Ease of doing business ranking in India: Centre, rather than congratulating itself, must attend to areas of concern

Published On: 05, Dec 2017 | Source: financialexpress.com

The World Bank’s Doing Business report ranked India at 100th position, giving the government a pat on the back for doing the right things to reform the regulatory system. However, the government cannot afford to revel in this achievement, and has to get deeper at reforming the system. The Doing Business project attempts to nudge economies to ease their regulatory environment. In most countries, new laws and rules are made without repealing the old and, as a result, there is a pile of unnecessary rules and regulations. If these rules are impacting the working of a business, they tend to hamper efficiency. The Doing Business yearly publication has identified regulations affecting 10 topics in the life of a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. The compliance of these 10 criteria is measured through three factors: how many procedures are required, what is the time taken to complete the procedures, and what is the cost incurred with reference to per capita income of a country. Ranks are given to each of these 10 topics and a composite rank is given to the country termed as ease of doing business rank. This composite rank is based on the concept of Distance to Frontier (DTF)—a measure that shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies. Sample some of the DTF scores: New Zealand with a DTF score of 86.55 is ranked first, Singapore with DTF of 84.57 is second, and the US with DTF of 82.54 is sixth. China with a DTF score of 65.29 is ranked 78th and India with DTF of 60.76 is ranked 100th.

The regulatory environment of doing business in India has traditionally been extraordinarily difficult.There was a jungle of rules that were archaic, and long procedural delays ensured entrepreneurs moved from pillar to post to get approvals and paid large transaction costs. Despite the country’s strong economic growth over the past two decades—putting India among the top 10 economies with the third largest market size and second largest workforce—local and global businesses had reservations. They were reluctant to commit large amount of investments into the economy as they were weary of the regulatory system. The 1991 reforms had changed the government policy towards liberalising the economy to an extent. However, reforming the regulatory system was a long process. India’s model of economic development that hinged on two pillars—one, larger role of the government, and two, harsher on regulating businesses—had led to economic malfunction. Thankfully, over time, there is a change in the mindset. The government is committed to cutting down bureaucratic costs in terms of procedures, time and money. The Department of Industrial Policy and Promotion worked backwards; it floated detailed questionnaire to understand the pain points so that remedial measures could be taken. The emphasis has been on simplification and rationalisation of existing rules and introduction of IT to make governance efficient and effective. All of this led to the improvement in Doing Business rank (see chart). The World Bank gives rank to countries on each of the parameters. The largest contribution to this improvement is in the area of paying taxes; India’s rank on this count improved from 172 to 119—introduction of GST promises to simplify tax system in the country. The second largest contribution is in the area of closing business, where India’s rank improved from 136 to 103. Economic reforms opened up a large number of sectors to private businesses, making entry free, but the unfinished reforms did not make exit also free. The insolvency and bankruptcy code is expected to make exit free and allow the businesses to close down. Cleaning up of banking system laden with NPAs is also expected to improve the efficiency of banks and credit delivery.

There are other reforms that have simplified procedures and saved time. Doing away with minimum paid-up capital for companies, single-step incorporation of companies, merging the applications for PAN and Tax Account Number are examples of such reforms. Use of IT by making systems online has been extended in various departments. Application for starting a business, construction permits, paying taxes, paying electricity charges have all been made online. However, as the table shows, our ranks are nowhere near the best and there is a long way to go. The government rolled out two-pronged strategy to cut the bureaucratic red tape that businesses had to face. The first was getting states to commit to simplifying and rationalising the regulatory environment. A spirit of competition among states was encouraged by introducing ranking. The second step was giving specific instructions to different arms of the central government to cut interdepartmental wrangling on clearances. Major improvements have been made in regulatory environment through deregulation, delicensing and simplifying of procedures. But there is long way to go in the area of dealing with construction permits. India’s rank in this area is 181th out of 190 countries. For starting business and enforcing contracts, India ranks poorly. Hope the government comes out of self-congratulatory mode and attends to these areas urgently. Going forward, businesses at micro level need an efficient bureaucracy and rules of governance that facilitate entrepreneurship and creativity among them. Such an enabling atmosphere for businesses to realise their full potential can lead to attracting higher investments, spurt in jobs, enhancing living standards, and promoting economic growth and shared prosperity. Hopes are raised as a beginning is made but there are miles to go before we sleep.