We all knew that starting, establishing — and even exiting — a business in India is not for the faint-hearted. But the latest World Bank survey on India’s investment climate shows just how badly India fares on this front at a time it is desperately trying to ramp up foreign direct investment (FDI) inflows.Compared to most other countries, including those in South Asia, the time for entry, exit and for contract enforcement are much higher in India, says the report (‘‘Doing Business in 2005: Removing Obstacles To Growth’).
After scanning laws around setting up businesses, employment, property transfers, court efficiency, and business licensing in 145 countries, the reports reveals:
• It takes 89 days to start a business in India, in contrast to the best delay of 2 days in Australia. Shockingly, our closest neighbours do much better with Nepal at 21 days, Pakistan at 24, Bangladesh at 35 and Sri Lanka at 50 days.
• It takes 79 weeks to sack an employee in India, while the global best is New Zealand at zero, and our neighbour Bangladesh is at 47.
• Registering property in India takes 67 days while the global best is Norway at 1 day. You have to spend 14 per cent of the value of the property in the registration process in India, while in Pakistan it would be only 3 per cent.
• Equally striking is the data about bankruptcy. In India, it takes 10 years to close down a business. The global best is Ireland, where it takes less than 6 months. Our neighbours are again much better than us on this index with Sri Lanka at 2 years, Pakistan at 3, Bangladesh at 4 and Nepal at 5 years.
The new element in the study is data from across states in India to determine which states have better investment climates and attract both domestic and foreign business (See Chart).
At the end of the day, business is all about timing. The survey seeks to measure the time and cost of starting a business in detail. Factors cover the gamut of doing business, from registration of property and acquiring a PAN number to the time required to register under the EPF Act and Factories Act, and so on.
While the study does well to focus attention on the legal and regulatory framework, the disproportionate emphasis on conditions of entry is a matter of concern.
While investors may be put off by inordinate delays in starting up a business, and it does involve an extra cost (including bribes, which have not been measured), the survey ignores the most important condition that businesses look for—law and order that ensures safety of life and property.
When organisations like the World Bank are obsessing about days to entry, India has an incentive to undertake reforms to address just this one issue. However, that would be missing the woods for the trees.
The delays in starting a firm are merely a manifestation of a larger problem: the poor legal framework, delays in the judiciary and the inadequate state of law and order in the country.
However, although entry costs are unquestionably important, the quality of law and order in a state is a major determinant of prosperity, and this should have been included in such a study.
After all, a single-window mechanism to start a firm within an hour would not have attracted firms to Punjab in the late 1980s, and it will not attract firms to Bihar and Manipur today.