Unease of doing business

India’s performance in the index of ease of doing business has been quite creditable in recent years. The index, prepared by the World Bank in October 2019, placed India at 63 among the 190 countries it had evaluated. This represented a jump of 14 notches from its earlier rank. In the previous year, India’s rank in ease of doing business had improved by 23 places. 
 

In its 2019 report, the World Bank had noted that sustained business reforms over the past several years helped India, which “put in place four new business reforms during the past year and earned a place among the world’s top ten improvers for the third consecutive year”. The reforms that helped India go up higher in the index included the simplification in the norms for starting a business, dealing with construction permits, facilitation in doing trade across borders and resolving insolvency. 
 

However, the World Bank report also highlighted a few areas of serious concern. For instance, it ranked India at 163 among 190 countries in respect of enforcing contracts and at 153 for registration of property. Worse, the Bank had noted that it took 58 days and cost an average of 8 per cent of a property’s value to register it, much longer and at a higher cost, than in the high-income countries. Similarly, a company in India took 1,445 days to resolve a commercial dispute at a lower court, which is three times the average time taken in developed countries.

It is important to recall India’s creditable performance in the index for ease of doing business and reflect on whether the current economic policy environment is conducive to a further improvement in the coming years. The question gains salience in light of a few disturbing developments that may have clouded the prospects of an easier business environment in the country. 

Take, for instance, what is happening in the country’s telecom sector. Today, India’s telecom service providers are facing an existential crisis — threatened by demands of a government to fork out more revenues and a judicial system that is reluctant to recognise the existing market structure before passing judgment on the justifiability of a revenue claim. 

The battle between the government and the telecom companies over how their adjusted gross revenues (AGR) should be calculated has gone on for several years. It began in 2003 when the companies argued that their AGR should include only telecom revenues, while the government countered it by claiming that AGR should include both telecom and non-telecom revenues. AGR has to be calculated for the purpose of determining the licence fee to be paid to the government, initially at 15 per cent of AGR in 1999 and later at a maximum of 8 per cent of AGR from 2013. 

In the initial phase of the battle, the telecom companies got the court to rule in their favour. In other words, the court rejected the government demand for a higher AGR amount based on both telecom and non-telecom revenues. By that time, the companies had already paid up 80 per cent of the claims. But the government, instead of refunding the amount, went in for an appeal demanding not just the entire principal amount, but also interest and penalty.  The appeal was heard by the Supreme Court, and much to the grief of the telecom companies, the government won. 

As lawyers, Sanjay Hegde and Pranjal Kishore, have argued in an article in Business Standard, there was no logic in asking the telecom companies to pay up interest and penalty in addition to the principal amount of claim, because they had won the case in the lower court that had stayed the government demand. If only the government had not insisted on the payment of interest and penalty, the telecom companies’ response to the Supreme Court verdict would have been different, the exchequer would have secured its revenues even if a little less than what it had hoped for and the telecom sector would not have faced the scary prospects of a duopoly and reduced competition, which are unmistakably bad news for Indian consumers of telecom services.  

Only about a fourth of the total demand of Rs 1.3 trillion on the telecom companies is the principal amount and the rest consists of interest and penalty. It would appear that the government did not forego the interest and penalty because such a decision might be frowned upon by the Comptroller and Auditor General of India later and give rise to a political controversy of having favoured a clutch of private-sector telecom companies. Another reason for the government insisting on the penalty and interest amount could be that it badly needed some additional revenues to make good the revenue shortfall under other heads. 

But insisting on the payment of the entire amount, including the interest and penalty, has actually implied that one of the telecom companies, Vodafone Idea, would be more hit than the other remaining two big players. Its overall dues would be more than Rs 0.5 trillion and its owners have indicated that such a huge burden on the company would leave them with no option other than shutting up shop. 

Did the government weigh the pros and cons of its decision on insisting on the payments, whose burden would be largely borne by one of the top three telecom players in the country? Should it have evaluated the impact of its decision on the telecom market structure? And finally, did the government realise that the consequent financial blow would be severe for Vodafone Idea, which had facilitated foreign investment flows of over $55 billion into the country? The government may eventually come out with a bail-out package for the telecom sector to help it overcome the current payment crisis. But its impact on India’s private sector will be significant. 

Since its return to power after the general elections in May 2019, the Narendra Modi government has been involved in two high-profile engagements with foreign investors. One involves Jeff Bezos of Amazon, whose foreign investment commitments have been scoffed at by government representatives. The other is with Vodafone Idea, whose foreign partner Vodafone Group of the UK, stung by the AGR burden, is now mulling the options of exiting the country. A third one may become news in the coming summer months when the arbitration decision on a $1.6 billion tax dispute between Cairn Energy and the Indian government would be announced.  Nobody knows which direction that battle will take. But for a country that takes pride in having improved the ease of doing business, the developments affecting three big foreign companies— Amazon, Vodafone and Cairn—may not help improve its prospects of a further improvement in its rank in that index.