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Tease for or Ease of doing business?

Author: A Saye Sekhar/Thursday, November 2, 2017/Categories: Economy, Expert View

Tease for or Ease of doing business?

Ease of Doing Business is the most-abused and oft-repeated phrase by jingoistic politicos in India where doing business itself is turning out knottier by the day, leave alone the adjective ‘ease’.

The World Bank’s announcement of the EoDB 2018 rankings, in which India scaled 30 notches above its current position from 130 to 100, is surely a reason for the glee seen on the faces of the powers that be. Nothing wrong in it. But are these ranks panacea to the actual ease of doing business? Are the parameters relevant? Is there ease in doing business in India? Ask the small traders and pan dabbawallahs in towns and villages after the implementation of the GST, what their perception is?

The nation has very little to boast about the ease, in reality. Take a look at the index in the website and you could decide whether to feel proud for climbing a notch up from 131 to 130 in the global rankings among 190 countries, last year – EoDB 2017.

This year’s ranking comes a breather. And, climbing 30 notches up is no mean an achievement. And, the Narendra Modi Government, which has already amplified its self-aggrandizement, is all set to sugarcoat every other difficulty confronted by the average businessman, thanks to the arm-twisting by the demonetization and suffocating situation encountered owing to GST implementation, with a high-decibel campaign on this “achievement”.

Are benchmark parameters correct?

The note on the EoDB website mentions distance to frontier (DTF) as the measure of scale. As defined, the distance to frontier (DTF) measure shows the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represents the frontier. The ease of doing business ranking ranges from 1 to 190.

The parameters considered include: 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.

India has performed extremely well on two to three of these performers – paying taxes, getting credit and resolving insolvency. In the days of abundant availability of business spaces, especially on a turn-key basis, securing of building permissions, electricity connection, and property registration are mundane and irrelevant.

The implementation of Goods and Services Tax (GST) – mostly by forced deadlines on compliance, the Government could have bracketed this as an achievement and submitted the same to the world bank.

HDI, GHI better indices to measure country’s performance

A lot of debate on the genuineness of the EoDB ranking as opposed to global hunger index (GHI) and human development index (HDI) is already going on and economists have already pointed out that the latter two indices are better indicators of the ground situation rather than the EoDB index, which is mostly based on interviews through questionnaires and some claims by the governments. The teething troubles and frequent gear shift in the policy enforcement and the multitudinous corrections in the rate structure of GST have not been factored in when it comes to EoDB. That the proclivity of the government in helping businesses settle hasn’t been measured.

‘Dealing with construction permits’ is a parameter in measuring the so-called ‘ease’ of doing business and India ranks at 181 this year as opposed to 185 a year ago – a 2.63 percentage points increase in DTF. ‘Paying taxes’ is another vital information factored in to decide where does a country stand. Do you wish to know where we stand? At a proud 119th position, an 18.39 percentage point spike. A manifold jump, it is, indeed from the 172nd position that hasn’t moved either up or down from 2016 to 2017.  

Getting credit is another parameter that showed a 10 percentage-point rise from 65 DTF to 75 DTF.  Once the credit is accessed from any source – mostly State-run Public Ssector Banks, the debt servicing goes to a toss.

Surging NPAs

Just recall how India very recently announced a Rs. 9 lakh crore stimulus out of which Rs. 2.11 lakh crore is apportioned to recapitalize the banks.

The sudden spike in the Non-Performing Assets (NPAs) have breached the Basel-III norms of the required capital adequacy ratio (CAR) or Capital to Risk Weighted Assets Ratio (CRAR) of the banks. The NPAs went through the roof: the SBI alone recorded 22.8 per cent at Rs. 1,88,068 crore. The SBI, Punjab National Bank, the IDBI Bank, Bank of Baroda and Bank of India together accounted for Rs. 3,93,154 crore or 47.4 per cent of the total NPAs.

Why isn’t this a parameter in the EoDB index. Maybe, it is the ease of defaulting in loans and still doing of the business is what is a benchmark for this. The cases of Sahara India, Vijay Mallya, Lalit Modi and the multitudinous corporate frauds only prove that India is a haven for the ‘ease of survival of the biggest’.

Striking off registration of companies

Recently, in the process of a slew of its measures on the economic front, the Ministry of Corporate Affairs had come up with a great idea of unilaterally striking off over two lakh companies – for failing to file compliances with the Registrar of Companies -- branding them as shell companies. Those who have the wherewithal to fight, especially the ones who were listed on the Securities and Exchange Board of India (SEBI), could secure a relief and stay afloat in business.

While the Government’s intent in choosing this blanket striking off of companies could be seen as a method of keeping the shell companies and fraudulent suitcase companies under check, the MoCA should have taken verified the cases individually by corresponding with the companies.

Blacklisting of Directors

Another indiscriminate and blanket disqualification of over 300,000 directors and debarring their Director Identification Numbers (DIN) preventing them from participating in the conduct of the businesses is a measure that actually complicated the doing of business in India.

A multi-billion-dollar multinational company like Dr Reddy’s Laboratories Ltd had to approach the court to have the directorships of its helmsmen G V Prasad and Satish K Reddy revived. The smaller businessmen are still hoping the government to come up with necessary measures that could help the genuine ones, for not every one would have the muscle to knock the doors of the court to seek a relief against a measure initiated by the State.

Out of the 300,000 disqualified or blacklisted directors, I have a hunch that not more than 25,000 to 30,000 would be fraudsters, while most others would have started a company with a definite purpose, but failed to operate the same owing to very genuine reasons. These companies would not have been shut down, for the process of shutting down a company is too very cumbersome. The filing of compliances and audit continue to remain very archaic in Indian context. In most cases, entrepreneurs don’t even understand the jargon in the regulations.

Process of starting a business

Registering a name, securing a DIN, obtaining a digital signature, reserving the company name, paying of stamp duties for certificate of incorporation, opening a bank account, obtaining a PAN number, and Tax Assessment Number, GSTN, Registration for Valued-Added Tax and Professional Tax, registration with Employees Provident Fund Organisation, Employees State Insurance, Securing trade licenses from the civic authority concerned aren’t as easy as depicted in the website.

And, the unaccounted commissions and “service charges” to be paid to mediators and those at the crucial positions would never be factored in. That is where the “so-called ease or difficulty” stems from in doing a business.

Amid this chaos, the dip in growth rate of GDP in the April-June quarter that plummeted to 5.7, NDA-II’s career’s lowest, has found the too many cooks in the managing the country’s finances jittery. Even the stimulus wouldn’t ease the situation, leave alone ease of doing business.

By the World Bank’s own admission, the Doing Business rankings do not “measure all aspects of the business environment that matter to firms or investors”. Rather, they provide an assessment of red tape and administrative hurdles across 11 areas of business regulation. To determine their rankings, the World Bank relies on four sources of information: the laws and regulations on the books, experts well-versed in local business practices, national governments, and World Bank staff. The World Bank uses these various inputs to estimate how many hoops a “prototypical firm” must jump through to carry out a set of standardized tasks, says Mohan Guruswamy, former Economic Advisor to the Prime Minister, and a commentator on policy.

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A Saye Sekhar
A Saye Sekhar

A Saye Sekhar

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2 comments on article "Tease for or Ease of doing business?"

Ch Sushil Rao

11/3/2017 11:25 PM

Very well analysed. Informative. Tells us why India does not have to pay its back.


5/12/2018 12:07 PM

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