Across the aisle: The case for creative destruction

The opportunity has come with the publication of the World Bank Group’s annual report titled ‘Doing Business 2017: Equal Opportunity for All’. The verdict on India is disappointing.

Written by P Chidambaram | Updated: October 30, 2016 9:47 am
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In my column on October 2, 2016 (How free is freedom in India?), I had made a brief reference to the World Bank’s Ease of Doing Business Report and concluded thus:

“Despite the reforms since 1991, which is a remarkable story, the State-to-firm interface remains a problem. What needs to be done and what can be done deserve a separate column and I hope to be able to write one soon.”

Accumulated negligence

The opportunity has come with the publication of the World Bank Group’s annual report titled ‘Doing Business 2017: Equal Opportunity for All’. The verdict on India is disappointing. In the year between the previous report and the latest, India’s overall rank improved one place from 131 to 130 among 190 countries. That means, despite the ambitious goal of getting into the top 50, nothing has changed. It reminds one of the French saying that, in translation, reads, “The more things change the more they remain the same.”

Sure, India did not reach this depressing position in one year. It is the result of the accumulated mistakes and negligence of the years since Independence, especially the 1960s and 1970s, when the State intervened, massively, in the direction and management of the economy. There was deep distrust of certain institutions (private sector) and natural forces (markets) and there was great dependence on some structures (bureaucracy) and organisations (public sector enterprises). Other key institutions (judiciary, municipal governments) carried on as before although many parts had become dysfunctional and obsolete.

If one looks closely at the methodology of the study, one could point out significant limitations. As far as India is concerned, it is based on a survey of just two cities — Delhi and Mumbai. Besides, the study is a ranking and measures relative performance among 190 countries; so, even if there is significant improvement on an absolute scale, India’s rank may not improve if other countries have done better. Nonetheless, the conclusions are important because they are approximations of the realities of doing business in India.

No cause for boasts

The study ranked countries on 10 parameters. In the case of India, there was significant improvement only on two: Getting Electricity (51 to 26) and Enforcing Contracts (178 to 172). There was marginal improvement on two parameters, the rank was the same on one and worsened on the remaining five. Altogether, there is no cause for the boasts that we hear from time to time.

Because of the privatisation of distribution of electricity in Delhi and Mumbai, it is easier to get an electricity connection. Improved supply has also helped. On enforcing contracts, presumably, the courts in Delhi and Mumbai are more aware of the need to be strict although, at 172, the rank is not exactly a badge of honour. Let’s look at the other parameters and consider what can be done.

REGISTERING PROPERTY (140/138): Just as we have authorised depositories for securities, we must authorise private registrars who will compete with each other and offer improved and quicker services.

TRADING ACROSS BORDERS (144/143): The external environment has indeed become more protectionist and difficult. So has the environment in India, especially due to the gobbledygook that has found its way back into the Foreign Trade Policy and the Handbook of Procedures. The minister has run out of ideas. It is time for another bonfire a la 1991-92 and a change of guard.

root & branch reforms

STARTING A BUSINESS (151/155): The obstacles are notorious. Do away with prior permissions in the case of a small or medium business and require the promoter to report the event within 60 days of starting the business.

RESOLVING INSOLVENCY (135/136): Let the new Insolvency and Bankruptcy Code be tried for a year. Afterwards, it should be brought back to Parliament for amendments that will improve the law.

CONSTRUCTION PERMITS (184/185): This is the notorious cash generator for municipal authorities everywhere in the world and India is no exception. I am loath to make any suggestion but here is one. Introduce public hearing and decision making on the applications. It will be like a hearing in a courtroom and decisions must be handed down on each application at the end of the hearing.

GETTING CREDIT (42/44): With NPAs worsening, it is not surprising that getting credit has become more difficult. To tackle NPAs, the government has relied on threats, arbitrary appointments, and a useless new supervisory board. We had a much worse situation in 1997/1998 and we resolved it through empowering experienced bankers. That is the way to go.

PROTECTING MINORITY INVESTORS (10/13): By not filling vacancies for months, the government emasculated the Company Law Board. Now we have the National Company Law Tribunal and the Appellate Tribunal. Their work should be closely monitored so that they deliver results.

PAYING TAXES (172/172): Why should paying taxes have become more difficult? The BJP coined the phrase “tax terrorism”. Ask any businessman his view on the current functioning of the Income-tax, Excise and Service Tax departments and the phrase you will hear repeatedly is “tax terrorism”. The recent ‘harvest’ of Rs 65,000 crore of ‘black money’ and the subsequent actions by different tax authorities have thrown up horror stories. Retrospective tax demands (there was one Vodafone case under UPA) continue to be made. The government seems to have lost the plot on how to collect taxes and hence I shall offer no suggestion.

I am glad the Prime Minister has called for suggestions on the World Bank Group’s report. The best suggestions will be based on ‘creative destruction’ of the present system.

Website: pchidambaram.in @Pchidambaram_IN