Appraising India’s Policy Response for COVID-19 Relief

India’s $265 billion COVID relief package has been criticized by many experts as falling short of expectations. In a speech before releasing the package, the Indian Prime Minister declared that the package will focus on land, labor, liquidity, and laws. The majority of the discussion has been around the proportion of fiscal and liquidity relief without much attention to the land, labor, and policy reforms.

The purpose of this article is to appraise the changes in laws announced (to the exclusion of economic measures) post COVID to address the slowing growth and to project India as an investor and corporate-friendly destination.

Through the COVID relief package, the central government took the opportunity to push through long-pending changes in controversial laws. Here are the major steps that are taken by the government to date.

Enhancing the definition of MSMEs

Through an amendment to the Micro, Small, and Medium Enterprises (MSME) Development Act, 2006, the government enhanced the investment and turnover limits to define MSMEs, a move critical to the economy where 29% of GDP (as of 2019) is contributed by the sector.

The proposed change is a welcome step and will propel the MSMEs to grow in size. They will continue to reap the benefits which come with the MSME tag even after growing beyond the thresholds set earlier. It will encourage businesses to combine operations under one single entity rather than splitting the business across entities to avoid losing the MSME tag.

Defense Sector Reforms

In a bid to reduce imports and augment exports of defense equipment and promote indigenous defense production, the government made a slew of reforms:

1. Increased Foreign Direct Investment(FDI) limit in the defense sector from 49% to 74% under the automatic route
2. Ban on imports of certain weapons and platforms to be notified each year
3. Corporatization of Ordnance Factory Board, a nearly 200-year-old organization that operates 41 ammunition production facilities across the country
4. A separate budget for procurement of India-made defense equipment
5. Procedural changes to relax the conditions under the General Staff Qualitative Requirements (GSQRs) through which the armed forces define criteria to procure platforms and hardware

The defense sector related announcements will be majorly pushed through as changes in the Industries (Development & Regulation) Act, 1951 (licensing of defense equipment manufacturing), the Arms Act, 1959 (manufacture of small arms and ammunition) and the Défense Procurement Procedure (DPP) Manual.

Through these regulatory changes, the government wants to attract global defense equipment makers. A 74% FDI limit guarantees the protection of the IP of foreign manufacturers. At the same time, the easing out of the GSQRs will ensure that defense procurement is transparent and fast. The corporatization of the OFB will hopefully result in augmentation of India’s defense exports, which is estimated to be a paltry 0.2% of the global arms market.

On the flip side, there are several lacunas in the current policy framework. 100% FDI limit is available through the government approval route but foreign players have not shown any interest in availing it in the past because of uncertainties in government policies, lack of large orders, and long payment cycles. Private sector participation from the Indian domestic sector is required to attract foreign investors to set up operations in India. This is possible only when the Government can ensure that large contracts are awarded under “Make” and “Buy and Make” procurement categories.

Further, the corporatization of OFB is not a solution in itself. A name change is no guarantee to the change in operations of the OFB factories. The government instead need to add key stakeholders from the Indian armed forces on the board of the OFB to provide critical inputs on equipment R&D and expedite the procurement process.

Labor Reforms

India has moved from one extreme to the other with respect to labor reforms post COVID. In its quest to incentivize economic activity, the government seems to have started a race to the bottom of the labor standards in the country. Labour laws in India is a complex matter with around 50 central laws and over 200 state laws. So far, 6 states have materially diluted their labor laws and Uttar Pradesh (home to over 200 million people) has completely exempted labor laws for the majority of the industry for 3 years. At least seven states have raised maximum working hours from 48 to 72 a week.

Before COVID, the central government had a vision of simplifying labor laws into four codes around wages, industrial relations, working conditions, and social security and welfare. This was a step in the right direction but the sudden shift with suspension and dilution of labor laws is regressive and will allow exploitation of labor and a decline in wages. The government could have shared the wage bill with the private sector instead of such a drastic step.

Further, the government could have made selective amendments to the central laws that are critical to attracting foreign investments. The temporary nature of these suspensions and relaxations are disliked by investors and labor unions alike. Foreign or domestic investors don’t like uncertainty. To deliver on its promise of labor reforms, the government must proactively work on the proposed four codes for labor laws to bring much-needed clarity for all stakeholders.

Agriculture Reforms

The government announced that it will amend the Essential Commodities Act, 1955 to Act deregulate six categories of agricultural foodstuffs: cereals, pulses, edible oils, oilseeds, potato, and onion. As part of the proposed changes, the stock limits on these commodities will be removed except in times of a national calamity or a famine. Further, stock limits will also not apply to food processors or value chain participants and exporters. In 2019, the Economic Survey called it an “anachronistic legislation” that often leads to harassment of traders in the name of regulations.

The central government is also bringing in federal law to break the monopoly of the Agricultural Produce Market Committee (APMC) mandis (wholesale food markets), which so far have negatively impacted the farm trade by imposing restrictions on where farmers can sell and to who under the APMC Acts, in various states. The proposed law is a major enabler in freeing up agriculture marketing from the shackles of regulations, a phenomenon unheard of in developed markets.

Both these amendments are bound to encourage investments in warehousing, food processing, and post-harvest infrastructure. The government seems to have hit the nail on its head with the agriculture reforms. There is an additional requirement to encourage corporate houses to participate in the agriculture sector and further push the sector toward the organized sector.

Privatization

In a major push to privatization, the government of India is all set to notify a list of strategic industries in which a maximum of four public sector undertakings will coexist with private sector companies. Further, subject to feasibility, all PSUs will be privatized in non-strategic sectors. Power distribution companies will also be privatized in the union territories of India. Further, the government is going for commercial mining of coal and boosting private investments in the mining sector.

While all the changes relating to privatization have been welcomed by all stakeholders, the key criticism has been the lack of immediate relief to key sectors like aviation, hospitality, public sector banks, manufacturing, etc. Further, India has had a shoddy track record with its privatization policy execution. The government needs to take a case-by-case approach to all PSUs and work on the modalities of each deal. Further, a few deals such as in the oil marketing sector, are at risk of getting under-valued given the economic uncertainty at the moment.

Corporate Reforms

Through amendments, notifications, and ordinances, the government has made changes to the Companies Act 2013 and The Insolvency and Bankruptcy (IBC) Code, 2016. The key changes are:

1. As many as 58 sections in the Companies Act are likely to see some changes as the government intends to decriminalize violations under the Companies act.
2. An amendment would be made in Section 23 of the Companies Act for inserting an enabling provision to allow for direct listing of securities by Indian public companies in permissible foreign jurisdictions.
3. Through the amendment of the IBC Code, the government has inserted section 10A which practically suspends the provisions for the pleas for insolvency under section 7 (financial creditors), 9 (operational creditors), and 10 (corporate debtor) to prevent companies from being pushed to insolvency for six months that can be further extended by another six months.

These reforms are well intended and serve the immediate purpose of increasing the ease of business by reducing the fear of jail term, providing avenues for foreign capital to the private sector, and keeping the insolvencies in check.

On the flip side, they remain far from being holistic. Decriminalization of corporate laws is not a new topic and something that the government had pushed and successfully achieved partially in the past as well. It remains to be seen if the government can completely decriminalize the act and stop the harassment of entrepreneurs and corporate executives. Further, the private sector is in the dire state looking for immediate capital infusion and government support. Raising money in such uncertain times especially for troubled companies is a tall order in any jurisdiction. Moreover, insolvency suspension for a year is only pushing the problems to the next fiscal. The financial health of the companies, consumers, workers, and bankers, involved in transactions with troubled companies will also deteriorate as they will be denied the right to recover their dues.

In nutshell, regulatory reforms by the Indian government as part of COVID relief are far from comprehensive and holistic. There is a reason to cheer the steps in the right direction but a lot needs to be done to make an impact and change the status quo.

This article was first published on Jurist