Given the downturn in economic growth and the daunting challenge of creating jobs for those already in and those about to enter the workforce in the country, the need to double down on bolstering the manufacturing sector has become exceedingly urgent.

The Narendra Modi led government at the Centre is committed to reviving manufacturing with initiatives such as the “Make in India” and “Digital India” programmes. It has correctly identified burdensome regulations as a major culprit for lagging manufacturing, resulting in a focus on easing regulatory hurdles in order to improve the “ease of doing business”.

Onus on the States

The rub is that many of the regulations that affect businesses fall within the jurisdiction of State governments. For instance, starting construction of any kind requires getting no-objection certificates (NOCs) and approvals from various departments of the municipality and State government.

Firms that employ more than 10 workers are subject to meeting compliance requirements under State labour laws. The task of providing adequate water and proper roads falls to respective State government departments. Thus, the ultimate responsibility for easing regulations and improving the business environment lies with States even more than the Centre.

State governments have grasped the nettle and many are making earnest efforts to improve the ease of doing business. They have undertaken reforms across different areas of doing business, such as labour, environment, setting up a business, among others, in order to reduce the time and costs of meeting compliances. A majority of States have introduced single window clearance systems along with the necessary laws to make it simpler to start a business. Many now allow self-certification as well as third-party certification for granting various permits.

Any assessment of the success or failure of these reforms in meeting the objectives of improving the doing business climate will require creating a baseline of the regulatory environment, followed by periodic measurement of the progress made. The Department of Industrial Policy and Promotion (DIPP) of the Union government introduced a detailed survey of State governments and it publishes a real-time annual ranking of States. This ranking reflects the number of reforms that states have implemented. This initiative has fostered competition among States in order improve their ranking and is taken very seriously by bureaucrats and politicians alike.

However, while important in assisting State governments, the DIPP survey only provides a part of the picture. To fully understand how business is actually done and whether reforms by States are being implemented, it is necessary to ask enterprises or firms themselves – who bear the burden of compliance – about their experience in meeting mandated requirements. This will provide direct feedback to State governments about how their actions are helping the situation on the ground. This would, therefore, be a complement, not a substitute, to DIPP’s survey.

Variations in performance

Along the lines of these World Bank Enterprise Surveys, NITI Aayog, in collaboration with IDFC Institute, published a report based on a State-level enterprise survey of more than 3,000 manufacturing firms across India. The survey reveals a wide variation in the time taken for getting various approvals and cost of doing business across States. It also shows that although States have implemented reforms and instituted improved processes, enterprises are often unaware of them. The results confirm our most basic conjecture: States that experience high growth have a better climate for doing business, suggesting a virtuous circle between a better regulatory environment and more rapid growth.

Repeated surveys of enterprises at the State level will provide sufficient data to reasonably measure whether States that have a better doing business climate as reported by firms also see better outcomes over time. They will also allow States to check whether their reforms are yielding results, how far they have come, how they fare in relation to other states, and recalibrate the measures undertaken.

These State level report cards could not only be a means for getting feedback but also help build political and public consensus around reforms at the State level. An improved doing business climate due to reforms could not just help electoral chances of incumbent political parties but deliver real gains in terms of increased investment in manufacturing and creating a large number of good jobs. India needs no less if we are to jumpstart growth and eradicate poverty.

The writers are affiliated with IDFC Institute, Mumbai

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