The Hindu Business Line : Nuts and bolts of doing business

THE latest report on Doing Business 2005, published by the World Bank, cites the findings of the Copenhagen Consensus, which included the views of a number of Nobel Prize winners to the effect that easing start-up was considered one of the most cost-effective ways to spur development — ahead of investing in infrastructure, developing the financial services and scaling up the health services. Not that the three last-mentioned items are not important. But, removing impediments to doing business is far too critical. Reform of the conditions that preclude easy start-ups, access to credit, facility of hiring and firing, recovery of creditors' dues — these are among the most important reforms that need to be attended to. They are not as glamorous as infrastructure, but they can be equally efficient. At least, they are necessary preconditions to growth of the economy.

The World Bank Survey cites the views of Mr Fernando De Soto, who has pointed out in his book The Mystery of Capital that there are many damaging effects of heavy business regulations and weak property rights, and its burdensome entry regulations. As a result of these, few businesses bother to register. Instead, they choose to operate in the informal economy, facing high transaction costs to get formal property titles. Many of these entrepreneurs own informal assets, but suffer from the obvious disadvantage that they cannot be used as collateral to obtain loans. Mr De Soto called this "dead capital". His preferred solution is to simplify business entry and ensure that the poor get titles to property. There are, of course, many problems in doing this. But, these have not been analysed in the report of the World Bank, but deserve to be considered by the Government, which is concerned about bringing the informal sector into active participation in economic growth.

In a telling recitation of the differences between poor and rich countries, the report points out that "it takes 153 days to start the business in Maputo, but three days in Toronto. It costs 126 per cent of the debt value to enforce a contract in Jakarta, but 5.4 per cent with the same value to do so in Seoul. It takes 21 procedures to register commercial properties in Abuja, but three procedures in Helsinki. If a debtor becomes insolvent and enters bankruptcy, creditors would get 13 cents for a dollar in Mumbai, but more than 90 cents in Tokyo. Many differences persist across the world. The countries that most need entrepreneurs to create jobs and boost growth — poor countries — put the most obstacles in their way".

In general, business in poor countries faces much larger regulatory burdens than those in rich countries. They face three times the administrative cost, nearly twice as many bureaucratic procedures and delays associated with them and they have fewer than half the protection of protection rights of rich countries. Heavy regulations and weak property rights exclude the poor from doing business. Particularly this is true in poor countries, where 40 per cent of the economy is informal, find the poor, especially the women, young and low skilled workers, are the worst affected by heavy regulations. It is necessary to reform these procedures.

Reforms in the areas of regulation, access to credit and insolvency procedures are important. They are, of course, receiving attention in India, but India needs to speed up the process. A comparison of India with China, Singapore and the US in respect of the various indicators mentioned in the Doing Business 2005 study is interesting (Table). While China with its scorching pace of growth does not show significant improvement over India in all of the indicators of doing business, it is definitely better in some, especially access to credit. Singapore and the US score much better. If they can do with minimal procedures and lesser number of days to register a business start-up, or a property, so can we. It behoves the authorities to initiate a survey of entrepreneurs on the lines of the World Bank's Doing Business review and tackle the impediments revealed by the Survey with a view to reducing them. The information provided in the World Bank Survey may be a useful starting point.

The administrative reform process has to start with this initiative. Are all our procedures and requirements of regulation necessary? This question is all the more necessary as more the impediments, which a bureaucracy places in the path of the intending business person, the more the possibility of corruption and political leverage. The message of doing away with "licence" and "Inspector Raj" has to permeate the whole approach to reform of current methods of doing business.

It is worth recording that, according to the report, India has joined the ranks of top 10 reformers in 2003 on the strength of its changes in debt recovery procedures. But, as the table shows, India still has a long way to go before it can catch up with the best performing countries for doing business. The nuts and bolts of reforms consist in changing the obstacles that face the intending entrepreneur in registering property, accessing credit, enforcing contracts in hiring and firing workers.

Here is hoping that the reformers of macro-economy will not hesitate to bring about changes in these essential aspects of macro-economic governance alone that will mine whether we will have a resurgence of business in the economy, which is vital to growth of GDP and reduction of poverty.

Above all, the misapprehension that such reforms can injure social equity needs to be removed from our mindset. As the World Bank's report points out, the Nordic Countries score the best in respect of low restrictions on start-ups, registration, hiring and firing and access to credit. But, they are nowhere accused of being indifferent to social issues. In fact, they are socially responsible to a fault. The resources released for Governments by easing restrictions on business can very well be better spent for improvement in the social sector.

The latest report points out that it is proposing to study new areas in its report in 2006. One of the areas promised by the latest report concerns reform of corporation tax. It states that there have been countries, which have experimented with flat corporate and personal income taxes. One country "Estonia" has no tax on corporate incomes, if they are reinvested. This is a difficult dilemma to resolve. The loss of revenue as a result of such lower taxes has to be made up by other taxes. This will be difficult to visualise in a scenario of low Customs and excise duties. These suggestions of Doing Business 2005 are interesting, but one cannot be sure if these revolutionary ideas promised in the next report will be equally pertinent to the Indian fiscal scenario.

In the light of the emphasis placed by the present Government on increasing investment, access to fixed credit particularly becomes critical. The latest survey of the World Bank shows that here there is a serious problem in India. It is not only by resorting to better debt recovery procedures, but by improving the mindset of bankers that credit can grow more easily. The practical problems faced by bankers — who have been accused of being lazy bankers — have to be fleshed out. It is no use exhorting them to take risk in lending, but keep indiscriminately waving before them the threat of vigilance and CBI enquiries.

The World Bank's report on Doing Business 2005 sets out an agenda for the practitioners of reform in India. It is to be hoped that the Indian political leadership will take up this task in right earnest so that starting and managing a business in India can be free of impediments brought on by mindless regulatory and investigative enthusiasm.