World Bank report: A long way to go
Earlier this year, Prime Minister Narendra Modi said that he wanted India to be among the top 50 countries on the list compiled each year by the World Bank in its report on the ease of doing business. Suffice to say, India has begun its slow climb, with the latest World Bank report indicating that India has moved up four places from 134 to 130 on a list of 189 countries. Since the dawn of liberalisation, and especially in the past decade, India has made steady progress in getting rid of the reams of red tape that have hampered the growth of business in India. Some of the biggest reforms passed in the past decade have been the introduction of the online value added tax (VAT) registration system, a sharp reduction in business registration fees and more recently, the decision to forego minimum capital requirement and a certificate to start business operations in India. If you want to break it down to simple figures, the days needed to start a business in India have fallen from 127 days in 2004 to 29 in 2015. In comparison to countries like Singapore, where it takes a mere two and a half days to start a business, India still lags far behind. Nonetheless, the progress made in the past decade has been encouraging. To give due credit, the Modi government has done well to minimise regulations on doing business in India. Simple changes in administrative rules, such as speeding up the time taken for new companies to apply for new electricity connections, a single online application window for new firms and a single-window system for building permit applications, have all aided in improving the business environment. Before one goes any further, it is important to raise one caveat. While determining its ease of doing business index, the World Bank uses data from two prominent commercial centres-Mumbai and Delhi- to rank India. However, the state rankings released last month showed that the most rapid progress in improving the business environment came from Odisha, Gujarat, and Maharashtra.
Here is where the good part ends. Although the Modi government and has done a reasonable job in making it easier for businessmen to initiate a new enterprise, India is still notoriously slow and cost ineffective in shutting down sick business ventures. It is precisely why India needs a new bankruptcy law to deal with this scenario. According to recent news reports, the Centre is most likely to introduce a new bankruptcy law in the upcoming Winter Session of the Parliament. In an unfortunate reflection of our banking sector, India has slipped six spots in the parameter of accessing credit to 142 out of 189 countries, implying that it has become much more difficult to get credit in India. According to the World Bank report, just 25.7 cents are recovered from every dollar invested in a failed Indian venture. In comparison, China recovers 36.2 cents, while Japan tops the list with 92.90 cents on the dollar. The pathetic state of balance sheets, especially among public sector, is probably because the Indian banking system has been regularly taking haircuts: the difference between the market value of an asset used as loan collateral and the amount of the loan. What’s worse they have been extending repayment periods and giving loans to sick private sector companies.
Although the Modi government has been successful in implanting better administrative rules, substantial structural changes have not been forthcoming. The Goods and Services Tax (GST) Bill, for example, is stuck in the Rajya Sabha. It is considered to be the most important tax reforms since Independence. Intended to subsume many of the central and state indirect taxes, the GST is expected to transform the tax structure in the country. Unfortunately, the bill contains provisions such as the imposition of an additional tax (not to exceed 1 per cent) on the supply of goods in the course of inter-state trade or commerce collected by the Centre. Such an additional tax shall be assigned to the States for two years, or as recommended by the GST Council. This tax on inter-state commerce directly contradicts everything the GST stands for. Such a confused tax code will not only hurt the industry’s competitive position in the local markets but also affect it in global markets too. An ambitious overhaul of India’s labyrinth of indirect taxes which is what the GST attempts to do would give business enterprises across the country a boost while also encouraging transparency. The World Bank’s report emphasises that point. India has slipped one spot in the criteria of ease of paying taxes. Under the ease of paying taxes, the World Bank measures the variety of taxes, frequency of filing and payment, tax rates and time required to comply with three major taxes. India ranks a poor 157 out of 189 countries. Therefore, there is still a long way to go before India becomes an attractive hub for business.