What stifles ease of doing business?
Bureaucratic mindset is the foremost reason. Bureaucrats believe they need to 'approve' of what citizens are doing. This is the classic license raj mindset.
To gain their 'approval' citizens need to bend backwards to satisfy them.
This mindset turns the procedures into hurdles by interfering with innocuous wording, changing the grammar etc. These procedures can be bent, of course, if you come through the 'proper channels'.
Where the laws are clear, they hide the procedure. If the 'entry level employee' of the revenue department does not know the procedure, then what chance do we citizens have? This procedural shroud can be eased by paying some 'agents'. Without this procedural secrecy we do not need any agents. The best illustration is the passport office procedure.
Understanding ease of doing business in India
Think of business opportunity as fruits on a tree in the orchard of the global market. Effort is the energy required to climb the tree and gather as much of fruit as possible while competing with other businesses that are trying to get the same fruit. The risk is that you may fall and hurt yourself and would not be able to pick any fruit while your competitors can take away all the fruit in entire orchard.
In India, the fruit trees are few (lower rewards), they are super tall (very high effort) and the entrepreneurs and markets are fenced by the government and guarded by ferocious dogs (high risks). The entrepreneur is given a stone to carry around his neck while she jumps the fence, escapes from the dogs, picks the fruit and makes it back. Naturally, not much fruit get picked, so our society cannot enjoy the fruit. The orchards are being picked by global entrepreneurs.
What the Indian ease of doing business needs is to set the entrepreneur free to compete. If she is not restrained from picking these fruits, and market orchards are not fenced, and there are no dogs, then the Indian entrepreneurs can outcompete the best.
The Western concept of ease of doing businesses goes a few steps further. It means making ladders and advanced equipment available to enterprising fruit-pickers so that their entire society can enjoy the fruit.
What do we need to improve ease of doing business?
Each business idea has a mix of three factors – effort, risks and rewards. Therefore, to 'Do' business, the rewards must be greater than the risks at the given level of effort.
Different types of risks are inherent in every business. Every entrepreneur must take the essential risk—that of the business model itself—how it is financed, marketing, sales, assets, scale, time to market, strategy, etc. But there are other risks which can be avoided.
For instance, if setting up a business firm is easy, then entrepreneurs can quickly try out ideas. Business firms are building structures that can hold the business model while bearing the load of the risk. The easier it is to create the structure, the bigger would be the incentive for entrepreneurs to build their businesses.
Also, many ideas fail. We need to provide a mechanism for the resolution of failed businesses—it should be easy to decide who is liable for how much i.e., how the assets and liabilities of the failed business will be distributed. Such mechanisms build clarity and certainty which itself reduces risks for the entrepreneur.
Regulations can reduce the non-core 'efforts'. To use the trucking industry analogy, the longer a truck is on the road the more it earns, the time a truck spends in the garage is a waste. So also, the more effort an entrepreneur makes in running the business, the more likely she will succeed.
The time she spends in compliance, running from pillar to post, waiting for permissions, permits, licences and clearance, the lower the earning power of the business. We do not want non-compliance, we need ease of compliance.
For example, we want the businesses to grow, expand across the country and possibly across the world. But, to expand presence across India and overseas requires multiple processes and interface with multiple governments.
Similarly, each step of creating a business can be simplified, clarified and eased such that law-abiding entrepreneurs can sail through the process in minutes while unscrupulous cheats will have a difficult time evading the laws. For example, if you want to build a furnace, there should be a list of registered furnace installers that you can hire. If you hire them, then these approved vendors will be liable to ensure that all laws are followed.
Increasing rewards for the corporates or entrepreneurs in India can be achieved by myopically reducing the shares in the pie or more appropriately by increasing the size of the pie itself.
To increase the size of the pie we need more prosperity. That will come with rising incomes, better productivity, greater employment, better employment etc. That, in turn, will come with competition, unleashing the forces of innovation (new products, better designs, etc.) .However, prosperity is a third order effect from the start of competition, innovation and growth.
Regulating or reducing the shares in the pie is easy and controllable and, therefore, appeals to the bureaucratic mindset. Increasing the size of the pie is difficult to control and therefore it is a bureaucratic blind spot.
Indian economy needs jobs which are going to be created by entrepreneurs. For ever, Indian governments have promoted pseudo-entrepreneurs while stifling the real entrepreneurs with red-tape and procedure.
We will say ease of doing business has improved when all the steps become easy—creating firms to define risks, expanding firms (both within state, within India and globally) AND closing firms with quick and fair dissolution of assets and liabilities.
The critical hurdle to ease of doing business and generally ease of living itself is the bureaucracy. The unique layout of bureaucracy was created over 60 years to expand and create opportunities for corruption. Unfortunately, Narendra Modi in the Centre and BJP governments in states have not really tamed this beast.
Until then, doing business or simply our day-to-day life itself will remain difficult.