One of the biggest challenges for the new government is to reverse the declining trend in private investments. Gross fixed capital formation in the private sector has fallen precipitously, from 14.26 per cent of the GDP in 2007-08 to 8.46 per cent by 2012-13.
This should come as no surprise, given that India is one of the toughest places to run a business, with the problems of recent years exacerbating it. It ranks near the bottom, 134 among 189 countries in 2014, of the World Bank’s Doing Business (DB) survey and has been slipping down. Apart from boosting private investment, a focused campaign to dramatically improve this ranking could be instrumental to reviving growth and creating jobs.
The “revolution of rising expectations” that has accompanied the dramatic electoral success of the BJP demands that the new government create adequate productive jobs to absorb the millions underemployed as well as the nearly 12 million youth entering the workforce each year. The manufacturing sector has historically been the job-creating engine for countries moving up the development escalator. But it has been stagnant at about 15 per cent of India’s GDP for nearly three decades, far smaller than similar emerging economies, and has been eclipsed by construction as the second largest employer after agriculture.
Further, several studies from around the world have shown that both manufacturing value addition and job creation come not so much from the big firms, but from small start-ups as they grow into medium-scale enterprises. Further, while informal firms generally stay informal, small, and unproductive, it is the formal firms that expand and drive job creation and value addition. But, for a variety of reasons, India’s manufacturing landscape is characterised by the “missing middle” among firms and a disproportionately low share of formal start-ups.
Addressing this should be central to any serious effort to create productive jobs. In this context, the DB rankings provide a useful starting point. Consider seven generic transactions involving the government that an entrepreneur faces when doing any kind of business — registration of the business, purchase and registration of property, obtaining construction permits, getting power supply, accessing credit, payment of taxes, and contract enforcement.
Much of the discussion on improving our business environment focuses on macro reforms. To be sure, there are significant macro reforms that are essential to increase the ease of doing business. Infrastructure constraints amplify the cost of doing business. Labour market regulations like the Industrial Disputes Act place onerous conditions for hiring labour. Poor property titling systems make land transactions a nightmare. Long-drawn judicial proceedings render contracts incomplete.
All these reforms pose formidable challenges, involve state and Central government regulations, need political consensus, and, even in the most optimistic scenarios, will take several years to materialise. But even if these constraints are eased, it is unlikely to dramatically alter the business environment. That would require a transformation of the manner in which the Indian state interacts with business and delivers on its commitments. It is, of course, possible to mitigate transactional problems by minimising and simplifying continued…