The 21st century was marked with measures to propel India’s business and economic reforms, pace for which was set in the early 1990s.
It triggered the process with a free trade agreement (FTA) with Thailand in 2003, followed by a Comprehensive Economic Cooperation Agreement with Singapore in 2005.
Under the aegis of Foreign Trade Development and Regulation(FTDR) Act, 1992, enacted with a view to augmenting international trade, rolled out foreign trade policy (FTP) with selective incentive regime for targeted trades.
Qualitative easing of trade barriers was ably complemented by exchange control reforms in the form of Foreign Exchange Management Act (FEMA) of 2000 replacing archaic law of 1973.
The Fiscal Responsibility and Budget Management Act of 2003 (implemented in 2004) marked a significant step in Parliament’s resolve to ensure fiscal discipline. After giveaways of 2008-10, the Act was amended in 2012 with revised goals, focusing on effective revenue deficit and medium-term expenditure framework.
India embraced reform of competitive policies in line with application of World Trade Organization (WTO) principles. Whilst the Monopolistic and Restrictive Trade Act (MRTPA) which had been in force since 1969, as mandated by Article 38 and 39 — part of Directive Principles of States — stood in the way of prompting market-force based competitive business practices.
In a major policy shift from curbing monopolies, to promoting competition, a new Competition Act was enacted in 2002, to replace MRTP Act. The Competition Commission of India and Competition Appellate Tribunal were instituted as apex bodies to oversee effective implementation of the law.
Rush of foreign investments followed a liberal approach to foreign direct investment (FDI) policy, which catapulted India to double digit billion dollar FDI growth in past decade ($30 bn+). Fortunately, progressive liberalisation of FDI has sustained since then, including the recent policy move to permit composite FDI caps across sectors, and allowing FDI up to 49 percent (under automatic routes) in most sectors except a few which require protection due to socio-economic reasons.
Permitting FDI in newer entity forms, i.e. LLPs, AIFs, REITs and InVITs were bold policy moves initiated by successive governments, and hopefully shall unleash the growth potential of capital starved India in key sectors, particularly telecom, infrastructure and real estate.
The alter ego of FDI policy — i.e., Monetary Policy of the Reserve Bank of India — has undergone periodic review to level the field for investors in debt instruments; recent policy moves to allow rupee denominated bonds (masala bonds) and overseas borrowings in rupees provide much needed natural hedge from Forex risk to Indian companies, and reduces the end-use arbitrage vis-à-vis equity instruments.
Tax policy reforms have been at the forefront, though more on policy and less on administration. Finance Act 2001 introduced the transfer pricing rules prescribing arm’s length standards for cross border transactions.
A series of tax incentives were rolled out in the past decade targeting high growth economic sectors, including special economic zones described as a wonder baby, pushing exports and accentuating employment, particularly in the area of R&D, BPO and KPO services.
In 2005, India embarked on an important indirect tax reform by replacing archaic sales tax regime with contemporary VAT regime, signalling a move towards partial VAT at the state level and gave confidence to the Centre to announce a nationwide GST, which is currently mired in political battle. During the same period, service tax legislation was broad based and eventually all services (barring negative list) were covered by 2013.
In recent years, India has embraced a contemporary and best practice-driven tax policy stance. In the past decade, India has been a significant contributor at multilateral forums (such as OECD, UN) in the global tax policy arena. Historically, India assumed an observer status at the OECD’s committee on fiscal affairs, in the wake of OCED’s project on ‘Preventing harmful tax practices’.
More recently, the OECD and G20 led BEPS project witnessed India’s participation as an associate member, i.e. at par with OECD member countries. This by itself underlines the distance India has come in the global political order in shaping tax policy.
A host of other legislative and policy initiatives are in works — start-up policy; draft bankruptcy code; ordinance to modernise arbitration and conciliation legislation; setting up of commercial courts, India’s policy on permitting arbitration in bilateral tax treaties, implementation of financial sector legislative reforms, etc. Clearly, the executive and legislative have their task cut out — only if economic wisdom prevails over political missions.