Let’s get down to business

Mumbai: Deepak Parekh, the non-executive chairman of the board of HDFC, has rightly lashed out at the government that there has been little improvement in the “ease of doing business” in India by the government in the last nine months. Hectic efforts are on by the Centre, but much of the action lies elsewhere. 

 

A possible approach could be to focus on the most distressing parameters and the countries which have improved over recent times. If we take a look at the Brics countries, we find that Russia has managed to improve its ranking by 50 points in the last two years. Other such examples can become a guiding tool for India’s reform process.

The dispute resolution mechanism needs to be efficient. In India’s tardy judicial system, it takes about four years and costs as high as 39.6 per cent of the claim to complete the judicial procedures in resolving cases due to various factors. The corresponding figures for the best performing Brics nation, namely Russia, are 267 days with costs at only 14.9 per cent of the claim. In order to speed up the judicial process, Russia introduced a law on jury trials for all regional courts and implemented electronic case filing systems. China, in 2009, tightened the rules on enforcement of judgements that would help limit the means by which debtors could conceal assets. In 2014, it amended its civil procedure code to streamline and speed-up court proceedings.

 

The second-worst performing indicator is dealing with construction permits, which are often costly, complicated and time consuming. One of the indicators in the report is the “Distance to Frontier” (DTF) measure, which captures the actual distance the economy has to traverse to reach the best performing nation that is set at 100; India currently stands at around 31. In terms of reforms, Russia and China have made significant progress as is evident from their DTF score, which has improved by almost 40 points from 2006 to 2015. Russia, also a federal country, focused on reducing the number of procedures and implementing effective single-window clearance mechanisms to reduce the time and effort required. China concentrated on reducing the delays through electronic processing, online applications and streamlining pre-construction approvals.

As per World Bank studies, the approval costs in India for building a warehouse are significantly high at around 28 per cent of the project cost which in case of Brazil, South Africa and Russia are less than two per cent. Moreover, these are only official costs and do not account for the money paid under the table.

 

As experience above shows, there is a need to reduce the number of approvals, club processes and facilitate con-current application processing rather than sequential.

The other critical measure is “Starting a Business”, which is beset with a multitude of procedures that are often extremely time consuming and involves different departments. While India has around 12 procedures that take 28 days for launching a company, the better performing Russia and South Africa have around five procedures, which take 11 and 19 days respectively. The costs in India are around 12.2 per cent of the start-up costs, while the corresponding figure is less than two per cent in Russia, South Africa and China. 

 

The minimum paid-up capital requirement is excessively high at 111.21 per cent, which is almost nil in other Brics nations. The Centre has taken some positive steps in this regard which include establishing an online VAT registration system, improving electronic payment and developing single-window clearance mechanisms and is also considering reducing/eliminating the high minimum capital requirements. 

The tax regime in India has so far followed what is an internationally termed as “adversarial approach” i.e., treating the investor as an intentional de-faulter even as the world is moving towards a “collaborative” or “co-operative” approach i.e, resolving disputes through dialogue. India is continually trying to improve on the most common feature of tax reforms, enhancement of electronic systems for filing and paying taxes. The long pending goods and services tax (GST) and direct tax code (DTC) will most likely usher in the next set of institutional reforms.

 

However, currently the number of taxes in India is 33, while the remaining Brics nations have less than 10. Further, Russia has reduced the tax rates, simplified VAT procedures and promoted accounting software. China, too, has reduced corporate tax rates, unified domestic and foreign taxation, enhanced calculation clarity, reduced social security contribution rate and introduce electronic filing and payments which has helped the DTF score increase from 18.5 to 67.4 in a span of seven years.

Fixing these laggards first would do much to help India improve its business climate. Additionally, it would be useful to study the reforms undertaken by other similar countries, even from non-Brics countries, which have progressed swiftly and handpick the critical measures like contract enforcement, taxation regime, construction permits etc that can be tailored to Indian conditions.

 

Finance minister Arun Jaitley has recently announced several initiatives that would help in this endeavour, a new law to replace the need for multiple prior permissions with pre-existing regulatory mechanisms, bankruptcy law reforms, simplification of tax procedures, exclusive commercial divisions in various courts, and a new law to resolve disputes in public contracts. However, what India needs is a coherent and systematic approach, undertaking impact assessments of legislations and regulations.

While the urgency shown by the new government to bring about necessary reforms to help businesses is promising, this needs to be followed equally ardently with action on the ground. For example, if the government can launch a new slogan: “India out of Red Tape” like “Incredible India” or “Make in India”, it might galvanise our system to attack unnecessary bureaucratic delays.