Tag Archives | Business

Why is the Ease of Doing Business report not enough?

The ease of doing business ranking is a useful tool to compare regulatory framework in countries. However, a single index is not enough to capture the complexities and practical difficulties at the ground level. 

By  Devika Kher (@DevikaKher) and Surya Prakash B. S. (@SuryaPrakashBS)

In the first post in this series, we have explained how there has been little focus in India on everyday hurdles to doing business which has lead to the generation of ‘unaccounted income’. However, there have been welcome deviations from this norm. One such example is the focus of the Union Government on India’s ranking in the World Bank’s Doing Business Report, one of the most comprehensive indices that compares regulatory frameworks across countries.

As per the World Bank’s Doing Business 2015 Report, India ranked 142 out of 189 countries. The ranking was based on factors such as dealing with construction permits, registering property, protecting minority shareholder interests, enforcing contracts, resolving insolvency, getting electricity, getting credit and trading across borders. Amongst these factors, India scored highest in protecting minority investors (7th position) and the lowest rank in enforcing contracts (185th position).

The factors considered by the report appropriately capture the regulatory hurdles faced by businesses. However, the report falls short on two grounds. First, it does not capture the administrative practices followed in a country. Second, it looks at all the sectors with the same frame of reference.

Reports on doing business

The Ease of Doing Business (EDB) ranking captures the conduciveness of the regulatory environment to business operation. The countries are ranked from 1 to 189 with 1 being the best. The EDB ranking is useful tool to compare business environments across borders. It highlights the cost incurred by businesses in a country in the form of innumerable regulations that precede setting up of a business. These additional barriers increase the cost of setting up business and indirectly provide a conducive atmosphere for illegal modes of transactions.

The rankings also act as a comprehensive guide for any business trying to set up shop in a new location. It has thereby helped in raising competition amongst countries trying to attract higher investment. The index provides an international scale to compare business environments across the globe. In order to attract foreign businesses, the 189 members have undertaken various reforms to improve the business environment within their countries. For instance, the Indian government recently increased the validity period of industrial licenses as a step to ease the burden of cumbersome registration processes in the country.

The EDB ranking plays a vital role in indicating the significance of business environment in attracting investment. However, it is overly dependant on factors which are one- time or infrequent, and does not factor in issues unique to the individual countries. As can be seen in Table 1, most of the factors consider by the EDB report are one-time or infrequent occurrences and does not capture the everyday hurdles faced by the businesses. In addition to that various countries have norms and general practices which are followed but are not in the regulations by the government.

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Table 1:  Factors taken into account by World Bank’s Doing Business Report and the frequency of their occurrence

Improving over the Ease of Doing Business Report, The World Bank along with KPMG came up with an India specific report titled “Assessment of state implementation of business reforms” covering a wide range of factors – see Table 2 below.

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Table 2: Factors considered by the Assessment of state implementation of business reforms

The assessment studied the implementation status of reforms in areas such as setting up a business, complying with the regulations, carrying out inspections and enforcing contacts. The Department of Industrial Policy and Promotion, a part of the Ministry of Commerce and Industry has listed out a set of recommendations based on these assessments for the States and Union Territories to begin implementing. The recommendations ranged from suggesting increase in access to information and transparency enablers to creating a special bench or division under the high court to hear commercial cases.

Shortcomings of the reports on doing business

To begin with, the EDB report although an important step towards recognising the need for a better business environment, fails to capture the administrative practices applied on the ground. For instance for a factor like obtaining construction permits, applying for the permits is only part of the process. The rest of the process involves paying a fee to obtain permit at almost each step of the construction. In addition to this, as per the Anti-Corruption Bureau Chief there exists rampant corruption while issuing building permits in major cities like Mumbai.

One of the plausible ways to indicate the high cost of conducting business transaction in a country can be based on the legal restrictions imposed on them. The high cost of transactions creates the incentive to opt for illegal activities which reduce the economic cost of the business. Hence, the builder in the previous example would prefer bribing the government official at the higher levels enough to reduce the fine paid at each step and the time spent in getting clearances.

The second shortcoming of both these reports is that they measure the same factors as if they were equally important to all sectors. For instance factors like complying with environment regulations will be of higher significance for the heavy industrial than for the software industry. Hence, the factors considered should vary as per the characteristics of a given sector.

In all, EDB report indicates the pace at which the global markets are opening up to business development. However, as the report specifies, “it is unable to capture  factors like security, market size, macroeconomic stability and the prevalence of bribery and corruption.” Thereby, it lacks the ability to capture the intrinsic problems with doing business and, thereby curb the generation of unaccounted income.

This is the third blog in our series on unaccounted income. The previous post explains the nuances of the common phrases used in the context of ‘black money’. 

Surya Prakash B. S. is a research scholar at The Takshashila Institution. His twitter handle is @SuryaPrakashBS

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.

Source for feature image: Wikipedia

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Farmers as businessmen

My association with the Takshashila Institution took me on a field trip today to trace the story of the not-so-humble potato. The journey actually started last night, as we checked out potato prices at retail stores near our respective homes. And we continued the journey this morning, in reverse order as we went first to the APMC Mandi in Bangalore and then to the potato growing areas near Arkalgud, in Hassan district. As an aside, today was the first time I visited (or rather passed through) my mother’s native place Holenarasipura (the H in her initials stood for that).

When we build narratives about farmers in India, we talk about the “humble farmer”, the “poor farmer”, the “farmer dying in Vidarbha”, the farmer exploited by zamindars, and of India itself as a “nation of farmers”. The one part of a farmer’s job that never makes it to the popular narratives is his role as a businessman and entrepreneur. A farmer we met at the APMC yard at Bangalore this morning had delayed his journey from Bettadapura by four days, only to realize a lower price than what he would have got on Tuesday. Another near Arkalgud had grown tobacco late in the season, not knowing the complications that could arise due to rainfall patterns.

Back in school when I studied Hindi, I read a story by Munshi Premchand about a young man who moves to a village because he wants to be a farmer. That story ends with him returning disgruntled to the city, claiming there is more to be done by the farmer in the city than just doing his job as a farmer. That story, which I remember as being beautifully written (though I don’t remember its name), is a good primer into how much of a business farming really is.

Consider the decisions that a farmer has to make, and decide if this is closer to being a businessman or being a tiller. First he has to decide what crop to plant. Next, he has to decide what exact variety to sow, and what variety of seeds to procure. Then comes the rather big decision about the timing of the sowing of the crop, comes as it does with dicey predictions and forecasts of rain which even the Met department can’t get right. That done, the farmer has to decide on the labour he needs to employ for the sowing season, and whether he needs to hire a tractor. Then towards the end of the season, there are decisions about hiring of labour with respect to harvest, decisions on where to sell and most importantly, timing the market right in order to realize the best possible price for his crop. And the farmer is his own salesman also, having to negotiate the price at which he sells.

Commenting on the pittance that the farmer stands to make (in terms of a profit) on what he grows, one of my colleagues on today’s field trip said it was a  no-brainer – in the long line of businessmen who stand between a crop and the customer, he said, the farmer is the worst businessman, so it is no surprise that he is the one who gets squeezed the worst.

From a “corporate strategy” standpoint, the amount of management required in the farming profession suggests that it makes eminent sense to separate the roles of the farm manager (who plans inputs , labour hire, sales, crop mix, etc.) and the farmer (who does the day to day job of tending to the farm and looking after the crops). Unfortunately, the fragmented nature of land holdings in India doesn’t allow us this luxury. In fact, there is evidence to suggest that back in the days of unequal (and supposedly unfair) land-holdings, this was perhaps actually the case, with farm managers (zamindars) taking the risk and making the big decisions, while leaving the actual farming job to the specialist farmers. Unfortunately, supposedly pro-farmer initiatives such as the Land Reforms Acts and the “land to the tiller” movement served to defeat this separation of responsibilities.

The other big problem with farming is the amount of risk in the business. At one of the farms, we saw heaps of potatoes which had been cast aside because of blight (wasn’t that the same culprit that caused the Irish potato famine back in the 1800s?). In another farm, lack of timely rain had meant that potatoes hadn’t grown to the size to which they had been expected to grow, thus resulting in much lower realizations in terms of output. Even with the best possible management, exposure to the elements means there is always a significant amount of risk in farming. Current land holdings, though, don’t allow a farmer to diversify his risk by planting more than one crop.

Fragmented land holdings creates a further problem – the produce from one farm is usually way too small to make it viable to take it to the market 200 km away in Bangalore, where an auction at the “mandi” can help the farmer realize the best possible price (more on this auction in another post). Instead, the farmer is forced to sell to local aggregators and simply accept the price the latter is willing to offer (in small centers such as Arkalgud, there isn’t much choice the farmer has in who he sells to). We met a local farmer there with considerably bigger holdings than others in his area, and he told us that he had enough to make a trip to Bangalore viable, and there was no reason he would sell locally.

From a purely business perspective, the logical way forward for farming in India would be consolidation. Consolidation of land holdings would solve several of the problems that I’ve mentioned above, and also make it viable for the farms to appoint specialist managers. One possible way forward I see would be for a bunch of farmers with contiguous farms to get together and form a private limited company (with their respective shares being proportional to their land holdings). The farmers can continue managing their own pieces of farmland, while they appoint a professional manager to do business for them (think of it as being similar to geeks Sergey Brin and Larry Page bringing in professional CEO Eric Schmidt to run Google).

Yes, that paragraph might sound too grand and fantastical, but I don’t see any other way out for Indian farmers to do better. It is time that policymakers recognize the amount of management that goes into farming, and understand that keeping farm sizes small does no good for the lot of the farmer. A comparable example would be the Indian textile industry, where labour laws have served to keep manufacturers tiny, and has resulted in them losing out to larger competitors from the Far East (who have no such constraints, and are thus able to do better business).

So what policy interventions do we need to enable better management of Indian farming? Undoubtedly, the one decision that can potentially go the farthest in this direction is to make purchase and sale of farmland easier. So far, laws that have been designed to keep “evil capitalists” out of the noble farming profession have sought to make farm-holdings illiquid, and hard to purchase or sell (making farm land sales more liquid will also ease land acquisitions for industrial purposes and infrastructure projects). However, the fact of the matter is that there is a significant amount of management skills required to successfully run a farm, and the best way to achieve that would be to be inclusive of “evil capitalists”.

The narrative about the Indian farmer needs to change, and change in a way that recognizes him as being a businessman. The sooner our policymakers recognize the business aspect of farming, the easier it would be in making farming a viable profession in India.

Karthik Shashidhar is a faculty at the Takshashila Institution and blogs at Pertinent Observations.

 

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