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The 'Ease of Doing Business' in India
Image Credit: Narendra Modi/Flickr

The 'Ease of Doing Business' in India

 
 

The World Bank’s Doing Business Report 2018 (PDF) ranked India 100th out of the 190 countries surveyed. That 30 place jump over last year’s ranking of 130th came as a welcome relief to the Modi government, which has lately been under intense attack both by opposition parties and senior members of the ruling party over India’s economic slowdown. The country’s Gross Domestic Product (GDP) growth rate has plunged from a high of 9.2 percent in the third quarter of 2016 to 5.7 percent in the third quarter of 2017. Economist attribute this mainly to the government’s demonetization drive and poor implementation of the new Goods and Service Tax (GST).

Chief Executive Officer of the World Bank Crystalline Gergiev, complimenting India on its performance in the Doing Business Report, attributed its success to the government’s resolve to make difficult decisions that have translated into remarkable progress. India is one of the top five reformers, improving its score in six out of ten criteria used by the World Bank for measuring the ease of doing business. Gergiev added that, considering the size of India, this progress has been phenomenal.

The Doing Business Report 2018 credited the Modi government for taking several measures to boost its ranking. One such step was recapitalizing the public sector banks with an infusion of $32 billion. This includes 1.35 trillion rupees through recapitalization bonds and 760 billion rupees via budgetary support. The easy credit will spur investment in critical infrastructural and power projects.  The government had also introduced 37 reforms in areas such as insolvency resolution, protecting the interest of minority shareholders, and simplifying the process of taxes. These measures, as the World Bank report states, led to India’s boosted ranking. Reforms to ensure the faster resolution of commercial disputes could further improve India’s ranking in future surveys.

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Another major step taken by the government was the introduction of the Bankruptcy and Insolvency Act, 2017. Once implemented, the act will make it easier to exit or attempt a revival of a business, thereby improving the nonperforming assets (NPAs) dilemma for the financial services sector. This will make it easier for financial institutions and banks to deal with NPAs arising from failed corporate ventures; it also helps firms by making the revival process and/or liquidation easier. As the GST and the Banking and Insolvency Act were introduced after the coverage period for this year’s Doing Business Report, their impact will be felt in the 2019 report.

There is one major caveat: the WB report based its report by talking to stakeholders only in two cities: Mumbai and Delhi. If one were to also factor into the difficulties in starting a business in India’s most populous state, Uttar Pradesh, or other states like Bihar, Madhya Pradesh, and Rajasthan, India’s ranking would take a big hit. To plug the lacunae in the WB report, the Department of Industrial Policy and Promotion (DIPP) is undertaking its own much wider evaluation across the country to find out where is real work is to be done.

Despite India’s phenomenal progress, its ranking comes below most of its fellow BRICS countries. Russia topped the BRICS with a ranking of 35 in 2018, followed by China (78) and South Africa (82). Of the BRICS, only Brazil (125) was ranked lower than India. However, India has shown more improvement over the past four years than the other BRICS members.

Meanwhile, India was outranked by a host of Northeast and Southeast Asian economies. South Korea (4), Hong Kong (5), Taiwan (15), Thailand (26), and Japan (34) all figure in the top 50 spots. Other Asian countries like Mongolia (62), Vietnam (68), and Indonesia (72) also outranked India.

If India wants to achieve Prime Minister Narendra Modi’s goal of a top 50 ranking by 2022, the government has to introduce big ticket reforms to land ownership, labor law, and the judicial process.

One area that continually frustrates foreign investors is the complex procedure for getting a construction permit. India has made dealing with construction permits less cumbersome by implementing an online system to streamline the process in the municipalities of New Delhi and Greater Mumbai. The online system has reduced the number of steps and overall time required to obtain a building permit in India. However, a lot needs to be done to make it easier to acquire both land and the permits necessary to build on that land.

Another area of concern is labor law. The government has been silent on this issue because of pressure from trade unions; many of the unions are affiliated with the ruling BJP. The government is loathe to displease this strong and reliable constituency. However, New Delhi needs to realize that it can encourage foreign investment only if musters the courage to overhaul labor laws, which, in the present form, make firing an employee very complicated.

Another aspect where the both the central and state governments need to act immediately is to cut the bureaucratic delays and resulting corruption in granting permission to start a business. At every stage of the clearance process — getting clearance to purchase land, registering property, hooking up electricity and water connections, getting environmental clearance, obtaining permission from the factory inspectorate and pollution control boards, etc — nothing moves unless the businessman or company pays a bribe. In one classic case, a well-known automobile giant decided not to set up a manufacturing facility in the state of Tamil Nadu, because the authorities wanted a fee amounting to 10 percent of the total project cost for facilitating the process of approval for the plant. The government should professionalize the bureaucracy to avoid this.

India has already several measures in this direction. With e-governance, a single window concept can be introduced where companies can file their application online for permission to acquire land, register property, get a construction clearance, etc. This will go a long way toward eliminating bureaucratic hurdles and eliminate corruption.

The government is already working in this direction, but only by taking bold steps in pushing reforms and simplifying the clearance processes will India be able to realize the prime minister’s dream of being among the top 50 economies of the world.

K.S. Venkatachalam is an independent columnist and political commentator.

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