MAINS Current Affairs includes India and Azerbaijan Move to Restore Relations After Diplomatic Tensions & India’s Next Reform: Reducing the Cost of Doing Business

International Relations

1. India and Azerbaijan Move to Restore Relations After Diplomatic Tensions

Context; Nearly a year after bilateral tensions emerged following Operation Sindoor, India and Azerbaijan have begun steps to improve diplomatic relations.

The 6th round of Foreign Office Consultations held in Baku marked the first high-level official engagement between the two sides since 2022.

Background

Tensions after Operation Sindoor

• Following India’s military action under Operation Sindoor, Azerbaijan, along with Turkey, voiced support for Pakistan under the framework of the “Three Brothers” strategic grouping.

Regional Geopolitical Alignments

• Azerbaijan shares close strategic and diplomatic relations with Pakistan, particularly because Pakistan has consistently backed Azerbaijan on the Nagorno-Karabakh conflict
• At the same time, India has expanded cooperation with Armenia, including in the defence sector.
• This led to allegations from Azerbaijan that India was extending military support to Armenia.

Recent Diplomatic Developments

• During the latest consultations, both countries carried out a comprehensive review of bilateral ties.
• The discussions covered:
  • trade relations
  • energy cooperation
  • technology collaboration
  • pharmaceutical sector
  • tourism
  • cultural exchanges
  • people-to-people contacts
  • cooperation against cross-border terrorism
• The inclusion of terrorism-related cooperation suggests a possible change in Azerbaijan’s earlier diplomatic position.

Importance of the Reset

• Azerbaijan has also resumed crude oil exports to India, with oil accounting for nearly 98% of its exports to India.
• This gives renewed momentum to economic and strategic ties.

India–Azerbaijan Relations

Diplomatic Relations

• India recognised Azerbaijan as an independent nation in December 1991, soon after its separation from the Soviet Union.
• Formal diplomatic relations were established in February 1992.

Economic Relations

• Trade between the two countries expanded significantly from nearly US$ 50 million in 2005 to around US$ 1.88 billion in 2022.
• However, it later declined to nearly US$ 401 million in 2025, mainly because of reduced crude oil imports by India.
• India’s exports to Azerbaijan include:
  • Pharmaceuticals
  • Rice
  • Machinery
  • Electronics
  • Construction materials

Energy Cooperation

• ONGC Videsh has investments in Azerbaijan’s oil and gas sector.
• It holds stakes in:
  • The Azeri-Chirag-Gunashli oil field
  • The Baku-Tbilisi-Ceyhan pipeline
• This strengthens India’s energy diversification strategy and its strategic presence in the Caspian region.

Cultural Relations

• Historical ties are reflected in the Ateshgah Fire Temple, which contains inscriptions in Devanagari and Gurmukhi scripts.
• This points to centuries-old trade and cultural connections.

Humanitarian Cooperation

• Azerbaijan recently assisted in the evacuation of over 200 Indian nationals during the US–Israel strikes on Iran, reflecting growing cooperation.
• The Indian diaspora in Azerbaijan currently numbers around 1,000 people, working across multiple sectors.

Way Forward

• India’s engagement with Azerbaijan reflects a pragmatic and multi-aligned foreign policy approach, balancing competing regional interests.
• The current efforts at normalisation underline the role of dialogue, strategic accommodation, and long-term economic interests in rebuilding stable bilateral ties.

Both countries are likely to focus on future cooperation rather than past disagreements.

Economy

2. India’s Next Reform: Reducing the Cost of Doing Business

Context: India now needs to move beyond procedural simplification and focus on lowering the structural cost of doing business, as high operational expenses continue to affect competitiveness.

For an economy like India, addressing major cost components such as credit, land, energy, logistics, and compliance expenses is essential for sustained growth.

What is Cost of Doing Business?

• The cost of doing business refers to the overall expenditure incurred by firms in production and operations.
• This includes:
  • Cost of capital
  • Land and labour expenses
  • Input and electricity costs
  • Logistics and supply chain costs
  • Compliance and regulatory burden
• While India has improved procedural ease, high structural costs continue to reduce global competitiveness.

Key Determinants

Cost of Capital

• India’s credit-to-GDP ratio (about 50–55%) remains significantly lower than the global average of around 148%.
• High government borrowing often crowds out private investment, leading to relatively higher interest rates compared to economies like China and Vietnam.

Input Costs

• Electricity tariffs remain high due to cross-subsidisation policies.
• In addition, inverted duty structures raise the cost of intermediate goods and production inputs.
• Limited access to advanced technology also increases costs.

Logistics Costs

• Logistics costs have come down from nearly 13–14% to around 8% of GDP, yet they remain above global benchmarks.
• Issues such as:
  • Port congestion
  • Customs delays
  • Uncertainty in cargo movement
• Continue to add to transaction costs.

Land Acquisition

• Fragmented land markets, unclear ownership titles, and legal disputes significantly increase project costs and delays.

Compliance Costs

• Heavy regulatory requirements, especially for MSMEs, increase the cost of formalisation and business expansion.
• The lack of risk-based proportional regulation further worsens the burden.

Major Concerns

• Key issues arising from high business costs include:
  • Reduced export competitiveness
  • Higher financing costs
  • Delays in project implementation
  • Discouragement of formalisation
• Infrastructure bottlenecks

Government Initiatives

Union Budget 2026–27

• The budget has reinforced Ease of Doing Business as a major growth pillar.
• Key measures include:
  • Digitisation of approvals
  • Tax certainty
  • Reduction in litigation
  • Investor facilitation

National Single Window System (NSWS)

• The NSWS integrates approvals across:
  • 32 Central Departments
  • 32 State Governments
• It provides access to hundreds of central and state approvals through a single digital platform.

Other Reforms

• Important initiatives include:
• Unified Payments Interface (UPI)-based digital finance ecosystem
• GST data integration
  • Open Credit Enablement Network (OCEN)
  • Production Linked Incentive (PLI) Schemes
  • National Infrastructure Pipeline (NIP)
  • PM Gati Shakti
  • National Monetisation Pipeline (NMP)
• These have improved processes, though cost reduction remains incomplete.

How India Can Compete with China and Vietnam

• Lower Cost of Capital
  • Reduce SLR burden
  • Improve credit access
  • Promote fintech-driven lending using GST and UPI data
• Rationalise Input Costs
  • Reduce cross-subsidisation in electricity
  • Correct inverted duty structures
  • Encourage technology-based FDI
• Improve Logistics
  • Trust-based customs clearance
  • Lower port dwell time
  • Strengthen multimodal transport systems
• Land Reforms
  • Clear land titles
  • Standard leasing models
  • Faster dispute resolution
• Regulatory Reforms
  • Risk-based compliance
  • Proportionate regulation
  • Sunset clauses for obsolete rules

Lessons from Other Countries

• Vietnam has succeeded through export-oriented policies, efficient logistics, and strong FDI integration.
• China has benefited from scale economies, deep infrastructure, and cheaper access to credit.

Conclusion

India has made significant progress in improving procedural ease of business, but the next major reform phase must focus on reducing the structural cost of production and operations.

A lower cost structure is essential for stronger exports, manufacturing growth, formal employment creation, and sustaining growth above 8%.

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