Doing Business in India tougher than Pak, Bangla, Nepal

India may be achieving record FDI inflows and close to double digit economic growth...

India may be achieving record FDI inflows and close to double digit economic growth, but it seems the buoyancy exists despite a poor business facilitating environment, not because of it. According to Doing Business 2008, the fifth report in an annual series by the World Bank and IFC, India ranks 120 among 178 countries on the basis of the ease with which it allows business to be conducted. Singapore, with its investor-friendly business policy, takes the top spot.

Although India’s rank has improved by 12 places since last year, the country still fares poorly compared to all of its smaller neighbours including Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and Maldives. Afghanistan, at 159, is the only country in the region to fare worse.

The key issues that contribute to an unfriendly business environment in India are an inability to successfully and speedily enforce contracts. “It takes almost four years to resolve a commercial dispute through the courts in Mumbai, compared with slightly over a year in Shanghai,” said Michael Klein, World Bank-IFC Vice President for financial and private sector development and chief economist at IFC.

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The process of contract enforcement involves a long drawn out 46-step procedure, takes an alarming 1,420 days to complete and eventually ends up costing almost 40 per cent of the claim amount, leading to an abysmal 177 th rank on the parameter. On the ease of closing business, too, India manages a lackluster 137th spot. It takes 10 years to go through bankruptcy in India compared to less than two years in Shanghai.

“There are a large number of issues that tend to make foreign firms wary when coming to India, such as labour laws. With these laws staying rigid, the economy is slowly heading towards ‘informalisation’ of labour, or the gradual reduction of long-term employment contracts,” points out D K Joshi, principal economist, CRISIL. The Doing Business report notes that the costs of firing an employee in India amount to 56 weeks’ wages.

Another potential area for reform is property registration, where India is ranked at 112. It takes, on an average, two months to transfer property and costs 7.7 per cent of India’s gross national income. In China, it takes just half the time and cost.

Despite India’s largely unimpressive overall ranking, there remain some key parameters where India has shown a marked reformist mindset. On credit off take and availability, the country’s rank jumped 26 places to settle at the 36 th spot. Similarly, a pro-reform trade policy has more than halved the time taken to export and import goods to India, leading to an improvement in rank from 142 last year to a healthier 79 this year.

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While positive movements are visible on the reforms front, the greatest area of concern for India lies in the mismatch of business environments between different states. The report finds that the time taken to obtain licenses ranges from 159 days in Bhubaneshwar to 522 in Ranchi . The time to register property ranges from 35 days in Hyderabad and Bangalore to 155 in Kolkata.

“There are instances of pro-reform state governments that have fallen out of power, which is a worrying trend,” cautions Abheek Barua, chief economist, HDFC bank. “The key will remain in ensuring that the pace of reforms taking place at the Center penetrates uniformly to the state-level as well.”