The long battle against red tape

The reams of red tape that make life miserable for Indian entrepreneurs are being thankfully snipped. The latest rankings from the World Bank on the ease of doing business show that India has moved up 12 places since last year, or a more modest four places if the new methodology used this year is applied to the scores on business regulations in previous years. India is now at 130 among 189 countries. It is not exactly a stellar performance. But what is important is the direction of change.

The biggest strides over the past decade have been made in the ease of starting a new business in India. Some of the important reforms over the past few years have been the introduction of an online value added tax (VAT) registration system, a sharp reduction in business registration fees and, more recently, the decision to eliminate minimum capital requirements as well as doing away with the need to get a certificate to begin business operations. The last move itself has saved Indian entrepreneurs five days of trouble. A longer view tells us an important story. The days needed to start a new business in India have fallen from 127 in 2004 to 29 days in 2015.

The Narendra Modi government has done well to focus on reducing business regulations. Such administrative progress especially matters at a time when structural reforms are making little progress. Some simple changes in rules—for instance, when new companies apply for an electricity connection—have helped India move up the global ease of doing business rankings. It is also worth asking whether India is actually progressing more rapidly than the latest numbers indicate.

The World Bank uses data from the two principal commercial centres—Mumbai and New Delhi—to rank India. But the state rankings released by the government last month show that the most rapid progress in easing business regulations comes from states such as Gujarat, Rajasthan, Chhattisgarh, Madhya Pradesh and Odisha, which are outside the ambit of the World Bank report.

We have already pointed out that some of the best work has been done in making it easier for businessmen to start a new enterprise. It is high time the Modi government paid more attention to the other end of the business life cycle. Too much capital gets frozen because it is so difficult to shut down a business in India. That is why the new bankruptcy law being prepared by the government is so important to the Indian business framework.

For example, when it comes to withdrawing capital from a struggling business, India has an abysmal record in terms of resolving corporate insolvency. It takes about 4.3 years for a settlement. China does it in 1.7 years. Ireland takes a mere three months. It is the same story on the financial front. Just 25.7 cents are recovered from every dollar invested in a failed Indian business. The comparable figure in China is 36.2 cents. The star global performer on this parameter in Japan: 92.90 cents to a dollar. The haircuts in India are clearly too large.

There is clearly a lot of work still to be done on all fronts. Many countries such as Costa Rica, Uganda, Jamaica and Senegal have worked hard to ease business regulations in recent years.

However, the best country to emulate is Georgia. It has moved up the rankings in a dramatic way over the past decade. It was at 100 in the 2006 rankings. Its current position is 24. The prime minister needs to ask his policy advisers what India can learn from Georgia.

The battle against red tape has only begun. There will be a temptation to have premature celebrations. Two reality checks are in order. First, India is still very much in the bottom half of the global rankings on the ease of doing business. Second, as many as 122 of the 189 countries that the World Bank has studied have been easing the rules for doing business. That defines the challenge ahead.