View: The new age of ‘nuts-and-bolts’ reforms

It has been thirty years since the big-picture reforms started in India with economic liberalisation in 1991. Over the past few years, the government has ushered a series of framework reforms including the Jandhan-Aadhaar-Mobile, Monetary Policy Framework, Insolvency and Bankruptcy Code, Good and Services Tax, Labour and Agriculture reforms. It would not be wrong to say that the government has checked almost all boxes of big-picture reforms, with the one exception of direct taxes. One could argue that some of these are yet to be implemented, but their announcements have been made.

What we are now witnessing is a new set of reforms called the ‘
nuts-and-bolts’ reforms, which are fundamentally different from the framework reforms. The
nuts-and-bolts reforms are targeted reforms, microeconomic in nature with an emphasis on specific sectors or issues. The reforms done in recent times can broadly be categorised into two types. One, sector-specific deregulation and two, improving ease of doing business.

The first set of reforms that target opening up of sectors include–
Simplification of Other Service Provider (OSP) Rules for BPO Sector, Regulations related to Geospatial maps and data, Amendment to Factoring Regulation Act 2011, Bilateral Netting Law, etc.

Under the new OSP rules, the distinction between Indian and international OSPs has been done away with and flexibility has been provided to OSPs (including domestic OSP) to use an EPABX outside India. This has immensely simplified the regulations of BPO sector and reduced their compliance burden. Next, the new Geospatial policy has liberalised the access to geospatial services and data to private players. Earlier, there were significant restrictions on the mapping industry– from creation to dissemination of maps, requiring Indian companies to seek licences and follow a cumbersome system of pre-approvals and permissions hindering innovation in the sector. Now, these have been done away with, opening up new options for the industry. Under the amendment to Factoring Regulation Act, the threshold limit for NBFCs to engage in factoring business has been removed allowing over 9,000 NBFCs as opposed to 7 earlier to participate in factoring. Note that Factoring is a transaction where an entity (like a MSME) sells its receivables (dues from a customer) to a third party (like a bank or NBFC) for immediate fund. This move has the potential to alleviate the cash flow stress faced by MSMEs. Moreover, Bilateral Netting Act, passed last year, allows financial institutions to ‘net’ out their capital exposures against each other, rather than on a gross basis routinely. This will help in development of Credit Default Swap market and reduce the credit risk exposure and systemic risk in the financial market. All of these reforms aim at liberalising specific sectors.

The second set of reforms that aim at improving the ease of doing business include– amendments to the
Insolvency and Bankruptcy Code, 2016; Limited Liability Partnership Act 2008, Taxation Laws Act, etc.

The amendment to Insolvency and Bankruptcy Code introduces an alternate insolvency resolution process for MSMEs, called the Pre-packaged Insolvency Resolution Process wherein the resolution plan is negotiated between debtors and creditors before the formal proceeding start, allowing for efficient and speedy resolution. Further, the amendment to the Limited Liability Partnership Act has decriminalised various offences and introduced the concept of ‘Small LLPs’ under specified thresholds, which will be subject to reduced fee, lesser compliance and smaller penalties in an event of default. In addition, the amendment to Taxation Laws repealed the retrospective taxation on gains arising from indirect transfer of Indian assets prior to May 28, 2012. This will strengthen the trust between the government and the industry and attract more capital investment in India. These reforms combined target improving the ease of doing business in India.

This list of nuts and bolts reforms is not exhaustive. Many other measures such as the Production Linked Incentive Scheme, Amending the Deposit Insurance and Credit Guarantee Corporation, etc. have been undertaken by the central government which is paying systematic attention to such supply-side targeted reforms. By their very nature, the nuts and bolts reforms have a shorter gestation period and are relatively easier to implement. These reforms combined will have far-reaching benefits for the economy which will show up in coming years!

(Aakanksha Arora is Deputy Director and Mahima is a consultant at Department of Economic Affairs, Ministry of Finance. Views are personal.)



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