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Budget 2015 – Will it improve ease of doing business?

File photo of Prime Minister Narendra Modi attending Vibrant Gujarat Summit recently. (PTI Photo)

Doing Business 2015: Going Beyond Efficiency is a World Bank flagship publication. It measures on a global basis the regulations that enhance business activity and those that constrain it. This report presents quantitative indicators on business regulations and the protection of property rights that can be compared across 189 economies-from Afghanistan to Zimbabwe.

Doing Business measures regulations affecting 11 areas of the life of a business. Ten of these areas included in this year’s ranking on the ease of doing business are starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency [the 11th area – labour market regulation is not included in this year’s ranking].

In its latest Report released in 2015 India is ranked 142 amongst 189 countries.

Interestingly, this Report catalogues entrepreneurs having seen improvement in 123 economies in local regulatory framework last year. Between June 2013 and June 2014, the report documented Sub-Saharan Africa accounting for the largest number of such reforms. Sadly, India does not figure in this list.

Sub-Saharan Africa accounts for 5 of the 10 top improvers in 2013-2014. The region also accounts for the largest number of regulatory reforms making it easier to do business in the past year. More than 70 per cent of its economies carried out at least one such reform.

Tajikistan, Benin, Togo, Côte d’Ivoire, Senegal, Trinidad and Tobago, the Democratic Republic of Congo, Azerbaijan, Ireland and the United Arab Emirates are among the economies that showed significant improvement in 2013-2014. India, in the same period slid two ranks – from 140th in 2013 to 142nd rank in 2014.

On further analysis India is ranked 158 in starting a business, 184 in getting construction permits, 137 in getting electricity, 121 in registering property, 36 in getting credit, 156 in paying taxes, 126 in trading across borders, 186 in enforcing contracts and 137 in resolving insolvency.

The only area where India scores a high rank of seven is when it involves “protecting minority investors!”

Core of the Issue
At the core of the issue is that when it involves enforcing a contract only Angola [Ranked 187], Bangladesh [Ranked 188], and Timor-Leste [Ranked 189] are ranked below India. Obviously courts, legislations and our legal processes are certainly an impediment to doing business.

Remember, we are a Republic with a sublime Constitution where the majesty of law supposedly prevails! As a professional advising on investing in India I often find that this inability to enforce a contract quickly and effectively through our courts as a single largest deterrent in inviting [foreign] investment.

Do we realise how badly we are wedged between archaic laws and outdated judicial processes? But when did we last hear about judicial reforms from the NDA Government? Crucially, is there some realisation within the establishment to tackle the extant situation?

That in more ways than one explains why contracts pertaining to India contain clauses of carrying arbitration out of India, either in Singapore or London. Why can’t we develop Mumbai, Goa or Delhi as an international arbitration hub? Why can’t we simplify laws that make people accountable for their contractual obligations? Why can’t we make out courts to be more pro-active on this?

Another area where we rank poorly is when it involves even setting up a business. The Companies Act, 2013 [a parting gift from UPA to the country] is a draconian piece of legislation that needs to be repealed forthwith. Despite enormous protests by the Indian corporate sector – the NDA Government turned a deaf year to the well-intended suggestions from all concerned.

The problem with Companies Act 2013 is that it is genetically flawed. Designed post-Satyam scam, this legislation presumes every businessman to be a rogue and mandates a visit to the nearest prison for even minor infractions of law. Needless to emphasise, such poorly drafted legislations will increase corruption or in the alternative, spoil business sentiments.

Either way such legislations are not intended for improving ease of doing business in India. It is indeed strange to note that the BJP leaders who sympathised with the Indian industry when the law was introduced in Parliament in 2013 quickly changes track and began to bat for the legislation post 2014 when they themselves assumed office.

Were they house-trained by the bureaucracy? Or were their concerns expressed when in Opposition simply filibuster? Do they view every single businessman who does business here – a potential rogue who needs to be kept on a tight leash through Companies Act 2013?

If so, why then talk of Ease of Doing Business?

Lack of Trust
Central to the discussion on Ease of Doing Business is the idea of trust between business and Government. If the Government refuses to trust its own people and legislates assuming every citizen to be a scoundrel surely there can be at best unease of doing business; note ease of doing Business. This trust [and lack of it] is a two way street.

When the Government trusts its own people, people begin to trust the Government. And when Government trusts it people it simplifies laws. That in turn improves the ease of doing business. On the other hand, if Government refuses to trust its own people it will usher in complex laws. Naturally that cannot improve the ease of doing business.

Either way, trust is at the core of the philosophy that drives reforms process. Of course, there will be errant players who need to be dealt with severely. But our legislations are aimed at mistrusting the honest while allowing the corrupt to loot and scoot. That in turn feeds on corruption which also dynamites the overall business sentiments.

The Companies Act 2013 is a context to the overall issue of improving the Ease of Doing Business. Likewise several of Labour and Revenue Laws are designed for rent seeking by Government officials.

For instance, a study by some small-and-medium business demonstrated that even for operating their business they required seven approvals and 54 filings with 15 departments – some of which were monthly, some quarterly, some half-yearly and others on an annual basis.

Adherence to such legal requirement meant increased costs. Non-adherence meant fines, penalty or even prosecution. Of course, the later invariably meant settlement through payment of speed money. Either way, none of these improves competitiveness of our domestic industry.

Similarly, can a country that perennially runs Revenue Deficits be ranked so low even on ease of paying taxes? Can we not, in the least, simply this? Can a country that ranks so poorly on infrastructure be ranked 184 out of 189 countries afford such antiquated rules when it comes to granting building permits? No wonder, it is easy to construct illegally than legally in our cities. A good friend of mine working as a clearing house agent tells me that every consignment of exports or imports when moved through the customs frontier is by itself a huge business risk. Anyone anywhere connected with international trade, especially imports, runs the risk of being detained and harassed by Customs officials. When will this tax terrorism end?

But there is yet another dimension to all this. Recently a group of entrepreneurs met a Government officer and explained how certain regulations were strangulating our industry. Simultaneously, they pointed out how some of our neighbours prospered in the absence of such corrosive rules.

The response of the officer stunned the audience – the officer simply asked these entrepreneurs to move their entire production to those countries which offered better facilities. Bureaucratic lethargy remains to be the bane of Indian economy. Crucially, what happens to “Make in India” campaign of the Prime Minister? Is a lethargic bureaucracy short circuiting “Make In India?”

In short, the lack of trust between Government and the governed, archaic laws and outdated judicial processes is responsible for this abysmal state of affairs. Surely, what adds fat to the fire is the indolent attitude of our bureaucracy that refuses to believe in India, Indians or Indian industry.

The net result: Forget acquiring global competitiveness – we are losing competitiveness even within India. That explains why we have begun to depend on imports [mostly from China] for goods that could otherwise be made in India.

Made in India campaign must first improve ease of doing business through deregulation. Obviously, we need to identify and do away with archaic laws. Secondly, we need to improve our judicial process including speeding up our arbitration mechanism. Business will invariably encounter disputes. We need to have easy, flexible but precise dispute resolution mechanisms.

Third, the Government has to trust its people but with stringent punishment to those who are wilful defaulters. This necessitates change in mind set and the manner of drafting our legislations. The Companies Act 2013 is a good starting point. Can we begin with by doing the needful?

Finally, Prime Minister Narendra Modi’s noble intention of Make in India is running aground on account of an irresponsible bureaucracy. This needs immediate intervention at the highest level. Will Budget 2015 address these concerns?

http://www.niticentral.com/2015/02/16/budget-2015-will-improve-ease-business-301390.html

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