PLUSES & MINUSES. Why States must mean business

Narendra Modi faced a barrage of comments during his recent interactions with American business honchos in New York. In unison, they said he was doing good work but must continue to do more, and faster. They were not shy in referring to a host of obstacles such as complex regulations, excessive approvals, confusing bureaucracy, red-tapism, taxation issues, poor infrastructure, etc. “It is not an easy place to do business” said one gentleman.

While the Centre is trying to overcome the obstacles, the federal nature of Indian polity requires traction to be gained equally at the State level. Some States are frontrunners in attracting domestic and foreign investment, but others continue to lag behind.

As the chain can’t be stronger than its weakest link, all States need to be pulled up to provide a market-friendly ecosystem, for achieving a ‘Doing Business’ rank under 50 in the next three years.

To achieve the objective and also usher in the spirit of ‘competitive and cooperative federalism’, the Department Of Industrial Policy & Promotion (DIPP) with the support from the World Bank undertook the unique exercise of coming out with a State-wise ranking for 32 Indian States and UTs on “assessment of state of implementation of business reforms”. This was undertaken over the period of first six months of 2015.

The World Bank’s Doing Business Report 2015 rates countries on the amount of regulatory burden that might befall an entrepreneur and not investment flows.

Firstly, every rating exercise is bound to leave out certain aspects and give disproportional weightage to some, other than the natural biases in reporting.

Secondly, investment flows and doing business are complex and, by nature, unpredictable phenomenon that depend on a vast number of factors and difficult to quantify. This is why India performs better in terms of attracting investments than many other countries that are placed at higher rankings than itself, in the report.

However, the importance of the comparative exercise lies in outlining the areas and scope of improvement that can be undertaken and judging the progress achieved by the State over time.

In the recent exercise, Indian States were judged and ranked in terms of ease of doing business on a 98-point Action Plan to enhance transparency, efficiency and effectiveness of government regulatory function.

The assessment was based on eight areas covering setting up, operating and existing business.

The exercise must be commended, as it is crucial for creating awareness amongst the States about the areas where they lack, the best practices they can adopt and create positive competition for attracting investment. (The GST when introduced will curb the tax incentives which states were giving to attract investment).

The exercise aims at ushering in not just competitive federalism, in place of the present race to special status and packages, but also cooperative federalism where States learn from each other.

Reducing regulatory burden would be critical to increasing India’s overall competitiveness, success of Make in India, economic revival and long-term growth.

The States in general have made good progress in easing compliance with taxes, shifting related processes online, improved timelines for construction permits and land allotments. Further, the poorest states have shown the greatest enthusiasm for the reforms.

Poor performance in general has been in areas of e-Courts and enforcement of contracts. None of the States has been able to demonstrate a fully comprehensive list of all licences, NOCs and registrations required by a business to set up, operate and exit.

As a result, entrepreneurs can’t get a comprehensive sense of the entire regulatory burden that will entail.

All of it needs to be seen in the background, that despite the economic reforms of past two and half decades, only a third of the proposed business reforms on an average have been implemented across the country. In fact, none of the States have undertaken more than 70 per cent of the desired reforms.

Twenty five Indian States out of the thirty two rated have implemented less than 50 per cent of the reforms; with the biggest chunk (16) falling in the ‘Jump Start Needed’ category, implementing less than 25 per cent of the said reforms.

Further, the special category States (north eastern States and Jammu & Kashmir) forming at the bottom rung raises concern about the effectiveness of developmental strategy followed by them.

Former BIMAROU States — apart from Bihar — bagging ranks in top ten while industrially advanced States Maharashtra, Tamil Nadu, Haryana, Karnataka, Punjab, Delhi finding place in ‘Acceleration Required’ category, has surprised everyone. Also, some States have been crying foul, complaining about their feedback not finding mention in the report.

In order to maintain the credibility of the report, the exercise could have been conducted in more transparent and participatory manner.

Further, the report at present relies on the responses given by States and not users or industry representatives. This provides only a partial picture of existing conditions. The report, undertaking such an exercise and reflecting the existing reality, is expected to be out only in 2016.

The mechanism of ‘fiscal federalism’ laid down by the 14th Finance Commission provides greater financial capacity to States to undertake the regulatory reforms proposed by the present exercise. NITI Aayog must be utilised to provide support to all States in building the capacity for this purpose.

As increasing investment in a State is not the only function of ‘Ease of Doing Business’, but involves a plethora of other equally important factors such as infrastructure — physical, digital, social; presence of skilled labour force; streamlining and continuous updating of laws; corruption perception; trade facilitation; level of urbanisation; presence of good educational institutions that promote innovation; quality and affordable health services, and markets.

Swift steps should be taken for improving all these factors. Further, States should be encouraged to employ cutting edge strategies such as Michael Porter’s Diamond Model to overcome their natural disadvantages and attain competitive advantages over other states.

The writer is the secretary-general of CUTS International. With inputs from Sonal Shukla