Its quite uneasy doing business in India

Written by K Vaidya Nathan | Updated: Oct 31 2013, 09:02am hrs
The Doing Business 2014 report released by the World Bank this week ranks India a dismal 134 among the 189 countries surveyed. This report is an annual study by the World Bank on the regulations that enhance business activity and those that constrain it. India ranks behind even countries such as Rwanda (32), Tunisia (51), Ghana (67), Sri Lanka (85), Namibia (98), Nepal (105), Pakistan (110), Swaziland (123) and Bangladesh (130).

The study surveys regulations affecting areas of the life of a business in each of the 189 countries. The index is a noteworthy measure since regulation is a reality from the beginning of a firms life to the end. Indias miserable rank implies that navigating regulations for our new firms is complex and costly. On average in India, starting a business takes 12 procedures, 27 days and costs 47.3% of income per capita in fees. In contrast, it takes as little as just one procedure, half a day and almost nothing in fees in New Zealand.

And this is just the tip of the iceberg. Consider what a new firm in India must go through to complete other transactions at the average level of time and effort required. Preparing, filing and paying the firms annual income tax could take up another 243 hoursmore than one-man month of staff time. Exporting just one shipment of a new firms final product would take 9 documents, 16 days and would cost more than R70,000. If the firm needs a simple warehouse, getting the facility ready to start operating could take 47 procedures and 279 days moreto get construction permit would take 35 procedures and 168 days, to buy the land and register its ownership would take 5 procedures and 44 days, getting electricity would take 7 procedures and 67 days, not to mention other utility connections such as water supply which the survey does not measure.

Having sorted out these initial formalities, if the firm becomes embroiled in a legal dispute with one of its suppliers or customers, resolving the dispute could mean being stuck in various levels of Indian courts for more than three years and ten months, on average. On top of that, the cost of being stuck in these courts would amount to nearly 40 paisa for every rupee of claim.

To operate and expand, the firm will need financingfrom shareholders or from creditors. Raising money in the capital market is easier and less costly where minority shareholders feel protected from self-interested transactions by large shareholders. Good corporate governance rules can provide this kind of protection. India still has very limited requirements for disclosing majority shareholders conflicts of interest. This undermines trust in the system, making it less likely that investors will take a minority stake in a firm.

Similarly, creditors need guarantees that their loans will be repaid. Information about potential borrowers and solid legal rights for creditors play an important part in providing those guarantees. Yet institutions providing these are not adequately developed in India. Though we have credit bureaus that distribute information about borrowers, we still lack a modern collateral registry where a creditor can check whether a movable asset being pledged as collateral has any other liens on it.

If despite all efforts the firm ends up insolvent, having institutions in place that enable creditors to recover their assets is imperative. In India, creditors recover no more than a quarter of their initial loan in case of bankruptcy. Even this paltry recovery takes them quite a while as the average time required to resolve insolvency in India is more than four years. On the positive side, World Bank data shows that there has been remarkable progress in removing some of the biggest bureaucratic obstacles to private sector activity. Yet, data indicates that small and medium-size enterprises still are subject to burdensome regulations and vague rules that are unevenly applied and that impose inefficiencies on the enterprise sector. This curtails the overall competitiveness of our economy and its potential for creating jobs.

Regulations that protect consumers, shareholders and the public without overburdening firms help create an environment where new firms, which are engines of innovation and growth, can thrive. Sound business regulation requires both efficient procedures and strong institutions that establish transparent and enforceable rules. A thriving private sectorwith new firms entering the market, creating jobs and developing innovative productscontributes to a more prosperous society. Our states and central government have got to play a more proactive role in supporting a dynamic ecosystem for firms. They need to set the rules that establish and clarify property rights, reduce the cost of resolving disputes and increase the predictability of economic transactions. Without good rules that are evenly enforced, domestic entrepreneurs are having a hard time starting and growing the small and medium-size firms that are the engines of growth and job creation, especially in a country like ours with the largest youth demography in the world.

If taken with the seriousness it deserves, the survey results could mobilise our policy-makers to reduce the cost and complexity of government procedures and to improve the quality of institutions. Such change would serve our underprivileged the mostwhere more firms enter the formal sector. Helping new businesses, be it in the formal or informal sector would boost shared prosperity for our country.

The author, formerly with JPMorgan Chases Global Capital Markets, trains finance professionals on derivatives and risk management