Thursday, 3 March 2011

Doing business in India - how easy is it?

The World Bank periodically comes out with its own assessment on how easy or difficult is it to start, run or shut-down a business in countries across the world. The 2011 version of the Doing Business report is out there.(You can download the 273 page report for free.)

As with any report, one has to take this one too with a pinch of salt.  But there are some interesting pointers as to what are the factors that affect doing business in India. The report surveys 183 countries and ranks them. It measures these countries on the following indicators:
  1. Starting a business
  2. Dealing with construction permits
  3. Registering property
  4. Getting Credit
  5. Protecting Investors
  6. Paying taxes
  7. Trading across borders
  8. Enforcing contracts
  9. Closing a business
India stands 134th in a list of 183 countries surveyed in this report. Any guesses on the top 5 countries to do business? Well they are (from 1 to 5): Singapore, Hong Kong, New Zealand,  United Kingdom and United States.

Let's get into the details - that is where the fun is. In "Starting a business" category, the report lists the time required to start a business (in India you need an average of 29 days) and the minimum capital required to start a business (as a % of the income per capita of the country) as important factors. You need about 188% of India's per capita income to start a company. (I don't know how they arrived at at this number of 188%. Per capita income for India currently is about Rs. 44 K per-annum and it takes about one lakh rupees to start a pvt. ltd. company.) For people with means (read middle class folks, businessmen etc.) shelling out this amount is not that big of a deal. But, if you want to promote entrepreneurship amongst the common man, this amount is prohibitive. Also, having a long drawn out process for registering a company also doesn't help. The more transparent and straight forward these processes are, the better it is for a first time entrepreneur. (Companies Act, 1956 stipulates that for Private Limited Companies the minimum paid-up capital is Rs 1 lakh and Rs 5 lakh for public limited companies.)

Also, if starting a business becomes difficult, the unorganized/informal sector becomes very prevalent. That sort of takes away the main advantages of operating as a business (access to new forms of credit, protecting your personal assets by having limited liability companies, being able to scale by hiring people and streamlining operations without issues etc.)

Coming to the next issue of "Getting Credit". The report concentrates more on getting credit by providing security (or pledging assets). That only covers the bank loans and other such traditional lending mechanisms. Also, the report focuses on publicly available information on the credit worthiness of the entrepreneur/individual (like credit scores in the US). It recommends that governments create a public database of the credit history of people, and use it to streamline the loan giving process. It cites some examples of some countries/economies (like US) where movable assets can be used as security to get loans. Since many businesses have majority of their assets in movable form - it makes sense to allow this class of assets to be pledged against loans obtained. But, the report ignores completely non-traditional methods of obtaining credit (like government support, access to microfinance, etc.) in this section - a shortcoming that could be corrected.

 It deals with day-to-day issues like "Dealing with Construction Permits" (India ranks 177th! - it takes 195 days, 37 individual procedures and one has to spend over 2000% of India's per capita income to get a permit).  For comparison, in the US it takes 40 days and 12.8% of per capita income to get this done. India has a loooong way to go!

Another such indicator is "Registering Property". In India it takes 44 days (US: 12 days) to register a property and it costs about 7.4% of the value of the property to register it (US: 0.5% of the value). (Yes, I know, you might be steaming up a little now...such is life.)

The report also has sections on "Protecting Investors" and "Enforcing Contracts".  In protecting investors section, it looks at the transparency of related party transactions, liability of the company directors for self-dealing and ability of shareholders to sue the company directors for misconduct. India ranks 44 (not bad-uh!) in this category - but, given the clubby nature of corporate boards and the recent corporate governance scandals, one can only wonder. In "Enforcing Contracts" part -India ranks (hold you breath) 182. It takes on an average about 1420 days (no, I did not put an extra zero by mistake there) to settle commercial disputes through courts. (In the US, it takes about 300 days.) Such extraordinary delays lead to the parties engaging in dealings and settlements outside the legal framework (the less said about it the better). This factor also ties into why the creditors lend solely on immovable assets and other financiers hesitate to enter through the legal routes.

Now comes the best part - how long does it take to close-down/wind-up a business in India? Only 7 years. And you can recover about 16.3 cents on every dollar you put in the company. In the US, it takes about 1.5 years to shut down a company and you recover 88.6 cents on the dollar.

These reports have their own reasons to exist. But, they do provide some insights and identify issues that are worth addressing and rectifying. If not rectifying, at least to get a clear picture of what is what, and act accordingly. 


  1. I actually enjoyed reading through this posting.Many thanks.
    How to Start a Company in India

  2. The above information is very nice and informative for me i learn lots of things form this post. Really very nice informative post your shared with us. Many thanks for this, i have online business directory, you can list your business in free business directory India.

  3. Excellent and decent post. I found this much informative, as to what I was exactly searching for. Thanks for such post and please keep it up.Doing Business in India


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