Ease of doing business – what are we learning from India’s business regulations experiment?

30-second summary User feedback is key to understanding the on-ground impact of a reform policy Striking a balance of appropriate levels of regulation rather than over or under-regulation is crucial Policymakers must focus on reducing cost and streamlining the entire gamut of business processes for MSMEs.

In recent years, India has made an impressive jump on the World Bank’s doing business rankings, by increasing 79 positions over five years (2014-19), placing itself at the 63rd position in 2019. With the intention of fostering healthy competition at the sub-national level, the Department for Promotion of Industries & Internal Trade (DPIIT) initiated the Business Reform Action Plan (BRAP) exercise in 2014, currently in its fifth edition. For the 2019 assessment year, the state of Andhra Pradesh was ranked as the top performer, followed by Uttar Pradesh and Telangana. As business environment reform has been a top priority for the Government of India since 2014, the BRAP exercise has been highly competitive.

A favorable business environment is an important pre-requisite to economic growth and attracting investment – both domestic and foreign. India’s potential as a market for goods and services is beyond doubt. With a promising demographic dividend projected to last for decades, India is at a pivotal moment where human capital can be channeled to the employment creation opportunities spurred by an ecosystem of effective regulatory process. The strong push towards ‘Make in India’ and ‘Vocal for Local’ campaigns against the backdrop of COVID-19 and the consequent disruption in global supply chains has put a spotlight on the need to strengthen local economies.

We supported the World Bank Group and DPIIT to develop the BRAP 2019 rankings, released jointly by the Finance Minister and the Commerce and Industry Minister, in September 2020. This raking was developed through an extensive data collection exercise that covered business across 32 states and union territories in India and gathered private sector feedback on some of the business environment reforms that have been undertaken by state governments. Over a period of three months, data from over 1.5 million businesses was processed and used for a phone survey. We look at some of the key learnings from the latest BRAP.

Seeking feedback

Both methodology and structure of the BRAP has undergone significant change across different iterations. The important methodological change that was introduced in the 2017-18 exercise was the collection of feedback from the end users of regulatory processes to establish the fidelity of implementation. The 2019 iteration further improved on the previous methodology and gave 100% weightage to user feedback. This was done to assess the on-ground implementation of reforms with utmost transparency and clarity by obtaining first-hand information from the actual users of regulatory processes.

User feedback is important because there is often a gap in the de jure and de facto implementation of reforms. This difference can be ascertained by comparing the implementation scores for states, with the feedback scores they have received. This gap was the narrowest for the reform areas of labour and construction permits, and the widest for environmental registration enablers and utility permits. Other empirical work conducted in the past has also highlighted a similar gap. For example, according to the 2017 NITI Aayog - IDFC Institute Enterprise Survey, while 75% of states surveyed had implemented single window systems, only 20% of new firms and 41% of experts claimed to use it.

The front end interface for users of regulatory processes has improved, but service delivery bottlenecks remain. While there seem to be clear improvements in the front-end online interface between an applicant and government agencies, the service delivery has room for improvement. In the 2019 exercise, a vast majority of users interviewed said that they were able to apply, pay fees and track the status of their application online, however the receipt of final approvals was not as effective. While significant progress has been made in digtalising processes, going forward, government agencies will need to focus on re-engineering back-end processes to reduce delivery timelines.

Firm size matters

There can be a stark contrast in the experience of big and small businesses in dealing with business regulations. In an interesting example, we encountered two businesses (big and small) that were situated in the same region about 35 km apart. The large business experienced minimal impediments in receiving the approvals they applied for, whereas the same approval, when availed by the small business was a point of frustration.

Small businesses, many of which operate with smaller staff do not have the personnel or the financial means to effectively navigate the web of business regulations. On the other hand, large corporations often have the capacity and means to engage in the process hiring professionals and setting up a dedicated department to deal with business regulations. This is a departure from the idea that reforms, once implemented would impact businesses of differing scales uniformly.

Strengthen regulation and streamline processes

Reform efforts must focus on appropriate levels of regulation, rather than over or under-regulation. Business regulations exist for three primary reasons. Firstly, businesses need to be regulated in cases where they create negative externalities for society. This ensures that the businesses are held responsible for the impact of their operations on the communities and environment, and there are appropriate safeguards in place to mitigate the harmful effects of business activity. Secondly, business regulations are necessary to check anti-competitive practices. This ensures that monopolistic practices can be curbed and a level playing field is established for all businesses. Thirdly, business regulations are required to safeguard public health and safety, and public finance. This can include everything from occupational safety in workplaces, to the regulation of how businesses use public assets.

Any regulation that does not serve any of the three purposes highlighted above, should ideally be phased out. On the other hand, in cases where regulations serve any of the above purposes, they should be strengthened in principle, not diluted. The focus of regulatory reform programmes should be to simplify the administrative process and reduce the compliance burden for companies. The ‘regulatory cholesterol’ is what reform efforts should focus on, and India has a lot of it!

The future of BRAP

The purpose of the BRAP is to spur competition among states and the ranking is only an enabler, and not a goal in itself. It is currently one of the few comprehensive business reform assessment tools that can provide a comparative picture of the regulatory landscape across the states. It is an evolving methodology and the inclusion of 100% user feedback-based scoring in the 2019 iteration was a learning experience which will influence future iterations of this exercise. More than being a gold standard empirical exercise, what the exercise successfully does is foster a healthy sense of competition among states. This competition can spur states to undertake reforms to make it easier to do business, as is evidenced in the volume of regulatory changes implemented by states across the life of BRAP. In that sense, the goal shouldn’t necessarily be a higher ranking, but rather, a genuinely better business environment.

Another testament to the push for business reforms was the linking of BRAP performance of states to borrowing, as part of the economic package released by the central government on May 17th, 2020. As part of the announcement, the borrowing limit of states was increased from 3% to 5% of the GSDP in 2020-21, making available an additional ₹ 4.28 lakh crore. This is expected to serve as motivation for states to continuously push for easing of regulatory burden and create an investor friendly business environment.