'A new report from the World Bank, Doing Business in 2005: Removing Obstacles to Growth, indicates that India has made the highest progress among the south Asian nations in improving its investment climate last year and was rated among the top ten reformers in the world. India established a private credit registry and made improvements in enforcing debt contracts and bankruptcy laws. But India still has a heavy regulatory burden on business, and it still ranks in the bottom quartile on the ease of doing business.
The World Bank's 'Doing Business' database shows that in China, the average time taken to secure the necessary clearances for a start-up or to complete a bankruptcy procedure is much shorter than in India. Also, Indian labour laws allow firms less latitude with their employees than the labour court does in China, Brazil or Mexico. The government's Economic Survey is not a research-style document, that is, it normally does not acknowledge research from other sources and there are no references. This quote is an exception and figures in this year's (2004-05) survey (Box 7.5).
Doing Business in 2005 is the second time the World Bank has attempted such an exercise, the first attempt was in 2004. And compared to the five indicators used in 2004, there are seven in 2005 ' starting a business, hiring and firing workers, registering property, getting credit, protecting investors, enforcing contracts, and closing a business.
Let's skip the methodology (there is a splicing together of objective data and subjective responses to questionnaires) and focus instead on what the World Bank finds. To start a business, 11 procedures are needed in India and this takes 89 days, the costs amounting to 49.5 per cent of Indian per capita income. (The data are for January 2004.) China is always the inevitable benchmark. So let us compare our performance with China's. In China, starting a business requires 12 procedures that take 41 days and the costs amount to 14.5 per cent of China's per capita income. Therefore, per se, the number of procedures is not the issue. The issue is the time and costs these procedures lead to.
On hiring and firing workers, there are actually five different indicators ' a difficulty of hiring index, a rigidity of working (working hours) index, a difficulty of firing index, a rigidity of employment index and firing costs (in weeks of salary paid). The lower the index value, the better it is. India's index values are 33 for difficulty of hiring, 20 for rigidity of hours, 90 for difficulty of firing, 48 for rigidity of employment and firing costs amount to 79 weeks. Benchmarking with China again, China's index values are 11 for difficulty of hiring, 40 for rigidity of hours, 40 for difficulty of firing, 30 for rigidity of employment and firing costs amount to 90 weeks. There is a perceptional element in the way the indices are constructed. But having said that, this reinforces the proposition that labour markets in China are more flexible, particularly on firing, although the severance pay is also higher in China.
Moving on to registering property, there are six procedures in India, requiring 67 days and the costs are 13.9 per cent of the property value. China has three procedures, requiring 32 days and the costs are 3.1 per cent of the property value. On getting credit, there are five separate indicators ' costs to create collateral (as percentage of per capita income), a legal rights (for borrowers and lenders) index, a credit information index, public registry coverage (per 1000 adults) and private registry coverage (per 1,000 adults).
In India, the costs to create collateral are 11.3 per cent of per capita income and India's score on the legal rights index is four. China scores two on the legal rights index, there are no Chinese figures on costs to create collateral. India does better than China on this. On protecting investors, there is a disclosure index and both India and China score four on this. On enforcing contracts, India has 40 procedures, requiring 425 days and involving costs that amount to 43.1 per cent of debt. China has 25 procedures, requiring 241 days and involving costs that amount to 25.5 per cent of debt. Finally, on closing an insolvent business, it takes 10 years in India, costing 8 per cent of the estate value and the recovery rate is 12.5 per cent. China takes 2.4 years, costing 18 per cent of the estate value and the recovery rate is 35.2 per cent. Compared to China, India's legal structure is often applauded. While that is true, clearly the speed of redressal neutralizes much of this advantage.
What about the survey's claim that India has made the greatest progress in south Asia and has been rated by the World Bank as one of the ten top reformers in the world on such matters' The former does not amount to saying much. The latter is true, although this listing of reformers is for 2003 and out of the five indicators (not seven used in 2004), India has reformed on enforcing contracts, getting credit and closing a business, but not on starting a business or hiring and firing. Incidentally, the other nine top reformers are Slovakia, Colombia, Belgium, Finland, Lithuania, Norway, Poland, Portugal and Spain.
Thanks partly to the survey and thanks more to the media, these cross-country findings have been reported, at least in the aggregate. What is even more interesting, and has usually not been reported, is a parallel regional profile document specifically for India and that gives us some idea of inter-state disparities. What is the maximum number of working hours allowed in a day' Ten in Uttar Pradesh and Orissa, but 8.5 in West Bengal.
What is the maximum number of working days per week' 5.5 in West Bengal and 6 everywhere else. How many days does it take to register property' 35 in Bangalore and 109 in Calcutta. What is the cost of registering property as percentage of the property value' 10.2 per cent in Chandigarh and 12.2 per cent in Calcutta.
What is the cost to create a collateral agreement, as percentage of secured property' 2.07 per cent in Hyderabad and 10.67 per cent in Calcutta. How many days are required to enforce a contract' 425 days in Mumbai and 942 days in Calcutta. How much does it cost to enforce a contract, as percentage of per capita income' 12.9 per cent in Bangalore and 13.7 per cent in Calcutta. How many years does it take to go through an insolvency proceeding' 8.33 years in Bangalore and 20.17 years in Calcutta. What is the recovery rate' 16.61 per cent in Bangalore and 4.60 per cent in Calcutta. How many days does it take to legally build a warehouse' 130 days in Hyderabad and 217 days in Calcutta.
One can dispute the methodology and the commission or omission of variables. However, the thrust of the World Bank's argument is beyond dispute. In any case, fiscal concessions were never a major determinant of investment flows (domestic or foreign) into a state and with value-added tax, the era of fiscal concessions is over. So what determines investment flows' There are determinants like size of markets and natural resources. But over-riding all of this, there is a question of physical and social infrastructure in the context of investments, particularly power and roads in the former category, and availability of a skilled workforce in the latter category. But equally important is legal institutions and the legal infrastructure, administrative procedures forming a sub-set of this.
It is this category that the World Bank focuses on in this report. And note that not only does India perform badly in cross-country comparisons, West Bengal also performs badly in cross-state comparisons.