Thursday 27 November 2014

Analysing International Business: From an Indian Lens ( Category- Ease of Doing Business)


(Morati Kelly Molelekeng is a final year student at Jindal School of International Affairs) 

One of the immediate challenges for the Indian economy is to improve the ease of doing business across the country. The role of the state is of critical importance in combating this challenge, prepare a solution model which points out at the tangible measures including policy initiatives that will help in improving the process of starting up and doing business across the country (not only in concentrated regions).



Every country’s government plays a critical role in shaping and directing the economy and its sectors to the desired growth rate. Over the years, India has shown some improvements in a few parameters with regard to the study on “Easy of Doing Business”, shows a report by the World Bank. The report assess how easy or difficult it is for an entrepreneur to set up and operate a business in a particular country. The study covers 189 countries. . Going by the study, in India, there still remains an enormous room for improvements. The central government and states governments need to spearhead policy reforms and provide policy guidance for India’s ranking to improve.  For the purposes of this essay I will, put forward  a solution model which points out at tangible measures including policy initiatives that will help in improving the process of starting up and doing business in the manufacturing sector in India.


Introduction

Manufacturing forms an important base for a country’s economic progress; no major economy has managed to blossom without the development of its manufacturing sector. According to Assocham[1], manufacturing activity, as a share of India’s Gross Domestic Product (GDP), plunged to 15.2 per cent during the financial year 2012-13 and it is expected to fall below 15 per cent in the current fiscal. Its share to the GDP in 2010-11 was 16.2 per cent and 15.7 per cent during 2011-12. The drop comes amidst government’s target to achieve 25 percent contribution to the total economic activity by 2020. On the contrary, the trend is certainly moving in the reverse.



Drawing from the above, it can be said that manufacturing sector has been moving at a slower pace than the overall economy for some time now. As a result, the sector’s contribution to GDP has declined marginally. It is also no surprise that the growth rate within the sector itself is on a declining trend.
The Government of India has announced a National Manufacturing Policy (NMP)[2] with the objective of enhancing the share of manufacturing in GDP to 25 per cent within a decade and creating 100 million jobs. Arun Maira[3] argues that change is necessary in many areas for India's manufacturing sector to reach its goals. These improvements must happen widely around the country, not only within the proposed Investment and Manufacturing Zones, for the country to realise its aspiring overall growth and employment targets.
Drawing from the above, India needs to transform some of its business processes in order to have a significant transformation of the sector. Ajay Shankar[4] emphasized while addressing the Manufacturing Excellence Conclave (MEC) organized by Confederation of Indian Industry (CII)[5],

“Adopting Manufacturing Excellence as a national mission is the only way to get India rid of the vast poverty and to help it achieve all inclusive growth. We need to build a strong Consensus amongst all stakeholders including Central & State governments and agencies, institutions, NGOs, industry bodies like CII and the society as a whole to make India world leader in manufacturing.

To achieve this goal, there is a need for a national effort that is implemented across all states and with the same urgency if manufacturing is to be revived to its desired growth rate and increase its contribution to GDP.  However, it is worth noting that the governments has drawn some initiatives to try and revive the sector, for example, different policies on Foreign Direct Investment (FDI), Goods and Services Tax (GST) and Land Acquisition Bill have been formulated in the recent years but it is their implementation that still remains an enormous challenge.

One Stop Shop

When looking at the 2014 Doing Business Report[6], starting a business in India just got harder. Currently the country is ranked 179 out of 189 countries, a movement down in ranking from the 177 position it held in 2013. This indicates that the procedures needed by an individual to set up a company need to be reformed and improved. Usually the process is made lengthy by moving from one government department to the next and each with a requirement of its own.

For this to improve, the government need to take centre stage and make the environment conducive for starting and operating a Manufacturing company.  Each state government needs to set up a One Stop Shop that will mostly carter to the needs of international investors as well as local entrepreneurs who want to establish a manufacturing business. A One Stop Shop reduces the amount of time an investor takes to access all the documents and procedures that are needed to start a business. The One stop Shop can be housed in the department responsible for trade issues as most of the procedures involve this department. For example, Singapore which is ranked 1st in the Ease of Starting a Business parameter, has established an online One Stop Business service portal called BIZFILE. According to the website[7],

BizFile (www.bizfile.gov.sg) is Accounting and Corporate Regulatory Authority (ACRA)’s award-winning online filing and information retrieval system. BizFile offers close to 300 e-services, serving as a one-stop facilitator for businesses. With the integration of e-services with multiple agencies such as the Singapore Customs, Inland Revenue Authority of Singapore, Spring Singapore and Singapore Government Network Information Centre, business owners can now be GST-registered, reserve their web domain name or activate their customs account, among other business processes. You can also do a search for registered entities, purchase information, and file business transaction, etc on BizFile.

The government of India can take this Singaporean model and make it part of its e-governance project and custom made the model to suit the requirements of different states with regard to setting up a business entity.

Infrastructure

Infrastructure could be said to be the heart beat of an economy. Due to this relationship, infrastructure and economic growth appears to run in both directions and the need for investment in infrastructure never goes away. The maintenance and expansion of infrastructure are important dimensions of supporting economic activity in a growing economy. Delmon, an infrastructure specialist with the World Bank, wrote the following: “Poor infrastructure impedes a nation’s economic growth and international competitiveness (The World Bank, 2006).

There is a need for India to up its game when it comes to infrastructure development especially in states that have manufacturing as their base.The PwC report[8]states that,

“India is one of the world’s most attractive markets for companies in the infrastructure business. But India’s difficult business environment has sapped the enthusiasm of many foreign investors. Among other things, they complain about unpredictable regulations; bureaucratic delays in approving projects; endless struggles to secure land rights; and the government’s stalled attempts at reform”

This clearly shows that more needs to be done by both the central and state governments to bring back the investor confidence for the infrastructure segment. The PwC Report[9]  also state that several manufacturing companies in states like Karnataka and Tamil Nadu don’t get power for several hours a day. Therefore, they’ve installed their own generators. But that power is about twice as expensive. This makes the manufacturing sector unattractive to investors, hence the need to act with much urgency to mitigate these challenges.

 Traditionally, highway and expressway construction and maintenance are conducted by states governments, which in turn pose significant pressure on their fiscal budgets. However, this is avoidable. The central government can take a cautious decision to explore and maximise the degree of private investment in the ‘Build Operate Transfer’ model across states. According to Menheere, Sebastiaan C.M., and Spiro N., Pollalis[10], the Build Operate Transfer approach (BOT) is an option for the government to outsource public projects to the private sector. With BOT, the private sector design, finances, constructs and operates the facility and eventually, after a specified concession period, the ownership is transferred to the government.

This model can be applied to many projects such as electricity power generation, building and maintaining road networks within and between states and high-speed rail program that can free track capacity for freight logistics. Electricity is very central to the manufacturing sector and India has been experiencing power shortage problem across the country. This BOT model can be used to explore the nuclear power generation sector which is capital intensive. This will also pose an opportunity to explore the local technology present in the nuclear sector within the country.

Land Use Policy
Land is one of the factors of production that any business cannot operate without, whether it is through ownership or leasing. Therefore, the land policies in any country are very vital in attracting investment in any sector especially manufacturing sector which usually needs hectors of land to operate large scale production. There is need for India to formulate a National Land Policy (NLP) that state governments’ can draw from which promote the cut down on the number of clearances for projects.

Jones Lang LaSalle[11] report states that

“Developers face the greatest challenges in obtaining a clean, bankable title to a contiguous land parcel of sufficient dimensions to develop projects in India. Another issue they face is the loss of control on cost during acquisition, since the cost of acquisition after completion of the entire process is often so high that any development becomes prohibitively expensive”.

This clearly shows that procedures involved in land acquisition need to be revised and cut down so as to reduce the costs of involving lawyers and middle men. The recent court cases in states government allocation, where petitioners have taken government to court for allocating huge chunks of land to big companies just heighten the problem. For example, The English daily Times of India[12] reported that, the allocation of land by state governments, including to Mukesh Ambani-promoted Reliance Industries in Punjab and Haryana and Anil Ambani-run Reliance Energy in Uttar Pradesh, for developing SEZs are under scrutiny. Another example according to the PwC Report[13] is Tata Motor’s land acquisition in Singur, West Bengal had an in-principle approval but later ran into hurdles and political opposition leading to major production delays. Eventually, the company pulled out of the project. Noting that these problems are taking place still with the new 2006 National Land Policy in place, evidently, there is more that needs to be done within the policy.

In recognition of all these problems, an Article on issues related to land acquisition in India[14] suggest that only a clear National Land Policy with more proactive laws for the process of acquisition, as well as for resettlement and rehabilitation can provide a clear mitigation strategy against all the problems that companies meet.  The Government should devise a mode to provide title security, and laws need to be made in a manner that ensures that old laws do not have an overhang on the land. Indeed more transparent and clear laws need to be at the centre of the National Land policy.

Better Business Regulatory Governance

A poor regulatory environment undermines business competitiveness and citizens’ trust in government, and it encourages corruption in public governance. India has gone an extra mile in developing and setting up business facilitation and investment promotion entities at both the national and state level and even extended further to create dedicated special economic zones.  However, such efforts have not been concerted and are not being undertaken in adequately planned and monitored way, especially, when it comes to reforming the business regulatory environment across the country. 

It is against this backdrop that the central government needs to spearhead a review of the existing regulations, with a view to streamline and reduce the burdens associated with policies, regulations and praxis that (adversely) affect business performance. Such burdens could be of purely economic nature like excess administrative cost or incidence of undue cost over doing business.

Conclusion

In conclusion, the government should become a catalyst and create laws and policies that will make the manufacturing industry more competitive. For India to remain a major player worldwide there is a need for reduction in bureaucratisation of procedures and formulation of laws that will ease the procedures of doing business in the country rather than obscure them. Most importantly, the central government and states governments have to take centre stage and drive the process through better business regulatory governance.

Reference

[1]The Associated Chambers of Commerce and Industry of India (ASSOCHAM)http://www.assocham.org/about/aboutus.php
[4]Member Secretary, National Manufacturing Competitiveness Council (NMCC),
[5] Ajay Shankar, Manufacturing Excellence not a choice, but dire need for India
[6] The World Bank, Doing Business Report: www.doingbusiness.org.
[7]Accounting and Corporate Regulatory Authority, http://www.acra.gov.sg/Quick+Links/Guide_to_Bizfile/About+BizFile.htm
[8]Manish Agarwal: A passage to modernity, Gridlines PwC summer, 2013
[9]Ibid
[10] Case Studies on Build Operate Transfer/ Rick Huijbregts 211 p. 23 cm. ISBN 90-9010335-X
[13] PwC Report:  Point of view National Manufacturing Policy, 2012 available  from https://www.pwc.in/en_IN/in/assets/pdfs/industries/industrial-manufacturing/national-manufacturing-policy-pov.pdf
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