Why entrepreneurs choose the informal sector

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: A recent report of the International Finance Corporation ranked 17 different states on the ease of doing business by surveying the major cities in these states. The findings were not very surprising as Ludhiana in Punjab, home to some efficient small & medium industries, emerged on top, while Kochi and Kolkata in the Left-ruled Kerala and West Bengal languished at the bottom, probably an indication of the insufficient enthusiasm of the official machinery for encouraging entrepreneurship.

What accounts for these substantial differences in doing business across the major cities in India? The study has investigated this issue in detail by looking at the number of procedures for starting a business, the problems with dealing in construction permits, the time for registering property and other similar aspects like trading across borders, paying taxes, enforcing contracts and the steps for closing down a business.

The problems of doing business in India start right at the beginning when the entrepreneur registers his business. The process takes at least one month in Mumbai, which ironically has the fastest procedure. It goes up to 40-41 days in Bengaluru or Kochi, at the higher end. The substantial difference in the days taken for setting up a business in the best and the worst cities is difficult to understand as the numbers of procedures required for the process do not vary significantly. The count showed that it ranged from a minimum of 11 in Jaipur to 13 in Ahmedabad. In fact a large number of cities have more procedures for setting up business than the two ranked at the bottom.

Smart working of the state machinery is evident in cities like Ahmedabad and New Delhi, which have set up a mechanism for electronic payment of stamp duty by companies. These cities, and Mumbai, also encourage on line application of Vat registration. The cities in states like Andhra Pradesh and Orissa have consolidated the registration for VAT and profession tax under the same authority. The aim should be to create a one-stop-shop for all pre- and post-registration requirements, says the report.