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Will The Modi Effect Help India In Improving Ease Of Doing Business?

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While the states have been blowing their own trumpet on how investor friendly their regimes are, the results will be out this week through a World Bank study on how the states rank on the ease of doing business.
 
Commerce and Industry Minister Nirmala Sitharaman has said most of the states have taken a number of steps to remove red-tape and improve business environment.
 
The minister expressed hope that India was likely to be ranked "better" in the World Bank's next report on the ease of doing business following the steps taken by the Narendra Modi-led National Democratic Alliance (NDA) government. 
 
Red tape and bureaucracy stand at the top of investor complaints about India, which was ranked 142 out of 189 in the World Bank's report on the ease of doing business. It is bad enough that it takes 27 days to start a business in India, as against 5-10 days in many other countries.
 
The next World Bank Doing Business report is scheduled to be released in October.
 
The Modi government, elected on a business-friendly ticket, has vowed to tackle the issue and aims to get within the top 50 countries. It has promised, for example, to speed up regulatory clearances across the board.
 
During April-June period of this fiscal, foreign direct investment (FDI) in the country grew by 31 per cent to $9.50 billion, as compared to $7.23 billion in the same period last year.
 
Experts are of the view that India needs to improve its ranking and make a place among the top 50 nations. Improved ranking will help in attracting both domestic and foreign investments. The Centre should take many steps, such as convert from manual to online process, prepare timeline to give clearances and punish delays, and eliminate unnecessary steps and requirements and so on.
 
Earlier, the Department of Industrial Policy and Promotion (DIPP) finalised eight areas in which states will be ranked: setting up a business, allotment of land and obtaining construction permit, complying with environmental procedures, complying with labour regulations, obtaining infrastructure-related utilities, registering and complying with tax procedures, carrying out inspections and enforcing contracts.
 
The idea behind the move was to encourage states to carry out reforms such as in land acquisition and labour laws, which the centre was finding it difficult to push through due to lack of enough strength in the upper house of Parliament.
 
Investors will get a fair idea about the best and worst performing states in the selected areas and base their investment decisions accordingly.
 
Quite a few columnists and media commentators are of the view that Prime Minister Modi has directed his administration to improve India's ranking, but many of the measurement parameters — registering a business, getting electricity, paying taxes, enforcing contracts — rest with the states.
 
Although the global economic environment may be uncertain, Modi believes that the current turmoil, triggered by a slowdown in China's growth, actually offers India an opportunity to catalyse domestic growth and employment creation. Business barons, on the other hand, wants the Centre to move first on removing what it sees as the key roadblocks to further investment and growth - the unaffordable cost of capital and poor demand, both linked to the current high interest rate regime; and stalled reforms, particularly relating to the Goods and Services Tax and land acquisition.
 
India's labour laws, principally the Industrial Disputes Act, Factories Act and Contract Labour Act, have given rise to macroeconomic distortions. First, they have disincentivised units from expanding and reaping economies of scale. Second, large units prefer to substitute capital for labour, which explains the phenomenon of 'jobless growth' in recent years. The employment intensity of organised Indian manufacturing is lower than in China and Vietnam, according to an article in The Hindu BusinessLine.
 
Of late, some of the small steps Modi has taken are practical: a new centralized Web portal lets companies apply for permissions, file tax returns and pay processing fees. Non-hazardous businesses no longer need government certification.
 
Modi and the NDA won with a large majority and they can do a lot more to fix the economy. And the first step is to get legislation through Parliament. That is what the economy really needs at present.
 
There is one school of thought that believes that Modi's intent of making India rise up the ranks in the 'ease of doing business' list has translated into some action but the regulatory undergrowth is so dense that cleaning it up will not be a cakewalk.