The World Bank's representative working at the heart of the definitive 'Doing Business' rankings revisits the Indian government's pledge to improve the country's rating on global charts. The overall assessment is good but there is a long road ahead to achieve a truly business-friendly environment.
The private sector is often described as the 'engine of economic growth', given its critical role in creating jobs, which enable citizens and countries to prosper. However, several factors, such as lack of access to finance or burdensome processes for starting a new business, can undermine private enterprise and, if left unaddressed, can impede growth.
For India, job creation and fostering entrepreneurship that creates formal jobs are of particular importance, given the country's demographic profile - 744 million working age people, of whom 326 million are youth aged 15 to 29 years.
Studies show that creating a regulatory milieu that enables private enterprise, especially small firms, to function and be creative has a large positive impact on job creation and is, therefore, good for the economy. It is in this spirit that the World Bank Group's 'Doing Business' report shines a spotlight on the main regulatory constraints affecting domestic small and medium-size enterprises in 189 economies from around the globe, including India.
While the report does not measure many factors that are important to a well-functioning business environment, such as macroeconomic stability or the availability of a skilled workforce, 'Doing Business' covers several critical factors throughout the life cycle of a small and medium enterprise (SME). The areas of business regulation covered by the report's 10 indicators are: Starting a Business; Dealing with Construction Permits; Getting Electricity; Registering Property; Getting Credit; Protecting Minority Investors; Paying Taxes; Trading Across Borders; Enforcing Contracts; and Resolving Insolvency.
Based on data collected every year, the annual 'Doing Business' report presents results for two aggregate measures:
- The ease of doing business ranking, which compares economies with one another; and
- The distance to frontier (DTF) score, which shows the absolute progress made towards best practice.
In the latest 'Doing Business' report, published in October 2015, India's ease of doing business ranking is 130, compared to 134 in the previous year, while its DTF score is 54.68, up 2 points over the previous year.
The improvements on both measures were driven mainly by reforms in both Mumbai and Delhi (the two cities covered by the report) across two 'Doing Business' indicators, namely “Starting a Business” and “Getting Electricity”.
To make starting a business easier, India adopted amendments to the Companies Act that eliminated the paid-in minimum capital requirement. Now, Indian entrepreneurs no longer need to deposit INR 100,000 ($1,629), which is 111 per cent of India's income per capita in order to start a local limited liability company. The amendments also ended the requirement to obtain a certificate to commence business operations, saving entrepreneurs an unnecessary step and five days.
In the area of “Getting Electricity”, utility companies in Delhi (TATA Power Delhi Distribution Limited) and Mumbai (Bhrihan Mumbai Electricity & Transport Undertaking) eased the process for obtaining a new electricity connection. As a result, it now takes less time for a business to connect to the grid in both cities.
These reforms, coupled with others undertaken by India over time, are encouraging. Indeed, India has recorded a total of 25 reforms easing business regulation since 2004 (when the first edition of 'Doing Business' was published) in all areas measured by the report, except in the area of Enforcing Contracts. These have led to tangible improvements for budding small businesses in India.
Three examples come immediately to mind:
- Since 2004, India has made starting a business easier by reducing the time required for obtaining the permanent account number (PAN), speeding up the process for obtaining a tax registration number; and establishing an online system for value added tax (VAT) registration. As a result, considerable gains have been recorded. Ten years ago, for instance, it took an entrepreneur in Mumbai almost 100 days and cost 62 per cent of GNI per capita and required a paid-in minimum capital equivalent to 352 per cent of the GNI per capita. Now, the process can be completed in just 29 days, it costs only 17 per cent of GNI per capita and there is no paid-in minimum capital required.
- A little over a decade ago, an entrepreneur seeking a loan to grow his business would have had little luck, because financial institutions lacked access to information systems to assess his credit-worthiness. Today, thanks to the creation and expansion of a national credit bureau offering credit scores and coverage on par with those in some high-income economies, a small business in India with a good financial history is more likely to get credit and hire more workers.
- In 2014, India strengthened minority investor protections by - among other things - requiring greater disclosure of conflicts of interest by board members and introducing additional safeguards for shareholders of privately held companies. As a result, India is in the top 10 on the Protecting Minority Investors indicator and minority shareholders benefit from strong protection from conflicts of interest and enjoy extensive rights in major corporate governance.
However, while India leads the South Asia region in the number of reforms undertaken historically, the pace of reforms has been irregular over time. For instance, India did not record a reform in 'Doing Business 2014'. Going forward, India's renewed efforts to improve the country's performance on 'Doing Business' measures will need to be sustained over some time. And, while businesses in India continue to face a wide array of challenges, the biggest improvements need to be made in the areas of “Dealing with Construction Permits” and “Enforcing Contracts”. For instance, on “Dealing with Construction Permits”, an entrepreneur faces an average of 34 procedures, compared to a global average of 14 procedures. In “Enforcing Contracts”, it takes 1,420 days to settle a commercial dispute through local courts in India, which is more than double the global average.
A study of 'Doing Business' data shows that the countries that have reformed the most over the past 12 years (i.e. Georgia and Rwanda), have also increased their national per capita output and firm creation. So, too, can India reap the benefits of a thriving private sector by providing a better business framework for entrepreneurs.
Rita Ramalho is the program manager of the World Bank Group's Doing Business, which provides objective measures of business regulations for local firms in 189 economies and ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency, and trading across borders.
