News wrap: Improving the ease of doing business in India
According to the World Bank’s ‘Doing Business 2015’ index, India has continued to slip in its global rankings, and stands at 142 out 189 countries in the ease of doing business.
Many, including officials in the new Modi government, were quick to point out that the survey used lagging indicators and that rankings next year would better reflect government reforms. A week before the rankings were announced, India’s commerce ministry announced it had set its sights on breaking into the top 50.
As the Modi government pursues this goal, some have pointed out that the government’s focus should be in improving the country’s perception as a business destination.
In describing the finer details of India’s rankings, Mint finds that the country ranks lowest in contract enforcement and suggests looking at South Korea’s example to improve this.
“The other big stumbling block for doing business in India is enforcing contracts. Here the situation is even worse than starting a business. India ranks 186 out of 189 countries. But solutions are available. Since the mid-1980s, South Korea has pioneered the use of technology to upgrade its court procedures. It started with a few judges using a floppy disk to save court cases. Over time South Korea invested heavily in making the electronic case management system more efficient and user-friendly. In 2010, Korea launched the electronic case filing system, which enables electronic submission, registration, service notification and access to court documents. The e-court suite of services not only makes huge savings in terms of cost and space but also makes the court procedures more secure, transparent, timely, and just. No wonder Korea ranks second in the world when it comes to enforcing contracts.”
Also in Mint, Gary Coleman, managing director of global industries at Deloitte Touche Tohmatsu Ltd., argued that for India to move up in the ease of doing business rankings it will have to implement reforms in the areas of labor law: “…Countries which are ranked higher tend to have labour laws which are more flexible. These include ability to hire and letting go being more flexible.”In an editorial for The Hindu, Pradeep S. Mehta of the trade focused nonprofit CUTS International, noted that major stumbling blocks include construction permits and judicial delays.
“That leaves us mainly with two major problems. The first one is getting construction permits from city authorities, which are notorious for their uncooperative, rent-seeking ways. For this, we have among the lowest rankings in the World Bank scale. Changing laws and procedures are not sufficient to deal with the delays. We need a bonus-malus (the return of performance-related compensation upon the discovery of deficient performance) system.”
“The bonus will help cover the lost rents, while malus will help in fixing responsibility at the right levels. Of course, this is easier said than done, but making an effort in this direction will result in incremental changes and, hopefully, a sustaining impact.”
“The other major problem is in the judicial system (delay in contract enforcement), which lies beyond the executive’s domain. However, the executive could install ombudsmen to deal with investor grievances or encourage the use of an alternative dispute settlement system so that our choked up courts do not hold up the resolution of disputes.”
“There is a Central mission to cut down delays in the judicial system but bureaucrats are shy of hurting the sensibilities of judges.”
“What the Government could do is get senior lawyer-ministers such as Arun Jaitley or Ravi Shankar Prasad to engage our judges to try and improve the system. This is also critical for the common man who has to wait forever to get decisions from the courts. Quite often one sees that engaging in dialogue helps resolve even contentious issues as opposed to sending letters, organizing seminars and the like. This again need not be restricted to the Central level but can be mirrored at the State and local levels, too.”
Another piece in Mint by partners from Oliver Wyman recommends three key strategies:
“Leading the first majority government in 30 years, Modi’s administration will not encounter the hurdles of competing political interests and the deadlock that has plagued coalition governments in the past. The sweep in the general elections has been reinforced by victories in state elections, with the Prime Minister’s party picking up an absolute majority in Haryana and being the clear winner in Maharashtra.”
“To accomplish Modi’s mandate to restore growth, the priorities of his administration must be to: Ensure that stalled projects, particularly in infrastructure, are resurrected and shovel-ready projects commissioned; Create employment for India’s sizeable and growing workable-age population, with almost 60% of it between the ages of 15 and 54; and Liberalize policy to attract domestic capital investment, foreign direct investment and institutional capital.”
“These initiatives will require resolve and commitment if they are to reduce India’s red tape, and simplify its labyrinthine rules, regulations and processes—with the aim of immediately improving the nation’s ranking in the World Bank’s Ease of Doing Business index.”
Writing in the Hindu Business Line, Subhankar Sinha of Siemens Ltd. suggests simplified tax policies to boost investor confidence.
“We need to simplify laws and remove unnecessary regulations to bring down the cost of compliance. Introduction of rational safe harbour norms under transfer pricing (TP) regulations for the manufacturing sector, and dispensing with some of the documentation can bring significant relief to taxpayers. Similarly we can scrap domestic TP regulations.”
“As originally envisaged in the Direct Taxes Code Bill 2009, India needs to gradually reduce the corporate tax rate to 25 per cent from the present level of 30 per cent (excluding surcharge). This will make the manufacturing sector competitive.”
“The Government must defer the General Anti Avoidance Rules (GAAR), due to kick in from April 1, 2015, by at least three years. Ideally, GAAR should be introduced only after the tax administration reforms are complete.”
“One of the most significant reforms for which the business community is waiting since 2010 is implementation of the Goods and Services Tax (GST). As GST will subsume most of the indirect taxes at the central (excise duty, service tax) and state ( VAT, stamp duty) level, it will also improve the ease of doing business considerably by bringing down the incidence of multiple taxes. The Government has set a target of 2016 to launch GST, and this time we must make it happen.”
Quoting Amitabha Kant, Secretary of the Department of Industrial Policy and Promotion, the Hindu Business Line adds that the key to driving growth is in making Indian states compete with each other.
“The country can move up from 134th rank to 50th rank (in global ranking for ease of doing business). If States put their mind to it, it will take only a month.”
“Kant said several States including Gujarat, Maharashtra and Tamil Nadu are following best practices to improve ease of doing business which other States should adopt and implement.”
“The Secretary added that if 26 departments of the Government (which investors in a city like Mumbai have to approach to get clearances for their projects) work with a new mindset and there is enough administrative will in States, businesses should be able to get a clearance within 24 hours.”
The Indian Express seeks to sum up the various opinions surrounding the latest rankings.
“The EDB rankings may not provide a robust measure of growth potential across economies — foreign investors are unlikely to rely on them to choose Armenia over India or Estonia over China. Yet, they are useful in helping governments to recognize the need to design rules and regulations that make it easier to conduct business. Narendra Modi may well have ensured progress on this count while he was chief minister of Gujarat; the state’s EDB rating would definitely far surpass India’s. The challenge for him as prime minister is to extend Gujarat’s success to the rest of India. But this challenge — of addressing the nuts and bolts or plumbing underlying an economy’s day-to-day functioning — has to ultimately be met at the level of the states.”