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Improving the business climate
Live Mint, November 27, 2018


By Pradeep S Mehta

The World Bank’s Doing Business 2019 report is out and the government has lapped it up for obvious reasons. No large country has registered gains like India in the past couple of years. The government deserves credit where it is due. The required political will has been ably demonstrated by the Prime Minister’s personal attention to the task. Alas, political will also waxes and wanes. Therefore, it now needs to institutionalize sustainable reforms initiated in previous years as well as focus on more difficult areas.

Despite apparent merits, the doing business rankings have attracted their fair share of criticisms, key among them being promotion of short-termism and divergence between policy and practice. Inherent in these deprecations are dilemmas that governments face while adopting ‘doing business’ reforms. Let me explain.

A close look at the change in India’s rankings reveals that the government may have prioritized reforms in ‘construction permits’ over areas like ‘enforcing contracts’ and ‘registering property’. Herein lies the first dilemma of reforms—how (and why) does a government prioritize one area over another? Reforming one area may not yield substantial results unless other areas are also reformed. The report itself postulates that ‘starting a business’ reform may be insufficient if adequate reforms in the area of ‘getting credit’ and ‘running a business’ are not introduced. In such a scenario, entrepreneurs may face hurdles that could negatively impact the wider economy as they struggle to meet their potential or compete.

Coming back to India, the report notes that it continued to streamline and centralize its construction permission process by implementing single-window and online approval mechanisms. India has been a front-runner in the use of information technology (IT) and thus making substantial gains on ‘construction permits’ should not come as a surprise. Another area in which IT has proved to be a game changer is ‘starting a business’. The report notes that in the previous year, maximum number of reforms (50) was recorded in this area. Simplifying preregistration and registration formalities through use of IT is the most popular manner of undertaking this reform. India is no exception and has climbed 19 ranks. Such prioritization of ‘easy to adopt and move up the rankings’ areas over ‘difficult to implement yet important’ areas is tempting, not completely unjustifiable, but begs serious reconsideration.

Reliance on IT and online process, while important, needs to be complemented with training and capacity building. Herein lies the second dilemma of doing business reforms—should training precede reforms or vice versa? This year’s report tries to answer this question with ‘training for reform’ as its central theme. It establishes a significant positive association between the availability of training programmes for public officials and streamlined business regulation. Training for officers at land registries, judges, prosecutors and engineers serves as a platform to acquire new skills and keep existing knowledge up to date. In the area of judicial performance, those economies that make the training of judges mandatory are more likely to enjoy higher resolution rates. However, persistent training and capacity building initiatives do not grab headlines and are unlikely to yield results in the short term. This may be a reason why reforms in ‘enforcing contracts’ have been pushed to the back burner. Judges in India lack understanding of complex linkages between governance and economy. Their tendency to take economically irresponsible decisions is putting a significant number of jobs at risk and substantial investment in peril. Our estimates suggest adverse economic impact of around ₹500 crore for every 1,000 km stretch of highway covered by the recent decision of prohibiting sale of alcohol on highways, without any discernible benefit.

While the report limits discussion on training of public officials, there is no reason why that should be the case. Small and medium-sized businesses may not be proficient in compliance, especially with online procedures required to be completed in English. Thus, capacity building of beneficiaries, while even more challenging, is key to ensure changes on the ground. Our recent study on cost benefit analysis of Rajasthan Shops and Commercial Establishments Act (available at tiny.cc/h20w0y), reveals that owing to lack of awareness and capacity building, small enterprises mostly rely on third-party intermediaries and e-mitras for online registration. Further, they are likely to incur 10 times higher cost than large enterprises that engage dedicated staff for registration and other IT-related work.

The third dilemma of doing business reforms is ensuring implementation. The report acknowledges that “Reform efforts will not always result in immediate improvements; indeed, some may have no impact at all. Efficient design and poor implementation are just two factors that explain why some reforms succeed while others fail.” It suggests effective communication of reforms as one of the best practices to improve implementation. Post facto communication is necessary but not sufficient to ensure implementation. Beneficiaries need to be involved in the process of designing reforms, through mechanisms like structured stakeholder consultation and regulatory impact assessment, to facilitate seamless implementation.

Improving on doing business rankings is indeed important. However, such improvement must be guided by the genuine need of improving business climate and not just rankings.

Pradeep S Mehta is secretary general of CUTS International.

 

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