Setting Right Trend For Business

Though the World Bank’s latest Doing Business report’s ranking provides a grim picture of India, in reality the Modi Government has managed to brand India around the world as a favourable destination for foreign direct investment with a transparent framework

The World Bank’s Doing Business ranking has unnerved many in the power corridors of Delhi. India’s ranking of 130 out of the 190 countries surveyed, paints a dismal picture. The euphoria surrounding the India story has been dampened and several leaders have vehemently rejected the ranking, calling them a poor reflection of the overall progress which has been made since 2014. Rankings can be a tricky indicator. Very often, important changes get obscured by statistics and the sheer volume of the parameters that are being scrutinised. India appears to have made remarkable changes in the business regulatory environment. We are on a promising growth trajectory and have every reason to be sanguine about the future prospects of the Indian economy.

The Modi Government has made palpable changes, especially in areas such as electricity, taxation, documentary compliance procedures with regard to trade, corporate social responsibility (CSR), and a dispute resolution mechanism for resolving commercial cases. Labour market distortion and archaic laws in this sector have stymied progress and are formidable obstacles.

Doing business measures the regulations that promote or prohibit private sector businesses from commencing, comfortably operating and expanding their operations. These regulations are measured using 11 indicators: Commencing a business, obtaining the required construction permits, getting electricity, registering a property for the establishment, securing credit, protecting minority investors, paying taxes which are levied, trading across borders, enforcing contracts, resolving insolvency efficiently and labour market regulation. Delhi and Mumbai are the two cities which have been covered in the rankings. Rankings are made using a distance to frontier score that captures the gap between a country’s performance and a measure of best practices across the globe.

This year, the report incorporated a gender dimension to the ranking, making it a more coherent measure of the business environment in the country. Economic data over the years have revealed a very disquieting trend. In their pursuit of economic independence, women entrepreneurs grapple with more challenges than their male counterparts. Questions such as, does a woman need her husband’s permission to leave the house (yes that is the case in 17 economies!), or does she require her consent to start a business, were analysed this year. It is imperative to integrate women in the workforce in order to harness the true potential of a country. In the case of India, amendments to the Hindu Succession Act empowered women by making it easier for them to inherit property. What it also did was to promote literacy amongst girls. On a more encouraging note, the Securities and Exchange Board of India dictates that every publicly listed company must have at least one woman director on its board.

Indian policymakers have been relentless in their endeavour to usher in constructive reforms and make the regulatory regime more conducive to business. In order to facilitate the employee state insurance contribution, an electronic system has been introduced. In the sphere of trade, the Customs Electronic Commerce Interchange Gateway portal successfully introduced the electronic filing of integrated customs declarations. This has tremendously reduced the time factor. Ask anyone in the industry and they will tell you that documentary compliance procedures were a nightmare. There has been a very significant reduction in time and costs associated with providing electricity in Delhi and Mumbai. But India is more than just political and financial capital. Reforms, even if introduced in a piecemeal fashion, must be announced in other urban and rural areas. The Insolvency and Bankruptcy Code, which is slated to come into effect, is going to introduce new insolvency practices as well. Businesses stand to gain from this important overhaul.

Amendments to the Companies Act have done away with the minimum capital requirement. As the Indian economy gallops ahead in an uncertain global environment, the practices adopted by Indian companies are consistent with global standards regarding transparency and corporate governance. In consonance with the Government’s objective of shared prosperity, the revamped Companies Act urged companies to allocate two per cent of their profit towards a social cause (education, health, women empowerment, sustainable development etc). With this bold move, India became the first country in the world to have a legislated CSR policy.

Hurdles continue to persist in the labour market which is fraught with a labyrinth of regulations. Nearly 45 Central Government laws and over 100 State statutes control India’s fractured labour market. The Industrial Disputes Act of 1947 has been a bone of contention. The Draconian law requires factories with more than 100 employees, needing Government consent prior to shutting shop. On the other hand, muscle-flexing and threats from trade unions and demands for minimum wage, have implications for employment. These throttling laws relating to employment, welfare and social security, are frequently circumvented by people who do not want to face the wrath of the Government.  Ironically, Indian labour laws are creating incentives to use less labour! Prime Minister Narendra Modi has asked ministries to scrutinise the report and suggest areas where changes can be initiated. The labour market is in crying need of an overhaul and the Ministry of Labour and Employment will have to work diligently towards alleviating these systemic distortions in the labour market. Micro-finance is also concentrated in a few States, and it is vital that it mushrooms in other States to reduce indebtedness in the country.

The Government has an important responsibility to rectify market failures, negative externalities and issues related to asymmetric information. When the market fails and we do not arrive at a socially acceptable outcome, the Government has a patriarchal role to play. Prime Minister Modi has managed to brand India as a favourable investment destination with a transparent framework. He promised to make the country more propitious for global investment and he has brought in a more favourable foreign direct investment regime (FDI). The policy announcement in June this year to radically liberalise the FDI regime, is a precursor to more prosperous times ahead. Gaps between policy formation and implementation do persist, but the Modi Government is on the right track to mitigate them.

(The writer is a freelance political commentator)

First Published in The Pioneer