Ease of Doing Business

  • Category
    Economy
  • Published
    20th Nov, 2018

Issue

Context

According to an output-outcome framework document prepared by the government, India seeks to reach the 30th position on World Bank’s Ease of Doing Business Index by 2020

Background

  • India has come a long way on World Bank’s Ease of Doing Business substantially improving its ranking from 142nd in 2014 to 77th in 2018.
  • The World Bank’s Doing Business report ranked 190 economies based on life cycle approach, taking into account starting a business, registering property, getting electricity, protecting minority investors, trading regulations, property rights, contract enforcement, investment laws, the availability of credit, and trade across the border.

Analysis

Reasons for improvement in ranking

  • Insolvency and Bankruptcy Code (IBC), which mandates that insolvency proceedings must be resolved in 180 days, extendable by 90 days in some cases.
  • The initial validity period of industrial license has been revised from two years to three years, extendable up to seven years by allowing two extensions of two years each.
  • The introduction of Goods and Services Tax (GST) has simplified the indirect tax regime in the country by subsuming large number of indirect taxes.
  • eBiz portal where one can apply for Permanent Account Number (PAN), Tax Deduction Account Number (TAN), Employees' Provident Fund Organization (EPFO) and Employee's State Insurance Corporation (ESIC) and incorporation of company through the eBiz portal.
  • To make the process of registering and incorporating companies faster, the government has discontinued with the requirement of reserving a name, and integrated the processes related to allotment of Director Identification Number (DIN), appointment of directors etc in a single form (INC - 29) for incorporation of a company.
  • Earlier, the minimum paid-up share capital requirement was Rs 1 lakh for a private company and Rs 5 lakh for a public company. This requirement has also been discontinued for incorporating private as well as public companies in India.
  • The government has accepted most of the first set of recommendations of Easwar Committee for simplification of tax laws. The most important of those being exemption to non-residents from mandatorily having a PAN for lower tax deduction at source.
  • Access to credit has been streamlined with much focus on MSMEs. The recapitalisation programme of Public Sector Banks (PSBs) by the government has revived the confidence of the investors.
  • Getting electricity was made faster and cheaper through various measures. It has been made mandatory to provide electricity connection within 15 days to the consumers in normal conditions.
  • Construction permits in Delhi and Mumbai were made easy by online permits, reducing time for processing permit applications, streamlining procedures, and improving transparency.
  • By amending the Commercial Courts Act, the government facilitated the establishment of commercial courts in 250 districts.
  • Time and cost to export and import have been reduced through various initiatives, including the implementation of electronic sealing of containers, upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures under National Trade Facilitation Action Plan 2017-2020.

Bottlenecks to catch up with top performing economies on EoDB

  • World Bank factors in cost of starting a business as a percentage of income per capita. India’s low income per capita makes the cost look higher therefore reduces its ranking.
  • In enforcing contracts, the country’s score has barely moved in the latest ranking. The delays in judicial process and court verdicts related to businesses are still slow compare to other countries.
  • The reforms like IBC is being neutralised by extending the process of resolution beyond the 270 day deadline in several cases, undermining a key tenet of the reform.
  • Financial services firms fall outside the ambit of the IBC, and so a separate mechanism remains to be created for bankruptcy procedures involving banks, in particular.
  • The cumbersome laws regarding labour are hurting the business sentiment in many parts of the country.
  • Centralisation of authority as for each permission, the project proponent is forced to come to the authority at the Centre or State.

Significance of the ranking

  • As the World Bank ranks 190 countries, investors have a comparable template to make cross-border investment decisions. The ranking provides a significant input to their decision-making process.
  • As the World Bank points out, economies with better business regulations are the ones that create more job opportunities and the countries with more transparent and accessible information have lower levels of corruption.
  • Removing systemic constrains would help business and industry become more competitive.

  Limitations of Ease of Doing Business Report

  • EoDB does not measure macro stability policies and development of the financial sector.
  • While the report talks about the business climate in a country, it merely focuses into business regulations. In India’s case, the business environment in only Delhi and Mumbai are used to compile the national ranking.
  • It undermine the focus on other aspects of development as manifested through scores of indices on malnutrition, hunger, education, workers rights, inequality etc.
  • The atmosphere of easing regulations for businesses has resulted in a tendency to issue easy environmental clearances. The changes in the draft Coastal Regulation Zone Notification 2018 proposes fast tracked single clearance systems, which may be in line with easing doing business but could result in projects that have adverse social and environmental consequences on an ecosystem, already vulnerable to climate change.

Measures to be taken to improve the ranking

  • Commercial courts should dispose of cases faster than at current pace. According to Economic Survey 2018, litigations involving government in tax related issues should be above certain threshold to reduce the burden of case on the courts and save time.
  • Ownership and titles need to be online which comes under the local government.
  • Collaboration between States and Centre in areas such as construction permits and registering property which generally come under local government.
  • Both the central and state governments need to cut the bureaucratic delays and resulting corruption in granting permission to start a business.
  • With e-governance, a single window concept can be introduced where companies can file their application online for permission to acquire land, register property, and to get a construction clearance.
  • States should include the permissions for construction and registering a property under the Public Service Delivery Guarantee Act.
  • The powers must be devolved to decentralise the system for faster decision-making in granting permission, register property etc.
  • Consolidation of rules which implies, combining different regulations that serve the same purpose e.g. integrated environment clearance/permission system.
  • A mechanism must be formulated to ensure exemptions are given based on the risk involved.
  • A credible third-party mechanism should be introduced under each rule and act to provide simpler compliance process for setting up and operating a business.
  • Codification of labour laws that will remove the multiplicity of definitions and authorities, leading to ease of compliance without compromising wage security and social security to workers.

Learning Aid

Question Practice:

India has come a long way in easing business regulations in the country. Examine the statement in the light of India’s improved ranking as per the World Bank’s Ease of Doing Business report 2019.

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