Opinion | Contract enforcement needs to be improved on war footing2 min read . Updated: 20 Nov 2018, 10:49 PM IST
In 'starting a biz', India is still at 137th rank out of 190. As India improves, others are improving even more
It has been a long and arduous trek for India to move from a pathetic 142 ranking in 2015 in the World Bank’s ease of doing business ranking to the 77th rank this year. This is a very laudable achievement by any standards, especially given the complexities involved, including multiple governmental jurisdictions in India.
But, as the saying goes, the devil is in the detail. India has made impressive strides in “dealing with construction permits" has surged from 129th to 52nd rank and India’s rank in “getting electricity" has shot up to 24th.
However, since this change is limited to only the two cities of Delhi and Mumbai, where there are hardly any manufacturing entities being set up, it distorts the real picture of easy it may be to set up manufacturing facilities in India. The battery of approvals needed to start construction in a state, especially of a manufacturing entity, is not something that even large investments find it easy to handle, leave alone the more modest investors who may want to set up greenfield manufacturing.
Which brings us to the aspect of merely starting a business in India.
Despite the many improvements in the process of “starting a business", India is still at 137th rank out of 190. So, as India improves, other countries are improving even faster, making it challenging to move up the rank. More importantly, if we are an easy place to start a business, we are nipping many new businesses in the bud, for whom the rest of ease of doing business becomes meaningless.
More importantly, legitimate businesses will find it difficult to operate in environments where there is a lack of contract enforcement. Contract enforcement is the lifeblood of private enterprise.
Sadly, India stands at 164 rank out of 190 countries. As we observe business practices in India, there is significant disregard for upholding commercial contracts.
In spite of regulatory changes allowing dedicated commercial courts to be established by state governments, hardly any state has actually set up the commercial courts which could have helped in greater contract enforcement in the country. And contract enforcement is not just a challenge with other private sector entities but also with the government. Government contracts get modified or nullified post contract signing, leading to significant damage to shareholder value. This has especially been observed in the infrastructure sector, where concessionaire agreements have been summarily discarded, with the remark that the concessionaire has made enough profits and hence need not make more profits. This is against the spirit of the contract.
Therefore, if contracts cannot be upheld, the risk of doing business in India goes up very significantly, which is what foreign enterprises who have recently entered India, are discovering. In addition, we are at 121st rank in terms of “paying taxes", which is also a reflection of corruption in the system at the lower levels.
This is also one of the key reasons Indian capital has been regularly investing outside of India but has been shy of investing within India.
So, if one finds it difficult to start a business and then finds it challenging to get into any commercial contract and enforce the contract, then the rest of the aspects of ease of doing business become significantly less relevant.
India therefore needs to bring in improvements in ease of “starting a business" and in “contract enforcement" on a war footing, to really make it easier for legitimate businesses to flourish in India and to generate jobs and bring in prosperity.
Jaijit Bhattacharya is president, Centre for Digital Economy Policy Research