We can't be serious about ease of doing business in India

World Bank has been reporting its Ease-Of-Doing-Business rankings for a long time showing India in a dismal light, even in comparison with its immediate neighbours or even with South East Asia averages. The fact that South East Asia itself is no big achiever in the world has not helped. Newspapers consistently highlighted these reports every year, but rulers never seemed to have taken note at all. New government is different. It is hot in fashion for almost every minister and babu to talk about ease of doing business rankings and their commitment to improve it drastically. PM Modi has even gone on record setting a target for himself to bring India to within first 50 from its present 142! This is indeed great news but déjà vu for India where promises to public are seldom meant to be kept. Is this one going to be different? Let us see.

This ranking is done on 10 different criterions, and on these criterions, we rank as under:-

    

Criterion	2015 Rank	2014 Rank	Progress
Starting a business	158	156	-2
Resolving insolvency	137	135	-2
Enforcing contracts	186	186	-
Trading across borders	126	122	-4
Paying taxes	156	154	-2
Dealing with construction permits	184	183	-1
Getting Electricity	137	134	-3
Registering property	121	115	-6
Getting credit	36	30	-6
Protecting minority shareholders	7	21	16
Overall	142	140	-2

I am surprised to learn that we are doing so well in Getting Credit. It is exactly like listening to Sheila Dixit during previous elections claiming there was no corruption in Delhi. Any entrepreneur could tell you that it is herculean task to get loans. Farmers almost never qualify for loans without government repeatedly doling out incentives forcing banks to lend as priority sector. Infrastructure projects are nearly untouchable due to policy problems leading to their nightmarish performance. Despite demanding personal guarantee from promoters and directors of limited liability companies, which is contrary to the fundamental principle of limited liability company, held way back in 1896 in Solomon vs. Solomon & Co Ltd., banks have formed a cartel in CIBIL. It is like bankers making a union against the entire country’s borrowers such that a “settlement” with by definition means mutually acceptable settlement, means poor credit score. Mortgage loans are not available if there is no existing source of cash inflows completely disregarding the future cash inflows through investment out of this mortgage loan. Hefty prepayment penalties are demanded (HDFC Bank demanded 4.41% prepayment penalty from me). Project loans require additional collateral, in addition to primary security with built in equity contribution and personal guarantees of promoters. Jesus is witness to the nightmare of entrepreneurs in their efforts to raise loans in India.

Then we are star performer in protecting minority shareholders. While India takes pride in its commitment to correcting historical wrongs through the policy of reverse discrimination, it goes overboard in protecting every minority, be it shareholder or otherwise, at least on paper. In reality, minority shareholders are regularly exploited through massive insider trading. In fact, insider trading is not common in the context of company management alone. It is norm of the day in real estate business where the privileged class corners most of land in an area before announcing any public project. And there is not even a talk about existence of this problem, which by the way, mostly is done through benami transactions as well.

Hence, I would believe that discounting these two unrealistic criterions we must realistically belong at around 150 rank!

Are we improving? The comparison with 2014 shows that we have slid 2 ranks, despite significantly improving on the last criterion. Excluding this last criterion, we would have dropped 26 points on 9 criterions!

The new government is committed to improving ease of doing business rankings, to within first 50! I have no doubt. It is serious about it, but I am not sure it understands what it means to do business in India. This reflects in the steps announced so far. So far in 10 months, it has only been talking about two major areas for improvement, One, speedier clearances, and Two, curtailment of formalities under the labour laws.

Not going into effectiveness of such measures, which itself is a huge concern, it assumes that if it easier to start a business, it will become easy to do business in India. This is not true. While it is not easy to start a business in India, it is still done because entrepreneurs are zealous and energetic at the time of start up, and put up with all obstructions brought before them by the system. The real problems are encountered in running the business. Consider big example of Enron setting up Dabhol Power Company which collapsed after running for a few years despite its sole customer being the government itself. Take Kingfisher airlines for another example. Consider steel industry running well for years and then, suddenly finding ban on their iron ore supplies. Consider Nokia which sold all its units worldwide to Microsoft except that in India which is closed down but bound to be decimated for nothing. Consider Vodafone swallowing bitter pills even after winning in Supreme Court, and so on.

Labour laws reforms confined to curtailment of some formalities and formats / registers to be maintained, hardly means anything. Most of these registers/forms are never maintained, and even if maintained, it is like shaving a dead body in order to reduce its weight.

These steps are unlikely to improve our rankings more than a dozen points at the most, to say 130. If anything, it only means that government really does not know what it means to do business in India. If diagnosis is not right, treatment just could not be effective.

Government will have to understand why it is difficult to do business in India. Well it might be more pertinent to ask as to whether it is easy to live in India before talking about doing business in India, but that sounds far too bold a question at the moment.

India has several pluses to make it potentially a great place to do business, but in reality it is a dismal place. It is not because of plain economics. Conditions of demand and supply, technical capabilities, infrastructure etc all are manageable. But what is not manageable is the undercurrent of MISTRUST which is the soul of this country. Our system is entirely founded on the principle of MISTRUST. Nobody trusts anybody in this country. State government does not trust Central Government. Chief Minister does not trust Governor. Prime Minister does not trust President. One government servant does not trust another. Employees do not trust employers. Government does not trust tax payers. Tax payers do not trust Government. So much so that even patients now do not trust their doctors! Credibility is considered important in this country. Everybody is cynical and skeptic. You hear about a major policy decision or a major judicial decision, and start wondering whether it was genuinely taken in public interest or was meant to favour some vested interests or vote bank. Nuclear agreement with USA is a classical example. From initiation of talks to signing of agreement, public remained confused as to whether it was in public interest as claimed by the ruling party, or a sellout of India as alleged by the opposition. This confusion has only darkened when the babu involved in finalization of this agreement is made foreign secretary on the last day of his retirement in token of his appreciation of vital role played for this agreement, by the then opposition party which alleged sell out of national interests through this agreement.

So, trust and credibility don’t count in India, but unfortunately, business and investment cannot thrive in absence of trust and credibility. No entrepreneur could invest if he cannot trust the policy environment, the government officials and other people within whom he shall be dealing in the course of this business. After starting a business, entrepreneur realizes to his shock and despair that every grey is decided against him in “revenue interest”, policies are frequently changed to his disadvantage, technicalities are used to ruin him and cost of compliance is always rising. These conditions are dangerous for business.

One serious malady in this country is that “Revenue interest” is considered as synonymous with “public interest”. Anything can be done in revenue interest, which automatically means public interest. Thus, public can be fleeced in public interest. One wonders what could possibly be outside the scope of this public interest.

The legal safeguards are conveniently ignored in “revenue interest”. For example, all “defaulters” are automatically assumed to be “willful defaulters”. “Suppression of facts” is automatically assumed to be “suppression of facts with intention to evade duty”, and so on. In fact, the government is so contradictory in itself that policy making and its implementation seem to be two completely different and mutually hostile worlds. Policy announces incentives, but one finds completely disinterest in system in granting these incentives. Consider my live example today. MP’s tourism policy promises 80% rebate in charges payable for diversion of land for hotel projects. For my hotel project in implementation, nobody is willing to even consider granting this rebate and the department is determined to charge me full 100% diversion charges, and that too, at rates increased 3 times 3 months after my application for such diversion.

Earlier road tax was payable annually. Then, they started collected 10 years road tax in advance as life time tax. Then, they started collecting toll tax for some special bridge projects. Then, they started collecting toll tax for every project. Then, they started charging premium for permission to build roads such that toll tax now is not only for cost of building roads, but also for permission given for building such roads. Now, latest is that toll tax is payable much before completion of a project such that everyday’s collection goes into construction the following day. Phenomenal guarding of public interest indeed!

If the government is really serious about improving business conditions in India, it must approach the problem completely differently. It could consider starting with:

1. Bring fairness into the system. It does not suit a great nation to be thirsty of Anderson’s blood simply because he was a wealthy chairman of American holding company of an Indian company that accidentally leaked gas. It Collector or Chief Minister or Prime Minister could not be booked for massive road accidents due to faulty road conditions, why should chairman of its holding company be held responsible for such accident? No wonder, we do not see foreigners willing to supply nuclear reactors due to nuclear liability law with union carbide as its background. Likewise, we do not have foreign investment in power sector due to Enron (or Dabhol) background. Vodafone is bound to discourage future foreign investment into this country. We must remember काठ की हांड़ी बार बार नहीं चढ़ती.

2. Applying a GDP Growth Test for every decision it makes. If a decision helps improve GDP, it is good to take and not otherwise. Clarify that revenue interest is not public interest. Revenue is subservient to public interest. If public interest is helped, it is good even if it amounts to forgoing of revenue. As an extreme example (just to agitate our thought process), steps to curb black money would be undesirable they result in discouraging GDP growth. Where black money only means tax evasion, but the money is still being used for productive purposes in the country, I would recommend government to ignore it for any stern action, and encourage its accounting through more liberalized taxation. For instance, abolish capital gains tax and minimize stamp duty charges in order to deal with cash component in real estate industry. This will not hamper the business but will make every money white. On the other hands, harsh measures to detect this cash component, will hurt real estate industry and thereby, the entire economy which is counter-productive.

3. Reduce multiplicity of taxes. If states and centre are unable to agree on how to share revenue, they cannot penalize the entire nation for this inability and impose separate state and central taxes.

4. Allow and encourage free movement of goods within the country. No toll taxes, no road permits at the border. This will release massive transport capacity, reduce fuel consumption and reduce cost of transaction.

5. Recognize that workers are not obliged to work for a factory if they do not like employment conditions offered by it. That should be all. Workers should not be allowed to form union and force a factory to meet their terms and else, be perished. If serious labour reforms are too hot to handle at the moment, at least exempt new industries from retrograde labour laws like Minimum Wages Act, Payment of Bonus Act, Industrial Disputes Act, and Contract Labour Regulation & Abolition Act etc. Gradually, they could all be abolished.

6. Improve legal system to ensure that courts deliver judgment in days and not decades (like Singapore). This will require (i) setting up more courts to deliver more judgments every day, (ii) amending laws and procedure to reduce time taken to deliver such judgments, and (iii) amending laws and creating conditions to discourage malicious litigation and appeals. This is a vast subject but easy and relatively free from controversy except from vested interests being lawyers. This improvement will not only help improve our business conditions, but also living conditions, law and order etc. Today, criminals are not afraid of law in India. This is the biggest challenge to our civilization.

7. We must avoid frequent changes in law. In fact, we are at war with our own laws. Far too frequent changes in laws. There ought to be some stability in our laws.

8. Abolish caps on foreign direct investment. It does not make sense to force Indian domestic investors to compulsorily invest in foreigners’ projects when they are keen to bring all the capital themselves. This will increase capitalization in the country, and also be attractive to majority of foreign investors who do not want to dilute their business and hence, are shy of coming to India at present.

9. Privatise power sector including distribution. India needs a telecom like revolution in its power sector as well.

10. Transport policy must focus on massive growth of rail network across the country, powered with cheaper electricity, and road transport to play a complimentary role within a local area of say 300 kms radius. This will reduce transport cost, time and also our consumption of imported petroleum.

11. Citizen’s charter which aims to ensure speedier delivery of service by the government must include services to business as well. Currently, it only deals with services to private citizens leaving commercial services completely outside its purview as it business is not important. This is wrong message for the government to give. It must be corrected.

12. Reforms in agriculture which is extremely poor in productivity, about 1/3rd of the world averages. It must be privatized just like industry. Allow corporate to be in agriculture including foreigners. Impose taxes just like industry. Make it internationally competitive not by continuously fostering it as vote bank, but by exposing it to tough international competition and emerge strong. This can boost farm produce by 200% in no time, and make India really rich like Israel, New Zealand, and Australia etc.

13. Recognize that inflation is not due to oversupply of money, but due to lower supply and higher demand, and higher demand is not bad because this is representing more purchasing power with the people. RBI is wrong is pursing single point agenda of curbing money supply by keeping high interest rates. It is only discouraging investment and thereby discouraging more supplies besides contributing to cost push inflation. This it is counter-productive.

14. Abolish toll taxes all together. Vehicles have been paying a lot of taxes (on vehicles as well as on fuels) which are not being used to build roads. Government is dishonest in using these resources elsewhere and collecting cost of roads again through toll taxes, and in the process, slowing down the economy further.

15. Replace bureaucrats with professionals. PSUs must not be headed by IAS but by CAs, MBAs, or Engineers who are better trained to manage businesses.

16. Reforms in real estate sector must include encouraging for all consideration to be accounted for which will discourage corruption in construction permissions and boost revenue indirectly (through more taxes on building materials, property taxes etc) even if government has to abolish capital gains tax and minimize stamp duty.

And so on

Not everything will appeal to everybody but at least such measures should be debated widely and then adopted. The list of what to do is far too long, but fortunately, it allows us the luxury of starting anywhere. But are we serious about it?