It's now easier to do business in India

The government has liberalised its foreign direct investment policy in order to attract investors

The Modi government has carried out a series of regulatory reforms to facilitate the ease of doing business in India and create a favourable investment climate. These include initiatives to do away with various compliances under the Companies Act (such as the minimum capital requirement for company incorporation and the requirement of obtaining a certificate to commence business operations); the Commercial Courts, Commercial Divisions and Commercial Appellate Divisions Act of 2015, aimed at resolving commercial disputes in a time-bound manner; and the enactment of the Insolvency and Bankruptcy Code 2016 to introduce global insolvency practices and a quick redressal mechanism for the increasing number of non-performing assets. 

The government has also liberalised its foreign direct investment policy in order to attract investors. Such liberalisation has taken place in the defence sector, in brownfield pharmaceuticals, and in both greenfield and brownfield airports. 

In this backdrop, the report of the NITI Aayog-IDFC Institute on Ease of Doing Business in India (“NITI-IDFC Report”), based on an enterprise survey of 3,500 manufacturing firms across Indian states and Union territories is a timely endeavour to assess the impact of these initiatives at the ground level. This article critically analyses the NITI-IDFC Report and examines India’s recent regulatory progress in order to evaluate the efficacy of such reforms.

The criterion adopted for determining the ease of doing business is the efficacy of these reforms. 

Single window clearance: This system was introduced under the government’s “Make in India” initiative in 2014, and mandates the routing of all approvals required by an enterprise to set up a business through a common application window. Only 20 per cent of the enterprises surveyed used the single window clearance system, which suggests either lack of awareness on the part of enterprises or ineffective implementation of the system.

Access to finance: Most enterprises rely on borrowings from banks and financial institutions as sources for finance. Sixty-one per cent of the enterprises surveyed reported that access to finance has either remained the same or worsened over the last year.  

Time for clearances: The average time taken to set up a business in India is 118 days, varying widely across states — from 63 days in Tamil Nadu to 248 days in Assam. On average, the time incurred for land allotment to an enterprise is 156 days and for getting a construction permit it is 112 days. The average number of days for completing labour-related compliances is 74 and for renewal of such compliances it is 62.

Dispute resolution: The survey showed that the time taken for dispute resolution by enterprises varied across states, from less than one year to 13 years. For pending legal disputes, the enterprises surveyed reported an average duration of four years once the matter is taken to court. 

Also, the sector-specific comparisons laid down in the NITI-IDFC Report throw up some interesting statistics. The average time taken by manufacturing start-ups to set up business is about 87 days, compared to 101 days for manufacturing companies other than start-ups. Similarly, young enterprises take 20 days less to set up a business, 46 days less for land allotment and 18 fewer days for construction permits, compared to older enterprises. Furthermore, labour-intensive industries face major obstacles in setting up a business, getting land and construction-related permits and tax-related compliances compared to capital-intensive industries.

Where are the bottlenecks?

There is an imperative need for the government to ensure effective implementation of the reforms introduced across all states uniformly. The NITI-IDFC Report states that the reforms and their impacts can be seen in big cities but are not clearly noticeable in smaller cities. Also, it is imperative to create awareness of the reforms introduced, so that the enterprises for whose benefit these reforms are introduced are in a position to avail of these benefits. For example, among start-ups that are of recent origin, only 20 per cent report using single-window systems for setting up a business and only 41 per cent among the experts have reported that they know about the existence of the single-window facility. 

One of the other findings of the NITI-IDFC Report is that labour-intensive sectors experience greater difficulty than those in capital-intensive sectors and this requires government attention and calls for regulatory reforms in this area. Labour compliances need to be further eased. In this context, the proposed Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill, 2016 is a step in the right direction and should enable labour-intensive industries to achieve higher productivity.

While the NITI-IDFC Report does raise some questions about the efficacy of regulatory reforms carried out to increase the ease of doing business in India, the fact is that such regulatory reforms are a high priority for this government. The results may not yet be clearly visible, but there is a greater amount of positivity about India among investors and one can safely state that the coming years should witness faster growth with a lower compliance burden on corporates.  

Atul Pandey is an Associate Partner at Khaitan and Co LLP, New Delhi. Satish Padhi and Shreya Gulati are Associates with the same firm. These views are personal