Our progress in reforms: From permit raj to clearance raj

India has moved away from permit raj into the pitfall of clearance raj. That is the conclusion of the recently released World Bank-IFC study ‘Doing Business 2013.’

Two decades of liberalisation has indeed transformed India into a less onerous environment for businesses. It earns kudos from the authors for simplifying procedures, reducing regulatory burdens and lowering costs that have made our country a relatively easier place for doing business.  But it is abundantly clear from the report that businesses are now spending an enormous amount of time seeking clearances from various government agencies at the Central, State and Local levels much to the detriment of genuine entrepreneurs.

Amongst the 185 countries surveyed for the study, a dreadful 132nd ranking is what India could muster as far as ease of doing business is concerned but nevertheless is an improvement from previous years. We are behind all our neighbouring countries and ways to go to match the rankings of other BRIC nations. Not surprisingly Singapore tops the list but Malaysia, Thailand, Saudi Arabia and Latvia are all ranked in the top 25. And the ranking of India to start a business is a hideous 173 with only a handful of lawless countries behind. In New Zealand, it just takes a day to have a business up and running.

A friendly business environment is vital to foster innovation and reward risk taking.  Entrepreneurs start small with a bright idea, go on to achieve success and create large enterprises provided government regulations allow them to flourish. Small and medium enterprises are the backbone of any country’s economy being a critical and essential force for job creation. Many provide varied services, are nimble and thrive when bureaucracy and red tape is limited. Onerous government regulations prevent the unleashing of entrepreneurship, thwarts progress, increases inequality and hinders poverty eradication. Business environment has an enormous impact on economic growth and an indirect bearing on human development indicators, a fact that our country can ill afford to ignore.

Unfortunately as the report points out, the prevailing business environment in our country is neither conducive for startups nor is easy for those up and running. There is no clarity on tax laws, legal contracts are difficult to enforce and lax rules prevail in ensuring the basic needs of a business – getting electricity, securing credit and protecting investors. Politicians want to cling on to arbitrary powers and are not willing to unshackle the remnants of a dirigiste economy.

Clear rules and regulations

The inability of Central, state and local governments to frame clear rules and regulations is a major impediment to growth of many of small and medium ventures. Tax laws are altered whimsically on a pressing need to close budget deficits or buttress populist measures. Non governmental groups can exert pressure and can successfully revoke licences or clearances that have been legally awarded to companies. Regulations can be changed mid-way through an investment cycle that can lead to stalling of projects and lost investments. According to the authors of the report, countries that top the list are not devoid of regulations but are SMART — Streamlined, Meaningful, Adaptable, Relevant, Transparent— a process that our bureaucracy and political stewards should begin implementing in a hurry to regain the higher growth trajectory of last few years.

Although the report does not delve deeply into effects of bribery and corruption, it certainly asserts that discretionary powers in the hands of political class are prone to misuse. While large industrial houses are adept at handling the political class, young entrepreneurs find it difficult to navigate and suffer the most. Unless palms are greased, inordinate delays are the norm in getting permission for land, electricity, registration and other permits. Middlemen at various ministries make hay that has a demoralising effect on startup companies and a debilitating effect on country’s economic growth.

India is ranked a dismal 95 in the most recent Corruption Perception Index. Enforcement of anti-bribery laws in India is sporadic, inconsistent and, for the most part, politically motivated. Multinational companies too find it difficult to operate in such a business environment. For a country that is overly dependent on foreign capital to spur technological innovations and economic growth, corruption and bribery are indeed a major hindrance to doing business.  

The report is an ominous warning to the political establishment and bureaucrats to transform the system. India being a young country has an urgent need to create both skilled and unskilled jobs for its youth in the next twenty years. Unless we follow the path set by Malaysia and Thailand in climbing the index in ease of doing business as well as starting a business, a generation of youngsters will be denied opportunity and prosperity while being mired in poverty.

It is imperative for government at all levels to heed to the warning of the report by hastening the reform process, advancing transparency, ensuring accountability and boosting governance.  It must also strengthen regulations to promote robust competition amongst businesses in the market place. Creating a conducive business environment will go a long way in helping Indians prosper and achieve a higher standard of living.