Lowering India’s Cost of Doing Business: SLR Rationalization, Credit Flow, and GST Compliance Realities in Manufacturing

Accelerating India’s job-intensive manufacturing capability requires shifting focus from short-term financial subsidies to deep structural cost reductions. Former NITI Aayog chief executive Amitabh Kant recently highlighted this policy imperative in statements to PTI, arguing that while targeted initiatives like the Production-Linked Incentive (PLI) scheme serve as helpful temporary measures, long-term industrial scale depends on lowering the fundamental cost of doing business across the country.

Central to Kant’s policy proposal is a call to lower the Statutory Liquidity Ratio (SLR)—currently pegged at 18 percent of banks’ net demand and time liabilities (NDTL)—to unlock private credit flow. However, transforming liquidity into sustained industrial output is not merely a monetary policy exercise. It carries profound implications for capital expenditure (Capex) cycles, revenue dynamics, and indirect tax compliance under India’s Goods and Services Tax (GST) framework.

Credit Availability and the Mechanics of Industrial Capital Expansion

The Statutory Liquidity Ratio mandates the minimum proportion of deposits that commercial banks must maintain in approved government securities. While maintaining an 18 percent SLR ensures stable funding for public borrowing, it simultaneously ties up institutional capital, crowding out private enterprise borrowing. For high-growth, labor-intensive manufacturing enterprises and emerging sectors such as geospatial technology, restricted credit flow limits scale and delays equipment upgrades.

From an indirect tax perspective, credit flow acts as the primary engine for capital expenditure and supply chain turnover. When manufacturing units secure affordable credit, capital investment flows directly into plant construction, heavy machinery procurement, specialized tooling, and technology integration. Under GST law, these capital investments trigger substantial tax movements:

• Input Tax Credit (ITC) Accumulation: Capital goods acquisitions generally carry standard GST rates (typically 18% or 28%). Increased industrial credit enables enterprises to purchase plant and equipment, creating substantial ITC balances that offset downstream tax liabilities on finished goods.
• Supply Chain Tax Velocity: Upstream procurement of capital goods creates taxable turnovers for equipment manufacturers, raw material suppliers, and engineering services, driving tax revenues across multiple tiers of the industrial ecosystem.
• Working Capital Optimization: High interest rates and restricted liquidity constrain cash flow, forcing firms to defer capital additions and delay GST cash outflows. Rationalizing credit costs improves cash flow, allowing businesses to meet statutory tax obligations on time without tapping high-cost working capital facilities.

Structural Bottlenecks: Power Tariffs and Inverted Tax Cost Traps

Beyond liquidity, the cost of core industrial inputs—specifically electricity—remains a major hurdle for domestic manufacturing. India remains one of the few global economies where commercial and industrial users pay higher electricity tariffs than residential consumers to cross-subsidize domestic consumption. Because power regulation is a state subject, local utility pricing directly impacts manufacturing competitiveness.

This structural cost burden is further compounded by the current indirect tax framework. Electricity remains outside the scope of GST, subject instead to state electricity duties. This regulatory division creates significant compliance and financial frictions for industrial users:

“You treat manufacturing as a second-grade subject when enterprises pay more for basic power usage than residential consumers,” Kant observed, calling for state-level reforms to restore industrial cost parity.

Because electricity is exempt or outside GST, industrial manufacturers cannot claim Input Tax Credit on the central and state taxes embedded in their power generation and distribution costs. The non-creditable tax on energy inputs aggregates into the final cost of produced goods, creating an un-creditable tax burden that makes Indian exports less competitive against international markets like China, Vietnam, and Mexico.

Land Leasing Models and the GST Landscape for Industrial Infrastructure

Land acquisition represents another major cost element where Indian policy faces global competition. Competing manufacturing hubs across Asia and North America frequently utilize long-term land leases and streamlined land acquisition frameworks to minimize upfront capital commitments for industrial investments.

Adopting long-term land leasing frameworks carries distinct tax implications under Indian tax laws:

1. Upfront Lease Premium Taxation: Under GST regulations, long-term leases (such as 30-year or 90-year industrial plots) granted by government industrial development corporations often face complex tax treatment regarding upfront lease premiums versus recurring annual lease rent. Clear, stable tax rules are essential to prevent disputes that could tie up real estate capital.
2. Infrastructure Capex Integration: Lower upfront land acquisition costs allow capital to be redirected toward physical factory construction and machinery procurement—inputs that generate valid Input Tax Credit, unlike outright land purchases which remain outside the GST framework.

Allied Supply Chains and Technology Infrastructure

The interaction between capital availability, physical infrastructure, and tax compliance is equally evident in new-age technology sectors like data centers. While primary data center facilities are highly automated, allied hardware production—including servers, racks, power units, and cooling systems—accounts for roughly 45 percent of total facility expenditure. This allied supply chain drives significant industrial employment and industrial activity.

When evaluated through capital expenditure perspectives, these high-value hardware components fall squarely under standard GST schedules. Efficient tax flow requires that equipment vendors, system integrators, and facility operators maintain strict compliance standards, accurate invoice matching, and timely GSTR-1 and GSTR-3B filings to ensure smooth Input Tax Credit utilization across the supply chain.

Conclusion: Aligning Financial Reform with Indirect Tax Efficiency

Achieving durable growth in job-creating manufacturing requires aligning monetary, state-level, and fiscal policies. Lowering the Statutory Liquidity Ratio can release private sector credit, but maximizing its impact depends on eliminating input cost distortions in power, streamlining land access, and maintaining a clear, friction-free GST framework. By reducing credit costs and addressing un-creditable tax bottlenecks, policy makers can build a cost-competitive ecosystem that supports long-term industrial growth.

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