The popular perception is that India is still a difficult place to do business, with its reams of red tape, complex regulations, procedures and delays. In that imagination, it is as if the reforms over the past two decades and the liberalisation and opening of the Indian economy never happened, and India is stuck in the 1970s and 1980s! How much of that perception is grounded in reality and how much of it is the noise of an open, vibrant and raucous democracy being picked up and amplified around the world, as also our short-comings in marketing our story positively to the world, is open to question.
In the latest publication titled “Doing Business 2015” by IFC, a World Bank group affiliate, which ranks the ease of doing business in 189 economies around the world, India is ranked at 142, down two ranks from 140 in 2014. The rankings are based on a total of ten parameters ranging from ease of starting and closing a business to mundane things like getting electricity, dealing with construction permits and paying taxes. One is not sure whether all the data disclosed is current, true or otherwise. Some definitely need re-examination.
Consider taxation. The IFC report says that taxes in India amount to 61.72% of profits, a truly ridiculous figure. Social security taxes are stated at 15.35%, central sales tax at 14.14% and ESI at 5.36%. All these are not taxes on profits, and even if they were, they are grossly exaggerated and wrong.
As per Union Budget documents, the corporate tax collection for FY14 was R3,94,678 crore, out of which dividend distribution tax would be, at the most, R30,000 crore. The effective tax rates, on an average, for all corporates as stated in the budget documents is roughly 23%. Therefore, corporate pre-tax profits in India in FY14 would be around R15,70,500 crore. The total PF contributions were R60,000 crore in FY12, as per the EPFO annual report, and in the best case (including exempted funds), it could not have grown beyond R1 lakh crore in FY14.
ESIC contribution is around R5,000 crore in total. Even assuming that employers contribute around 60% of EPFO and 75% of ESIC, these would amount to R60,000 crore and R3,750 crore, respectively. At 2% tax on sales on interstate commerce, Central Sales Tax would be around R15,000 crore for all of India. If these estimates are taken and applied to the pre-tax income, the effective tax rates will be as shown in the accompanying table. India’s taxation is therefore nowhere as high as what IFC claims it to be and it is clear that India’s ranking of 156 out of 189 in taxation is wrong and based on erroneous data.
New York City, with its higher statutory tax rates and additional state, city and insurance taxes, is ranked as having lower taxation rate (at 45.76% of profits) and the US as whole ranks 47 globally on taxation, 109 spots ahead of India. If the IFC had not based the rankings on erroneous data, India would actually rank ahead of the US in taxation.
In the parameter “Getting Electricity”, Ireland which jumped 72 ranks from 139 in 2014 to 67 in 2015, in the absence of any reforms/improvements listed in the report, ranks worse than Mumbai in time (85 versus 67 days), is comparable in cost (83.3% versus 84% of per capita income) and better in number of procedures (5 versus 7). Overall, India, in contrast to Ireland, slips down 3 ranks for electricity.
The fact is, in many parameters that are relevant to attracting investors and to ease of doing business, India is not as bad as it is made out to be. We have neither updated our data nor publicly challenged the wrong data and conclusions based on it. We have also not made sufficient efforts to market ourselves actively as a business-friendly investment destination and to build and manage our brand. This lacuna has by default led to others managing our brand and perceptions to our detriment.
Ireland has been consistently ranked and perceived very highly as an investment destination and gained the reputation as the “Celtic Tiger”. A focused and managed effort, similar to Ireland’s and fronted by an agency like IDA Ireland, is necessary for India as well. The Irish effort focuses on what they offer to an investor, the advantages of investing in Ireland over their competitors, communicating actively and providing data of interest to investors such as taxes, education and skills, property and infrastructure, along with targeted outreach and marketing of Ireland as an investment destination to investors in major geographies.
The DIPP of India is an agency similar to IDA Ireland and is driving the Make-in-India initiative of the government and the Invest-in-India rally. It might make sense to centralise the brand-building, inward investment and communication campaigns under Make-in-India and, like Ireland, include the latest data on the attractiveness of India vis-a-vis its competitors as an investment destination and tweak the messaging to primarily target a business audience in major geographies. There are many other global surveys which need a similar approach to ensure like comparisons. Comparing India to Finland on internet penetration is ridiculous, too. This will allow us to take control of our brand and brand perceptions and present the country’s data in a positive light with the right perspective. An India growing at 8% per annum is effectively a new economy every five years.
Taking control of our narrative will also allow us to put out our message on key improvement areas in bankruptcy laws, trade facilitation and enforcement of contracts, where reforms are in the pipeline. In the absence of such control, even areas where India is a global leader gets lost in the overall perception. For instance, in “Protecting Minority Investors”, India is ranked 7th in the world jumping up 14 places from 2014, on the back of strengthened minority investor protections spearheaded by Sebi, a fact that does not get sufficiently highlighted in front of a foreign investor.
As India actively pursues reforms and shows improvements on the ground, it will eventually get noticed and errors like in the World Bank/IFC report will get corrected. However, we should take control of our own brand and narrative and be actively promoting our story, perspective, successes and plans around the world backed by data, and not let this important activity devolve passively on others. We need a special cell within the DIPP which actively takes part in these global surveys, publishes India’s investment relevant data and analysis publicly and shapes the agenda pro-actively.
Pai is chairman, Aarin Capital
Partners, and Nathan is investment manager, Suvitta Capital Trust