The Ease Of Doing Business Report —A Moderate View

Earlier last week NITI Aayog released the Ease of Doing Business Report which was undertaken jointly with IDFC institute. The report is based on a survey of 3276 manufacturing firms and numerous professionals across the country.

An interesting finding was that very few firms were aware of the single window system for start-ups. Only 20% of start-ups have used the system. Awareness among professionals was limited to only 41% having any knowledge about the existence of these schemes. Newer firms reportedly took less time in obtaining approvals and didn’t find regulatory compliance a major impediment in doing business, pointing to an improved business environment. While this remains the broader view, certain types of firms face obstacles particular to them.

Labour-intensive firms find regulatory compliance with labour regulations an issue as significantly higher time is taken for environment approvals. Power-intensive firms have to wait longer to get a power connection while also facing greater power shortages. There is also a correlation between fast growing states and the ease of doing business in those states. Bigger firms reported to have experienced higher waiting time and costs while obtaining regulatory approvals —This is a major impediment while scaling up and is cited as one of the possible reasons as to why firms remain small. For instance, the Economic Census survey in 2013-14 revealed that 98.6% of non-agricultural establishments had less than ten workers. There is a strong relation between economic growth and business climate. There are self-reinforcing positive feedback loops that could help states attain double digit growth.

Based on these findings, the report provides seven recommendations —
1. Greater Ease of Doing Business is Essential to Faster Growth
The analysis of fast growing states in the country showed that firms experienced few delays in obtaining permits and clearances. While there is no causal flow, there is a strong case for a self-reinforcing “virtuous cycle” enabling high growth in these states.

2. Enterprises Need to be Better Informed About Improvements in the Ease of Doing Business
The survey points to a gap between schemes and regulatory improvements being done and awareness of these schemes among firms. Increasing awareness and ensuring information dissemination could yield in gains at very little cost.

3. Enhance Flexibility of Labour Laws
The survey suggests that firms in labour intensive sectors find compliance with labour laws troublesome. Labour intensive firms also reported a greater time in obtaining permits and clearances. Apart from regulatory hurdles, firms also find it difficult to find skilled labour, hiring contract employees and firing employees. Firms also reported more days lost due to labour related problems. Such factors lead to enterprises avoiding labour intensive sectors. More flexible labour laws could enable firms to scale up and increase productivity and employment.

4. Accelerate Power Sector Reforms
Firms in fast growing states reported power shortages that are ten hours less than slow growing states. Power is a critical component of production in today’s world. India is moving towards a phase where states are generating surplus electricity. However, firms are plagued by access and supply issues. As costs of power are dramatically reducing, states could use this as an opportunity to provide power faster, cheaper and more reliably.

5. Facilitate Firm Entry and Exit
Facilitating easy entry and exit of firms into the market is one of the main issues in ease of doing business. Greater dynamism in the market could lead to greater productivity, job creation and economic growth.

6. Level playing field for small and large firms
Larger firms face issues in regulatory compliance in certain areas. Larger firms have reported compliance a greater obstacle as compared to smaller firms. This acts as an impediment to scale firm size.

7. Improving Access to Finance
Half of the respondents reported that they don’t borrow from financial institutions with a third considering access to finance as a severe obstacle. While there are differences based on states and type of firms, access to low-cost finance would facilitate business.

This report comes at a very important time as the government has brought about a series of reforms over the years. It is important to take stock of how these reforms have been received and what impact they have had. The suggestion shows the difference between policies and ground level implementation and success. Despite large awareness campaigns and ads, many of these facilities and schemes remain unknown and unutilized by target beneficiaries.

The recommendations provided in this report are very practical and can be applied immediately to improve success rates. It is important to recognize that this is a rigorous study carried out over a long time. The difference in findings between the World Bank report and this report arise due to methodological variations. An understanding of the methodology would provide much more clarity. Arguments built based upon two different numbers provided by two sources without considering the context, setting and methodology would lead to erroneous conclusions and inferences. Statements such as ‘government distancing itself from the report’ based on a press release by the government that it doesn’t represent the view of the government would make for an interesting read, but a careful reading of the second page of the report would have clarified this account. Many of the reports in the media are based on impressions rather than an actual study and understanding of this report.

Reports, such as this, that reflect the current state of affairs based on extensive interaction with numerous firms while also providing practical and implementable solutions should be lauded and studied carefully.

– Contributed by Bhargav Dhakappa

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