No Country For Doing Business

The World Bank’s Doing Business 2013 report is depressing reading. India has not risen in the global rankings, remaining the 132nd most difficult place to do business. It is a small miracle it has not fallen since in the 10 indices that determine ranking, it improved in only two of them, fell in six and stayed the same in two.

The sharpest drop was in “getting electricity” which went from a ranking of 99th worst in the world to 105th. No surprise: this was, after all, the year of the Great North India Blackout. But the Pranab Mukherjee effect is relatively clear to see: harder to pay taxes, less protection for investors and more difficult to go insolvent in a sensible manner.

Presumably India stayed in one place because other countries did even worse – somewhat hard to believe.

There is a narrower concern that I will focus on. Namely, that light manufacturing is fleeing China as its wage costs keep rising and, to some degree, it becomes increasingly unfriendly to foreign (especially Japanese) business. But as a UBS study noted some months ago, these jobs are going to Vietnam, Bangladesh, Indonesia but, surprisingly, not to India.

I got another sense of how difficult running a manufacturing setup is in India recently while listening to a West Asian businessman who has a textile plant in Maharashtra.

Here’s what his few years of experience in India taught him about the business environment. It more or less confirmed by overall sense that the Indian government and bureaucracy are a barrier to the country’s development and the Indian people remain its greatest asset.

First the problems. Though India has one-tenth his country’s per capita income, the only cost that is competitive in India is its labour. Everything else: transport, power, water, whatnot, are all more or the same expense. That alone would probably reason enough why no one is moving their factories from China to here.

He said caste, ethnic and religious differences didn’t matter on the factory floor. But Indian workers are very bolshie and, strangely, ignore their union leaders on a regular basis.

He said Indian banks are inefficient and ponderous. They make all sorts of ridiculous charges, inflexible about the terms of credit and generally useless. It makes little difference if they are private or state-owned.

But the real nightmare in India is the tax structure. It is not that it is somewhat high, what is the worst aspect is that it is incomprehensible. Taxes change every few kilometres. The multiplicity of charges makes little or no sense. “After four years I still do not understand how the tax system works,” he said.

Take a look at Mukherjee’s last budget which has over 20 clauses that say the income tax officials will have the discretion to decide what the tax charges should be. Here’s a point of view: India will remain the permanently emerging economy if it doesn’t get the general services tax reform passed one day.

He waived off corruption though. Bribes are needed to accelerate government processes but they are small — $ 50 on average, with an annual cost of $ 4000 or so. I suspect if he had been in real estate or an industry where government discretion is far greater the song would be different. Nonetheless, it bodes well for manufacturing if other things can ever be resolved.

His praise, however, was for Indian managers. His factory had no expatriates, everything was run by desis. Indian customers were sophisticated and brand conscious. Profit margins were steady if low because of Indian price consciousness. But cash flow was positive from the word go.

Today corporations are the main source of government tax revenue, the main source of new employment and were, until recently, the main source of investment in the country. Even if you believe in a welfare state and all that stuff, you need government revenue to pay for it. And this means making it easier to do business. Which is not happening. Which is why government revenue is stagnating. And why the present welfare programmes are increasingly unaffordable.

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