The World Bank’s Doing Business (DB) rankings for 2018 have just arrived out and India has gained a very notable jump, elevating its position from 130th in 2017 to 100th.
These rankings are based on the country’s performance in several areas, like starting a business, getting construction permits, getting electricity, contract enforcement, etc.- fields where India has traditionally done very poorly, resulting in its global rankings wavering around the 130s during the decisive decade.
This had aided the contemporary government to initiate a slew of business-friendly institutional improvements including, Make In India, simplification of tax procedures, insolvency laws and so on. All of these resemble to have led to the big jump in India’s ranking.
What does all this say about the actual business environmentin India? What are the comprehensive challenges that one might face in India in starting a business?
Here are 5 important points that everyone should know before jumping into the entrepreneurship scenario:
1. Inadequate Policy-Making
Instead of depending only on any report, the government that wanted improvements in the country’s business environment would want to understand the de facto situation faced by firms. Understanding this, the NITI Aayog and the IDFC Institute undertook a joint study of this issue based on firm surveys and came out with a report in August 2017. Unfortunately, rather than providing a comprehensive picture of the business environment in India and how it should be improved, the study draws conclusions that are of limited use for policymaking.
2. Business Environment
It is prudent to question the usefulness of this aspect. If it implies that a high growth rate is a prerequisite for a better business environment, then improving the business environment loses its usefulness as a policy to push up growth rates. In such a situation, it’s not clear why a government would try to improve the business environment at all.
Another major finding focuses on the nature of the firms and shows that start-ups report a more favourable business environment as they need less time to obtain approvals than older firms. However, the study defines start-ups by categorizing all manufacturing firms that have been set up after 2014 in this group.
3. Technology
It is important to note that, in order to undertake effective policies to improve the business environment in India, we need to understand what causes it to be relatively good in some situations and poor in others.
The NITI Aayog-IDFC study throws light on some of the broad trends in the country’s business environment but fails to provide a deeper understanding of its causes due to the lack of a conceptual framework to analyse the data.
4. Conceptual framework
In a recently published book titled The Political Economy Of India’s Growth Episodes, written by Kunal Sen of Manchester University and one of us, we have attempted to answer this question.
We argue that the business environment in any developing country like India results from the nature of deals that are struck between the state and the business leaders, both at the Central and state levels. Here, the state includes both the political and the bureaucratic class.
These deals between the state and elite business entities explain why, for example, it takes some firms in India only one day to get a construction permit while it takes other firms around one year.
5. Socio-Economics And Strategy-Formation
This framework should lead to two clear questions that any study on this issue should focus on:
(i) What are the underlying social, economic or political characteristics of a state?
The answer would encourage it to provide better deals to the bulk of the private sector firms.
(ii) What are the strategies firms should undertake in order to ensure that the political class offers them more business-friendly deals?
Unless we have studies answering these questions, our policymakers will remain handicapped in their attempt to better India’s business environment.
