Here is a great article. It seems that this apathy in
not being able to help private startups has held India
back from its true potentials.
>From personal experience, we had a tough time to cash
travellers' checks in Banks. You must have an account
with that bank (and that branch) before they will
accommodate you. Store will cash when you buy
something.
Moral of the story, when travelling to India,
Traveller's checks of no use - really!
Mr. Venkitaramanan was a former governor, Reserve Bank
of India.
Issue Date: Monday, November 15, 2004
TRIPPED AT THE START
- Conditions of business in India do not allow it to
compete
S. VENKITARAMANAN
Every year, over the last few years, the World Bank
has been coming out with an analysis of the various
elements that govern business conditions in different
countries. This study, known as Doing Business in
2005, has come out recently, with a wealth of
comparative data showing the ease or difficulty of
commencing a business, hiring and firing people,
accessing credit, closing a business and firing
workers. The study, carried out with the help of
distinguished consultants, shows that India has a long
way to go to make the climate conducive for investors.
The World Bank study rightly cites a number of Nobel
Prize winners, who were of the opinion that easing the
start-up of business was considered one of the
cost-effective ways of speeding up development, ahead
of investing in infrastructure. This makes sense,
since even with the best infrastructure, difficulties
in business start-up, access to credit and so on can
impact negatively entrepreneurs� intentions to invest.
This is a serious fallout of poorer countries being
over-concerned with regulation.
Heavy regulation of entry into business is a result of
a mindset, which considers the start of business as
part of a privilege given by governments. Registering
a business in such a situation involves a series of
procedures and costs. The impact of severe regulatory
restriction is that people shy away from formally
entering business. They prefer to operate in the
informal sector, which has its own disadvantages, in
that the entrepreneur cannot have a record of his
assets and borrow thereon. Fernando de Soto, the
Peruvian economist, calls this effect an accumulation
of �dead capital�. The informal sector represents so
much of wasted potential, it is reason enough for a
relaxation of procedural restrictions. His preferred
solution is to simplify business entry and ensure that
the poor get titles to property. There are, of course,
many problems in doing this. Although not analysed in
the report of the World Bank, these deserve to be
considered by our government, which wishes to bring
the informal sector into active participation in
economic growth.
The World Bank report cites many details of the
impediments placed by poorer countries in the path of
businessmen. It shows how, for instance, Singapore
requires just seven procedures and takes eight days
for a business to be started. In addition, the cost
the businessman incurs is just 1.2 per cent of the
income per capita. The corresponding figures for India
are 11 procedures, 89 days and 49.5 per cent of the
income per capita. The information required by
governments regarding business start-ups cannot be
more in India than in Singapore, unless it is
information for information�s sake, filling up files.
Indeed, even China, with its suspicion of private
industry, takes 41 days in 14.5 per cent per capita
income to start up a business. The United States of
America is more investor-friendly with just five
procedures, five days in time taken and costs of 0.6
per cent of the per capita income. It does not take a
rocket scientist to find out how to simplify our
procedures and reduce our costs of entry to at least
the Singapore level, if not the US�s. This is a task
which our reformers can usefully initiate as part of
promised administrative reforms and also as part of
cutting the excess baggage of babudom.
Above all, we need to remove from our mindset the
misapprehension that such reforms can injure social
equity. As the World Bank�s report points out, the
Nordic countries score the best in respect of low
restrictions on start-ups, registration, hiring and
firing and access to credit. But they are nowhere
accused of being indifferent to social issues. The
resources released for governments by easing
restrictions on business can be better spent for
improvement in the social sector.
It is in the area of access to credit that the
differences between various countries are marked. The
World Bank rightly stresses that the ease of access to
credit is also determined by the ease of collection if
the credit goes bad. This is in terms of creditors�
rights in the case of business closure. The ease of
access to credit is measured by the cost of creating
collateral as percentage of income per capita, the
credit information index (the amount of information
available in the borrowers� credit history) and the
legal rights of borrowers and lenders. Here, India�s
record is not as good as that of Singapore or the US
or even China. The cost to create collateral in India
is 11.3 per cent of per capita income, 0.3 per cent in
Singapore, 1 per cent in the US and 0 per cent in
China. Credit information is abundant in Singapore and
the US, but was complex in India till recently.
What the World Bank report misses out is the time
taken to get a clear �yes� or �no� from the banker. In
India, it is mere prevarication. In China, the banks
dare to lend. So too in the US. While senior officials
have been castigating bankers in India for being lazy,
they have not recognized that this so-called
�laziness� is rooted in the fear of lending, which can
bring down on the banker the collective wrath of
vigilance, investigators and the regulator. Unless the
mindset of excessive vigilance and suspicion of even
bona fide bankers is changed, access to credit cannot
be easier.
But in recent years, the rights of lenders have been
improved in India, thanks to debt recovery instruments
and asset reconstruction agencies. But, borrowers�
rights remain in the limbo. There are countless cases
of small-scale industries left out in the cold by
arbitrary actions of lenders. These difficulties
require redressal if Indian businessmen have to
compete on a level playing field with their
counterparts in other countries.
The World Bank report brings out a table showing the
remarkable differences in time and cost taken to
register a commercial property in India compared to
other countries. In India, it takes six procedures, 67
days and 13.9 per cent of the cost to register a
property. The corresponding figures for Singapore are
three procedures, nine days to complete and 1.5 per
cent of the cost of property. Even China requires only
three procedures, 32 days and 3.1 per cent of the
cost. The US has four procedures, 12 days and 0.5 per
cent of the cost. Why can we not cut down the
procedures, time and costs?
It is in respect of closing a business that India
takes the cake. It takes 10 years to complete the
closure of a business in India, while it takes 0.8
years in Singapore. The cost of insolvency is 8 per
cent of the cost of the estate in India, while it is
one per cent in Singapore. When the creditor disposes
of the insolvent�s estate, he can recover 12.5 cents
on the dollar in India, while he can recover 91 cents
in the dollar in Singapore and 68 cents in the US. We
need to be more effective in enforcing lenders� rights
in insolvency cases, if they are to lend boldly to
various entrepreneurs.
The World Bank report compares the difficulty of
firing and hiring by a composite measure, the details
of which are not spelt out. It comes out that the
difficulty of firing index for India is 90, where it
is 0 in Singapore and the US, and 30 in China. In the
absence of details, it is difficult to judge how far
this dimension can be changed to India�s advantage.
However, there is much to be said for a review at our
laws governing hire-and-fire of employees.
The whole exercise started by the World Bank can have
meaning only in a specific context. Indian reformers
have to evolve their own version of a similar attempt
to compare our procedures and other restrictions with
what is optimal. It goes without saying that an
over-regulated and an under-governed economy is a
recipe for failure. India should learn from the World
Bank�s report as to how to improve the investment
climate in the country. Perhaps the exercise of
improving business indicators can initiate a healthy
competition between different states and create a
favourable ambience for industry and entrepreneurs in
the coming decade.
Hopefully, India�s reformers will start out with a
process of consultation with various industry
associations and state governments on how to improve
the process started by the bank. Perhaps, we can offer
a better paradigm for encouraging industrial
entrepreneurs as a result of our own effort.
The author is former governor, Reserve Bank of India
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