Thanks to the much-publicised annual study of the World Bank, ease of doing business in a country is an important metric for the global business community in taking investment decisions. While very large corporations do consider long term competitiveness as measured by the Global Competitiveness Index (GCI) rankings of the World Economic Forum (WEF), most other businesses look at practical considerations of the ease of doing business. I do not have to repeat where India stands in that ranking.
Ranking below more than 130 countries—many of them small, developing nations—it is clear that India lacks some of the basic hygiene factors when it comes to doing business here. Isn’t it practical, then, to have a closer look at those systemic bottlenecks and focus on how to remove them rather than look at so many factors together?
In short, isn’t it time to focus on the difficulty of doing business in India—especially as a proactive, business-friendly prime minister promises to remove all those hurdles?
Some of India’s biggest problems are systemic, and are to do with the country’s hangover from the days of license raj. It’s not surprising, then, that some of the least regulated businesses are the businesses that are new; that have no legacy. On the other hand, manufacturing businesses, which involve the physical movement of goods, are the worst affected by regulation.
On an average, a manufacturing unit needs to comply with nearly 70 laws and regulations. Such a unit is required to file as many as 100 returns a year, apart from having to comply with multiple inspections. Compliance costs for a typical manufacturing unit are estimated to be 39 percent of the income per capita.
Top challenges & their solutions
The primary challenges of running a manufacturing business in India are tackling systemic issues and procedures. The specifics may vary from sector to sector but, primarily, they have to do with bureaucratic control, tax and labour laws, irrespective of the sector.
The challenges faced by the manufacturers in doing business are on account of:
- Adverse government policies/ reforms- Complex tax structures- Compliance with numerous laws- Poor infrastructure- Corruption
The culture of control, a hangover of the pre-reforms era, is still very much prevalent in many places. While top leaders and even senior bureaucrats talk of facilitating business and single-window clearance, there is a tendency to put in controls at the ground level, at each step. It is only partly to do with corruption; there is also an attitudinal issue.
If that were not enough, the recent spate of scams and the subsequent targeting of bureaucrats has created a culture of fear among the bureaucracy. In many cases, bureaucrats are afraid to take decisions, lest they have to pay for these with corruption charges. It is a great sign that the prime minister himself has recognised this issue and has urged bureaucrats to take decisions without fear, promising to back them up if needed. That is a great signal to the industry.
But another thing that needs to be tackled is the challenges created by given anti-corruption targets. It is as if the government expects businesses to take the corrupt route. The vigilance sections want to meet their anti-corruption targets and are, in turn, encouraged to take a negative, suspicious view of everything. As if the real challenges were not enough, we have to live with these artificially-created ones as well.
However, what really affects businesses a lot, even when there is no issue of control and attitude, is the operation of government departments and agencies in silos. They hardly talk to each other. Despite the promise of a single window, inter-departmental communication is often completely absent and that results in longer clearance cycles and ‘procedural delays’.
Poor logistics and obstructions to the smooth movement of goods across the country is another challenge. Bad roads, tolls/ check posts and port congestion are a few deterrents and factors of disability affecting manufacturers. There is no synergy between the logistical departments governed by the Centre and the states resulting in delays in infrastructure development. An integrated infrastructure development council of all the heads of various departments and headed by the Hon’ble Prime Minister should be formed to overlook infrastructural development like roads, rail, ports and airports.
Bureaucratic reforms and a smoother network connecting departments are a must before these problems can completely be eliminated.
Taxation continues to be a big issue in India, as well. Apart from taxation rates and some of the anomalous provisions (MAIT has already presented these issues to the central government, with its recommendations); the issue arising out of multiple points of tax and discrepancies are a common underlying issue.
India has a complex three-tier tax structure:
- Central government taxes - Excise/customs/ service tax
- State government taxes – Value added tax (VAT)/ entry tax/ entertainment tax/
- Local/ municipal body taxes - Octroi/ local body tax (LBT)/ house tax
In addition, there are central taxes enforced by the state governments like the central sales tax (CST).
Today, there is a mass of litigation pending in Indian courts of law pertaining to taxation issues. Verdicts in more than 90 percent of the cases are against the government department. This litigation is doing no good to the Indian economy, even as government resources are being wasted in illogical cases being filed by its various departments.
Implementation of the goods and services tax (GST) would, in one stroke, eliminate this issue. Implementation of GST will also ensure that transactions are captured, which will widen even the direct tax base, apart from indirect tax collection. This will help in lowering the burden of taxation on the limited number of taxpayers including businesses.
Similarly, unification of social security laws instead of multiple provisions such as under the Employee’s State Insurance Corporation (ESIC) and Provident Fund will not only smoothen social security compliance for businesses, in the long run, it will help employees by giving them flexibility.
With ‘Make in India’, with real targets, the prime minister has shown his intent to revive manufacturing in India. India is probably the only developing country with such a poor manufacturing to services ratio. The prime minister’s intent and his track record as chief minister of Gujarat make the industry hopeful.
While many of these reforms require long-term commitment, no one is expecting things to change overnight. However, tangible announcements in this direction will surely boost Indian manufacturing’s spirits and attract investment. The Union Budget is one such a platform to make some path-breaking announcements.