Make it simple for millions to start a business

Elite journals like Economic and Political Weekly are full of articles describing Indian economic policy as neo-liberal. This might lead readers to think that India has become a haven of economic freedom, a business paradise. Anybody who has actually tried to start and run a business will tell you this is a pack of lies, but the fiction continues unabated. India ranks only 132 out of 183 countries in ease of doing business, according to \’Doing Business 2012\’, the latest global annual report on ease of doing business produced by the International Finance Corporation and World Bank. China is way ahead of India in 91st position, but is clearly no business paradise either.

Five years ago, in the \’Doing Business 2007\’ report, India came 134th out of 175 countries. Clearly the improvement since then is very minimal. This is not liberalism or neo-liberalism. Rather it is neo-illiberalism, in which you remove a few of a hundred hurdles and claim you have done economic reform. The hundreds of remaining hurdles are imposed in the supposed public interest, but actually used for kickbacks and patronage networks.

You might think that governments swearing to make life simpler for the aam aadmi will take special care to improve the ease of starting a business. Alas, India ranks just 166th in ease of starting a business. The government wants the aam aadmi to be a recipient of subsidies and freebies, not somebody who can start a business and stand on his own feet. Five years ago, India occupied 88th position, and has gone seriously downhill since. This constitutes a huge bias against small businesses and in favour of entrenched large business. That is a hallmark of neo-illiberalism.

Most new businesses require some form of construction. Whether you are opening a new shop or factory, you need a construction permit. How easy is this? The latest report places India at 181st out of 183 countries, almost at the bottom! So much for euphoric reports abut India becoming a superpower. The New Statesman, UK, actually had a cover story on India posing the question \”Should we fear this new superpower?\” Nobody should fear a country that seems determined to place every possible hurdle in the way of construction.

Hurdles and delays raise the cost of starting a business to 46.8% of per capita income, without even counting any bribes or speed payments. The cost of getting a construction permit is a whopping 1,631.4% of per capita income, against 444% in China and just 12.8% in the US.

Left-wing politicians complain that reforms have created a two-track India where some of the bigger firms have surged ahead but others cannot take off. The problem surely lies in the continuing illiberalism that makes it so difficult to start a new business or get a construction permit.

Any market system depends critically on contracts being honoured. If people can renege on or ignore contracts without paying any penalty, business becomes very risky for new and small entrepreneurs. Only those with money, muscle and influence can thrive in this milieu, because they have extra-legal ways of ensuring that they are not double-crossed. Alas, India ranks 182nd out of 183 countries in enforcement of contract. On average it takes 1,420 days to enforce a contract, given our legal and administrative delays. China beats us hollow-it ranks 16th in the world. Contract enforcement in China averages 114 days, less than one-tenth of the time taken in India.

Businesses everywhere pay a multitude of taxes-corporate tax, excise duty, sales tax and so on. India ranks 147th in ease of paying business taxes. Indian businesses have to pay some sort of tax no less than 33 times a year, against just seven times in China. In this respect too, India discriminates against new, small entrepreneurs. Large companies have the staff and contacts to deal with the burden of repeated tax payments, but smaller businesses do not.

Competitive markets imply the winding up of insolvent businesses as well as creation of new ones. Insolvent companies should be wound up quickly, so that their machines and workers can be redeployed in new, more productive enterprises. India comes 128th in ease of winding up. On average, resolving insolvency takes seven years! In China it takes only 1.7 years.

The key reforms India needs are not higher limits for foreign investment in banks or insurance. The most important reforms will be those making it simple for millions of Indians to start businesses and stand on their own feet. Such reforms will not get banner headlines or TV coverage. Yet they are the most important reforms of all.