Making it easier for businesses to hold their own in India

Doing Business 2008 survey has given the country a 12-pt upgrade, but things could be better

Doing Business 2008, the fifth in a series of annual surveys carried out jointly by the World Bank and the International Finance Corporation, has been widely cited in the media for reporting an improvement in India’s business environment. The country ranked 120 among 178 countries in terms of ease of doing business, 12 points higher than in the 2007 survey. The improvement suggests that the regulatory environment is becoming more conducive to business activity.

The survey, which investigates regulations and their enforcement, covers 10 distinct phases in the lifecycle of a business: starting a business, dealing with licences, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. Indicators are generated to measure each factor, which are then combined to create an index that measures the ease of doing business in a given policy environment.

Doing Business 2008 is based on a simple ranking methodology, with fairly limiting assumptions. The analysis does not incorporate attributes such as size of consumer markets, skilled labour force and stable macroeconomic conditions. The top ten countries - Singapore, New Zealand, USA, Hong Kong (China), Denmark, UK, Canada, Ireland, Australia and Iceland - do not include any rising economy (China, Russia and Brazil are ranked at 83, 106 and 122, respectively). Despite this drawback, the report offers interesting insights into the impact of economic reform, and its role in motivating business enterprise.

Disaggregated analysis of the business environment by countries and selected cities is feasible as separate rankings for each of the ten factors are provided. India ranks 36th in ease of obtaining credit but is ranked 177th in contract enforceability. Further, the key indicators for each factor are benchmarked against regional and OECD averages, enabling a comparative analysis.

As an example, the time taken to process an export shipment has steadily declined in India, falling from 36 in 2006 to 18 days in 2008, comparable to China (21 days) and Mexico (17 days), though considerably behind the best practice economy - Denmark (5 days). The report also enables us to identify which reforms have worked, in which sphere of business activity, and the gaps that continue to exist.

Despite having a trusted and reliable judiciary, India has been near the bottom of the sample in contract enforcement for the past three years. Enforcing contracts in the country is time consuming, costly and involves several procedures. This results in loss of economic value among businesses and entrepreneurs caught up in claim resolution and discourages new investments.

Recently, the Supreme Court of India and a few High Courts have permitted litigants to electronically download forms and access information such as court schedules and case status. Yet, more needs to be done to improve the efficiency of the enforcement systems.

There is also considerable scope in India for encouraging appropriate social norms and skills conducive to resolving conflicts before they reach the courts. Modernising laws and regulations is also essential.

India is not the easiest of countries in which to start a business (ranked 111), but it is much more difficult to close a business in India (ranked 137). A modern bankruptcy law that facilitates quick and fair closure of businesses is needed. Existing bankruptcy procedures are complex and inefficient, resulting in final recovery rates of only 12%. The time taken for liquidation varies from state to state as companies facing closure require state sanction for labour retrenchment. Greater uniformity in bankruptcy procedures would likely result in less skewed industrial development.

Doing Business 2008 also benchmarks business-related government services in selected cities within a country. Services such as licensing, registration, procedural compliance, and project approval vary in quality and competence across India. The time taken to obtain a business licence ranges from 159 days in Bhubaneswar to 522 in Ranchi, and time to register property varies from 35 days in Hyderabad to 155 in Calcutta.

Obtaining a construction permit takes a month in Hyderabad and Jaipur, about 2 months in New Delhi, but almost 5 months in Mumbai - the commercial capital of India. This information has driven the Maharashtra government to introduce a single-window clearance system for eliminating delays in the process. This is an encouraging sign.
Inter-city comparisons of business environment provide a more sophisticated understanding of the depth of reform and effectiveness of state-level initiatives. Such data should spur faster reform, since ultimately it is the municipalities and states which must take responsibility for reducing constraints on business.

It is estimated that a hypothetical Indian city with the country’s best scores on each indicator would rank 55 places higher than Mumbai on the Doing Business index.

This suggests there is tremendous potential for lower ranked cities and states to learn from those ranked substantially higher. It is the cumulative impact of many small improvements in reducing costs of doing business by government entities across the country which will bring about significant efficiencies, with improved ranking as a by-product.

India should take similar measures to improve its ranking in other international surveys and indices as well, including those relating to human development, competitiveness, and corruption. In the process, there will be a significant positive impact on perception of both domestic and international investors, as well as on choices of skilled people with location options. 

To emerge as a leading nation, India must sustain high economic growth (at current growth rates, the GDP is projected to touch $2 trillion by the middle of next decade); efficiently manage its external trade in goods and services ($500 billion in 2006-07); and provide nearly 150 million new livelihoods between 2005 and 2020. Focused and widespread efforts to improve the business environment are an urgent necessity.

Mukul Asher is Professor of Public Policy, National University of Singapore (sppasher@nus.edu.sg) & Deepa Vasudevan a freelance researcher (deepavasu@hotmail.com)