The reality of doing business

By: | Updated: June 14, 2018 2:39 AM

In the areas of obtaining a construction permit, starting a business and export/import, there’s a non-linear relationship between the reported time in Doing Business and Enterprise Surveys.

Doing Business is taken as a barometer of an investor-friendly business environment of a country. However, a paper by Mary Hallward-Driemeier and Lant Pritchett, titled ‘How Business is Done in the Developing World: Deals versus Rules,’ has compared this against two other benchmarks. One is the Worldwide Governance Indicators report of the World Bank, which reflects upon a government’s effective functioning or otherwise. When compared against this benchmark, it is shown that Doing Business parameters are more in the realm of de jure rather than de facto. In essence, elaborate or complex regulatory environment may be having a paper existence, whereas actual enforcement may be manipulated by other measures such as influence peddling in its myriad forms.

The authors, therefore, find a marked dichotomy between the de jure and de facto regulatory framework at a cross-national level. The de facto is represented by the World Bank’s Enterprise Surveys, which measure the actual time taken to get regulatory procedures carried out by actual firms.

The Doing Business benchmark, in contrast, measures the time taken for the regulatory procedures on the basis of actual compliance. It is based on responses by experts, and not actual firms. In addition, it does not take into account some realistic factors such as third-party facilitation, influence and bribe-peddling etc.

It was seen that in the three areas of obtaining a construction permit, starting a business and exporting/importing goods, there was a non-linear relationship between the reported time in the Doing Business and Enterprise Surveys, with the latter showing a markedly downward trend.

Taking it forward, the authors found that even with the de facto regulatory time-lines, there is disparity within the time taken by different types of firms. For some firms, the time is remarkably less than that reported for the Doing Business benchmark, but other firms were taking much longer time than the de jure time-lines.

Obtaining a construction permit

If one limits these findings to India alone, the findings are not incongruous. As Enterprise Surveys for India are available for 2014, the data is picked up from the Doing Business Report for 2014 with respect to three parameters. According to Doing Business 2014, if one is to get a construction permit in India in 2014—with full compliance—it requires 35 procedural steps with a time-frame of 168 days. On the same parameter, according to the Enterprise Surveys for India for 2014, firms reported actual requirement of just 30.6 days. It is an even spread if firm size is taken, with small firms taking a time of 28.4 days, medium-sized firms taking a time of 31.4 days, and large firms taking a time of 31.3 days. The reason for this divergence can be revealed by further research, as it could be either efficiency which is responsible for it or ubiquity of short-cuts being resorted to by all the firms, irrespective of firm size. The latter is a strong probability, considering that this sector has very less presence of either government or OECD/US firms.

Starting a business

The second parameter, which can be compared across both the reports, is the time taken to start a business or obtain an operating licence. The Doing Business Report 2014 lists the number of days for this as 27. The actual time-line experienced by small firms in this regard is 12.3 days, and it is common number of days (23.4) for both medium-sized and large firms. The incongruity is noticed remarkably for small firms, and if reduced procedures for this segment exist, then the same would be explicable, more or less.

Exporting/importing goods

The last comparable parameter between the Doing Business Report and the Enterprise Surveys is that of trading across borders—days to clear exports and imports through customs. According to the Doing Business Report 2014, it requires 16 days to export from India. The actual time is shorter in the Enterprise Surveys by about 10 days, with smaller firms experiencing a time-line of 6.1 days, medium-sized firms experiencing a time-line of 5.7 days, and large firms experiencing a time-line of 5.9 days. The only difference is that the Doing Business Report is taking the whole supply-chain for export, minus inland transportation, whereas the Enterprise Surveys are only concentrating on export through customs. Therefore, policy-makers should be examining which other agencies are contributing to this delay of 10 days.

The same reasoning would apply to the time taken to import goods. The Doing Business Report lists 11 documents and 20 days for the entire import supply-chain cycle to complete. The Enterprise Surveys, on the other hand, list 5.9 days as the time reported by a firm to clear imports from customs. Here, the gap is bigger between different sized firms, with medium-sized and large firms taking 5.7 days and 5.8 days, respectively, while the smaller firms take a longer period of 7.7 days to clear imports from customs. Here again, various facilitation programmes run by the customs such as ACP/AEO may be the reason for faster clearances from customs by bigger/medium-sized firms.

Therefore, in conclusion, it can be noted that besides looking at the Doing Business Report as a standalone document, policy-makers also need to study this against two other reports—also by the World Bank—which are the Worldwide Governance Indicators and Enterprise Surveys. If, as in the case of obtaining construction permits, extraneous factors of influence-peddling and corruption can be attributed, the solution will lie in institutional repair through more transparency and accountability. With regard to the last parameter, apparently the data is not comparable as the Doing Business Report looks at the whole supply-chain, whereas Enterprise Surveys confine themselves to clearance from customs only.

By Mallika Mahajan & Pawan Kumar Sinha. Mahajan is commissioner, Central Board of Indirect Taxes and Customs, India. Sinha is director, International Anti-Corruption Academy, Austria

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