Why I agree with Arun Jaitley on ease of doing business

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010
I am often accused of being extremely pessimistic about things.

May be that’s a function of having grown up in erstwhile Bihar, when Lalu Prasad Yadav ruled the state, first directly and then through Rabri Devi.

It was an era when there was nothing to look forward to and that possibly led to me becoming extremely pessimistic about most things and a cynic to boot.

The cynicism and the pessimism got further refined when I first spent three years trying to do a PhD (academics can do that to you) and then spent nearly seven years working in daily newspapers. “If it bleeds, it leads,” is an oft repeated dictum in the media, though this has started to change in the recent past.

In this scenario, my contacts in the financial services industry (mutual funds, insurance, stock broking and so on) keep telling me that I am extremely pessimistic about things. “Things are not as bad as they seem,” I am often told. But then they need to sell things but I don’t.

So today’s column is an exception to me being pessimistic all the time—but only slightly.

The World Bank released its Ease of Doing Business Rankings on October 27, 2015. India moved up four positions to 130, out of 189 nations which were a part of the ranking. This is a jump of four places in comparison to last year.

Certain sections of the media made a lot of song and dance about India’s rank jumping twelve positions to the 130th position. But that is incorrect. When the rankings were first released last year, India was at 142nd position. Nevertheless, the World Bank later revised the ranking to 134, after it started following a new methodology.

Hence, India’s ranking has jumped by only four positions and not 12 positions as a reasonably large section of the media seems to have reported.
The ranking is carried out on multiple parameters (as can be seen from the accompanying table).

TopicsDB 2016 RankDB 2015 RankChange in Rank
Starting a Business1551649
Dealing with Construction Permits1831841
Getting Electricity709929
Registering Property138138No change
Getting Credit4236-6
Proteting Minority Investors88No change
Paying Taxes157156-1
Trading Across Borders133133No change
Enforcing Contracts178178No change
Resolving Insolvency136136No change

Source: http://www.doingbusiness.org/data/exploreeconomies/india#Hence, the ranking does not measure how things stand across the length and breadth of India, when it comes to the ease of doing business. I have no way of figuring out how much Delhi and Mumbai represent the country as a whole. Hence, this and any other analysis on this topic should be viewed with this fact in mind.

India’s jump of four places has come primarily because the country’s performance has improved dramatically on the getting electricity parameter. As the report accompanying the ranking points out: “In getting electricity the main pattern is clear: economies with a simpler, faster and less costly process for connecting to the electrical grid also tend to have a more reliable electricity supply.”

And what is that Delhi and Mumbai have done right on this front? As the report points out: “Another focus is to make the process for getting a new electricity connection simpler and faster. Toward that end the utility in Delhi eliminated an internal wiring inspection by the Electrical Inspectorate—and now instead of two inspections for the same purpose, there is only one. The utility also combined the external connection works and the final switching on of electricity in one procedure.”

And how did things pan out in Mumbai? “The utility in Mumbai reduced the procedures and time for connecting to electricity by improving internal work processes and coordination. It combined several steps into one procedure—the inspection and installation of the meter, the external connection works and the final connection. Now companies can get connected to the grid, and get on with their business, 14 days sooner than before.”

The other big jump came on starting a business parameter. India moved from the 164th position to 155th position. What were the right things that happened on this front? “In May 2015 the government adopted amendments to the Companies Act that eliminated the minimum capital requirement. Now Indian entrepreneurs no longer need to deposit 100,000 Indian rupees ($1,629)—equivalent to 111% of income per capita—in order to start a local limited liability company. The amendments also ended the requirement to obtain a certificate to commence business operations, saving business founders an unnecessary step and five days,” the report points out.

Over and above this “several other initiatives to simplify the start-up process were still ongoing on June 1, 2015, the cutoff date for this year’s data collection. These include developing a single application form for new firms and introducing online registration for tax identification numbers.”

These factors helped in India’s performance on the starting a business parameter improving. On protecting minority investors front India is ranked number eight in the world, so there is not much scope for improvement there.

But look at other factors. Paying taxes continues to remain a pain and it is reflected in the 157th rank on this parameter. As a self-employed professional I can vouch for that. I am still unable to figure out why does a self-employed professional need three different numbers for income tax, service tax and professional tax? I understand that three different departments of the government are collecting these taxes, but why do I have to suffer because the right hand of the government does not talk to its left hand?

When it comes to trading across borders, India is at 133rd position and this is the same as last year. The rankings on resolving insolvency, enforcing contracts and registering property continue to remain abysmally low, all very important parts of running any business.

Once these factors are taken into account, the jump of four positions in the ease of doing business, doesn’t seem much. Yes, it is better than what it was in the past. Nevertheless, there is no real reason to make a song and dance about it, as has been done in large sections of the media.

In fact, on this issue I for once agree with the finance minister Arun Jaitley who said: “I personally believe that we are still a long way away from our eventual goal. Our ranking really has to move up substantially. As of now, we are just a work in progress.”

Yes, we are just in work progress. And there is a long way to go before we can actually make some song and dance about the ease of doing business in India.  As the report points out: “Fostering an environment more supportive of private sector activity will take time. But if the efforts are sustained over the next several years, they could lead to substantial benefits for Indian entrepreneurs—along with potential gains in economic growth and job creation.”

For once I am ending on an optimistic note.

The column originally appeared in The Daily Reckoning dated October 29, 2015

10 cr ‘new’ jobs: This number in Cong manifesto shows what’s wrong with India


Vivek Kaul

A lot has been written panning the manifesto of the Congress party for the Lok Sabha elections scheduled over the next two months. Given this, I will just concentrate on one point that the party promises in the manifesto.
The grand old party of India has promised to create
10 crore jobs for the youth, if it forms the next government. A very noble idea indeed, at least on paper. Let’s go into this in a little detail.
In order to create 10 crore jobs (or a large number of jobs irrespective of a specific number) primarily four things are required—land, labour, money and electricity.
Let’s look at these factors one by one. If a large number of jobs are to be created, India needs labour intensive manufacturing to progress. But labour-intensive manufacturing in India has slowed down over the years. As Crisil analysts point out in a recent report titled
Hire and Lower: Slowdown compounds India’s job-creation challenge “The decline in employment creation has been compounded by falling labour intensity in the economy…The capacity of labour intensive sectors such as manufacturing to absorb labour has diminished considerably in face of rising automation and complicated labour laws.”
Take the case of the apparel sector. A country like Bangladesh does better at it than us.
Economist Arvind Panagariya in an open letter to Rahul Gandhi in November 2013 wrote that “India exported less apparel than much smaller Bangaldesh and less than one-tenth that by China.” Most Indian apparel firms start small and continue to remain small.
This leads to a situation where they cannot benefit from the economies of scale and hence, cannot compete in the export market. In their book
India’s Tryst with Destiny, Jagdish Bhagwati and Panagariya point out that 92.4% of the workers in this sector work with small firms which have forty-nine or less workers. Now compare this to China where large and medium firms make up around 87.7% of the employment in the apparel sector.
Why is that the case? A surfeit of labour laws are a major reason why Indian apparel firms choose to remain small . Labour comes under the Concurrent list of the Indian constitution, meaning both the state government as well as the central government can formulate laws in this area. “The ministry of labour lists as many as fifty-two independent Central government Acts in the area of labour. According to Amit Mitra (the finance minister of West Bengal and a former business lobbyist), there exist another 150 state-level laws in India. This count places the total number of labour laws in India at approximately 200. Compounding the confusion created by this multitude of laws is the fact that they are not entirely consistent with one another, leading a wit to remark that you cannot implement Indian labour laws 100 per cent without violating 20 per cent of them,” write Bhagwati and Panagariya.
This leads to a situation where the cost of following these laws is very high. Labour costs account for close to 80 per cent of the total costs in the apparel sector. As Bhagwati and Panagariya write “As the firm size rises from six regular workers towards 100, at no point between these two thresholds is the saving in manufacturing costs sufficiently large to pay for the extra cost of satisfying the laws”.
The authors recount an interesting story told to them by economist Ajay Shah. Shah, asked a leading Indian industrialist about why he did not enter the apparel sector, given that he was already backward integrated and made yarn and cloth. “The industrialist replied that with the low profit margins in apparel, this would be worth while only if he operated on the scale of 100,000 workers. But this would not be practical in view of India’s restrictive labour laws.”
Given this, it is not surprising that the Crisil analysts expect the number of fresh jobs being created to fall over the next few years. As they write “Employment generation in the non-agriculture sector will slow down sharply in the coming years as the economy treads a lower-growth path. CRISIL estimates that employment outside agriculture will increase by only 38 million between 2011-12 and 2018-19 compared with 52 million between 2004-05 and 2011-12.”
The Congress party hopes to create 10 crore or 100 million jobs in a considerably lesser period of time. In fact, the Crisil estimate suggests that more people will join the agriculture workforce over the next few years. “Due to insufficient employment creation in industry and services sectors, more workers will become locked in the least productive and low-wage agricultural sector. We estimate that 12 million people will join the agriculture workforce by 2018-19, compared with a decline of 37 million in agriculture employment between 2004-05 and 2011-12,” the Crisil analysts write.
Now let’s take the case of electricity. Every new manufacturing set up requires electricity. India currently has the power plants but it does not have the coal required to feed into those power plants to produce electricity. As Neelkanth Mishra and Ravi Shankar of Credit Suisse write in a report titled
Elections: Much Ado about Nothing dated March 19, 2014 “True utilisation in thermal power generation is below 60%, near 20-year lows (reported plant load factor is 65%).”
India does not produce enough coal to feed its power plants despite having the third largest coal reserves in the world. A major reason for the same is that it takes more than 10 years and many permissions to get a coal mine going. In fact, even if coal mines are auctioned to private sector it will take a while to get these mines going. “From the time the blocks are auctioned to the time coal can start to get mined could be another 3-5 years at least,” write Mishra and Shankar. Hence, by the time, the term of the next Lok Sabha will be more or less over.
Now let’s consider the land factor. Over the years, land has been taken over from farmers by the government at rock bottom rates and been handed over to industrialists and real estate builders, who have profited majorly from this. The Congress led UPA government (along with most of the opposition parties) passed the Land Acquisition Act in 2013. This Act goes to the other extreme in comparison to what was happening till this point of time.
As TN Ninan wrote in a recent column in the Business Standard “The land law stipulates that forcibly acquired land must be paid for at two to four times…market prices, in addition to other relief and rehabilitation costs. So the new law will make land acquisition next to impossible, or unaffordably expensive (which becomes the same thing) in most states.”
Ninan also points out that “land prices “ in significant parts of rural India “are higher than those in any rural area of the United States, and in almost all of Europe barring countries like Holland.”
So, for anyone looking to set up a new business enterprise, land will be a huge cost. And this may make the entire idea of setting up a new enterprise unviable.
Finally, let’s consider the money factor. The interest rates charged by banks on loans have been at high levels over the last few years. This is because the fiscal deficit of the government (or the difference between what it earns and what it spends) has exploded. To finance the deficit the government has had to borrow more and hence, crowding out other borrowers. This has led to high interest rates. If interest rates are to come down, the fiscal deficit of the government needs to come down dramatically.
One final factor that needs to be considered here is the ease with which a new business can be started in India.
In a ranking of 189 countries carried out by the World Bank, when it comes to the ease with which a new business can be set up, India stands 179th. Hence, anyone looking to start a new business enterprise in this country, needs to be slightly wrong in the head. And it is ultimately, new enterprises that create many jobs.
If all these factors are taken into account, the promise by the Congress party to create 10 crore jobs, is a big joke played on the people of this country.
The article originally appeared on www.FirstBiz.com on March 27, 2014

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why Congress' new found love for FDI wont help rupee much

Vivek Kaul 
Foreign direct investment(FDI) seems to be new buzzword of the Congress led United Progressive Alliance (UPA) government. Earlier this week the government relaxed foreign direct investment norms in twelve sectors including telecom, insurance, asset reconstruction, petroleum refining, stock exchanges and so on.
This sudden love of the government for FDI after nearly nine years of sitting on their bums, can be attributed to the rupee losing value rapidly against the dollar and creating huge economic problems. The hope is that with FDI reform foreign investors will bring in dollars into India to set up new businesses, increase their investment in existing businesses or buy up businesses.
When these dollars come into the country they will have to be converted into rupees. This will increase the demand for rupees and ensure that the rupee will gain value against the dollar. That is how things are supposed to work, at least in theory.
But this is easier said than done. A foreign investor looking to get money into India through the FDI route is committing to stay invested for the long term. In comparison, a foreign investor investing money in the stock market or the bond market, can sell the stocks or bonds, take his money and leave, the moment he sees things going wrong.
An investor who has got in money through the FDI route cannot exit like an investor who has invested money in stocks or bonds. Selling a business or a factory is not as easy as selling stocks or bonds for that matter. And more than that setting up a profitable business to justify the investment being made in a foreign country is not so easy. I
t is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Given this, any investor getting in money through the FDI route is likely to look at many factors than get in money simply because FDI is the flavour of the week with the government.
Take the case of the South Korean steel company POSCO which has pulled out of setting up a steel plant in Karnataka. The company had signed 
an agreement to set up a steel plant with a capacity of 6 million tonnes in the state in June 2010. The project would have got in $6 billion worth of FDI in the state. Along similar lines ArcelorMittal, the global steel giant, has decided to opt out of a $12 billion steel plant in Odisha. So the country lost out on FDI worth $18 billion within two days of the Congress led UPA government discovering FDI.
The reasons for pulling out cited by both the companies were similar. They couldn’t get the land required to set up the steel plant and at the same time iron ore linkages weren’t in place. Iron ore is used to produced steel.
What this tells us is that it is not very easy for a foreign investor to set up shop in India. The process of acquisition of land for the Posco plant in Karnatka had been on for around two and a half years. 
ArcelorMittal also had been trying to acquire land for its plant in Odisha for more than three years now.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to enforcing a contract, India came in 184th on the list. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India. Given this, why should they be hurrying to India?
In fact ArcelorMittal had announced last year that India was no longer a priority for them when it came to making major investments. Of course these withdrawals would have had much more impact on prospective investors than the announcements made by the government welcoming FDI.
Then there is issue of corruption. Over the last few years a spate of scams from coalgate to the telecom scam have come to light. This also has an impact on the foreign investor looking to get in money into India through the FDI route.
As Ali Al-Sadig writes 
in a research paper titled The Effects of Corruption on FDI inflows written for the CATO insitute “From a theoretical viewpoint, corruption—that is, paying bribes to corrupt government bureaucrats to get “favours” such as permits, investment licenses, tax assessments, and police protection—is generally viewed as an additional cost of doing business or a tax on profits. As a result, corruption can be expected to decrease the expected profitability of investment projects. Investors will therefore take the level of corruption in a host country into account in making decisions to invest abroad.”
And empirical research shows that there is a negative relationship between corruption and FDI inflows. As Al-Sadig writes “That is, ceteris paribus, a one-point increase in the corruption index causes a reduction in per capita FDI inflows by 11 percent.”
In another research paper titled 
Foreign direct investment, corruption and democracy Aparna Mathura and Kartikeya Singh reported a similar result. As they write “We find quite convincingly that corruption perception does play a big role in investors’ decision of where to invest. The more corrupt a country is perceived to be, the less the flows of FDI to that country.”
So corruption is another factor which will continue to have an impact on FDI into India in the days to come, given that its not going to go away any time soon.
Then there is the perpetual problem of India’s infrastructure. Businesses need roads, ports, power, rails etc to function. There is a clear lack of supply on this front. And this also has an impact on the amount of money coming in through the FDI route. As Rajesh Chakrabarti, Krishnamurthy Subramanian, Sesha Meka and Kuntluru Sudershan write in a research paper titled 
Infrastructure and FDI: Evidence from district-level data in India published in March 2012 “We find that while there is indeed a positive relationship between physical infrastructure and FDI inflows, the relationship is essentially non-linear with a “threshold level” of infrastructure after which the positive effect becomes significant.”
What this means is that districts in India which have a better physical infrastructure attract more FDI. What it also means is that significant FDI inflows happen once physical infrastructure is of a certain ‘threshold’ level. So there is a clear link between physical infrastructure and the total amount of FDI that comes in. And India loses out on this front.
All these factors have led to a situation where 
FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. the period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
To conclude, while the Congress led UPA government might have fallen in love with FDI, it is unlikely to lead to a flood of dollars in the months to come. For that to happen the country first needs better governance which will lead to better infrastructure, lower corruption and a greater ease of doing business. But governance is something that has gone missing from this country. And given this, the rupee will continue to have a tough time. It is currently quoting 40 paisa lower at Rs 59.74 to a dollar against yesterday’s close of Rs 59.35 to a dollar.
The article originally appeared on www.firstpost.com on July 20, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)