The post talks about the World Bank Group's Ease of Doing Business Index, how India ranks in the world, what are the problems it faces and what it could do to improve its rankings.
October 10, 2016
Think of a government office and it is likely that your first thoughts would be the bore yellow paint, red paan-stained walls, gloomy tube-lights, lots and lots of ancient files and forever-agitated employees sipping tea from little glass cups. Not the prettiest of sights! Yet, if you are one of the daring few, thinking of setting up shop in India, this is what you will be up against. Welcome to the ease of doing business in India!
The Ease of Doing Business Index first published by the World Bank Group in 2003 to assess efficient business climate and strength of legal institutions in a country. While India has never performed great on this index, it reached a new low in last years’ rankings- an abyssal 142nd out of the 189 participating countries. Surrounded by the likes of Kenya, Uzbekistan and ranked well below countries like Pakistan and Sri Lanka, India is not currently in an enviable position.
The Index takes into account 10 parameters involved while setting up a business. This includes, dealing with construction permits, registering property etc. While the index rates India high on protecting investor rights (rank 7), and quality of credit information available through registries (rank 36), it rates India as third from the bottom on enforcing contracts.
The ‘enforcing contracts’ can also be viewed as a peek into the current state of the Indian Judiciary. The parameter views the time, cost and procedures involved from the moment the plaintiff files a lawsuit until payment is received.
Amongst the BRICS, a group of equally competent countries with advanced economic development, the ranking is S-R-C-B-I. (Ironic that the acronym finishes with “CBI”) South Africa, ranks the highest at 43rd position.
Russia, the poster boy of the index, posted a record jump of 30 places in the previous year rankings and has been easing up business processes leaps and bounds.
So, what did Russia do right? First, it made transferring property smoother, second, it axed notarization and third, it axed requirement of companies to notify authorities before opening a bank account.
On similar lines, China has also kept up persistent efforts to improve its rankings. However, it also criticizes the Index in failing to adequately assess fast-growing economies and it to be biased towards regulations.
Mr. Deepak Parekh, Chairman of HDFC, recently criticized the complex Indian procedures involved in doing business. He quoted an example of HDFC raising funds including that from overseas. First, HDFC would require FIPB approvals. Next, FIPB minutes need to be signed. Next, HDFC has to approach the Cabinet Committee on Economic Affairs for approvals. And the list goes on.
In starting a business, the cost incurred in India as a percentage of income/capita is 47.3% in comparison to 4.6% in Brazil. (New Zealand, which ranks at second in the index for the year 2015, has the same figure as 0.3%)
Further, it takes about 7-8 months to obtain a Category-A environment clearance. The new Land Acquisition Act further complicated provisions rather than easing them- Businesses now require consent of 70% of project affected families in case of public-private projects and 80% in private projects. This results in the average acquisition time to inflate upto 56 months! The exit procedures in India are equally complex with multiple formalities to be completed under corporate laws, tax laws, labour laws.
Yes there is. With the change in government last year and a renewed vigor to improve rankings, there is a silver lining in the dark clouds. The government hopes to jump to the top 50 ranks in the next two years. For the same, the eBiz portal was introduced last year which unified 14 services. On the legislative side, an amended Companies Act has relaxed few norms. The C.I.I. has made recommendations to the PMO on streamlining investment approvals and provisions for utilities.
Other improvement measures for the Government to undertake should start with the adoption of global best practices. For example, to improve exit clauses of a company, India could replicate UK’s liquidation process or have a look into the US bankruptcy laws. E-enablement of the entire dispute resolution process through e-filing across courts, introduction of a single annual inspection by all inspectors across industries, self-certifications for units are few measures which should help India to improve its rankings over the years.