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Big picture Modi on step to robust business reforms

Improving the business environment is often seen as an inclusive answer to growth challenges: a vibrant business ecosystem can attract investments to further fuel the economy, create wealth as a consequence, while redistribution in a well-designed manner can raise standards of living to gradually lift the veil of poverty

Written by Kadambari Shah , Vaidehi Tandel | Updated: November 19, 2017 9:23:30 am
Prime Minister Narendra Modi Prime Minister Narendra Modi (PTI Photo / PIB)

In the Museum of Modern Art in New York City, there hangs a massive, 2.42 m x 5.42 m painting called Vir Heroicus Sublimis (Man, Heroic and Sublime) by American artist Barnett Newman. The description next to it reads, “There is a tendency to look at large pictures from a distance. The large pictures [here] are intended to be seen from a short distance.”

This sentiment is analogous to Prime Minister Narendra Modi’s perception of ease of doing business in India, where the larger picture of achieving a robust business environment is viewed as an immediate concern requiring close and comprehensive reforms.

Over the last few years, “ease of doing business” has emerged as a critical buzzword for the Indian development trajectory. A sizeable step forward in this domain was captured in India’s enormous jump from rank 130 to 100 in the World Bank’s flagship Doing Business Report 2018, released on October 31.

Why Ease of Doing Business Matters

Improving the business environment is often seen as an inclusive answer to growth challenges: a vibrant business ecosystem can attract investments to further fuel the economy, create wealth as a consequence, while redistribution in a well-designed manner can raise standards of living to gradually lift the veil of poverty. Along the way, this process also has the potential for job creation, a much-needed area of attention. The Ministry of Labour and Employment estimates that a million people are entering the workforce every month, and the country’s young population is expected to perpetuate this trend for the near future.

Economic growth and ease of doing business are inextricably linked. An Enterprise Survey conducted by NITI Aayog and IDFC Institute finds that high-growth states appear to have a better doing business environment than their low-growth counterparts (firms in these states face less severe obstacles in the regulatory environment and fewer delays in acquiring approvals for various areas of doing business). Several opinion pieces critical of this finding state that it is growth that matter and not regulatory reform.

We re-emphasise that we do not know which way the causality runs (i.e., whether better business environments lead to higher economic growth or vice-versa). However, it is evident that there is a virtuous cycle and positive feedback loop between the two spheres.

Reform efforts

India’s rise in the World Bank Doing Business rankings comes by no small feat. The Modi government has put in place several new reforms targeted at bettering the business environment. They take the form of campaigns like “Make in India” and “Digital India”, regulatory policies such as the merger of PAN/TAN cards to accelerate the procedure of starting a business, increases in minority protections to level the playing field, and introducing a bankruptcy code to make resolving insolvency easier.

The NITI-IDFC Survey finds that firms on the ground do indeed face a better business environment. Manufacturing start-ups (defined as those set up in or after 2014) report fewer days to obtain permits and face less severe obstacles than the older firms in the sample. They also report that the costs they incurred in getting necessary compliances were on par with the officially prescribed fees. In other words, they did not have to pay additional transaction costs. All of these variables suggest improvement. Admittedly, the assessment is limited to start-ups in the manufacturing sector, but future iterations of surveys of this kind will include those in the services sector as well.

The future of regulatory reform should focus not only keeping up the momentum but also on addressing asymmetry of information between firms and governments. The NITI-IDFC Survey also found that while reforms are in place, a significant number of firms don’t know about them. As evident in the World Bank report where experts (lawyers, chartered accounts and other public and private officials) have a positive outlook towards India’s changing business environment, surveys have found that on average, experts are more aware than firms about policy reforms.

Looking ahead

Juxtaposing the World Bank and NITI Aayog-IDFC Institute reports, we suggest the following roadmap for reform:

1) Enhancing communications strategies on part of central/state governments. Smartphone apps, email/text messaging services, and media broadcasts of new policies could help firms know more about them.

2) Easing regulation further, especially in labour and power sectors, as firms in labour-intensive and power-intensive sectors face more hardships than their counterparts.

3) Improving access to finance, given its centrality in business and a wide variation across states in this regard.

4) Instituting policies targeted at start-ups in order to accelerate job creation. In the US and other advanced countries, start-ups account for over 20% of job creation.

5) Facilitating firm entry and exit: the bankruptcy code is an important start in improving the exit process; a comparable effort must be made to stimulate entry of new enterprises, which are often deterred from entering the market by regulatory burdens and compliance costs.

Thus, while India appears to be on the right path forward, the de jure changes will necessarily need to translate into de facto ones. This entails looking at the larger picture from an even shorter distance, i.e. re-calibrating policies based on on-ground realities in addition to expert/government ones to get a wholesome perception. Then, India can further improve its stance in the World Bank rankings, but more importantly, it can also improve it’s doing business environment.

Kadambari Shah and Vaidehi Tandel are Senior Analyst and Junior Fellow, respectively, at IDFC Institute, a Mumbai-based think/do tank.

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