A diagnostic assessment

EASE OF DOING BUSINESS: India is in the bottom five countries when ranked on two categories - Enforcing contracts and dealing with construction permit

Prime Minister Narendra Modi, apart from cleaning India, and making in India, wants to make doing business in India among the easiest in the world. This, I claim, is a worthy goal.

A large number of indicators in the World Bank’s Ease of Doing Business index are related to the cost and time it takes to obtain permits for building, obtaining water and electricity permits among other things, and the cost and time it takes to resolve disputes.

Ultimately, since time is valued in money, it comes down to how inexpensive or expensive it is to actually do business in any country. Ideally, if the cost of doing business were to be zero, all of the value that the business creates would go to either the producer or the consumer.

However, where doing business actually costs money, some of this value that is generated from the enterprise is lost into the black hole of the system - enhancing productivity of the system therefore, would depend upon recovering these ultimately unproductive costs. It is like putting spokes in the well oiled machine of capitalism. Instead of spokes, I submit, capitalism needs grease.

That’s the theory. Where, empirically, does India stand? Overall, India stands 134th in the world out of 189 countries in the World Bank’s index. This ranking however, masks significant variation in sub-category indicators of the index. For example, in protecting minority investors, India ranks seventh in the world, even though it is still at a significant distance to the frontier  score (it has a score of 72.50 where the frontier is 100). However, that is the anomaly.

Out of the nine categories that are scored, India is in the bottom 100 in seven. Most alarmingly, it is in the bottom five countries when ranked on two categories - enforcing contracts and dealing with construction permits. That’s right, it is worse than almost the entire world in these categories. Therefore, it appears that improvements in these two categories would yield the greatest dividend should India want to improve its overall ranking.

Theoretically, it should also be the easiest to improve since the situation is in fact so bad. In order to get an idea of global best practices, it is useful to compare India with the country that is often hailed as the most business-friendly - Hong Kong (even though it is technically an autonomous region, not a country). Some comparisons follow that are extracted from the 2014 World Bank report on doing business.

For example, in India in order to get clearance to construct a warehouse, the study states that it “has determined seven basic No Objection Certificates (NOCs) that are required of almost all projects: Tree Authority, Storm Water and Drain Department, Sewerage Department, Hydraulic Department, Environmental Department (concerned with debris management), Traffic and Coordination Department, CFO (fire clearance)” and further, “NOC offices are spread out so the submission for these seven NOCs is likely to take some time.” Overall, “According to data collected by Doing Business, dealing with construction permits there requires 25.4 procedures, takes 185.9 days and costs 28.2 per cent of the warehouse value”

Permits in Hong Kong

In Hong Kong, the report has the following to say, “In December 2008 a One Stop Centre was established for Warehouse Construction Permits under the administration of the Efficiency Unit (EU) for receiving all relevant building licence applications to six government departments and two private utilities (that is, telephone line and electricity supply) and coordinating their joint inspections for two- storey warehouse projects.”

Thus, post 2008 in Hong Kong, there were just three agencies that needed to be visited for the complete construction of a typical warehouse - the One Stop Centre, the Buildings Department and the Water Supplies Department. Further, “in March 2012, the Government and some utility service providers collaborated to launch a Composite Form in order to gain approval for the warehouse construction. Now, companies can submit applications for electricity and telecommunication services and notification to Water Supplies Department for completion of plumbing works in one visit via the Composite Form to the One Stop Centre administered by the Efficiency Unit.”

As far as enforcing contracts goes, well, the less said the better, so let me just share the overall statistics with you: “How efficient is the process of resolving a commercial dispute through the courts in India? According to data collected by Doing Business, contract enforcement takes 1420 days, costs 39.6 per cent of the value of the claim and requires 46 procedures.

How efficient is the process of resolving a commercial dispute through the courts in Hong Kong SAR, China? According to data collected by Doing Business, contract enforcement takes 360 days, costs 21.2 per cent of the value of the claim and requires 26 procedures.”

Hong Kong not only absolutely outperforms India (as would be expected, for example in terms of the absolute number of days taken to resolve cases) but actually relatively outperforms India too. Costs of litigation are measured in attorney fees, largely a result of market forces, and court costs - under the purview of the government. In India, court costs stand at an average of 8 per cent of the claim value while in Hong Kong this is 0.7 per cent of claim value.

And India may yet slip further in the next World Bank report when it includes, among other variables, indicators that measure whether the law limits the number of adjournments possible in litigation, whether there is a specialised commercial court, whether pre-trial attachment of assets is available et al.

Forget Modi, even if god comes to rule India, she will not be able to implement radical enough reforms to overcome the bureaucratic inertia that is required to launch India from rank 186 out of 189 to even the top 50 in enforcing contracts in our beleaguered judicial system.