Strengthening India’s biz environment

India was, for a while, the world’s second fastest growing economy, but its growth engine has been faltering in the recent period. The International Monetary Fund (IMF) forecasts a growth of 4.9 per cent for 2012 due to internal structural sluggishness and a sputtering global recovery. Itdescribes the country’s business scenario as “unusually uncertain” amidst waning business confidence, slow approval of new projects and sluggish structural reforms.

Without the Government’s strong and unabated commitment to reforms that would enable strengthening of the macroeconomic environment and enhancing of investor confidence, businesses are unlikely to shift from a “wait and watch” to “action” mode.

The real picture

All this, seen in conjunction with global benchmark indices such as ease of doing business, global competitiveness and human development tells another story about India’s business environment. Businesses in India are over-regulated at each stage. Whether it is starting a new business or obtaining a construction permit, getting electricity, paying taxes, enforcing contracts or even closing down the business, there are a myriad rules and regulations.

A simple precondition for efficient business operations is free markets for products and resources, and free entry and exit. However, in India, resources are highly regulated, whether it is land or labour or capital or natural resources. There are barriers to entry as well as exit, and despite two decades of reforms, the procedural hurdles are becoming increasingly complex. Such regulations are burdensome; they breed corruption and limit competition. Thus, success in business depends more upon ‘whom you know’ than on ‘what you can do’.

Not doing enough

Though the recent reform measures of liberalisation of foreign direct investment norms and the rationalisation of fuel subsidies have somewhat changed the earlier perception of policy paralysis, they are not sufficient. There is a qualitative difference between changing the perception of an investor and encouraging a ground-level entrepreneur to start a business in India. In fact, the findings of the ‘Doing Business Report’ of the World Bank reveal that the regulatory environment in India is not conducive to the smooth functioning of business. India’s ranking has slipped from 120 in 2008 to 132 in 2012, even when neighbouring Sri Lanka, Nepal and Pakistan figure higher.

As the third largest economy in the world in purchasing power parity terms, India is perceived as strategically important on the global stage. To its advantage, it has a large domestic market, favourable demographic factors and high savings/investment rate. India’s growth story is partly contributed by the ‘demographic dividend’ – the advantage that a country derives as a result of a fall in its dependency ratio or the proportion of its non-working to working population.

Human capital advantage

However, with labour being a key factor of production, human development is of critical importance. The Human Development Index (HDI) is a comparative measure of life expectancy, literacy, education, standard of living and quality of life. India ranks 134 out of 187 in the HDI index, which only underlines the need for it to invest in its human capital to encash its demographic dividend. This is actually what accounted for a large part of the growth recorded by the southern States in the last decade. As much of population growth is going to occur in States that are currently poor in human capital as well, the much talked about demographic dividend could well turn into a demographic nightmare.

Despite more than two decades of reforms, the root cause of India’s weak ranking in the global context is the divergence between micro business decisions and the macro business environment. What India needs is convergence of all the elements of the PESTLE model of business environment that covers the Political, the Economic, the Sociological, the Technological, the Legal and the Environmental. This convergence would produce outcomes similar to similar to the boat races in Kerala, where everyone toils to row the boat in the same direction.

Streamline laws

Alongside these, a careful balancing of environmental and growth needs would be necessary. As the RBI Annual Report of 2011 says, “There is a need to make doing business easy by adopting models like the one in Singapore, where multiple agencies/ministries sit together to quickly give decision clearing investment projects. The onus for such clearance clearly rests with the bureaucratic machinery.

“Businesses also need to rejig their strategies that aim at operating in a more competitive environment earning normal profits within the legal and environmental framework and not try to exploit rules and weak regulation to its advantage at cost of integrity”.

To conclude, an action plan similar to the 1991 reforms is necessary, where a macroeconomic crisis provided the opportunity to dismantle the Licence Permit Raj that ushered inIndia’s growth story. What is required now is to streamlinethe multiple rules and laws governing land acquisition, labour , use of natural resources and capital controls.

Market forces should be encouraged to determine the allocation of these resources, while the Government should create mechanisms for fast-track implementation of infrastructure projects and investments in human capital through reorientation of existing health and education programmes.

(The authors are professors at S.P. Jain Institute of Management and Research, Mumbai.)

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