The great unease of doing business in India

By Andy Mukherjee

A little over three years ago, the World Bank scrapped its annual “Doing Business” report amid allegations that its top management had applied pressure on staff to boost China’s score.

Back then, India’s rank was 63. That was a big jump from 2014, when it languished at a lowly 134th position among 189 economies. Still, starting a business continues to be a nightmare. The internet is strewn with first-person accounts — like this one — of the fruitless running around for mindless permits and approvals overwhelming even the most intrepid of entrepreneurs.

Prime Minister Narendra Modi’s “Make in India” campaign has also got lost somewhere in the labyrinths of this bureaucratic maze. Despite the decade-old program, which claims to be the “single largest manufacturing initiative undertaken by a nation in recent history,” the share of manufacturing in the economy has shrunk to its lowest since 1960. A great unease of doing business is a big drag on India’s competitiveness.

To see how big a problem it is, I spoke to someone who has set up a factory. The person, who requested anonymity to avoid getting into trouble with officials, sketched out in great detail the differences between Thailand, where he had successfully managed an industrial-machinery unit for nearly two decades, and India, where he has put up a similar-sized facility in the western state of Maharashtra, among the country’s most industrialized. According to him, the decision to manufacture in India comes with significant disadvantages. Let’s add them up:

Land and Registration

Factory land in better-equipped industrial areas is 25 per cent more expensive in India than Thailand. For the unit in question, the difference works out to $200,000 for the same plot size with comparable transport connectivity.

The buyer pays a 2 per cent stamp duty in Thailand, and 6 per cent in Maharashtra. On top of that, there is a standard bribe for registering property, something nearly every Indian homeowner can attest to. The usual practice is to hand over the money in a thick manila envelope to one’s broker, who then passes it on to the officials. It works no differently for industrial property. Add the legal and the “extra”-legal expenses, and property registration for the industrial-machines factory in Maharashtra costs nearly $50,000 more than in Bangkok.

Construction

The availability of low-cost labor makes it a sixth cheaper to build factories in India. However, nearly half of the advantage is eaten up by India’s 18 per cent goods and services tax on construction. In Thailand, the 7 per cent levy can be offset against the value-added tax the firm starts collecting from its customers once the factory goes into production. That isn’t allowed In India. And while all civic authorities insist on free space, regulations in Bangkok allow as much as 65 per cent of the plot to be used for production. In Maharashtra, that figure drops to 55 per cent.

Permissions

Then come the fees for building approvals and various no-objection certificates. (See table below.) But even after paying, the owner has to self-insure against each and every risk. Since power shutdowns are rampant, the factory requires a diesel generator. It also needs to store 40,000 gallons of water on the premises. Forget a fire truck. Since the municipality can’t be relied upon to supply even day-to-day water, the unit needs a go-ahead to dig a borewell. That permission also costs money. The Indian municipality charges a labor welfare fee, even though the workmen have to be insured against accidents by the labor contractor.

At every step of dealing with the petty bureaucracy, some money needs to change hands to speed up the process. It is most certainly expected. All told, 19 per centof a $2.3 million factory in India is an extra burden of governance — or lack of it — that doesn’t exist in Thailand.

This may not be an showstopper for a high-margin business that relies on skilled, productive labor and cutting-edge technology. But for a labor-intensive startup operating with slim profits in an industry like readymade garments, going into production from a weak financial position means fewer resources left to scale up. And therein, the entrepreneur tells me, lies the basic difference between India and its East Asian neighbors. No ordinary Thai businessmen fears bankruptcy because of something his government may do; in India, such a prospect is very real.

Solutions

So what is the way out? Tackling overregulation — like the “number and location of spittoons” prescribed in the outmoded labor codes — should be a priority. A recent survey of 9,000 firms by LocalCircles, a New Delhi-based community engagement platform, showed that 68 per cent of respondents had paid a bribe for property registration or transfer in the past year; and 62 per cent had greased the palms of GST officials.

The law behind property registration in India goes back to 1899, while the goods and services tax has been in operation for less than a decade. And yet, when it comes to being avenues for graft, they now seem to be almost equally bad.

I asked the industrial-machines entrepreneur if he had to pay any “extras” to register the Bangkok factory. Yes, a little bit, he said. But that’s where it stopped, whereas in India, ownership became the starting point for all kinds of negative surprises.

For instance, he bought the land in India from a third party, which had won it in a bank auction after the previous occupant’s business went belly-up. But there’s a catch: an old, unpaid electricity bill from the same address. The utility is waving a 2023 judgment from India’s Supreme Court to ask the machinery business to pay those dues, which it should have collected from the auction winner. That’s another $200,000. The new owner has to pay a sizable chunk of the arrears to get reconnected, and then sue the seller to recover his loss.

It’s the little things that add up to a great unease. It leaves the jobless youth angry and factory owners struggling to compete.