How Business-Friendly is India? Here Are Some Hard Realities

As per study, ‘Doing Business’ is ‘easier’ in Lebanon, Nicaragua, Tajikistan and Cape Verde than in India.

6 min read
How Business-Friendly is India? Here Are Some Hard Realities

Ease of Doing Business is a flagship aspiration of the Modi sarkar. It is declared as an imperative, there has been much deliberation on rising to the top 50 of the World Bank rankings, many committees and surveys by NITI Aayog.

So how is India doing – has motion translated into movement? It does seem, after much has been said about all that is being done, much has been said but a lot is left to be done. Since 2014 India has moved from 142 to 131 and to 130 this year. India continues to trail BRICS peers.

Sanctions-hit Russia has moved from 62 to 51 to 40 and China from 90 to 84 to 78 in rankings. Worse, as per the study, ‘Doing Business’ is ‘easier’ in Lebanon, Nicaragua, Tajikistan and Cape Verde than in India.
Often rankings are dragged down by one or two sectors. The converse seems to be true for India. (Photo: BloomberQuint

Ranking in Seven of 10 Parameters Are Worse Than the Overall Story

Critically, this year, India’s rankings have slid in five of 10 segments – starting a business, dealing with construction permits, getting credit, protecting minority investors resolving insolvency. India could have slipped in the rankings had it not been for the jump from 51 to 26 in “getting electricity”.

India is aggrieved. And the World Bank has assured that ongoing initiatives – the bankruptcy law, transparency through auction of natural resources, online processes in tax compliance, the potential of Goods and Services Tax – will be factored in the future. Be that as it may, the crux of the issue is whether the steps taken and promised will unlock the hurt locker of entrepreneurs – especially for small businesses, the start-up, and the newbie with an idea but without the muscle to manoeuvre.

How easy is it to start a business in India? Data shows it could take upwards of 26 days to start a business. This year India slipped from 151 last year to 155 in the ranking for ‘starting a business’.

As per the rankings it is easier to start a business in Swaziland, Botswana, Gabon, Malawi and Cameroon. To be fair rankings are not just a function of what the aspirant does but are also dependent on what the competition does. If India has slipped from 151, the question is who has risen to 151? It is Indonesia – which has reformed systems and shot up from 167 to 151 in the ranking for ‘starting a business’.

What about operations? Arguably once an investor puts up seed capital the first task is to set up his project and the first clearances would be for construction permits. India ranks fifth from the bottom – 185/190, in construction permits. Sure, there are countries doing worse. The only countries doing worse than India are terror-afflicted Afghanistan, war-torn Syria, strafed out Libya, strife-affected Eritrea and crime-and-terror hit Somalia. All five figure on the “avoid travel to” list of global travel advisories.

(Photo: BloombergQuint)

In the globalised economy, time, veritably, is a factor of production – along with land, labour, technology and capital.  Incredible as it seems, the concept of time is money has not quite percolated into the mind-set of policy makers at the Bhavans. Consider the granular details from the data: it takes 26 days to start a business, 164 days for dealing with process for construction permits, 47 days to get electricity.

Once the business gets going entrepreneurs spend roughly 241 hours or 10 days a year in tax compliance. The expectation of rule of law costs both money and time – it takes 1,420 days to enforce contracts.

Believe it or not, with a ranking of 172, India trails Congo, Papua New Guinea and Benin in enforcement of contracts.

Compare India with New Zealand – which has ousted Singapore from the top spot. It takes half a day to start a business, 93 days for construction permits, 58 days to get electricity. Once the business gets going it takes 152 hours a year for tax compliance. The promise of rule of law is delivered speedily – it takes 216 days (versus 1,420 days in India) to enforce contracts. Resolution of insolvency takes 1.3 years vis-a-vis 4.3 in India.

(Photo: BloombergQuint)

Essentially, the rankings are indicators of competitiveness – for investors at home and abroad – in the global chase for growth. A few weeks back the World Economic Forum put out the Global Competitiveness Report. India did well overall to jump 16 places to 39 of 135. Much of the rise was boosted by macro economic factors – lower oil prices, lower deficit, higher growth and by the FDI policy and transparency.

However India’s ranking is dragged down by the maze of red tape – in procedures required to start a business and consequently the time taken.

India does very poorly at the starting block – in procedures to start a business it ranks 132/138 behind its BRICS peers and worse than Bosnia Herzegovina, Algeria, Ethiopia and Pakistan. It also takes too much time – India is ranked 115/138 and trails Gambia, Peru, Tanzania and Malta.

It is entirely possible to game any ranking by playing segments per weightage to nudge ahead. That would be a tactical objective – a bit like running on the treadmill. Given the state of demand, consumption and job creation, investments are both an economic and a political objective. Real progress requires a strategic plan and sequencing of reforms – in the policy domain as also to address systemic bottlenecks.

The clogging is at three levels – the permissions parade, overlapping layers of clearances at centre, state and local bodies and poor governance. 

Frequently the response of the government is that clearances are online and are being sped up. That is good. But is anyone questioning whether there is justification for all the clearances that are sought? Must a hotel project travel through 32 stops for nearly 120 clearances? Must every building project travel to and from Delhi for height, environment and coastal zone clearances – would it not be smarter to make available a GIS/GPS code on what can be or what cannot be done where?

On Wednesday, Prime Minister Narendra Modi asked departments and ministries to study and analyse the World Bank Doing Business 2017 report to suggest ways of improving the rankings. At a philosophical level the need is to re-arrange the percept-rework the focus from just wooing foreign investors to enabling the home-grown small entrepreneur. To clear the structural logjam it would be a good idea to ask ministries – or the NITI Aayog – to study the level of distrust that leads to overlapping in the clearance regime.

At the operational day-to-day level ministries must be asked to present a flow chart of clearances – for instances for a power project or a manufacturing plant which need over 90 permissions – and examine the legitimacy of each.

The idea of good governance obliges governments in the centre and the states to establish a template of trust.

The objective question that centre and states must subject the landscape of governance is – must everyone okay everything?

Must every Foxconn travel between centre, states and district to accumulate a trunk-load of clearances? Must every wind power project pay obeisance to the civil aviation ministry for height – seriously can’t it be codified? Must elected state governments seek the sanction of the centre for all major investment proposals?

Competitiveness also demands attention to human development indicators, delivery of public services.

Frequently the human element gets obfuscated in the clamour of procedures, forms and days.

It is no secret that the quality of human capital is and will be a determinant in competitiveness – particularly with the emergence of internet and intelligence driven growth. How does India fare? India ranks the lowest among G-20 nations in the 2016 Human Capital Report of WEF – at 105, flanked by Bangladesh and trailed by Pakistan. Poor enrollment averages have left India at 103 in youth literacy, well behind leading emerging markets. There is also the gender factor.

No developed economy has progressed without the participation of female workforce. India at 130 is not just behind its BRICS peers but trails Tunisia, Oman and Yemen in female participation in the labour force.

The imperative for better rankings is dictated by the aspiration for growth. And the road to growth is paved with investments. Development will not sustain if it remains an abstract idea open to interpretation for those with access and opportunity. Ease of doing business is really about enabling every citizen to aspire and achieve. Growth demands systemic change and an unstated confidence in governance. The idea of minimum government is less about the size of the government and more about minimising the interface and interjections by the government and maximising benefits.

(This article was originally published in BloomgbergQuint.)

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