Doing Business: how difficult is it?

After 13 years of half-baked economic liberalization, how difficult is it to run a business in India? Comparisons with other countries would be useful, but are technically difficult. The World Bank’s recent publication “Doing Business in 2004”, bravely tries to develop a methodology to yield comparability  across countries for medium-sized businesses.

The methodology starts with a hypothetical medium business, and posits scenarios.  Then experts and businessmen are surveyed to assess the issues such a typical firm will face in these scenarios. This is an inherently inexact way of assessing problems faced by businesses. Yet it provides approximate comparisons across countries.

The data suggest  that India’s biggest problem is slow contract enforcement and liquidation, aggravated by poor credit to medium business (which can be eased by creating credit bureaus). Labour inflexibility turns out to be a lesser problem.

The study looks at five issues.

How easy is it to start a business? This remains difficult in India. Start-ups require 10 procedures and take 88 days, costing  49.8% of per capita income. This is better than in Angola (146 days costing 838% of per capita income). Yet India lags well  behind Asian neighbours. China has more procedures (12) than India (10), but these take just 46 days, costing 14.3% of per capita income. The champion here is Australia: just two procedures taking two days. India should aim for this too.

Many countries have no minimum capital requirement for a limited liability company. India does have a minimum, but  China’s minimum is far higher, and it booms nevertheless.

How easy is it to hire and fire workers?  The hypothetical firm has 201 workers. The methodology develops indices to measure flexibility of hiring, conditions of  employment (hours of work, paid leave etc.), flexibility in firing, and an overall employment laws index . Each index varies from 100 for total rigidity to 0 for total freedom.

Major surprise: India is reasonably competitive. Its overall index is 51, against China’s 47 and Thailand’s 61. India is far more rigid than Singapore (20) or the USA (22). Yet labour flexibility alone is no guarantee of success, as shown by  Zimbabwe (27), Papua New Guinea (26) and, Kenya (34). On the other hand, some rigid countries have fared very well, such as Taiwan (57), Germany (51) and France (50). Clearly some inflexibility can aid welfare without unduly hampering efficiency.

How good is enforcement of contract? The time taken to judicially enforce a hypothetical supplier’s contract (without allowing for appeals to higher courts) is estimated at 365 days in India, much better than in Guatemala (1,460 days). But India is way behind Tunisia (7 days), Netherlands (39 days), Singapore (50 days) or Botswana (56 days). I suspect the World Bank has underestimated the time for enforcement in India, but perhaps the problem is less severe for medium companies considered in this study.

India has 22 procedures for contract enforcement, comparable with China (20), Singapore(23) and Thailand (19). Nor are Indian laws especially complex.  The real problem is time.

How difficult is it to close a business? India is the world champion here. It takes 11.3 years to close a hypothetical medium-sized business in India. Closure is  far quicker in  neighbours like Singapore (0.7 years), China (2.6 years) and Thailand (2.6 years).

The Indian cost of winding up is only 8% of the cost of the estate in question, much lower than in China (18%) or Thailand (38%). But time is money.

In China and Singapore, the priority of lenders over other claimants is preserved 100%.  But in India the government and workers get seniority over creditors. The goals-of-insolvency index in this study measures the extent to which a satisfactory resolution is made for all stakeholders. India (21) scores badly compared with China (57), Thailand (62) and Singapore (99).

How easy is it to get credit? The study  recommends creating  public credit registries and  private credit bureaus that collect and share data on the credit record of borrowers from all sources. This reduces the information asymmetry that makes lenders reluctant to lend, and has facilitated  the explosive growth of credit cards in the West. India, alas, has neither public credit registries or private credit bureaus, and urgently needs this relatively painless reform.

Only when the legal rights of creditors are secure will they lend with confidence. India makes it so difficult for creditors to legally recover their dues that they are reluctant to lend to small and medium industry. Credit is the lifeblood of business, yet this is choked  by defective laws and legal delays.

The bottom line: labour reform, while desirable, is by no means the biggest hurdle to doing business in India. Creating an environment that promotes credit flows, and providing for rapid enforcement of contract and closure will do far more for business. These are the microeconomic reforms needing most attention.

Starting-a-business indicators

Hiring-firing indicators (100=total rigidity)

Contract-enforcement indicators

Closing-a-business indicators

Source: Doing Business in 2004, World Bank