Minding our business

That India should rank 120 on a ranking of 178 countries in a World Bank report released last week is a shame. But this should come as no surprise for a country that’s doing a very good job of keeping the real parameters of doing business, particularly for international investors, under a strong and ruthless status quo. Try closing a business and going beyond anecdotal evidence of brutal financial torture, the empirical evidence — as provided by

Doing Business 2008 — in terms of ‘recovery rate’ (or what the investor gets in the number of cents per dollar) is abysmal: at 11.59 cents,

India ranks 135, in the last quartile.

But the story that should hurt more is even more predictable: the slow pace of delivering justice, through the timely enforcement of contracts. Theoretically, the faster contracts are enforced, the greater the velocity of money, goods and services into and out of the country. This, as we all know, leads to greater trade among nations, more profits for the entrepreneur, increased capital formation for the country and, in most cases, particularly in the high-end knowledge economy of today that includes factory workers as well as genetic engineers, a boost in the country’s employment. In this report, this factor has been defined as number of procedures from filing a lawsuit in court till payment, time taken to resolve the dispute, and costs incurred.

On this count, India stands ranked at 177, better than only Timor-Leste. It takes 1,420 days to enforce a contract. To put that in perspective and among comparable BRIC nations, that’s more than double of Brazil’s 616 days, 3.5 times China’s 406 days and more than five times Russia’s 281 days. Only five countries do worse than India on this count — Bangladesh, Guatemala, Afghanistan, Suriname and Timor-Leste. The country has 46 procedures the investor has to negotiate — one more than Brazil, nine more than Russia and 11 more than China. The investor, on an average, has to shell out as much as two-fifths of the debt value vis-a-vis 16.5 per cent in Brazil, 13.4 per cent in Russia and 8.8 per cent in China.

Then there are the country’s overloaded courts — against a sanction of 15,228 judges in all courts of India, the working strength, at 12,390, stands short by a fifth, noted K.G. Balakrishnan, chief justice of India last month. Much of the blame for this would go to the executive. As Balakrishnan observed, “Judiciary has no power to increase the strength of courts or appoint additional judges without government sanction and budgetary support.” The Supreme Court had noted in 2002 that the number of judges should have seen a five-fold increase.

What the report, therefore, has done is that it has not merely ranked countries, but through such ranking, has taken a look at the real economy and its real problems that entrepreneurs in general and global entrepreneurs in particular face. Take taxes, another indicator where India, at 165, ranks poorly. According to the report, businesses have to pay over 70.6 per cent of their profits as taxes — the criteria include total number of tax payments per year; the time it takes to prepare, file and pay (or withhold) income tax; value added tax and social security contributions; the amount of taxes on profits paid by the business as a percentage of commercial profits; the amount of taxes and mandatory contributions on labour paid by the business as a percentage of commercial profits.

The surprises are many too. In terms of procedural requirements for trade — documents relating to importing and exporting goods; time to comply with procedures; and costs associated with them — India has climbed 63 steps, from 142 to 79. That places it 76 ranks higher than Russia and 14 ranks above Brazil, but still 37 ranks behind China.

Labour, as a comprehensive entity, is not much of a problem, with India ranked at 85. But hiding among the parameters there lies a crucial limitation: the difficulty and expense involved in dismissing a redundant worker. On this count and expressed as ‘difficulty of firing index’, India at 70, is way below China’s and Russia’s 40.

But what I find a little intriguing is the contradiction between this report and country- and firm-level investment behaviour. It gives an impression that while creating and disseminating such reports would be, and often is, a rather profitable and publicity-positive activity for its creators and sponsoring organisations, global investors aren’t taking them too seriously. Only yesterday, management consulting firm A.T. Kearney noted in its latest FDI Confidence Index that India ranks No 2 among 25 investment destinations, which include developed and emerging economies. In fact, all four BRIC nations are among the top 10 — China at No 1, Brazil at 6 and Russia at 9. Barring China which is ranked 83 in Doing Business, the other three countries are ranked in the bottom half of the list — Russia at 106 and Brazil at 122.

The paradox gets even more curious when you place this report next to UNCTAD’s World Investment Report 2007, which shows that while FDI inflows across the world grew at 33 per cent per annum between 2004 and 2006 (the latest data), with most of that growth in developed economies (43 per cent), growth in FDI inflows to India, at 71 per cent, is more than double — and given the huge inflows this year’s will only rise. Which forces me to reach two conclusions. One, while doing business in India may be difficult, the opportunity in India is greater than all such costs. Two, smart money knows this.

gautam.chikermaneexpressindia.com