India’s ease of doing biz isn’t just about permits

The Asian Age, November 09, 2016

Pradeep S. Mehta & Udai S. Mehta

When the World Bank’s ease of doing business rankings showed that India has only gone up by one notch from 131 to 130, it sent the whole government into a tizzy. At the same time, the department of industrial policy and promotion with the World Bank also put out a comparison of Indian states on how their Eodb has been performing.Thus, India has been lately focusing more on the aspect of ease of doing business. Following the cue, a lot of Indian states are pushing reforms on taxes, environmental and labour reforms, single-window online clearance and setting up of commercial courts. This has ensured a competitive spirit among Indian states, each trying to lure the private sector. Finally, they seem to have understood the reason for driving the business, i.e. to stay in business.

A review of indicators for rankings reveals the predominance of ease with which businesses can obtain permits from relevant government departments. For instance, both rankings cover ease of obtaining permits with respect to construction, getting electricity and registering property. Other permit related indicators, covered in at least one of the reports, include environmental clearance, single-window clearance, starting a business and labour regulation enablers. The resources required to obtain permits are easier to measure and compare, and thus, unsurprisingly find mention in such reports.
As part of an ongoing project focused on “Eodb among North Indian states with the perspective of improving competitiveness”, our team had undertaken a field visit to six North Indian states (Rajasthan, Haryana, Uttar Pradesh, Uttarakhand, Himachal Pradesh and Punjab). The initiative will culminate in a conference in Jaipur (on November 17-19), which will create a forum for all stakeholders to discuss some of the implementation challenges.

The ease of obtaining permits cannot be equated with the ease of doing business. Obtaining permits is only one of the factors in doing business, after which the “unease” of doing business often begins.
Several Indian states, such as Uttarakhand, have implemented a concept of “deemed approval” under its singlewindow clearance mechanism. While this laudable reform has helped the state move up the rankings, feedback from investors reveals that such “deemed” approval is not considered equivalent of “in-principle” approval by financial institutions, limiting the ability of small and medium enterprises to raise finance. Similarly, while the efforts of the Uttar Pradesh government to institutionalise a dedicated body for providing approvals for setting up of business are worth appreciating and emulating, frequent transfers of key officials seems to have rendered this body dysfunctional. Single-window clearance mechanisms of states like Rajasthan and Himachal Pradesh are also reported to be functioning below par despite being in existence for a considerable period.

Thus, the single-window clearance mechanism should not just be a mere mirage which hides several windows behind one single window but should be implemented in a manner which offers an actual one-stop shop for investors, as done in Punjab. The government of Punjab has established a separate institution for singlewindow clearance (Invest Punjab), by bringing on board staff from various government departments under one roof and one command. For example, an electricity utility’s employee is deputed to work in Invest Punjab. She has full powers to sanction the electricity connection and convey it to the field staff. In other states, the single-window service for electricity is still dependent on the power utility’s distant staff to get the connection done. Thus, the institution is able to take decisions on time and efficiently implement the same.
Like the cross-country ranking, which compares reforms in top cities of countries (Mumbai and Delhi in India’s case), the interstate comparison also seems to have focused on the capital city in the state and neighbouring areas. Such narrow focus might nudge states to improve performance within the limited geographical area relevant for rankings. For instance, a review of economic development in Haryana points to the state government’s focus on developing the region within NCR and huge income disparity between Gurgaon and other cities. Such phenomenon is more evident in hilly states like Himachal Pradesh and Uttarakhand, so people in hilly areas tend to migrate to the plains for jobs.

The ease of obtaining labour-related approvals does not ensure the availability of skilled and committed labour at all times. For instance, while Haryana adopted labour reforms in March 2016, state-based industries have suffered with frequent strikes and labour unrest. This has resulted in business coming to a standstill. Punjab has a perennial problem of lack of skilled labour, and has a limited grievance redressal mechanism for labour-related issues. Unfortunately, these issues do not get mentioned in any of the
It would be the MSMEs that are going to be the important sources of job creation. While North Indian states have taken steps to encourage its growth, there are a plethora of challenges they will face.
We need to create many more jobs in India to ensure that our demographic divided is not converted into a demographic liability. One understands that big corporations won’t create a large number of jobs, as many would prefer to move towards automation. Thus, it would be the MSMEs that are going to be the important sources of job creation. While North Indian states have taken several steps to encourage the growth of MSMEs, there are a plethora of challenges that they face, from accessing finance to delay in receiving payments, which negatively impacts their growth. According to a World Bank report, 35 per cent or one in three MSMEs receive payment only after 90 days or more. While larger corporations can alleviate the adverse effects of delayed payments, managing cash flows is a struggle for MSMEs due to the nature of their businesses.

Thus, the need to periodically review measures adopted by states is important to gauge progress. However, it is essential to confront such implementation bottlenecks to make real progress on the ease of doing business and improving overall competitiveness. Without addressing these, good policies carry the risk of resulting in bad outcomes. Ascertainment of implementation challenges requires a bottom-up approach. This comprises consultation with key stakeholder groups, including employers and labour, midlevel government officials, experts and civil society representatives. Such comprehensive consultation exercises help to identify bottlenecks to inclusive growth and devising strategies to address these. Looking at the other side of the aisle also helps in assessing if the governments have been merely enamoured by the rankings or have made sincere efforts to improve the level of competitiveness and the ease of doing business.

The authors work for CUTS International

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