Every year, over the last few years, the World Bank has been coming out with an analysis of the various elements that govern business conditions in different countries. This study, known as Doing Business in 2005, has come out recently, with a wealth of comparative data showing the ease or difficulty of commencing a business, hiring and firing people, accessing credit, closing a business and firing workers. The study, carried out with the help of distinguished consultants, shows that India has a long way to go to make the climate conducive for investors.
The World Bank study rightly cites a number of Nobel Prize winners, who were of the opinion that easing the start-up of business was considered one of the cost-effective ways of speeding up development, ahead of investing in infrastructure. This makes sense, since even with the best infrastructure, difficulties in business start-up, access to credit and so on can impact negatively entrepreneurs' intentions to invest. This is a serious fallout of poorer countries being over-concerned with regulation.
Heavy regulation of entry into business is a result of a mindset, which considers the start of business as part of a privilege given by governments. Registering a business in such a situation involves a series of procedures and costs. The impact of severe regulatory restriction is that people shy away from formally entering business. They prefer to operate in the informal sector, which has its own disadvantages, in that the entrepreneur cannot have a record of his assets and borrow thereon. Fernando de Soto, the Peruvian economist, calls this effect an accumulation of 'dead capital'. The informal sector represents so much of wasted potential, it is reason enough for a relaxation of procedural restrictions. His preferred solution is to simplify business entry and ensure that the poor get titles to property. There are, of course, many problems in doing this. Although not analysed in the report of the World Bank, these deserve to be considered by our government, which wishes to bring the informal sector into active participation in economic growth.
The World Bank report cites many details of the impediments placed by poorer countries in the path of businessmen. It shows how, for instance, Singapore requires just seven procedures and takes eight days for a business to be started. In addition, the cost the businessman incurs is just 1.2 per cent of the income per capita. The corresponding figures for India are 11 procedures, 89 days and 49.5 per cent of the income per capita. The information required by governments regarding business start-ups cannot be more in India than in Singapore, unless it is information for information's sake, filling up files.
Indeed, even China, with its suspicion of private industry, takes 41 days in 14.5 per cent per capita income to start up a business. The United States of America is more investor-friendly with just five procedures, five days in time taken and costs of 0.6 per cent of the per capita income. It does not take a rocket scientist to find out how to simplify our procedures and reduce our costs of entry to at least the Singapore level, if not the US's. This is a task which our reformers can usefully initiate as part of promised administrative reforms and also as part of cutting the excess baggage of babudom.
Above all, we need to remove from our mindset the misapprehension that such reforms can injure social equity. As the World Bank's report points out, the Nordic countries score the best in respect of low restrictions on start-ups, registration, hiring and firing and access to credit. But they are nowhere accused of being indifferent to social issues. The resources released for governments by easing restrictions on business can be better spent for improvement in the social sector.
It is in the area of access to credit that the differences between various countries are marked. The World Bank rightly stresses that the ease of access to credit is also determined by the ease of collection if the credit goes bad. This is in terms of creditors' rights in the case of business closure. The ease of access to credit is measured by the cost of creating collateral as percentage of income per capita, the credit information index (the amount of information available in the borrowers' credit history) and the legal rights of borrowers and lenders. Here, India's record is not as good as that of Singapore or the US or even China. The cost to create collateral in India is 11.3 per cent of per capita income, 0.3 per cent in Singapore, 1 per cent in the US and 0 per cent in China. Credit information is abundant in Singapore and the US, but was complex in India till recently.
What the World Bank report misses out is the time taken to get a clear 'yes' or 'no' from the banker. In India, it is mere prevarication. In China, the banks dare to lend. So too in the US. While senior officials have been castigating bankers in India for being lazy, they have not recognized that this so-called 'laziness' is rooted in the fear of lending, which can bring down on the banker the collective wrath of vigilance, investigators and the regulator. Unless the mindset of excessive vigilance and suspicion of even bona fide bankers is changed, access to credit cannot be easier.
But in recent years, the rights of lenders have been improved in India, thanks to debt recovery instruments and asset reconstruction agencies. But, borrowers' rights remain in the limbo. There are countless cases of small-scale industries left out in the cold by arbitrary actions of lenders. These difficulties require redressal if Indian businessmen have to compete on a level playing field with their counterparts in other countries.
The World Bank report brings out a table showing the remarkable differences in time and cost taken to register a commercial property in India compared to other countries. In India, it takes six procedures, 67 days and 13.9 per cent of the cost to register a property. The corresponding figures for Singapore are three procedures, nine days to complete and 1.5 per cent of the cost of property. Even China requires only three procedures, 32 days and 3.1 per cent of the cost. The US has four procedures, 12 days and 0.5 per cent of the cost. Why can we not cut down the procedures, time and costs'
It is in respect of closing a business that India takes the cake. It takes 10 years to complete the closure of a business in India, while it takes 0.8 years in Singapore. The cost of insolvency is 8 per cent of the cost of the estate in India, while it is one per cent in Singapore. When the creditor disposes of the insolvent's estate, he can recover 12.5 cents on the dollar in India, while he can recover 91 cents in the dollar in Singapore and 68 cents in the US. We need to be more effective in enforcing lenders' rights in insolvency cases, if they are to lend boldly to various entrepreneurs.
The World Bank report compares the difficulty of firing and hiring by a composite measure, the details of which are not spelt out. It comes out that the difficulty of firing index for India is 90, where it is 0 in Singapore and the US, and 30 in China. In the absence of details, it is difficult to judge how far this dimension can be changed to India's advantage. However, there is much to be said for a review at our laws governing hire-and-fire of employees.
The whole exercise started by the World Bank can have meaning only in a specific context. Indian reformers have to evolve their own version of a similar attempt to compare our procedures and other restrictions with what is optimal. It goes without saying that an over-regulated and an under-governed economy is a recipe for failure. India should learn from the World Bank's report as to how to improve the investment climate in the country. Perhaps the exercise of improving business indicators can initiate a healthy competition between different states and create a favourable ambience for industry and entrepreneurs in the coming decade.
Hopefully, India's reformers will start out with a process of consultation with various industry associations and state governments on how to improve the process started by the bank. Perhaps, we can offer a better paradigm for encouraging industrial entrepreneurs as a result of our own effort.