Ease of doing business: States hold the key to change

While the Centre can play the role of influencer and facilitator for some parameters, the actual reforms must be driven by the state/local governments

Over the last few months, the government of India has initiated a number of measures to improve ease of doing business in the country. The Apprenticeship Act has been updated to facilitate increased private participation in vocational training, compliance requirements for central labour laws have been simplified and forest- and labour-related clearances are being moved online. While all this has generated considerable positive sentiment within the investor community, the slipping of India’s rank by 2 notches to 142 in the World Bank Doing Business 2015 report comes as a slight setback.

While it is too early for the recent measures to have had an impact on the Doing Business rankings, the question which needs to be asked is whether the measures being initiated by the central government are adequate. For this, let us take a closer look at the underlying parameters of the Doing Business rankings. The overall country rank in Doing Business 2015 is based on the simple average of the “Distance to Frontier” score across 10 parameters, where Distance to Frontier is defined as the gap between the country in question and the best performing country in that area. For example, let us take construction permits, one of the 10 parameters used for arriving at the overall score. The score for this parameter is, in turn, a simple average of the scores for 3 sub-parameters: (a) number of procedures required for approval, (b) time taken (number of days) and (c) cost (as % of project cost). Hong Kong, with only 5 procedures required for obtaining a permit, represents the regulatory frontier or best practice for the first parameter, translating to a score of 100. Singapore, which takes an average of 26 days for approval, is the best performer as far as time taken is concerned and Qatar, which does not charge any fees for approval, emerges on top in the third parameter. All other countries are awarded scores on a proportionate basis depending on where they feature on a scale with the best performing countries at one end and the worst performing at the other. With 25.4 procedures, 185.9 days for approval and cost of approval at 28.2% of project cost, India’s score for this parameter is only 30.89 out of 100 and it is ranked 184 out of the 189 countries covered in the study.

What is also interesting is that as in the case of construction permits (which actually covers building plan approval as well as water and sewerage connections), 2 other parameters, i.e., getting electricity and registering property also fall under the jurisdiction of either the state government or the concerned municipality or utility (in case of electricity). Yet another parameter, paying taxes, depends on the regulatory processes at the state and the local government levels, since in addition to income tax which is under the central government, it also includes value-added tax, sales tax, professional tax, property tax, etc. For these 4 parameters (out of 10), while the government of India can play the role of guide, influencer and facilitator, the actual reforms would have to be driven by the concerned state or local government.

Within each state, the number of agencies involved in regulatory compliance activities is again significant. In addition to the individual corporations or municipalities at the local government level, for each state, there exist at least 6-7 agencies (state pollution control boards, factories departments, commercial tax departments, fire services departments, etc) which are involved in compliance-related activities in their respective area. Consequently, any improvements in ease of doing business are likely to require simplification of state-specific regulations (for example, state building rules in the case of construction permits) as well as streamlining the compliance processes in each of these agencies. Given the need to cover multiple states and within each state multiple agencies, the associated time and cost involved in any such exercise is likely to be significant. Limited technical and financial capacity at the municipality level is likely to further complicate the situation.

How then can significant improvements in investment climate be achieved within the limited time frame of say a year or at most 2 years? The answer possibly lies in (a) replicating at a national level select reforms, both at the policy and process level, implemented by some of the more investor-friendly states; (b) adopting the right institutional framework spanning the 3 tiers of government, i.e., Centre, state and local government, for ensuring effective regulatory compliance practices, supported by (c) a strong IT-enabled platform which helps capture and monitor application specific data at the State and Local Government level. A typical example of (a) would be the industrial investment promotion policy of Andhra Pradesh which allows all small and medium units in the green category to treat their environmental approval application receipts as deemed approval. The committees set up by multiple states in different tiers of government as part of the single-window approval system constitutes an example of (b), while the e-Biz platform developed by DIPP for monitoring single-window as well as other approvals exemplifies (c). The government of India would need to play a key role in any such initiative, of incentivising the respective state and local governments to adopt identified policy and process level reforms, in return for specific financial and technical support (including solutions of the likes of e-Biz) which helps overcome their key capacity constraints and attract investments.

By Arindam Guha
The author is a senior director with Deloitte in India.
Views are personal

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express Telegram Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.