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Ease of doing business in India

Ease of doing business in India

The Doing Business 2015 rankings show India at a depressing 142 out of 189 countries ranked, having actually slipped two ranks (140) from the previous year world order. Most of the entire business life cycle right from starting a business, running it and to exit is indeed bothered by inefficient and lengthy procedures, lack of information and weak accountability that make it cumbersome and expensive to conduct business in India.

There is a strong correlation between a country’s level of economic development and the ease of doing business there. Easing the ability to do business can smooth a country’s transition to higher-income status. If India aspires to more than 9% GDP growth, it will have to improve its business environment.

Components

The ease of doing business index is meant to measure regulations directly affecting businesses and does not directly measure more general conditions such as a nation’s proximity to large markets, quality of infrastructure, inflation, or crime. A nation’s ranking on the index is based on the average of 10 sub-indices:

  • Starting a business – Procedures, time, cost and minimum capital to open a new business
  • Dealing with construction permits – Procedures, time and cost to build a warehouse
  • Getting electricity – procedures, time and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse
  • Registering property – Procedures, time and cost to register commercial real estate
  • Getting credit – Strength of legal rights index, depth of credit information index
  • Protecting investors – Indices on the extent of disclosure, extent of director liability and ease of shareholder suits
  • Paying taxes – Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit
  • Trading across borders – Number of documents, cost and time necessary to export and import
  • Enforcing contracts – Procedures, time and cost to enforce a debt contract
  • Resolving insolvency – The time, cost and recovery rate (%) under bankruptcy proceeding

The Doing Business project also offers information on following datasets:

  • Distance to frontier – Shows the distance of each economy to the “frontier,” which represents the highest performance observed on each of the indicators across all economies included in Doing Business since each indicator was included in Doing Business
  • Entrepreneurship – Measures entrepreneurial activity. The data is collected directly from 130 company registrars on the number of newly registered firms over the past seven years
  • Good practices – Provide insights into how governments have improved the regulatory environment in the past in the areas measured by Doing Business
  • Transparency in business regulation – Data on the accessibility of regulatory information measures how easy it is to access fee schedules for 4 regulatory processes in the largest business city of an economy.
Ease of doing business index 2015
TOPICS DB 2015 Rank DB 2014 Rank Change in Rank
Starting a Business 158 156 -2
Dealing with Construction Permits 184 183 -1
Getting Electricity 137 134 -3
Registering Property 121 115 -6
Getting Credit 36 30 -6
Protecting Minority Investors 7 21 14
 
Paying Taxes 156 154 -2
Trading Across Borders 126 122 -4
Enforcing Contracts 186 186 No change
Resolving Insolvency 137 135 -2

Performance of India

India slipped two ranks from 142 to 140 but it has improved on the DTF score from 52.8 to 54 between 2014 and 2015. The DTF tries to capture the actual distance each economy has to traverse to reach the ‘frontier’ of best performance, which is set at 100.

Indicators where India has performed bad

Main focus is on below given 4 indicators as India has done bad in these indicators.

Enforcing contracts

Enforcing contracts (ranked 186, DTF-25.8) however is particularly bad in case of India. Indian judiciary is characterised by extraordinary delays, corruption and complex filing process. Businesses are deeply affected as commercial disputes remain pending for long, soaking up expensive time, administrative capacity and financial resources.

Recent amendments by the new Government in the Arbitration and Conciliations Act to speed up commercial dispute resolution by setting up fast track courts, brought about through an ordinance can prove to be helpful.

The law commission has also suggested changes in the Civil Procedure Code, 1908, which lays down rules for the courts to adjudicate such disputes. The institution of these exclusive courts and division will be helpful in faster resolution of commercial disputes and inducing business growth.

Dealing with Construction Permits

India has done badly on this indicator too, ranked at 184. Even within BRICS countries, where most countries seem to be struggling, India is the worst performing.

India is way too low on the distance to frontier (30.9) measure. Also, the cost of obtaining construction permits is abnormally high in India as compared to all other economies in the group.

In India, complying with building regulations to obtain construction permits is excessively costly, complicated and time consuming. Land and real estate development are State subjects; the procedure for obtaining clearances varies from city to city in terms of time and number of clearances as decided by the Urban Local Body/Urban Development Authority of city concerned.

Another problem is, the construction activity in India comprises multitude of authorities at various levels.

A high-level Committee headed by the former Cabinet Secretary T S R Subramanian, constituted by the Union Ministry of Environment, Forests and Climate Change (MoEF&CC) to review the environmental laws have proposed new Environment Law Management Act (ELMA)which will have two fulltime expert bodies – National Environment Management Authority (NEMA) and State Environment Management Authority (SEMA), to be constituted at the Central and State-levels respectively to evaluate project clearance (using technology and expertise), in a time bound manner, providing for single window clearance.

A ‘fast track’ procedure for ‘linear’ projects (roads, railways and transmission lines), power and mining projects and for the ‘projects of national importance’ has also been prescribed in the new mechanism.

Starting a business

India has been ranked at 158 on this indicator.

Some of the problems faced by companies are High paid-in minimum capital requirements, High costs of registration, Timely approvals not provided, Differing requirements across cities, Uncertainties associated with policies and regulations etc.

Some of the recommendations for improvement in this indicator are Reducing/removing the minimum capital requirements, Simplifying procedures, single window clearance mechanism, Increased usage of technology and timely approvals.

Paying Taxes

India ranked at 156 in paying taxes indicator.

The Indian tax regime is characterised by high tax rates, massive build-up of tax disputes, arbitrary interpretations, multiple taxes and inadequate infrastructure to cope up with changing situations such as proposed Goods and Service Tax (GST) law and Direct Tax Law (DTC), etc. These issues make it excessively expensive for smaller and mid-sized firms to do business.

Some of the recommendation for improvement are reducing tax rates, progressive tax regime, Comprehensive General Anti-avoidance Agreement (GAAR), Improved technological infrastructure.

Some of the recent governmental reforms:-

  • Process of applying for Industrial License (IL) and Industrial Entrepreneur Memorandum (IEM) has been made online and this service is now available to entrepreneurs on 24 x 7 basis at the eBiz website. This had led to ease of filing applications and online payment of service charges. Following 14 services are integrated with eBiz portal which will function as a single window portal for obtaining clearances from various governments and government agencies.
  • The Companies Amendment Act, 2015 has been passed to remove requirements of minimum paid-up capital and common seal for companies. It also simplifies a number of other regulatory requirements.
  • Large number of parts/components, castings/forgings etc. have been excluded from the purview of industrial licensing. Similarly dual use items, having military as well as civilian applications (unless classified as defence item) will also not require Industrial License from defence angle. For these items only an Industrial Entrepreneur Memorandum (IEM) has to be filed.
  • A checklist with specific time-lines has been developed for processing all applications filed by foreign investors in cases relating to Retail/NRI/EoU foreign investments. This has been placed on the DIPP website.
  • An Investor Facilitation Cell has been created in ‘Invest India’ to guide, assist and handhold investors during the entire life-cycle of the business.
  • Process of applying for Environment and Forests clearances has been made online through Ministry of Environment and Forests’ portals.

Question:

Ease of doing business index has become a measure for business environment worldwide, what are its components and discuss the hurdles India facing in making its business environment smooth.

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