Why Real Ease of Doing Business matters

Clear the pile Fast approvals mean business

Routine metrics apart, desi factors such as timeliness in administrative matters, regulatory certainty and credit flow are crucial

It’s that time of the year. Country rankings on Ease of Doing Business are due. India assumed the bold challenge of improving its ranking to the top 50 (from earlier 142). Both the Centre and States are putting in great efforts; the last ranking jumped to 130, which however was not broad-based but driven by particular spheres.

Here, it is useful to differentiate between rankings and what business sincerely needs (or reasonably expects). A global ranking derives from evaluation of mercantile indicators across 189 countries; it provides one (but not the only) reference point in promoting a jurisdiction to investors, and so has due merit.

But just this merit must not influence our thinking that rankings created by external experts fully depict our priorities and objectives. Only ranking or incidental indicators must not seize the place of pride, even if they are valuable in maintaining pressure on the larger ecosystem in keeping the economic environment conducive.

Need astute methods

To avoid any misperceptions, when Indian enterprise pushes for ease of doing business, it mostly does not mean a World Bank ranking jump; it wants real change on the ground. Let us also remember the norm that desi (or native) sentiments, experiences and concerns either energise or deter entrepreneurship, and influence the climate for foreign inward investments.

We need astute methods for enhancing the real ease of doing business alongside strengthening India’s perception. So many things are being done beyond the need of rankings per se and these deserve more attention and articulation.

Real ease of doing business relates to ground-level factors and conditions that Indian businesses routinely face. How they can do so with minimised pain, and with what lasting certainty, reflects in both their well-being and risk/investment appetite.

The key indicators in the formal survey are ease of starting a business, electricity, construction permits, registering property, getting credit, minority protection, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Of these, it is not hard to identify areas that are not of make-or-break concern for doing business in India.

In the alternative, let us identify some generic traits for improvement: (a) respect for timelines in administrative matters and judicial resolution (b) regulatory certainty and (c) flow of credit.

Time and rules

The crying need is to willy-nilly institutionalise sensitivity to the value of time, the waste of which has unpredictable financial and operational implications. This needs a revolution in administrative mindsets (ending big-daddy or control mentality), and also calls for greater evolution culturally.

The ratings process can evaluate laws and procedures as written but cannot reliably evaluate implementation. Multifaceted rules, procedures, or a due approval or the occasional scrutiny can literally drag on. Other than select or one-way digital interactions with government, the concept of time-bound decisions and outcomes remains nebulous. Even where law prescribes, say, a 30-day reaction time, it is not uncommon for queries to go out on day 29, triggering another 30-day cycle.

It is not unknown for tax notices to be sent out on the last day for keeping the matter alive, stretching out matters unreasonably. Besides seeding frustration, such traits can occasionally foster rent seeking.

It is not unknown for civil litigation — the core of contract enforcement — to drag on for more than a decade. In absence of rapid judicial outcomes, alternative dispute resolution mechanisms such as arbitration must deliver. Recent developments should make this possible, but efficient outcomes are not yet entrenched. Much faster judicial/alternate resolution is central to the enforcement of contracts or dealing with insolvency. Delays only help those seeking to game the system.

On legal or policy certainty, India has a slightly blemished reputation; much negativity arises from creative application of and occasional arbitrariness in tax and other laws/rules, and what may be lightly termed judicial overreach (e.g. selective ban on legally produced diesel vehicles). Nothing in the formal rating captures these risks.

Nothing can panic businesses more than the possibility of a look-in-the-past or activist-led crusade without substantive validation. Eliminating confusion requires major leadership/administrative willpower and decisive actions (with an equitable attitude that can bolster confidence).

Credit issues

Systemic credit is critical to Indian business. Getting credit was rated at a decent No. 42; so it looks good. But much work is needed to merit this rating in real life.

Regulatory pressures on banks/lending institutions, broad-brush negative portrayal of borrowers in difficulty, and inability of banks to effectively leverage the law to recover monies have generally queered the pitch for borrowers.

While lenders’ liquidity is not an issue, subtle changes to terms/conditions and over-cautiousness (read: reluctance) in taking decisions will keep real credit flow restrained, until a more realistic approach reappears. In case of businesses where hand-holding or restructuring is merited, the colloquial concept of Indian Stretchable Time plays out in full force; matters that are systemically time-bound to a few weeks may not conclude for months.

All in all, in its ranking for getting credit, India is boxing above its true weight.

As an aside, India scored its highest rank for minority protection at No. 8, which probably has limited relevance vis-à-vis real needs.

Its safe to say that enterprise neither commences, nor endures, on the basis of minority ownership, but that of majority. Of course, majority rights do not come free of fetters, but without a more balanced approach this metric is largely theoretical or infructuous.

India competes for foreign/domestic investment at various forums and so will continue needing evaluation via formal rankings. Establishing and implementing India’s own metrics in sync with its own priorities and realities will only reinforce this.

The PMO is reported to have just begun an outreach to address the real ease of doing business. Besides MNC’s and global consultants I trust they will equally reach out to Indian business.

We trail competing nations in enforcing the value of timelines, and demonstrating policy/judicial consistency and certainty. My core proposition is that we effectively balance all systemic efforts between formal rankings and the real ease of doing business.

This column explores ideas and opinions on Indian enterprise and economy. The writer is an entrepreneur and former president of Ficci. The views are personal

Published on October 14, 2016
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