Policy Reforms that Transformed India’s Business Environment

Relevance: GS Paper 2 (Government Policies and Interventions); GS Paper 3 (Indian Economy, Growth, Development, Employment, and Investment Models).

Why in News?

The Government of India recently released a comprehensive report highlighting the success of its decade-long regulatory reforms aimed at improving the Ease of Doing Business (EoDB). The data shows a massive 27% increase in active registered companies, growing from 1.55 lakh in 2020–21 to 1.98 lakh in 2025–26.

Background and Context

Over the past decade, India has strategically focused on becoming an emerging global business powerhouse. The government launched an ambitious reform program to remove redundant compliances, streamline procedures, and shift towards a trust-based governance model. This is reflected in the RBI’s Business Expectations Index, which has consistently stayed above the neutral benchmark of 100 through FY 2024-25 and Q2 of FY 2025-26, indicating highly positive industry sentiment.

Government’s Strategic Focus on Ease of Doing Business:

The transformation of the business environment rests on four critical pillars:

Institutional Reforms: Building ecosystems for startups and MSMEs.
Regulatory Simplification: Reducing the “Compliance Burden.”
Financial & Tax Reforms: Ensuring tax certainty and credit flow.
Trade Facilitation: Modernizing customs and digital trade.

1. Institutional Support for Businesses

The government has created structured mechanisms to help businesses access capital and protect their operations.

Start-up Ecosystem: Under the Start-Up India initiative, eligible companies receive recognition from the Department for Promotion of Industry and Internal Trade (DPIIT). This provides them with tax incentives and fast-tracked Intellectual Property Rights (IPR) processing. By February 2026, India had over 2.16 lakh DPIIT-recognised start-ups.
Credit Access for MSMEs: Credit Guarantee Schemes provide collateral-free loans to smaller businesses. For example, the Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE) provides support up to ₹10 crore, while the scheme for start-ups covers up to ₹20 crore.
Digital Loan Approvals: Public sector banks have adopted a Credit Assessment Model (CAM). This system uses digital data to automatically evaluate and approve loans for Micro, Small, and Medium Enterprises (MSMEs), speeding up the funding process.
Insurance Sector Reforms: The Sabka Bima, Sabki Raksha Act, 2025 increased the Foreign Direct Investment (FDI) limit in insurance to 100%. It also reduced the capital requirement for foreign reinsurers from ₹5,000 crore to ₹1,000 crore, ensuring businesses have better access to risk protection.

2. Streamlining Rules and Decriminalisation

A major focus of the reforms has been to reduce the fear of severe legal action for minor business mistakes, promoting a system of trust.

The Jan Vishwas Act: This legislation changes the punishment for minor, technical rule violations from criminal penalties (jail time) to financial fines. The Jan Vishwas Act, 2023 decriminalised 183 provisions. The 2025 Bill proposes to amend 355 more provisions, reflecting the principle of “Minimum Government, Maximum Governance”.
Reducing Compliance Burden: Through the Regulatory Compliance Burden (RCB) initiative, the government has eliminated over 47,000 unnecessary compliances across various departments to save time for business owners.
Consolidating Financial Rules: The Reserve Bank of India (RBI) combined over 9,000 different circulars into 238 clear Master Directions. Similarly, the Securities Markets Code (SMC), 2025 merged three older laws (including the SEBI Act) to govern the stock markets more efficiently.

3. Trade Facilitation and Taxation

Simplifying how businesses pay taxes and trade across borders is essential for economic growth.

Trust-Based Customs: The government introduced the Authorised Economic Operator (AEO) system for trusted importers. It allows a deferred duty payment mechanism (‘Clear First-Pay later’). The Union Budget 2026-27 extended this payment period from 15 days to 30 days for Tier 2 and Tier 3 AEOs, which facilitates just-in-time manufacturing.
Minimum Alternate Tax (MAT): MAT ensures that profitable companies pay a baseline tax. Recent reforms reduced the MAT rate from 15% to 14% and exempted non-residents who opt for presumptive taxation.
GST 2.0: The Goods and Services Tax was upgraded to a simpler two-rate structure. This reform corrected the inverted duty structure (where raw materials are taxed higher than the final product) in sectors like textiles. Due to simpler rules, registered GST taxpayers increased to over 1.6 crore by January 2026.
Foreign Investment: Individuals outside India can now invest up to 10% in listed Indian companies through the Portfolio Investment Scheme (PIS), up from the previous 5%.

4. Labour Laws and Corporate Insolvency

Clear rules regarding hiring workers and managing business failures are crucial for industrial stability.

Labour Codes: The government combined 29 central labour laws into four simplified Labour Codes. These codes introduce a single electronic registration system and increase the threshold for retrenchment (firing workers) or factory closure to establishments with 300 workers, giving factories more operational flexibility without needing prior government approval.
Insolvency and Bankruptcy Code (IBC), 2016: The IBC provides a time-bound process to resolve failing companies (corporate debtors). If a company cannot be rescued, its assets are sold to repay banks. By September 2025, creditors had recovered ₹3.99 lakh crore, which is about 170% of the liquidation value of those companies. This strengthens the overall credit ecosystem.

5. Quality Standards for Manufacturing

Quality Control Orders (QCOs): To make Indian products globally competitive and safe for consumers, the government issues QCOs. By December 2025, mandatory quality standards covered 723 products, ensuring early detection of defects and restricting the sale of sub-standard goods.

Challenges in implementation reforms:

State-Level Execution: Uneven adoption of central reforms (such as the four Labour Codes and the RCB+ initiative) by state governments delays true ease of doing business across the country.
Digital Divide for MSMEs: Small businesses face hurdles in rapidly adapting to new, technology-heavy platforms like the Customs Integrated System (CIS) and the Credit Assessment Model (CAM).
Transition Friction: Merging old laws into new frameworks, such as the consolidated Securities Markets Code (SMC), 2025, creates temporary compliance confusion for companies.
Balancing Quality and Capacity: Enforcing strict standards through the rapid expansion of Quality Control Orders (QCOs) (now covering 723 products) puts heavy compliance pressure on smaller manufacturers.
Insurance Penetration: Despite allowing 100% FDI, a massive “protection gap” still exists in extending insurance coverage to rural areas and the unorganized sector.
Taxation Anomalies: Continuous monitoring is required to ensure the inverted duty structure (where raw materials are taxed higher than finished goods) is fully resolved under GST 2.0.

Way Forward

State-Level Execution: Ensure all State governments actively adopt Central reforms (like the Labour Codes and RCB+) for uniform business rules across India.
Digital Handholding: Provide targeted training to help small MSMEs adapt to new technology platforms like the Customs Integrated System (CIS) and the Credit Assessment Model (CAM).
Balanced Regulation: Maintain continuous dialogue with industry bodies before implementing new Quality Control Orders (QCOs) to ensure they do not harm MSME production.
Capacity Building: Strengthen institutional capacity to smoothly transition businesses into the newly consolidated laws, such as the Securities Markets Code 2025 and GST 2.0.

Conclusion:

India’s transformation into a global business powerhouse is anchored in structural reforms across taxation, finance, labour, and trade. By prioritizing trust-based governance, decriminalization, and digital integration, India is not just enhancing the Ease of Doing Business, but successfully shaping a resilient and future-ready economy.

UPSC PYQ

Which one of the following is not a sub-index of the Ease of Doing Business Index prepared by the World Bank?(UPSC 2019)

A. Maintenance of law and order

B. Paying taxes

C. Registering property

D. Dealing with construction permits

Answer: A

Explanation

The Ease of Doing Business Index measured how easy it is to start and operate a business in different countries. It was based on several sub-indicators related to business regulations.

Important sub-indices included:

Starting a business
Dealing with construction permits
Getting electricity
Registering property
Getting credit
Protecting minority investors
Paying taxes
Trading across borders
Enforcing contracts
Resolving insolvency

Option A – Maintenance of law and order

This is not a component of the Ease of Doing Business Index.
The index focuses on regulatory and procedural aspects of business operations, not general law-and-order conditions.

CARE MCQ

The ‘Sabka Bima, Sabki Raksha (Amendment of Insurance Laws) Act, 2025’ introduces which of the following key reforms?

A. It restricts Foreign Direct Investment (FDI) in the insurance sector to 74% to protect domestic companies.

B. It increases the Foreign Direct Investment (FDI) limit in the insurance sector to 100%.

C. It lowers the IRDAI approval threshold for share transfers from 5% to 1%.

D. It increases the Net Owned Fund requirement for foreign reinsurers to ₹5,000 crore.

Answer: B

Explanation

The Sabka Bima, Sabki Raksha (Amendment of Insurance Laws) Act, 2025 aims to expand insurance coverage and strengthen the insurance sector in India.

Option A – Incorrect

The reform does not restrict FDI to 74%.
Instead, it expands foreign investment limits.

Option B – Correct

The Act proposes to increase the FDI limit to 100% in the insurance sector.
The objective is to bring greater capital inflows, improve insurance penetration, and bridge the protection gap in India.

Option C – Incorrect