India enacting ambitious structural reforms but remains challenging place to do business: US Investment Climate Report 2021

The government's earnings from the equalisation levy almost doubled to Rs 2,057 crore in FY21, up from Rs 1,136 crore in FY20.

Despite enacting multiple structural reforms that have sought to rescue economic growth and boost foreign direct investment (FDI), the growth of protectionist measures has stifled trade, the US Investment Climate Report 2021 has said about India.

Multiple moves made by the government in the aftermath of the first wave of COVID-19 will attract foreign direct investment the US said, hailing the new labour codes and the controversial agriculture laws as 'landmark reforms'. It also lauded the government's plans to raise $2.4 billion through its privatisation program saying it would 'dramatically reduce the government’s role in the economy'.

It however remained firm on its overall assessment of the country being a tough place to do business, due to historical factors and a slew of new barriers.

Rising protectionism

"New protectionist measures, including increased tariffs, procurement rules that limit competitive choices, sanitary and phytosanitary measures not based on science, and Indian-specific standards not aligned with international standards," were mentioned by the US report.

However, it stressed that these effectively closed off producers from global supply chains and restricted the expansion in bilateral trade. This is expected to come as a disappointment for policymakers given the government's focus on pulling in global manufacturers based in China and emerge as a hub of multiple supply chains in the post-COVID era.

As regards exports, the report mentioned that the Reserve Bank of India requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors. This includes agriculture, small and medium enterprises, export-oriented companies, and social infrastructure.

Old grievances

The report also said that some government policies are written in a way that can be discriminatory to foreign investors or favour domestic industry. It said approval in 2021 for higher FDI thresholds in the insurance sector came with a requirement of 'Indian management and control.'

It also sharpened its attack on the India's equalisation levy - also known as google tax - which has applied to non-resident e-commerce operators since 2017. While it applied only to digital advertising services till 2019-20 at the rate of 6 percent, the government widened the scope to impose a 2 percent tax on non-resident e-commerce players from 2020-21.

"Neither the original 2017 levy, nor the additional 2020 two percent tax applied to Indian firms," the report has said. It added that while the tax had the aim of “equalizing the playing field” between resident service suppliers and non-resident service suppliers, its provisions did not provide credit for taxes paid in other countries for services supplied in India.

The government's earnings from the equalisation levy almost doubled to Rs 2,057 crore in FY21, up from Rs 1,136 crore in FY20.

The report has also mentioned that the government's decision to mandate all payment system providers to store their Indian transaction data only in India, came without prior stakeholder consultation.

According to the State Department, the Investment Climate Statements address market conditions, including issues critical to maintaining high standards, such as labor protections, environmental considerations, and responsible business conduct.