The Unease Of Doing Business In India

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In India, doing business is easy - for those who know the right people and know how to grease their palms.

When asked the question, “How easy is it to do business in India,” the answer that most immediately comes to mind usually has to do with India’s ranking on the World Bank’s Ease of Doing Business Index.

It’s a ranking that placed India at 134th place in 2007, 130th in 2016 and famously, 100th in 2017. Improvements in the ranking are supposed to signify the breakdown of regulations that limit economic growth. A change in ranking – particularly the record jump that India has managed – is a sign that economic reforms are underway and that potential business should take note.

For Narendra Modi’s government, the 100th position (out of 188) represents a much-needed vindication for his many experiments in economic policy. It is also an index – capable of winning votes from a population that is increasingly questioning the business acumen of the nation’s top decision makers.

However, if the intention of the World Bank’s index is to answer the question, “how easy it is to start a business?” then one might find that little, if anything, has changed.

Research underway by economist Kunal Sen of the University of Manchester shows how the World Bank’s own datasets reflect how difficult it still is to set up a company in India. Companies still spend months, even years, trying to get the two main permits they need to set up a manufacturing base in India – the operating license and a construction license.

What emerges from the much hailed ‘India growth story’ is that business comes easy, for some, but not for everyone. Some companies seem to get permits approved in a matter of days. Others can take weeks. And surprisingly enough, albeit based on inconclusive data, this is not related to corruption. Businesses seldom self-report cases where they might have paid a bribe, but based on Kunal’s reading, it doesn’t matter. From the company that waited a year, to the company that had it done in a day, bribe-giving is endemic. What turns out to be a decisive factor in setting up shop in India is political capital – and how private companies wield it.

Some states, where there is what Kunal calls ‘a private takeover of bureaucracy,’ see businesses set up with far greater ease than others. This is not a factor of business climate – as these states tend to be ones that are weaker institutionally. High-performing, high-HDI states, like Tamil Nadu and Maharashtra, perform the worst when it comes to the time needed to get registration and paperwork done. Lower-income states such as Bihar and Orissa, on the other hand, show a far greater ease of access for companies to get their deeds signed.

Kunal attributes this to the presence of networking connections with powerful politicians – who can then order the bureaucrats to perform the job efficiently. And while this approach suggests that the outcome is private economic growth, it’s not always the best option. Companies with lower productivity are routinely picked over those with higher ones – courtesy the whims of political favour. The market, by all means, is not a level playing field. The best-competing product or service does not necessarily get the contract – rather, the company that knows the right people, has their ear, and knows how to grease their palms.

Kunal’s research reflects the reality of countless entrepreneurs and medium and small-scale businesses who still struggle with paperwork, over two decades since the infamous License Raj supposedly ended. As Kunal highlights, doing business ‘by the rules’ is pointless in a country where the de jure rules are seldom enforced.

Indeed, by the World Bank’s data, India still maintains a poor position in terms of acquiring construction permits (181st), registering properties (154th) and enforcing contracts (164th). The indicators where India performs well – far above the world average) are in Protecting Minority Investors (number 4th) and getting electricity and credit.

In response to a question from the Madras Courier, Kunal agreed that the Doing Business index could not account for the biggest aspect of Indian business by far – the informal sector. With no official data, the World Bank was at a loss to explain this intangible yet crucial aspect of India’s economy. But there are other teething problems with the index.

Worker’s rights organisations have criticized the World Bank’s criteria, which tends to favour employers over workers. States with a higher level of worker protections tend to fare poorly on the index, while those with abysmal track records score higher. The ITUC Global Rights Index was started as a counter to the World Bank’s metric.

The Ease of Doing business index proves itself unable to answer the question its name implies – how easy is it to do business in India? The answer encompasses numerous factors which the World Bank cannot measure – the extent and nature of informal operations, the propensity of local bureaucrats to answer to political bosses who in turn answer to select private enterprises, the ease of setting up a business versus the ease of worker’s accessing their rights, and so on.

Unless the Ease of Doing Business Index accounts for the sleaze of doing business in India, it will not reflect the reality of greased palms, favoured-ears, and dysfunctional bureaucracy continues to define the Indian business climate.

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