AIAI Memorandum to the Hon'ble Prime Minister

At the outset, we extend hearty congratulations to Hon’ble Prime Minister and his team for receiving the mandate to form government for the third time in a row. We are confident that under your leadership India will become the 3rd largest economy well before 2030 and will lay strong foundation to attain ‘Developed Economy’ status by 2047. In the last 10 years, your government has introduced several reforms on taxation, foreign direct investment, labour laws, land acquisition, banking laws, disinvestment and so on to promote private investment. Your government has also repealed thousands of obsolete laws and regulations and decriminalized several provisions under the Companies Act to improve ease of doing business and reduce compliance burden.

At the same time, industry still faces several challenges in doing business, complying with central, state and local government regulations. This increases the cost of doing business, especially for MSMEs who operate on thin margin and hence they are unable to compete in the global market. It is high time that India focuses on reducing cost of doing business to become a globally competitive economy.

The new government may continue with its reform agenda especially in areas such as labour laws, environmental clearances, single window clearance and investment aftercare to improve attractiveness of investing in the country. Also, there is a need to continue public investment in infrastructure, ports, railway and road connectivity, industrial corridors to reduce logistics cost.

MSMEs and agriculture sector need special attention as they support substantial share of the workforce outside the formal sector. We need to promote research & development and investment in agriculture sector to enhance productivity, diversify cropping pattern and increase farm productivity.

The major cause of subdued private consumption in recent months is the slow pace of growth in rural wages. The rural economy needs substantial support by increasing investment in agriculture, post-harvest infrastructure, skill development, food processing parks, rural roads and power connectivity. These measures will increase employment opportunities in rural areas and stimulate growth in rural wages.

Reserve Bank of India has declared a windfall dividend payout of Rs. 2.1 lakh crore to the central government for FY24, which has given the government enough fiscal headroom to streamline direct taxation and reduce taxes, wherever possible to support private consumption.

Improve Skilling and Employability: The government needs to improve the effectiveness of its skill development programs by upgrading vocational training institutes, Industrial Training Institutes and effective implementation of the Apprenticeship program. Infrastructure in training institutes needs to be upgraded by sourcing funds. Reduce Logistics Cost: The cost of logistics in India ranges from 8.9% to 14%, according to different estimates. Indian industry faces higher logistics cost compared to countries such as China, which are its principal competitors in the global market. Women-led economic development: The new government may provide renewed thrust on bridging gender gap in entrepreneurship, manufacturing, research & development and other sectors. Women entrepreneurs need timely access to finance, mentorship, skill development, acceleration and incubation centers to scale up their business. Establish MSME Clinic: The new government may establish MSME clinic to turnaround sick MSME units that have the potential to grow if provided with adequate funding and managerial support.  Many MSME units in the country have become sick in the aftermath of pandemic, which need to be revived through appropriate financial and business support.  MSME Credit: The new government may convert SIDBI into a full-fledge commercial bank to promote credit to the MSME sector. According to RBI’s UK Sinha Committee report, Indian MSMEs face credit gap to the extent of Rs. 20-25 lakh crore and they mostly rely on informal sources such as moneylenders or microfinance institutions that charge hefty interest rate. Lack of finance at affordable interest rate affects the competitiveness of local MSMEs. Electricity reform: Electricity is the critical raw material for industry. Many state power distribution companies are coping with huge debt burden and weak financial position. Indian industry is facing high power tariff due to cross-subsidization of electricity for household sector Weak financial position of state distribution companies and high technical and commercial losses are other reasons for the hefty tariff being imposed in industrial consumers. The government may upgrade transmission and distribution infrastructure through smart grid, smart metering and advanced technologies for monitoring and theft evasion to reduce losses and improve operational efficiency of state distribution companies

Tax Reforms: The government may amend direct and indirect taxes to reduce disputes, ambiguity and pendency of cases. The government may simplify the GST system by removing the multiple rate and slab structure to two rates or a single rate of 12% as suggested by the 13th Finance Commission. The government may also consider establishing an independent GST Secretariat for the GST Council, which is the highest decision making body of the GST. Such an independent GST Secretariat will take decisions by balancing the interests of both the central and state governments It is high time the government brings power, fuel and other left over sectors under the GST regime to enable seamless flow of input tax credit, reduce complexity and achieve the goal of ‘One Nation One Tax’. In the direct tax system, there is a need to simplify the capital gains tax structure as currently there are multiple rates for different asset classes and the definition of short term and long term capital gains also differs according to asset classes. The government may also simplify the Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) provisions to reduce ambiguity, promote ease of doing business and reduce chances of disputes. Specifically, the TDS provisions need to be simplified as currently, there are 33 sections for 36 types of transactions with multiple TDS rates. The government may reduce the number of TDS slabs to reduce ambiguity, improve ease of filing taxes and reduce disputes. The government may set up a committee to reform the direct taxation system or implement the recommendations of the earlier committees on Direct Tax Code

Tax devolution to municipal bodies: India is a rapidly urbanizing society and we need to empower our municipal bodies with funds to upgrade civic infrastructure. Urban municipal bodies and Panchayati Raj institutions are starved of much needed funds to implement local infrastructure development. Therefore, the government may amend the Constitution to create a consolidated fund for municipal bodies and transfer tax revenues to these local bodies. There is also a need to reform GST laws to allow devolution of GST proceeds to the local government bodies. Reduce import dependence for energy: India’s substantial dependence on imports for crude oil and natural gas exposes it to the risk of high trade deficit, currency volatility and macroeconomic vulnerability. Currently, our economy is largely run by fossil-fuel based energy sources, which needs to be corrected to reduce our dependence on crude oil and hence import demand There is a need to reduce dependence on imports for crude oil by transitioning to renewable energy, electric vehicle, green hydrogen and other non-conventional energy systems

Expedite passage of pending bills: The government may expedite the passage of outstanding bills such as the Insurance Amendment Bill, National Financial Information Registry Bill, Insolvency and Bankruptcy Code Amendment Bill, Drugs, Medical Devices and Cosmetics Bill and so on. Specifically, the government may amend the Insurance Act, 1938 to allow composite licensing for insurance companies. Similarly, there is a need to amend the Insolvency and Bankruptcy Law to provide enabling provisions for cross-border and group insolvency resolutions. Finalise rules for Digital Personal Data Protection Act: The Digital Personal Data Protection Act, which was passed last year, will have impact on most of the services sectors such as e-commerce, healthcare, financial services, telecommunications etc. The Act was passed to protect personal data of individuals and bring about trust and transparency in the operation of companies handling personal sensitive data. Industry players, including potential foreign investors in these sectors, are awaiting the notification of rules under this Act to align their processes, systems and technologies in accordance with the provisions of this law. The government may notify and implement the rules under this Act. Higher Education Reforms: It is welcome that the government has introduced New Education Policy and also replaced the obsolete Indian Medical Council Act of 1956 with a new law in 2019. At the same time, the government may modernize the archaic UGC Act of 1956 that governs higher education institutions and provide greater autonomy to leading universities and colleges to collaborate with foreign universities and get funding to upgrade infrastructure. Privatisation: The government may ensure effective implementation of the Public Sector Enterprise (PSE) Policy 2021 by privatizing most of the state-run units expect a hanful of firms in the four strategic sectors identified under the policy. There is also a need to steup up privation of some of the 12 public sector banks to improve performance and demonstrate the government’s commitment of ‘minimum government, maximum governance’. Revamp the SEZ policy: Clearance from SEZs should be brought at par with EOUs where the import duty is payable on imported raw material used in finished goods and not on finished product itself. It is the need of the hour to liberalise the current SEZ policies to provide ease of operation and exit, procedural relaxations in clearance of goods and uniformity in administrative and financial aspects across all SEZs

Strengthen Industry-Academia collaboration: The central and state governments may promote industry-academia collaboration by encouraging industries and corporate houses to tie-up with rural agriculture universities and other rural education institutions. Such an industry-academia collaboration should lead to upgradation of academic curriculum to meet the emerging skill needs of the industry, training faculty of academic institutions, enhancing the research capability of education institutions and providing industry exposure through internships to students.   Facilitate Technology Transfer: MSMEs do not have the capacity to invest in research, testing of new product prototypes and product innovation. Therefore, research institutions such as IITs and corporate houses need to be encouraged to transfer their commercially proven technologies and product prototypes to MSMEs at reasonable cost. The state government or central government may facilitate this transfer of technology by subsidizing the cost involved in this. This will be mutually beneficial for MSMEs as well as to the research institutions or large corporates as MSMEs benefit from access to these technologies and research institutions/large corporates can benefit from large scale commercialization of these technologies. Address agrarian distress: India’s agriculture sector is facing new challenges from erratic climatic conditions, depleting water resources, poor value addition, declining quality of soil and so on. Even though the Indian economy is expected to grow 7.6% in FY24, the agriculture growth is likely to be low at 1.6% erratic climatic pattern. The low agriculture growth has affected farmers’ income and hence rural consumption. Falling agriculture production is a cause of worry because 46% of labour force depend on this sector for their livelihood. The real rural wages is estimated to have fallen in 25 of the 27 months upto February 2024. Falling rural wages and agrarian challenges will hurt rural consumption and hence overall economic growth. Therefore, government may take steps to address the long term challenges in this critical sector, which is the backbone of the Indian economy. In order to address weakness in the agriculture sector, India needs a renewed green revolution with focus on farm and fertilizer subsidy reform, introduction of precision agriculture, re-evaluation of trade policy for agriculture goods, increase in investment, R&D in agriculture sector, crop diversification. There is also a need to build climate resilience in agriculture sector through widespread adoption of eco-friendly farm practices, efficient use of fertilizers, water and adoption of high quality seeds.    The government may also conduct the next socio-economic caste census, which is long overdue, as the last census was conducted in 2011. This census is conducted jointly by the central and state governments and this data is used to identify economically backward households for targeting government subsidies. Lack of up