of the passage of this Bill. Though the government does not have the required number in the Upper House, it is hopeful of getting support from the Congress in this issue. Nevertheless, the draft report on the Bill is not ready yet and is likely that this may not be passed in the current winter session. Although the insurance Bill at core aims to increase the cap on foreign ownership in the insurance sector to 49 per cent from 26 per cent, there are other clauses in the Bill that will have material impact on the development of the industry.

For example, health insurance is to be recognised as a separate line of business; currently there is no definition of health insurance in the Insurance Act. The Bill proposes to define health insurance, which will help more firms to enter the health insurance sector. Similarly, there is a proposal for recognition of Tier II capital for insurers that will open up new source of funds for insurance companies. The insurance sector in the last four years has seen a decline in sales due to significant change in regulations, volatility in capital markets, elevated interest rates, and decline in financial savings.

The situation, however, is going to improve from here on as the share of financial savings is likely to increase given the improved sentiment in equity markets and the lacklustre performance of physical assets such as real estate and gold during the past year. Moreover, with the expectations of interest rate cuts, traditional life insurance products will become attractive as compared to bank fixed deposits and with optimism in the capital markets, ULIP may gain traction. Therefore, we believe that the insurance sector is poised to grow going ahead and increasing the cap of foreign shareholding will give the required impetus to the sector. Although the entire sector is going to be re-rated from the passing of the Bill, we believe there are some companies that will gain more and our top pick from this sector would be Max India.

LAND ACQUISITION: Amendment Will Boost Economy

Sometimes the medicine administered to cure an illness is worse than the illness itself. This is exactly what happened last year in 2013 when after the growing protests and unrest over land acquisition, the UPA 2 government re-examined the existing land acquisition framework as laid out in the Land Acquisition Act, 1894. In September 2013, a Bill to repeal this Land Acquisition Act was approved by both the houses and was named ‘The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill 2013’ (LARR 2013). The Bill tried to address two critical aspects of land acquisition namely acquisition and rehabilitation & resettlement (R&R).

Some of the important provisions of this Act such as private companies will be required to implement resettlement and rehabilitation in case the land acquired is more than or equal to 100 acres in rural areas and more than or equal to 50 acres in urban area and that every acquisition requires a ‘Social Impact Assessment’ by an independent body in consultation with the Gram Panchayat proved detrimental for infrastructural development and industrialisation. We had in our editorial for the DSIJ issue dated October 6, 2013 clearly pointed out that the Act was bought “to buy votes by selling false hopes of a richer future to our poor farmers”.

Therefore, instead of smoothening and creating the right environment for growth and development, the government created additional impediments and hurdles to acquire land for business. In the first six months of the implementation of the law (the act came into force from January 1, 2014), no land has been acquired for public purpose due to ambiguity in rules. According to some estimates, any enforcement of the new law of land acquisition is likely to cost three times more without adding the cost of rehabilitation and resettlement. Higher land acquisition cost has made many infrastructure projects financially unviable, thereby impacting economic activities.

It is estimated that more than Rs 1 trillion worth of projects including road, coal and steel are stalled due to this Act. As such, it has become highly imperative to amend the Act so that investment activity can pick up. This amendment will help the entire gamut of companies that need to acquire land for their business. It includes companies that are engaged in development of infrastructure, including those engaged in realty and manufacturing. In fact, for realty and infrastructure companies this amendment would be more beneficial since land forms a major portion of the total cost.