The Hindu : `Tardy reforms, labour laws affecting FDI'

Online edition of India's National Newspaper
Monday, Dec 02, 2002

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National

`Tardy reforms, labour laws affecting FDI'

By Our Special Correspondent

NEW DELHI DEC. 1. The slow pace of economic reforms, health of public institutions, the corporate rate tax structure, inflexible labour laws, infrastructure bottlenecks and administrative and legal formalities are some of the major factors responsible for India slipping eight positions to the 15th slot in the list of major attractive foreign destinations in 2001, while China has upstaged the United States to move to the top slot.

According to an analysis carried out by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), corporate tax rates also impact the level of FDI to a particular country.

At present, the tax rate is 36.5 per cent for foreign companies in India. East Asian countries have a much lower tax structure and have been extending tax advantages to companies with foreign holdings.

Moreover, the 36.5 per cent tax rate is the same as the highest marginal income tax rate for domestic companies. The customs, excise and service tax laws should also be made simpler and internationally comparable.

Labour laws in India are perceived to be inflexible as compared to international practices. With regard to labour regulations and hiring and firing practices, India was ranked 50th in the GCR 2000. Trans-national companies are now increasingly demanding flexible management of labour force and the lack of this is hampering FDI flows to India, states the analysis.

Enterprises in India have to abide by the Urban Land (Ceiling and Regulation) Act of 1976. This Act is considered to be archaic as it prevents enterprises from selling surplus land in major cities without the permission of the State Government. The arbitrary provisions of this Act hinder investment in real estate.

While the reforms implemented so far have helped remove entry barriers, the exit barriers have only been partially liberalised.

Tardy progress on this front is largely due to the perception among the political class in India that the entire concept of exit policy is anti-labour.

The ASSOCHAM has pointed out that infrastructure had been identified as a major factor influencing locational differences in FDI flows. Indian States having better infrastructure have attracted more FDI in recent years. Realising this, the Government is now allocating more funding for the development of sound infrastructure facilities.

Enterprises in the country have to fulfil several administrative and legal formalities. This is reflected in the fact that a foreign investor is required to approach as many as 17 district/Central authorities for clearance before a final approval for investment is granted.

These requirements cause enormous delays and reduce financial viability of an investment project. Thus there is an urgent need for simplification of procedures.

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