Ranking does not justify our potential: M Damodaran

Interview with former chairman, SEBI

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In August 2012, the Ministry of Corporate Affairs set up a Committee for Reforming the Regulatory Environment for Doing Business in India, under the chairmanship of former SEBI chief Meleveetil Damodaran. After a year of deliberations with various stakeholders within industry and the government, the Committee has come out with its recommendations in September this year. In an email interaction with Sudipto Dey, Damodaran – who is currently on a holiday in the United States - explains why India’s low rank in the Doing Business Report does not surprise him. Edited excerpts:

Why does India continue to perform poorly in the World Bank's ease of doing business parameters - its overall rank slipped from 131 in 2013 to 134 in 2014?

The mother problem is our understanding of what constitutes reforms. In the last two decades, we have plucked some low-hanging fruits, and some of that under circumstantial compulsion. Even today, the urban intelligentsia and a large segment of the media equate economic reforms with a few high-profile items like increasing FDI in insurance or opening up the banking sector to foreign participants, ignoring the principles of reciprocity and non-discrimination. The ease of doing business has never been addressed as a subject meriting serious attention. Why should our low ranking surprise us? The sad part is that the ranking does no justice to our immense potential.

Discretionary powers in the hand of government officials and opaque procedures continue to plague business decision-making. Why have we failed to bite the bullet in this respect?

Discretionary power by itself is not necessarily bad. It is a well-understood concept in administrative law. The important requirement for legitimate exercise of discretionary power is that such exercise of power should be within well-laid out guidelines. If the guidelines are clear and are within the public domain, decision-making will not be opaque. Discretionary power, legitimately exercised, is often the only way to address the problems caused by rigidity of rules and regulations, the overriding consideration being that public interest is paramount.

Do you expect the new Companies Act to address any of the issues that hinder ease of doing business in India?

It is too early to conclude what effect, if any, the Companies Act 2013 will have on the ease of doing business. Many rules under the Act are yet to be finalised. Even after that is done, the manner in which the rules are administered, and the mindset of those at the cutting edge will be critical.

One pet peeve of India Inc has been that their regulatory compliance costs have gone up, which eventually gets passed on to consumers. Do you agree with this assessment?

On the need to have only a limited number of regulatory bodies all of which are adequately manned and appropriately empowered, there are clear recommendations in the Committee's report. The problem of increasing regulatory costs stems from an excessive number of regulations, some of which are not well thought through.
We have recommended that Regulatory Impact Assessment should be made an essential part of the exercise of writing out regulations. More than industry it is the customer who suffers because compliance costs invariably get factored into the price that the end-user pays. And to think that all regulation is written to protect her!

What are the key state-level issues that need immediate attention to facilitate the ease of doing business?

As far as states are concerned, the common problems appear to be multiplicity of authorities, leisurely processes, out-dated regulations, and in some case a compromised delivery system. The fact that some states have made significant progress, while some others have stayed put points to the clear possibility that the willingness to make improvements will translate to major successes. Some talk of a single-window approach without ensuring that the window is open.

On one hand, we showcase our legal establishment while wooing foreign investment, but for all practical purpose India continues to be a laggard when it comes to legal reforms. How could the dichotomy be reconciled?

Legal reforms, whether by making new laws or by simplifying processes, leaves a lot to be desired. Dilatory tactics, multiple levels of appeal, archaic procedures and relative lack of familiarity of some components of the judiciary with modern commercial concepts and practices together constitute a part of the problem. However, given the explosion in the number of cases at different levels in the judiciary, alternate dispute resolution alone can provide the breakthrough. The report stresses on the need for more arbitration, and more trained arbitrators.

You recommended sunset provisions in new laws, and institutionalising the Regulatory Impact Assessment mechanism. How will that ease the business climate?

Sunset provisions constitute one element in a package of recommendations, along with a regulation review authority in every regulatory organisation, such authority being also tasked with previewing regulations. There is also a recommendation for an Advance Ruling Authority in each such organisation, with timelines to be stipulated for giving its rulings. We need to address the problem of stock and the problem of flow in regulation. Sunset provisions will help to eliminate regulations that have lost contemporary relevance or have, on occasion, become counterproductive. I may add that the experience in different jurisdictions has been mixed. What we have tried to address are the requirements of relevance, certainty, clarity and, wherever necessary, continuity.