Improving Cost Competitiveness in India

The past decade has seen improvements in the ease of doing business in India. However, high costs related to credit, land, inputs, logistics, and compliance continue to erode competitiveness. A comparison with countries like Vietnam and China is necessary to address these structural cost disadvantages.

Cost of Capital

• India's cost of capital is higher than China, Vietnam, and other economies.
• Domestic private sector credit stands between 50% and 55% of GDP, far below the global average of 148%.
• There's a significant opportunity for credit growth; expanding and lowering credit costs is crucial.
• Large government borrowing absorbs domestic savings, increasing capital costs. A phased SLR reduction from 18% to 10% could free up capital and decrease borrowing costs.
• The RBI and DFS should simplify banking processes, transitioning to digital with a risk-based approach for enhanced safety and compliance.
• Credit instruments need evolution to reflect changes in the work landscape, utilizing data from GST, UPI, and OCEN.

Input Costs

• Power costs are high due to cross-subsidization; this must be phased out with better-targeted beneficiaries.
• Power prices should reflect actual delivery costs.
• India needs to import to export and address issues like inverted duty structures on capital and intermediate goods.
• Foreign investments in technology should be encouraged by revisiting 'Press Note 3' and adopting a risk-based screening process.

Logistics Cost

• Logistics costs have reduced from 13-14% to about 8%.
• Capex-GDP is maintained at 3.1%, with effective capex at 4.4% of GDP.
• The National Monetisation Pipeline (NMP) 2.0 envisions ₹16 lakh crore in monetisation value.
• Collaboration with MDBs, governments, and the private sector is needed to derisk PPP instruments through credit enhancement and risk-sharing mechanisms.
• Port and customs delays add to business costs; a move towards a trust-based, tech-enabled customs system is essential.

Land Acquisition

• Land markets are fragmented with unclear pricing and insecure tenure.
• Standardised land tenure models are needed for greater predictability.
• Land governance reforms should be implemented within a cooperative federal framework.

Compliance Costs

• High compliance costs discourage MSMEs from scaling and formalizing.
• Regulations should move towards a proportionate, risk-based model to reduce the burden on MSMEs.
• Periodic reviews and sunset clauses should be introduced to prevent regulatory accumulation.

India must transition from just improving the ease of doing business to lowering the cost of doing business to achieve sustained growth of 8% or more, enabling firms to expand capacity, win export orders, and create more formal, high-productivity jobs.