Ease Of Doing Business In India
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Ease Of Doing Business In India

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Economics

Ease Of Doing Business In India

Why in the news?

In the latest ranking for countries in ease of doing business, the World Bank has placed India at 63rd position out of 190 countries — an improvement of 14 places from its 77th position last year.

India figures in the top ten most improved countries in the world for the third consecutive year.

India’s score improved from 67.23 (2019) to 71.0 (2020).

Ease Of Doing Business Index

The Ease of Doing Business index is a ranking system established by the World Bank Group. In the EODB index, 'higher rankings' (a lower numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

Economies are ranked from 1–190. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the aggregate scores on 10 parameters each consisting of several indicators.

Parameters to calculate EoDB Index

Starting a business - Procedures, time, cost, and minimum capital to open a new business

Dealing with construction permits - Procedures, time, and cost to build a warehouse

Getting electricity - procedures, time, and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse along with the reliability of supply.

Registering property - Procedures, time and cost to register commercial real estate and quality of land administration (index calculated)

Getting Credit - Strength of legal rights index, depth of credit information index

Protecting Minority Investors - Indices on the extent of disclosure, the extent of director liability, and ease of shareholder suits

Paying Taxes - Number of taxes paid, hours per year spent preparing tax returns, and total tax payable as a share of gross profit

Trading across borders - Number of documents, cost, and time necessary to export and import

Enforcing contracts - Procedures, time, and cost to enforce a debt contract

Resolving insolvency - The time, cost, and recovery rate (%) under a bankruptcy proceeding

Each of these parameters has certain sub-parameters that are quantifiable  For example, the 'Starting a business' parameter has procedures, time, cost, and minimum capital required as calculative parameters. 

Challenges to Ease of Doing Business in India

Economic Slowdown: The viability of a business depends on the stability and growth of the economy.

Aggregate Demand Dip: The economic slowdown has put a brake on consumption growth which is the main driver for the Indian economy.

Income Distribution: Income distribution shifts away from the overwhelming majority of the population to a handful of few, increasing the income gap. 

Regulatory Challenges: Complex regulatory framework which includes a plethora of overlapping laws and compliance requirements from various departments in setting up and running a business.

Subjective interpretation of the law: Complex  Tax laws lack clarity and are prone to the subjective interpretation of tax officers which causes undue hardships to taxpayers and leaves scope for “tax terrorism”.

Asymmetrical Policy Focus: The government measures are mainly directed toward reforming the formal sector, while almost 85% of our workforce is engaged in the unorganized sector.

Land Acquisition Issue:

Land acquisition has become one of the greatest challenges for new businesses.

There is a lack of clarity, infrastructure, and technology support in proper record keeping.

Political Issues

Emotional attachment with the land instead of treating it as immovable property.

Cultural and psychological barriers. (Ex: No land for Leather factory or winemakers)

Lack of uninterruptible Energy Sources:

Electricity generation and distribution are costly as we are still dependant on conventional sources. We need more capacity building to support new businesses.

Credit Issue: With rising NPA, Getting credit for small businesses has become a bigger problem.

Administrative Challenges: Lack of coordination among different government ministries and departments, Central and State governments.

Measures are taken to improve EoDB

Insolvency and Bankruptcy Code: The Insolvency and Bankruptcy Code of 2016 has introduced new dimensions in resolving insolvency in India. It is India’s first comprehensive legislation of corporate insolvency.

Under Fast-track Corporate Insolvency Resolution Process (CIRP) for mid-sized companies, the process for insolvency shall be completed within 90 days with a maximum grace period of another 45 days.

Goods and Service Tax (GST): The idea of ‘one nation, one tax’ has made it easier for people to start a business, and ITC (Input Credit) mechanism ensures an uninterrupted flow of cash for businesses and reduced price of goods/services for the end consumers.

The Goods and Service Tax came into effect from 01 July 2017. It subsumes eight taxes at the Central and nine taxes at the State level.

Application of technology :

Digitization of services has made various administrative processes faster, smoother, and transparent.

Concessional tax regime: GoI has reduced the corporate tax to reduce the tax liability of companies. It is also providing tax rebates to the startups under the make in India campaign.

All technical and administrative support to startups under Make In India initiative.

Generation of the employable workforce through various pieces of training and certifications under Pradhan Mantri Kushal Vikas Yojana(PMKVY)

Way Forward::

Creating Demand: To address an aggregate-demand growth slowdown, an active macroeconomic policy is needed. Spending must focus on the rural sector to raise agricultural yields and build the infrastructure needed to support non-farm livelihoods 

Legal Barriers:

Companies Act should be reviewed to minimize the criminalization of violations.

Taxation laws should be made simpler and tax administration should be impersonal. 

The GST law should be stabilized and the technology backbone should be strengthened rather than making more changes.

The human interface between tax officers and taxpayers should be reduced while automating the tax machinery.

Make in India: The program represents a comprehensive overhaul of processes and policies and represents a complete change of the Government’s mindset.

Emphasis on manufacturing would help in solving the employment crisis and will lead to increased purchasing capacity, thus boosting domestic consumption.

Access to credit It should be assured for small businesses and rural entrepreneurs 

Digitizing land records, improving titling, and streamlining procedures for transfer of property should be taken up.

Other reforms

Foreign trade needs to be boosted by cutting red tape and reducing transaction costs.

Governments should be proactive in obtaining regular feedback about the implementation and initiating the changes accordingly.

A fair judicial and executive system needs to be in place to achieve the confidence of domestic and foreign investors.

Fast track commercial courts, paper-less courts need to be set up to speed up the judicial processes.

Labour compliances need to be eased.

In the spirit of cooperative and competitive federalism, all the states should initiate the best and proven practices for ease of doing business.