India’s Next Reform: Lowering Cost of Doing Business in India

Syllabus: GS3/Economy

Context

• India needs to shift focus from procedural reforms to cost rationalization, as it faces high business costs impacting competitiveness. Addressing high structural costs like credit, land, inputs, logistics, and compliance expenses is crucial for countries like India.

About Cost of Doing Business in India

• Cost of doing business refers to the total expenses incurred by firms in production and operations, including cost of capital; land and labour costs; input and power costs; logistics and supply chain costs; and compliance and regulatory burden.
• India has improved procedural ease, but structural cost disadvantages persist, affecting global competitiveness.

Key Determinants

• Cost of Capital: India’s credit-to-GDP ratio (~50–55%) is far below global average (~148%).
  • High government borrowing crowds out private investment.
  • Higher interest rates compared to China/Vietnam.
• Input Costs: High electricity tariffs due to cross-subsidization.
  • Inverted duty structures increase the cost of intermediate goods.
  • Limited access to advanced technology inputs.
• Logistics Costs: Logistics costs reduced from ~13–14% to ~8% of GDP, still higher than global benchmarks.
  • Port delays, customs inefficiencies, and uncertainty persist.
• Land Acquisition: Fragmented land markets, unclear titles, and disputes increase costs.
• Compliance Costs: Heavy regulatory burden, especially on MSMEs; and lack of proportional, risk-based regulation.

Related Issues & Concerns

• Structural Cost Disadvantage: India’s firms face higher input and financing costs, reducing export competitiveness.
• Logistics & Trade Inefficiencies: Delays and unpredictability in customs increase transaction costs.
• Credit Constraints: Limited financial deepening restricts MSME growth.
• Regulatory Overload: Excessive compliance discourages formalization.
• Land & Infrastructure Bottlenecks: Project delays increase financing and operational costs.

Key Government Efforts

• Union Budget 2026-27: It reinforces Ease of Doing Business as pillar of growth and development, while focusing on digitisation, tax certainty, investor access and litigation reduction.
  • Focus on digital trade facilitation by single, interconnected digital window for custom clearance and Custom Integrated System.
  • Exemption from Minimum Alternate Tax (MAT) to all non-residents who pay tax on presumptive basis.
  • Trusted importers recognised in risk systems, reducing physical verification and enabling factory-to-ship clearance.
• National Single Window System (NSWS): It guides in identifying and applying for approvals according to the business requirements.
  • It integrates approval processes across 32 Central Departments and 32 State Governments, and has access to over 698 central and 7435 state approvals.
• Digital financial ecosystem like UPI, GST data, Open Credit Enablement Network (OCEN) for credit access
• PLI Schemes to boost manufacturing competitiveness.
  • These reforms have improved processes, but cost reduction remains incomplete.
• Ease of Doing Business reforms (digitization, single-window systems)
• National Infrastructure Pipeline (NIP) and Gati Shakti
• National Monetisation Pipeline (NMP) (₹16 lakh crore target)
• GST implementation  for reduced cascading taxes

How India Can Compete with China & Vietnam?

• Lower Cost of Capital: Reduce Statutory Liquidity Ratio (SLR), improve credit access; and use fintech (GST, UPI data) for risk-based lending.
• Rationalize Input Costs: End cross-subsidization in power; correct inverted duty structures; and encourage technology-linked FDI.
• Improve Logistics Efficiency: Shift to tech-enabled, trust-based customs; reduce dwell time at ports; and expand multimodal transport.
• Land Reforms: Standardised leasing models; and clear land titles and faster dispute resolution.
• Regulatory Reforms: Introduce risk-based, proportionate regulation; and sunset clauses to reduce regulatory burden.

Way Forward: From Ease to Cost Competitiveness

• Benchmark India’s cost structure with China, Vietnam, and ASEAN economies.
• Focus on factor market reforms (land, labour, capital).
• Promote export competitiveness through cost efficiency.
• Encourage public-private partnerships and institutional reforms.

Learn from Vietnam & China

• Vietnam: Export-oriented policies, efficient logistics, FDI integration
• China: Scale economies, infrastructure depth, cheaper credit

Conclusion

• India has successfully improved the ease of doing business, but the next phase requires reducing the cost of doing business.
• A competitive cost structure is essential for boosting exports, expanding manufacturing, creating formal employment, and achieving sustained economic growth of more than 8%.
• Thus, cost competitiveness will define India’s global economic position, along with procedural ease.

Source: ET