Doing business in India is basically a pain - Wrld Bank

  BL Amar Babu 27 March 2014

The World Bank says doing business in India is basically a pain. The World Economic Forum agrees

It is not a matter of great pride that India, a country of a billion plus people, which aspires to be an economic superpower, ranks in the bottom 30 per cent of global economies when it comes to ease of doing business for small and medium size enterprises.

In the latest (11th) annual edition of the World Bank study, Doing Business 2014, the rank has slipped a further three positions from an already lowly 131 last year to 134 this year.

India sits among the bottom 10 per cent of countries when it comes to the ease of starting a business — ranking 179 out of 189. It takes, on an average, 27 days and the completion of 12 procedures to start a business in India. Even its South Asian neighbours — not exactly economic superpowers — fare better on this count. The regional average is 16.4 days and seven procedures.

As a progressive country we need to show better numbers than the regional average.

Why it matters

There is a strong co-relation between the rankings of the World Bank report, which measures ease of doing business, and the ranking of the World Economic Forum’s Global Competitiveness Report (GCR) 2013-14, which measures the competitiveness of economies. As many as 10 countries are common in the top 20 in both lists. And no, they have no other commonality: be it region, size, or type of government. So clearly, it directly affects the competitiveness of an economy.

But it is not just about empirical evidence. Two of the factors that the GCR takes into account are what it calls goods market efficiency and labour market efficiency. Both these factors affect doing business smoothly. “The best possible environment for the exchange of goods”, notes the report, “requires a minimum of government intervention that impedes business activity”.

India occupies the 60th position among 148 countries in the GCR 2013-14, have slipped down 15 places since 2006. Yet, 60th doesn’t look as bad as 134th, as in the Doing Business report. That is because theGCR takes into account market size as one parameter, where it is a no-brainer that India scores — being at Number 3 globally. It also does fairly well in financial market development — another testimony to the positive impact of a pragmatic regulator, the Reserve Bank of India. India does comparatively well in business sophistication and innovation, things that have nothing to do with regulations.

And where does India falter? Well, it ranks 85 in goods market efficiency and 99 in labour market efficiency — exactly the two factors that measure ease of doing business directly!

In fact, all the problematic factors identified by the GCR when it comes to “doing business” are to do with regulation, governance and policy, such as inadequate supply of infrastructure, an inefficient government bureaucracy, corruption, policy restrictions and policy instability.

Interestingly, it was in response to the 2012 version of Doing Business that the government decided to act. It set up the Committee for Reforming the Regulatory Environment for Doing Business in India, under the chairmanship of former SEBI chairman, M Damodaran.

The committee submitted its report in September 2013, with twenty specific recommendations. Unlike other such taskforces and committees, the Damodaran Committee chose to downplay the role of incentives and focused more on systemic changes, mostly to do with creating a better regulatory architecture and enhancing the efficacy of the regulatory process. The committee also stressed the need to put special emphasis on micro, small and medium enterprises (MSME) and advocated single window mechanisms for all regulatory clearances.

Among its core observations were the needs to tackle the complexity arising out of regulatory disparity between states and the Centre and leverage IT to enhance effectiveness. The Manufacturers’ Association for Information Technology (MAIT) is in complete agreement with both these observations. We believe that working at a state level is absolutely necessary to remove regulatory bottlenecks.

Challenges and opportunities

India’s engineering design capability is proven. The design of a portable ECG machine by GE that became a worldwide hit or a small tractor by John Deere is now part of global engineering folklore. Carlos Ghosn, arguably the most respected automotive industry business leader, has been raving about the frugal engineering capability of India. In high-tech and semiconductors, there is no global company worth its name which does not design products in India.

This led many to hope that India, which had missed the first manufacturing wave, would see the ushering in of a new design-led manufacturing era. In electronics specifically, the government even announced incentives to attract electronic system design and manufacturing investments to the country.

Yet, if large investments have not come, it is because of the operational challenges at the ground level.

MAIT recognises this and has taken several initiatives to address this issue. We conducted a successful workshop in Bangalore on operational excellence in manufacturing, where several Karnataka government officials and IT industry executives jointly deliberated on the steps to remove roadblocks. We plan to replicate the workshop model in other states.

As rightly pointed out in the Global Competitiveness Report, goods market efficiency dealing with taxation and supply chain, and labour market efficiency are extremely important for doing business in a country and contribute to its overall competitiveness.

The four key areas to focus on in the short- to medium-term are customs and logistics issues, taxation issues such as delay in implementation of GST, labour reforms and environment-related issues.

Given its growing local market, large workforce and proven engineering capability, nothing can stop India becoming a major player in the “new manufacturing” era, especially in hi-tech industries, provided we address the operational bottlenecks right now.

The writer is the president of MAIT