Arvind Panagariya's parting shot: NITI's ease of doing business survey is an eye-opener for govt
It is claimed that companies can be incorporated in less than a week. The reality? In Tamil Nadu, it takes 63 days. In Kerala and Assam, over 200 days.
Most governments love to pat themselves on the back and this tendency is quite pronounced in the Narendra Modi government. So it is quite refreshing to find a government organisation partnering in a report that points to reality trailing hype. The report in question is Ease of Doing Business: An Enterprise Survey of Indian States, a joint endeavour of the NITI Aayog and the IDFC Institute.
The report is based on an enterprise survey of over 3,200 companies in the manufacturing sector across all states. The message coming out of it is unequivocal – The central and state governments may have done a fair amount to make doing business easier, but they need to do more, much more. And that the challenge of formalisation is not only about a goods and services tax regime or digitalisation; it is also about thinning regulatory cholesterol for the small and medium firms. The report released today is the first of two; the second, which looks at individual states, is being finalised.
The Modi government has been aggressively pushing ease of doing business after the Prime Minister famously vowed, soon after assuming office, to put India in the 50th spot in the World Bank’s Ease of Doing Business ranking in three years. In the Doing Business Report 2017, released in August 2016, India was still at 130. That hasn’t stopped Modi and his ministers from tom-toming the various initiatives the government has taken on this front, not the least being kicking off competition among states with a ranking akin to the Doing Business Report.
The central and state governments can boast all they want about how they have scythed processes and axed paperwork, but businesses, especially small and medium ones, still complain about facing harassment at the hands of field level babus.
That is why it was bold on the part of the NITI Aayog – and outgoing vice-chairman Arvind Panagariya deserves applause for this – to initiate an exercise to get feedback from over 3,200 manufacturing sector businesses across the country about whether the all the action on the ease of doing business front was actually making their life easier. This is really holding up the mirror to governments and forcing them to see a not very pretty picture.
The findings are quite damning. Though all state governments boast about a single window for various clearances, the report finds that only 20 percent of companies surveyed use this system. As much as 68 percent do not. And 12 percent have not even heard of single windows!
Despite claims that companies can be incorporated in less than a week, the survey shows that even in the best performing state, Tamil Nadu, it takes 63 days. In Kerala and Assam, it takes over 200 days. The average time taken is 118 days.
Land and construction continue to be a bugbear for companies. The average time to get land allotted is 156 days and only Himachal Pradesh does this in less than a month – 28 days. Getting construction permits and no objection certificates takes, on an average, 112 days and 75 days respectively. This is an area, it is common knowledge, where corruption is rampant and clearly this needs to be tackled urgently. But will this be done, considering this is a huge money-spinner for bureaucrats?
What’s particularly valuable about this report is that it identifies areas that need special attention.
At a time when the government is grappling with the challenge of giving a boost to employment-intensive sectors, the report shows that it is these sectors that deal with more regulatory challenges than capital-intensive ones. The labour-intensive industries account for 1,846 of the total number of companies surveyed and the largest numbers are from the textiles, food products and non-metallic mineral products sectors. The challenges faced by these sectors are contrasted with those faced by capital-intensive sectors.
The survey finds that labour-intensive sectors are less likely to use self-certification under the Minimum Wages Act and Payment of Wages Act, 19 percent more likely to report that finding skilled workers to be a major obstacle, 33 percent more likely to report that hiring contract labour is a severe obstacle and 14 percent more likely to report that terminating employees is a major obstacle. They are more likely to report that setting up a business, getting land and construction permits and tax-related compliances are major or serious obstacles.
Access to credit is another area that the report flags. It shows that retained earnings and personal savings together account for 59 percent of financing of firms. While 46 percent of firms said access to finance is not a problem, 54 percent said it is either a moderate or severe obstacle.
There is some good news for the government in the report. It also surveys young firms in the manufacturing sector that started operations in or after 2014 to see if their experience is better than older firms because of the ease of doing business initiatives. It shows that the newer firms took lesser time than older ones in setting up a business, getting land, construction-related permits, water connection, sewerage connection and labour compliances, among others. They, however, did not do better in the case of environmental approvals, registering for VAT and hours of water shortage.
And in a clear message to state governments, the report finds that life is easier for businesses in high growth states as against those in low growth states. It also finds that the share of young firms is higher in the high-growth states than in the low growth ones.
While this is a very painstakingly done report with valuable insights, it will not mean very much unless the many issues it flags are addressed.
It shows that gap between initiatives and ground reality is pretty large in many cases. This points to a clear need to get the lower bureaucracy on board, using a carrot and stick approach. Merely putting processes online is not enough.
It also shows that the problem of informality in business is a very complex and multi-faceted one. Smaller firms may have a capacity problem even in dealing with simpler processes.
More importantly, the focus has to shift from merely making compliance with various processes easier to questioning the very rationale for many of these. As secretary, Department of Industrial Policy and Promotion, Ramesh Abhishek noted at the launch of the report, are construction permits really necessary? Couldn’t there be a shift to merely checking if buildings conform to bye-laws?
This is Panagariya’s farewell gift to the government. If it really valued him, as the Prime Minister said it did, he will ensure that the report is studied closely and acted upon. This should not be consigned to the backburner where most reports generally do.
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