The Telegraph
Since 1st March, 1999
Email This Page
- Why is starting a business made so difficult in India'

The World Bank has done a signal service to the cause of development by coming out with a report, Doing Business 2003, which analyses the different procedures and bottlenecks in countries faced by businessmen around the world. It describes quite clearly the range in regulatory and other bottle-necks faced by business in poorer countries as compared to the richer ones. This variation explains why non-residents from poorer countries flourish better in the environment of their adopted affluent countries, like the United Kingdom and the United States of America. The procedures for starting, running and getting out of business are more cumbersome, costly and time-consuming in the less-developed countries compared to the richer ones. That is why the former stay less-developed.

The report points out how the number of procedures, the time taken and costs incurred in starting a business in India are much higher than in the US or UK. In an instructive table, the report of the World Bank points out that it takes 10 procedures and 50 times the Indian per capita gross domestic product to start a business in India, whereas in the US the number of procedures is just 5, in the UK it is just 6. The costs are also significantly lower in relative terms — just 27 times per capita GDP in the US and an amount equal to per capita GDP in the UK. What is more interesting is the time taken. In the UK, it takes 18 days and in the US 4 days, while in India it takes 88 days. China scores better than India, in that it takes 12 procedures, 14 times the per capita GDP and 46 days. Still, a long way to go even for China to compete with the US or UK.

Why should we in India make it so difficult to start a business' Regulations require the entrepreneur to comply with so many rules, partly in order to satisfy the requirement of security and adequate qualifications. Information sought from a businessman has to be provided, once to the tax collector and separately to the company law, Factory Act and labour law functionaries. In these days, when information technology is increasingly resorted to, it should be possible to have one registration do all the functions. Information can be collected at one source. Besides, it is an intriguing question as to what use all the information is put to, once provided, except to have the smooth functioning of enterprise hindered by intrusive inspectors, who come for their “collections”.

Businessmen in developing countries face innumerable obstacles. The talk of a “single window” clearance is just that — so much talk. There is need to go behind the functions of each clearance and streamline them. It is also necessary to reduce the impact of the “inspector raj” — which is the declared objective of many governments.

Equally important from the point of view of the entrepreneur is the number race. Intending businessmen have to lay out their business plans before bankers, who often take their own time in their scrutiny. There is no encouragement to be proactive and to help intending borrowers. This is, of course, an outcome of the current environment of suspicion, which pitchforks a friendly banker into the clutches of investigative officials — if he ever so much as helps a borrower to complete his formalities in quick time. It is often suggested that expeditious clearance of borrowers’ requests is itself a cause for suspicion. Delay in clearances is twice-blessed. It helps the banker in many ways. It also avoids any suspicion of collusion. The time has come for the central bank to benchmark speed of decision-making as a touchstone for banker’s efficiency, in dealing with proposals from intending businessmen.

The World Bank report devotes considerable attention to the complex issues of regulation. It points out that the successful countries have a more efficient system of regulation. Poorer countries have more complex regulations, even though they lack the expert staff to understand and implement regulations. In a pertinent passage, the report outlines certain essential elements in business regulations, which are as follows: simplify and deregulate competitive markets; to continue regulation when competition can do the trick is superfluous; focus on enhancing rights; expand the use of technology; reduce court involvement in business matters; and make reform a continuous process.

The report is also perspicacious in pointing out that care should be taken to reduce the role of the judiciary in matters of regulation. It pertinently points out that when regulatory matters go to the judiciary, it is often handled by judges without the benefit of technical expertise, which, ostensibly, regulators have. In any event, this observation is pertinent with reference to countries, like India, where many regulatory matters tend to end up in the courts, overburdening an already overworked judiciary and making for a complex regulatory settlement.

The point is made in the World Bank report that quite often, countries carry the baggage of their ex-colonial masters, although the former colonial powers have already reformed radically the procedures of business regulation in their own countries. Witness the UK and France, which have simplified their procedures substantially, although their old colonies are still struggling with the complexities of their legacy. It is an implicit recommendation of the report that countries should re-examine their procedures for regulating enterprises with a view to making them more business-friendly.

In a telling passage, the report quotes from the famous writings of the author, Hernando de Soto, of Peru: “Prohibitively high cost of establishing a business in Peru denies economic opportunity to the poor. In 1983, de Soto’s research team followed all the bureaucratic procedures in setting up a one-employee garment factory in the outskirts of Lima. Two hundred and eighty nine days and $ 1231 later, the factory could legally start operation. The cost amounted to three years’ wages — not the kind of money the average Peruvian entrepreneur has at his or her disposal.” The message of the quote is telling. The urgency for simplifying procedures for start-up of enterprise is obvious.

The only defect with this otherwise well-structured report is that it has not concentrated sufficiently on the questions of easier access to credit. However, it makes the obvious point that in more developed countries, there is a greater access for borrowers to credit information either in the public or private domain. Bankers are able to understand the credit status of the prospective borrowers. There is also the existence of better safeguards for creditors’ rights. We are still a long way from enforcing such rights quickly.

The success of macroeconomic reforms depends a great deal on the presence of a business-friendly environment. The World Bank report highlights many features of the business infrastructure in which countries, like India, are lacking. Economic reform cannot be a success unless millions of small and medium-scale entrepreneurs come forward to invest and start new enterprises. It is time we focus on creating a favourable environment for the entrepreneurs to flourish. This requires a multi-dimensional approach. Improvement in labour laws is one important ingredient, if enterprises are to be enabled to start and exit businesses without much hassle. The much-awaited labour reforms have to be expedited. Equally, the inspector raj has to be simplified and made more business-friendly.

It is time that our policy-makers take the task of structural reform seriously and help to readjust the bureaucratic framework of regulation and control so as to facilitate businessmen to start and run enterprises without going through too much of a hurdle-race. While it is too much to expect a transition to a dream-world like the one in developed countries, it is time that we initiate a change in the slow and costly procedures of approvals and restrictions.

The days of licence and permit raj are reportedly over. But their influence still remains. The long hand of bureaucracy continues to intervene in the running of business, under the ostensible cover of labour laws, environment and so on. It is essential that we make the entire process much more user-friendly and less costly and time-consuming. Only then can enterprise truly flourish in India.

The World Bank report would do a useful service if it opens the government’s eyes to the problems that businesses face in India. It is to be hoped that advice from the World Bank is not rejected on the usual ground of prejudice against the Bretton Woods institutions. In this case, it is definitely a dispassionate study the Bank has made. Its recommendations should not be rejected on the facile ground of not being invented here. Good advice should be welcomed even from the World Bank — even if we claim that we do not need its financial aid any more.

Email This Page