India has a long history of entrepreneurship. History tells us that ancient Indian merchants traveled far and wide, selling exotic spices and indigenous fabrics. At the turn of the millennium, the IT boom established India as a global player in the IT services industry. Indians have always been known for their innovative and dedicated business skills.
But, where does that leave India? Is it easy to do business in the country? Does the nation offer a conducive environment for aspiring entrepreneurs? Let's explore the answers to these questions in this article.
Ease of Doing Business Global Rankings
The World Bank publishes an "Ease of Doing Business" report ranks countries based on the ease of business climate index. The rankings are based on several parameters like registering property, ease of getting construction permits, easy availability of credit, paying taxes, getting electricity, and more.
Surprisingly, India has leapfrogged several positions in this index in recent years. In 2014, India was ranked 142nd at the tail-end of the rankings. In May 2019, the recent report published by the World Bank, India moved 79 positions to occupy 63rd position among 190 countries.
While India has made it easier for entrepreneurs and startups to launch and grow their businesses, there are several challenges to overcome. Let's take a look at the common challenges faced by entrepreneurs while starting a business in India.
Challenges that make it Difficult to do Business in India
1. Ease of Doing Business
New Zealand ranks No.1 on the ease of doing business index. In New Zealand, it takes just half-a-day for a new business to register and commence operations. In contrast, it can take anywhere from one to four months for a new company to begin operations in India. There are plenty of legalities, documentation, and licenses to procure before a business can start operating.
While the Companies Act 2013, introduced in 2014, makes the process relatively easier, several hurdles can still cross. One criticism of the latest act is that it increases compliance, making it difficult for companies to incorporate. As a result, there has been a widespread trend of de-corporatization in the last few years.
2. Land Acquisition & Property Registration
Land registration is one of the biggest hurdles for businesses in India. There are several difficulties in establishing legal ownership, litigation due to inheritance, demand for cash payments by sellers, fragmented holdings, etc. But, progress has been underway, with state and central governments stepping in to help businesses acquire land at SEZs (Special Economic Zones).
India lags behind its peers when it comes to registering property. As per the World Bank report, India ranks 154 among 190 countries for ease of property registration. The process is time-consuming, with a range of charges to pay. The cost of registration is 1% of the property's value, subject to Rs' maximum fee. 30,000. Besides the registration fee, entrepreneurs also have to pay stamp duty before registering a business property. Stamp duty is determined by the legislation of each state and varies from one state to another.
3. Getting an Electricity Connection & Electricity Shortages
Earlier, the time taken to get an electricity connection for a new business was a whopping 138 days in Delhi. Currently, this time has dropped to 45 days, yet it involves lengthy waiting time and complicated fire-safety procedures. Another major challenge facing new entrepreneurs is increasing electricity costs. As the economy rapidly grows, the electricity demand is outstripping supply, and frequent power outages plague businesses.
4. Lack of Uniform Infrastructure Development
India is a vast country. As a result, infrastructure development has not progressed uniformly across the country. While it's heartening to see the government focus on boosting road and rail connectivity, it will be a long time before we can see the fruits of these developments. Modernisation of ports, roads, railways, and solar energy needs the hour to make India a thriving business environment.
5. Myriad Export and Import Laws
Both exporters and importers in India face unpredictable and continually changing tariffs and laws. Customs duty in India is either fixed (specific rupees per unit) or a percentage of the value (ad valorem). Besides custom duties, the other tariffs imposed include CVD (Countervailing Duty), Landing Charge, IGST (Integrated Goods and Services Tax), Additional CVD, and Education Cess.
Importers and exporters have to deal with multiple bureaucracy levels before moving goods efficiently across the borders. To encourage small exporters, the GoI (Government of India) offers several benefits and exporters schemes. For example, the SEIS (Service Exports from India Scheme) was launched in 2015 to provide service exporters with a duty credit scrip, which they can use for various purposes like payment of customs duties.
Though the government encourages exports, there's still a long way to go before it becomes easy for small businesses to get started with exports and imports.
6. Finding the Right Talent
This is another major challenge facing small businesses from getting started in India. For several years now, there has been a prevailing trend of urban migration. Young people from towns and villages move to Tier-I and Tier-II cities, making it difficult for rural businesses to find qualified employees.
Another challenge is staff retention, as there is a huge employee turnover, especially among small businesses. Besides the difficulties of finding qualified staff, companies also have to navigate complex labor laws that vary from state to state.
7. Bribery and Corruption
India currently ranks 81 on the Global Corruption Perception Index. A major challenge faced by businesses at all levels in dealing with malpractices like corruption and bribery. However, the government has taken multiple steps to curb these malpractices, providing firms with a safe and transparent working environment.
8. Price Sensitivity
India has always been a price-sensitive market. The price of the product is given more preference than quality. Consumers look to find the cheapest product on the market, rather than products with other attributes like quality, longevity, and more. Businesses have to deal with price competition from other businesses. As a business owner, you have to deal with constant price negotiations by all customers.
India presents Myriad Opportunities for Businesses that Persevere.
"Where there is a challenge, there is an opportunity waiting to be uncovered."
This holds so true in the Indian business environment. While there's no denying that doing business in India is challenging and more unpredictable than other developed nations, there are plenty of opportunities to be reaped.
Here are the top reasons why doing business in India is rewarding, despite the challenging environment:
A Fast-Growing Economy
India is still characterised as a developing economy. It hasn't yet reached the saturation levels of other developed economies like the EU, UK, Singapore, South Korea, Japan, and others. India is the world's fifth-largest economy and has the third-largest purchasing power in the world.
As a result, the market is still open, and there are plenty of opportunities for businesses. By understanding your target audience's purchasing power, the purchase volumes, and preferences, you can capitalise on the options available.
Supportive Government Policies
Manufacturing and entrepreneurship are emerging as the fast-growing sectors in the current environment. Here are some of the flagship programs from India's government to lend a helping hand to businesses of all sizes - with a special focus on MSMEs and startups.
- Make in India - This is a key program launched by the Prime Minister of India to boost manufacturing across sectors and help India emerge as a global manufacturing hub. It aims to increase manufacturing to 25% of the overall GDP.
- Digital India - Various initiatives under this campaign have created several ancillary benefits for businesses like – ease of availing credit beyond traditional lenders, digital payments and transactions, digital bookkeeping, and much more.
- The development of smart cities and industrial corridors aims to address some challenges like uneven infrastructure development, urban migration, and connectivity.
- Startup India - This is the largest entrepreneurship portal in the country, offering free tools and resources to startups and helps them network with the leaders in their industry.
- MUDRA loans - Under this scheme, small non-corporate and non-farming businesses can secure loans up to Rs. 10 lakhs. Easy to avail and simple eligibility make Mudra loans a boon for small businesses, especially from the informal sector.
- Stand-up India - This scheme provides handholding support and credit guarantee (ranging from Rs. 10 lakhs to Rs. 100 lakhs) to deserving SC/ST/women entrepreneurs.
Additionally, the implementation of GST (Goods and Services Tax) has done away with multiple taxes, making it easy for companies to file their taxes. The various government policies provide the right support and scaffolding for businesses to grow and expand. These policies go a long way in building a conducive environment for small businesses.
Wrapping Up: A Planned and Well-developed Business Strategy can help you Overcome the Difficulties and Reap the Opportunities
There's no doubt that doing business in India is more challenging than a regular 9-to-5 job. It's a full-time commitment. But, the opportunities and rewards are worth the difficulties.
Doing business is like investing in the stock market. It would help if you had a long-term plan and not be scared of short-term market fluctuations. Having a cohesive business strategy – objectives, milestones, and realistic financial expectations – will help you get a clear idea of how to proceed and leave no scope for surprises.
Understanding the various challenges unique to the Indian business market can help you make the best of the opportunities available and create your own success story.
Q. What are the main documents needed for company incorporation?
Ans: The government has now merged all the key documents required for company incorporation in a single form (SPICe - Simplified Proforma for Incorporating a Company electronically) to make it easy for businesses to incorporate. The key documents required include:
- PAN (Permanent Account Number)
- TAN (Tax Deduction & Collection Account Number)
- DIN (Director Identification Number)
Q. Is it easy to get an electricity connection for a business?
Ans: Yes. The government now offers electricity to new businesses within seven days if no RoW (Right of Way) is required. On the other hand, if the RoW is needed, you can get a new EB connection within 15 days for your business.
Q. Can I convert my existing partnership business into an LLP?
Ans: Yes, existing partnership firms can be converted into an LLP by submitting Form 17 (MCA Form) along with Form 2 (MCA Form).
Q. What are some of the advantages of doing business in India?
Ans: As a business owner, you can leverage the following factors to your advantage:
- Market Potential - India is one of the fastest-growing economies in the world. Coupled with good infrastructure and rising living standards, you have access to a vast domestic market.
- Supportive Financial System - The Fintech industry in the country is rapidly growing. As a result, small businesses have more access to credit than ever before. Additionally, the digital revolution has made payments seamless and secure.
- Demographic Advantage - The median Indian age is 25, and the country has a large working population. So, it's easy for businesses to attract the right workforce at competitive wages.
Q. What are some of the credit facilities available to businesses?
Ans: Businesses can choose from myriad credit facilities like - term loans, working capital loans, equipment loans, overdrafts, merchant cash advance, invoice discounting, etc., depending on their financial needs.