Bangladesh is putting Ease of Doing Business into Action

In summary

  • India and Bangladesh have followed similar economic growth trajectories since the Liberation of Bangladesh in 1971, but there are key differences in the way they have grown
  • Bangladesh has been able to build a favourable ecosystem with improved ease of doing business in labour intensive manufacturing for apparel exports, leading to a high share of manufacturing in its GDP, more job creation and high labour force participation of women
  • World Bank Enterprise Surveys highlight differences in the business climate and ease of doing business between India and Bangladesh, with Indian firms facing more challenges in areas such as business licensing and government regulations
  • Indian exporters also encounter challenges in customs and trade regulations, resulting in longer clearance times compared to Bangladesh
  • Bangladesh has demonstrated strong political will in making sure that simplified applications and reduced compliance processes actually translate into ease of doing business on the ground and contribute to an export competitive business environment
  • India should treat Bangladesh’s success in creating a business-friendly environment as a bare minimum for improving our own business climate and promoting exports and job creation

Growth journey of India and Bangladesh

Since the Liberation of Bangladesh in 1971, India and Bangladesh have followed similar economic growth trajectories. Both countries grew at an average annual growth rate of about 4% till 2001 and since then have grown at 8-9% annually. This growth trajectory, however, masks key differences in the way the two countries have grown. Since 2001, Bangladesh has seen a sharp increase in manufacturing as a share of GDP while India’s manufacturing share has remained stagnant. In the same period, India’s labour force participation rate (LFPR) has witnessed a steady decline from 60% down to 52%. Crucially, India’s decline in LFPR has been driven by a fall in female LFPR whereas the share of Bangladeshi women in the workforce has been increasing. These facts coupled with data from World Bank Enterprise Surveys give a clear picture of the nature of growth and ease of doing business in India and Bangladesh.

World Bank Enterprise Surveys offer a range of economic data on more than 190,000 firms in over 150 countries. The annual surveys cover a variety of topics that can help us understand the business climate in a particular country. These include perceptions on corruption and crime to regulations, taxes and trade. The standardised nature of the questions allows for a reasonable comparison amongst different countries. The 2022 survey highlights important similarities and differences in the experience of manufacturing businesses in India and Bangladesh. It is important to note that neither India nor Bangladesh are “best-in-class” and should not be viewed as potential ceilings. There is a lot of scope for both countries to improve their business environment further.

Issues in business licensing and permits

While only about 6% of manufacturing firms in Bangladesh identify business licensing and permits as their single biggest obstacle or otherwise major constraint, in India this number is more than 20%. This difference persists for exporters i.e. firms with direct exports as 10% or more of sales. In Bangladesh, 8% of exporters see licensing and permits as a major constraint while in India more than 17% do.

As a consequence, as much as 14% of senior management time in both countries is spent dealing with the requirements of government regulation. Looking at just exporters, while both countries see an increase in management time spent dealing with regulation, in Bangladesh the increase is about 5 percentage points to 19% whereas in India the figure is close to double at 26%. In other words, Indian exporters spend a quarter of their senior management’s time in dealing with government regulation.

Not only do managers in India have to spend more time dealing with government regulation, but they also have to contend with longer waiting times for important approvals. While India is similar to Bangladesh in terms of time taken to obtain an operating license (about 30 days), India performs much worse when it comes to construction-related permits. Construction permits in India take 2.5x as long as in Bangladesh (35 vs 14 days). The differences in time and effort for these basic approvals adds a significant cost burden to firms in India.

This burden is in addition to factor cost disadvantages that Indian firms already face. For example, labour costs in India are higher due to higher minimum wages, shorter shifts and restrictive regulations related to women workers. Electricity prices for businesses are also more than 20% higher in India compared to Bangladesh.

Trade and customs regulations can hurt performance

Apart from general business regulations, exporters are also impacted by regulations specific to customs and trade. As before, there are some crucial differences in the perceptions of Indian and Bangladeshi firms towards such regulations. Less than 5% of manufacturing firms in Bangladesh think customs and trade regulation is their single biggest obstacle or otherwise major constraint. In India however, this number is 5.5x greater at about 28%. For exporters specifically, the gap is narrower (18% for Bangladeshi exporters vs 26% for Indian exporters) but perceptions are still worse in India.

Most importantly, it takes 2-3x longer in India to clear exports or imports through customs compared to Bangladesh. These significant delays are a clear marker for the problems faced by Indian exporters in doing business.

What can India learn from Bangladesh?

In the previous section, we noted the differences seen in Bangladesh and India. But what drove these variations? We look at the driving forces – (a) Strong political will, (b) Simplifying applications & compliances, and (c) Re-designing processes.

(a) Strong political will: Who are the key beneficiaries?

Export success for the local manufacturers has been a top political priority in Bangladesh. This is part of the country’s objective to promote economic growth driven by export-led industrialisation which has been prevalent for several decades. Soon after independence, Bangladesh realised that it needs to develop industrial capacity to rehabilitate its economy and acted accordingly. This is not unique to Bangladesh. Focusing on export success has been a key ingredient for the success of all other countries that have grown fast for sustained periods – Japan, Taiwan, South Korea and China.

This focussed approach of the government of Bangladesh has led to notable advantages – especially in creating a regulatory business environment backed by progressive policy initiatives which allows for flexibility down to the last mile. Since the mid-1980s, Bangladesh has worked closely with the guidelines provided by the World Bank and the International Monetary Fund to design and implement economic policy reforms. This has led to Bangladesh developing a keen focus on private enterprise and investment, privatising public industries, reinstating budgetary discipline, increasing exports, and liberalising the import regime. In fact, Bangladesh had their “1991-moment” back in 1985 when they abolished their import licensing system.

But this focus is noticed not just in theory and design, but also in implementation. Industrialists mention that the Bangladesh government has been proactive in especially supporting the Ready-Made Garments industry. There are systematic follow-ups by ministries towards industrialists in Bangladesh.

For instance, the One Stop Service Act of 2018, and its subsequent rules, which is similar to India’s national and state single window systems, gave investment facilitating agencies and regulatory authorities the power to act as the nodal agency for all clearances and approvals. Such bodies were responsible for registration, issue clearance, permits and other documents within a maximum limit of 45 days. Although the portal has taken time to become completely active online (much like India), a political push ensures that most clearances and approvals are given within the time frame promised (unlike India). The government acts as a partner in helping the industry solve its problems, for instance, priority is given to logistics vehicles that are tagged as ‘On Export Duty’ to help get past the traffic jams in Bangladesh. Visas for expat managers are available on priority.

Overall, the Bangladesh government provides a positive response towards private investment. Firms, their manufacturing and their exports are seen as essential to the economy.

(b) Simplifying applications & compliances: What to apply for?

Bangladesh has focused on minimising the number of applications & compliances for businesses, in some cases by making the laws more accessible for everyone, and in other cases by creating alternative governance structures.

In the former category lie labour laws – one of the largest pain points in India. In Bangladesh, these are more agile and flexible. For instance, for dismissals, approval by public administration is not required, nor is an obligation to consider alternatives to dismissals or take the consent of workers’ representatives (all of which are required to some degree in India). Regular shifts can be longer – up to 10 hours, and overtime rates are 1.5x, compared to 2x in India. Activists would say this is ‘anti-labour’, but Bangladesh’s success in providing jobs for labour shows that such flexibility is actually pro-labour. This reduces compliance burden for firms operating in Bangladesh. Within this bucket is also publication of all rules, regulations, and statutory orders of Bangladesh, including any changes made during the budget.

In the latter category falls Export Processing Zone (EPZ) which were first established in the 1980s in Bangladesh, and today account for ~20% of the country’s exports. In these EPZs, the number of approvals and clearances required are significantly lower. For instance, in the Act governing EPZ, organisations or zones can be exempt from 16 Acts including Municipal Taxation Act, Explosives Act, Stamp Act, Boilers Act, etc. In India, the draft Development of Enterprise and Services Hub (DESH) bill provides some of this flexibility, but it has not yet been passed.

Moreover, in recent times Bangladesh has also begun leasing out Plug & Play facilities. In these facilities, the setup is already available, and companies simply need to “plug” in and operate. Several clearances and approvals in these cases are pre-approved.

(c) Re-designing processes: How difficult & time consuming is the process?

Bangladesh also acted to reduce the time taken for any process by re-engineering processes and reducing time. For instance, while 25 signatures were required for clearance of import and export consignments in 1999, the number is now reduced to 5.  There are additional steps being taken to further simplify the procedure and release time by automation.

Initiatives were also taken to adopt computerised systems. The Automated System for Customs Data (ASYCUDA), a computerised customs management system that covers most foreign trade procedures, was introduced in 1992. Electronic submission of bill of entry is allowed in the main customs houses. In 2009, customs installed container scanners to detect illegal shipments. These steps have ensured that timely trade is not heavily compromised while dealing with security.

The way forward

The environment for Indian exporters needs to improve considerably. In 2021, the Asian Development Bank studied two key Indian ports (Jawaharlal Nehru Port and Visakhapatnam Port) and found significant issues related processes which contribute to delays. These issues included: several manual processes and physical touch points, multiple submission and redundancy of documents and lack of standardisation. Fundamental issues like these, if not tackled, will hold back progress in India.

Bangladesh also has a long way to go to improve its ease of doing business. It should not be viewed as the ceiling, or even an aspiration for India, but as the bare minimum. Giving credit where it is due, India has significantly improved in the past several years. The central and state governments are already working on other key aspects related to compliance burden, automation, etc. The Single Window Systems are well-intentioned, even if not implemented well.

However, to make a real on-ground impact and unlock its true potential, India needs to do more than what it is currently doing. The Indian government needs to prioritise improvements in the business environment by focussing on well-defined outcomes like time to clear consignments of its manufacturers and exporters. We need strong leadership backed by the appropriate incentives and disincentives, within our vast bureaucratic machinery. India needs to simplify applications, re-design processes and have better enforcement.

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