Enhancing doing business in states: The race begins now

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Updated: September 17, 2015 7:35:34 AM

States which are doing well but are low on implementation have to take corrective action, as there can be migration of investment to other states

vastu shastraPotential investors look at the comparative environment provided by states before taking decisions. (Thinkstock)

The report on an assessment of the implementation of business reforms by various states—brought out by DIPP along with World Bank, CII and KPMG—is interesting as it is probably the first of its kind. While analysing the extent to which states have achieved success when targeting 98 action plans, we get a fair idea of how states stand on a common scale. This is a starting point and, going forward, if this exercise is done on an annual basis, we will get a clear idea of the progress made intertemporally. Given the stark differences across states, there would be an incentive for those lower down the echelon to improve on the pace of business reforms, enabling faster growth.

India’s overall rank of doing business is low, at 142, in a list of 189 countries, and in only two parameters—on credit access and investor protection—we come in the first 100. The implication here is that we do well when it comes to regulation—where credit goes to RBI and Sebi—but falter when it comes to processes where there is human interface. Besides, most laws that have to be adhered to are localised and fall under the domain of the state or the specific town or city where activity is undertaken. Hence, a state analysis is more compelling to pinpoint the areas that need improvement, as often these stress areas are not under the purview of the Centre.

Potential investors look at the comparative environment provided by states before taking decisions. It matters more when the decision to invest is not based on the availability of something specific to a state—like minerals—when there are fewer options.



The results of this study are revealing. First, no state has complied with above 75% implementation of the 98-point action plan and hence there are no ‘leaders’ as per the report. The other three categories classified in terms of implementation performance are ‘aspiring leaders’ (50-75%), ‘acceleration required’ (35-50%) and ‘jump-start needed’ (0-25%). The bands have been kept quite wide, and the aspiring leaders are Gujarat, Andhra Pradesh, Jharkhand, Chhattisgarh, Madhya Pradesh, Rajasthan and Odisha. Some of these names do come as a surprise as they are not associated with high growth. The opportunities for mining, for example, in states like Jharkhand, Odisha and MP could be accelerating factors for the states.

On the other side, states like Maharashtra, Karnataka, Tamil Nadu, West Bengal, Delhi and Punjab, which come across as the more advanced states, are in the ‘acceleration required’ category. There are 10 states that need a jump-start, and eight of the set of 16 states have a rate of less than 10% with six of them being states of the Northeast. While these states have traditionally been neglected, the state governments should start becoming more involved in the growth process and create an enabling environment.

The study points out that there is little relationship between high level of implementation and per capita income or investment, though the trend line moves downwards for the former and upwards for the latter.

The table gives the share of states in the total number of Industrial Entrepreneurs Memorandum (IEMs) filed from 2010 to July 2015 in terms of number and value. It shows that six of the seven states in the ‘aspiring leaders’ category are in the top 10 states witnessing filing of IEMs. States like Maharashtra, Tamil Nadu and West Bengal are the others on this list, which has a lot of interest from industry notwithstanding the limited set of reforms that have been implemented.

Some conclusions can be drawn. One, while doing business may be difficult, it may not be a deterrent, provided there is opportunity. Highly industrialising states will still get higher doses of investment, notwithstanding the challenges.

Two, as a corollary, it can be said that if there is improvement in implementation of business reforms, there would be probably more investment flowing in these states. Therefore, these governments cannot sit back and have to work on improving these scores. Three, the relatively new states of Jharkhand and Chhattisgarh have done better, probably due to the mineral wealth and interest of investors. But Uttarakhand lags and falls in the ‘jump-start needed’ category. Normally, new states starting afresh would be better positioned and enthusiastic to make investment easier. Clearly, this has not happened here. In fact, even Telangana is in the acceleration required category, and hopefully will see a major change when the review is done the next time.

The report indicates the area where there has been maximum progress in terms of states implementing reforms is taxation—VAT, CST. This involves doing away with manual intervention with e-filing. The hint here is that, as the country introduces GST, there will be a lot of convenience for companies which will make doing business that much easier.

On the other side, wherever manual intervention is involved, reforms are harder to come by. Here the report talks of inspection in areas like labour, wages, bonus, shops and establishment, etc, where a lot needs to be done. Similarly, the idea of electronic courts at the district level has been covered relating to e-summons and e-filing of cases. Also, in the area of enforcement of contracts, conditions are pitifully slow across the country and would be a deterrent to investors.

Cross-comparison of states in terms of achieving these 98 action points is classified under eight categories. The table lists top five states on the scale in each of these areas along with the national average and highest score achieved by the leading state.

There is concentration in the performance of states, and it is members of the same group that dominate these lists.

When juxtaposed with regional disparities that exist across countries, it is a wakeup call for those governments where investment does not take place, so special effort has to be put in case these states have to advance. Those which are doing well but are low on implementation have to take corrective action, as there would be migration of investment to other states that are more hospitable to the same.

The author is chief economist, CARE Ratings.
Views are personal

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