A troubling roadmap for Indian manufacturing sector

Context:

Niti Aayog recently launched the Ease of doing business report based on an enterprise survey of 3,500 manufacturing firms across the nation.

Introduction:

• The report, ‘Ease of Doing business — An enterprise survey of Indian states’,said starting a business in India took longer than that estimated by the World Bank.
• The report sharply delineates the manufacturing sector’s problems.
• The survey has been conducted, along with the IDFC Institute, to assess the business regulations and enabling environment across India from firm’s perspective.
• The ease of doing business report based on an enterprise survey comes in the backdrop of the fact that India needs to create an environment that fosters globally competitive firms, capable of driving and sustaining economic growth.

What are the major findings this report?

The major findings of this report are as follows:

Economic Performance and Reforms. 

• A higher level of economic activity and better performance on a range of doing business indicators are strongly correlated.
• Enterprises in high-growth states are significantly less likely to report major or very severe obstacles in areas like
• land/ construction re­lated approvals,
• environmental approvals and

Water and sanitation availability relative to enterprises in low-growth states

• Firms located in high-growth states also report 25% less power shortages in a typical month, compared to firms in low-growth states.
•  Improvements over time. 
• Newer and younger firms re­port a more favorable business environment in that they take less time in obtaining approvals than older firms, suggesting an improvement in the business environment.
• Newer firms include startups established after 2014.
• Young firms report that most regulatory processes do not constitute a major obstacle to their doing business.

Informational gaps:

• States need to enhance awareness of the steps being undertaken by them to the improve ease of doing business.
• The survey data show low awareness among enterprises about single window systems, instituted by states.
• On aver­age, only about 20% of start-ups, which are of recent origin, report using single window facilities introduced by state governments for setting up a business.
• Only 41% have any knowledge of the existence of these facilities.

4- Labor regulations are a bigger constraint for labor intensive firms.

• Labour intensive sectors, that create proportionately more jobs per unit of capital investment, feel more constrained by labor related regulations. For example, compared to other enterprises, the enterprises in labor intensive sectors:
• 19% more likely to report that finding skilled work­ers is a major or very severe obstacle.
• 33% more likely to report that hiring contract labor is a major or very severe obstacle.
• Lose a greater number of days due to strikes and lockouts.
• Report higher average time for environmental approvals and longer power shortages.

Barriers to firm growth:

• The experience of firms with fewer employees is different from that of larger firms. In some cases, large firms face more regulatory barriers than smaller firms.
• Firms with more than 100 employees took significantly longer to get necessary approvals than smaller firms with less than 10 employees.
• Large firms were also more likely to report that regulatory obstacles were a major impediment to doing business and that they incurred higher costs for getting approvals.

What are the key highlights of the 2017 report?

Global rankings:

• New Zealand has topped the Ease of Doing Business rankings in 2017.
• The top 10 countries includes- New Zealand (1st), Singapore (2nd), Denmark (3rd), Hong Kong (4th), South Korea (5th), Norway (6th), UK (7th), US (8th), Sweden (9th) and Macedonia (10^th).
• BRICS nations: India ranks lowest in Doing Business among the BRICS nations. Russia (40), South Africa (74), China (78), Brazil (123) and India (130)
• India’s neighbours: India’s Neighbours: Bhutan (73), China (78), Nepal (107), Sri Lanka (110), Pakistan (144), and Bangladesh (176).

India’s position in ease of doing index:

• According to the latest report of World Bank’s ease of doing business index for the year 2017, India has been ranked at 130^th position among the 190 countries.
• India has embarked on a fast-paced reform path and has acknowledged a number of substantial improvements.
• India is ranked 178 in the parameter of enforcing contracts and 136 on the parameter of resolving insolvency.

Areas in which India’s performance has improved:

• India has made a substantial improvement in some areas such as electricity connection to businesses.
• Electricity moved up 29 spots to 70.

Areas in which India has not performed good:

• India has sliped in areas, including payment of taxes and enforcing contracts

What were the challenges highlighted by the report?

• The challenges faced by a business house in obtaining a permanent electricity connection for a newly constructed warehouse, was limited to the city of Mumbai, which has the best electricity distribution utilities operting in the country.
• Another area of concern was that the ‘getting credit’ ranking has slipped from 36 to 42, implying that it has become much more difficult to get credit in India.

What are the objectives of Doing Business Report?

• The doing business report is a study by the World Bank Group since 2004 every year.
• The study has become one of the flagship knowledge products in the field of private sector development and is claimed to have motivated the design of several regulatory reforms in developing countries.
• The study presents every year a detailed analysis of costs, requirements, and a procedure a specific type of private firm in subjects in all countries, and creates rankings for every country.
• By creating ranking, the study spotlights countries and leaders that are promoting reforms.

What are the steps taken by government to improve India’s ranking?

Government has taken the following steps for improving ease of doing business in India:

• The government has been making efforts to further improve the ease of doing business and aims to bring the country in the top 50.
• Improving business climate helps attract both domestic and foreign investments.
• Reduction in number of documents for foreign trade.
• Online application for environment clearance.
• Improvements have been made in regulatory environment through Deregulation, delicening, simplification of procedure.
• Action plan has been formed for improving the regulatory environment.
• New sectors have been opened to FDI and partnership has been forged between industries and the government through positive mindset
• Government has also focused on creation of modern and efficient infrastructure
• Allotment of PAN and TAN cards has been simplified and CIN/Corporate Identity Number has been included as proof of identity
• Indirect tax front initiatives have also been promoted to improve ease of doing business.
• Introduction of e-biz project for single window clearance
• Mandatory filing of all returns on-line through a unified form.

What is Ease of doing business index?

• The ease of doing business index is an index created by the World Bank Group.
• Higher rankings indicate better, regulations for businesses and stronger protections of property rights.
• It was introduced in 2004.
• In this index, ranking of country is based on index averages the country’s percentile ranking on 10 indicators each having equal weightage.
• 10 indicators includes- starting business, getting electricity, dealing with construction permits, registering property, protecting investors, getting credit, employing workers, trading across borders, paying taxes, enforcing contracts and resolving insolvency.

What need to be done improve India’s ranking?

• Improving physical infrastructure is essential.
• This ranges from transport systems to the power sector.
• The report also mentions the need to improve access to finance for smaller enterprises and making firm entry and exit easier.
• Enhancing the flexibility of labour regulations.