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’s actually a small miracle that it hadn’t fallen, since of the 10 indices that determine ranking, it improved in only two, fell in six, and stayed the same in two.

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

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

There is a narrower concern 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, and Indonesia, but, surprisingly, not to India.

I got a 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: 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 labor. Everything else — transport, power, water, whatnot — are all priced higher or the same. That alone is probably reason enough why no one is moving their factories from China to here.

He said caste, ethnic and religious differences don’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, and are 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. It is incomprehensible. Taxes change every few kilometers. 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 giving income tax officials the power to decide the tax charges. Here’s a thought: India will remain a permanently emerging economy if the general services tax reform is not passed one day.

He waved off corruption, though. Bribes are needed to accelerate government processes but they are small — $50 on average, with an annual cost of $4,000 or so. I suspect if he had been in real estate or an industry with more government discretion, the song would be different. Nonetheless, it bodes well for manufacturing if other things can be resolved.

He had nothing but praise, however, 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, until recently, the main source of investment in the country. Even if you believe in a welfare state, you need to make it easier to do business so the government has the revenue to pay for it. This is not happening, which is why government revenue is stagnating. And why present welfare programs are increasingly unaffordable.