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The latest edition of the World Bank’s Doing Business report, which was released recently, shows that India has done worse than last year as far as indicators like starting a business, getting electricity, registering property, getting credit, protecting investors, trading across borders and resolving insolvency go.
In terms of ranking, the country has slipped from 131 to 134. Despite being ranked very high in various surveys in terms of potential investment destination, India is perceived to be a difficult place to operate by investors thanks to such difficulties.
Questions have been raised about whether India should be bothered about this ranking when the World Bank has accepted the Independent Panel Review of the Doing Business Report submitted in June 2013 that recommended doing away with such aggregate rankings of countries. Besides, the panel also questioned the methodology adopted for the Doing Business Report.
These suggestions are likely to be considered for the 2015 edition.
Despite important economic reforms since 1991, regulatory burden on Indian businesses is real and these issues need to be resolved to realise our growth potential.
The report of the Committee for Reforming the Regulatory Environment for Doing Business in India (or the Damodaran Committee report) agreed that there were hurdles and said: “The seemingly mindless explosion of regulations, impacting seriously on management time and cost has created a negative perception of the regulatory environment in which business is conducted”.
However, at the same time, the country has lowered regulatory barriers to be more in line with international best practices in a few areas. Thanks to such changes, some states have been able to attract investments. But this has not happened in a concerted manner at the Centre and in all the states.
The lack of such an holistic approach is impacting job creation in this country.
With negative employment elasticity in manufacturing, the National Manufacturing Policy’s target of 100 million additional jobs by 2025 will be easier said than done. The Federation of Indian Chambers of Commerce and Industry (Ficci)’s 12-point manufacturing mandate emphasises on the need for improving the regulatory environment in the country.
The Doing Business report tries to capture entrepreneurs’ experience in the largest business city of a country. For India, it is Mumbai. But India is a large and diverse country and so it may not be appropriate to perceive the country’s business environment through such a narrow prism. In fact, a number of measures are being implemented to reduce the regulatory burden on business in different states and departments.
As noted in the Damodaran Committee report, certain departments that have set up authorities for advance rulings. Such authorities can be approached by investors to get a clear picture about the applicability of a particular regulation to their activity.
This system of advance rulings can bring about predictability and certainty in investment decisions. But then not all relevant departments or states are taking such measures. Maharashtra has been following the system of self-certification and consolidated annual returns for over 13 labour laws to reduce the compliance cost and time. Wage payments are being made through cheques to ensure workers are paid fairly.
Today, land acquisition, allotment and prices are major worries for the manufacturing sector. There are a number of issues involved here. The system of land allotment needs to be transparent and e-based. States need to ensure a smooth land conversion process and time-bound land use change notifications and also time-bound permissions for purchase of land.
There are some states that have been able to provide effective solutions to the industry. For example, Gujarat has a land bank for industry to choose from. More than the cost of land, it is the information about land availability and the transparency of the process that matters.
The Haryana government provides for authorised qualified engineers or third party agencies to carry out inspections under various laws like Air (Prevention and Control of Pollution) Act, Water (Prevention and Control of Pollution Act), Standards of Weights and Measures (Enforcement) Act etc, to reduce compliance cost and time.
As part of its tax reforms, the Bihar government passed a legislation in 2010 that created a new tax regime and expanded the online payment options in 2012. These reforms are expected to save the private sector more than $7 million per year and decrease rent-seeking opportunities. Such steps will also benefit Bihar by increasing its tax revenues.
This is being implemented with the support of the World Bank. The Ficci’s Bain & Company Empowering India report captures many such best practices in India. We need to replicate these across the country.
Globally, many countries have instituted a Regulatory Impact Analysis system to assess the quality and utility of any legislation over time. In 1995, Mexico launched ‘The Agreement for Deregulation of Business Activity’, leading to the review of 95% of their regulations. The net result: an estimated 40% reduction in either their scope or mandate of the regulations which were reviewed.
In India, there is no such institutionalised mechanism in operation, though the 12th Plan document and also the Damodaran Committee report mention the need for such reviews. It is important that all levels of the government adopt this approach to lower regulatory barriers for manufacturing to realise the target of 100 million jobs.
(Naina Lal Kidwai is president, Federation of Indian Chambers of Commerce and Industry. She is also Country Head of HSBC IndiaThe views expressed by the author are personal.)