Opening shop in India? Bring scissors to cut red tape.

By , Staff writer of The Christian Science Monitor

So you want to start a business in India? Great. First jot down these rules. You will have to abide by them in order to get your permits from the Indian government. (And the state government, and the city government, too.)

Rule 1. Don't grow too large. Any business with more than 10 employees will be covered by the Indian Labor Act, which requires strict hiring and firing rules, short working hours, and generous pension funds.

Rule 2. Leave your accounting software at home. The government requires that all bank records, for instance, be kept in books, in duplicate. Computers didn't exist when the Constitution was written, so those records are invalid.

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Rule 3. Don't forget the Government Seal Act of 1862. A holdover from British colonial rule, all Indian businessmen and government agents must be able to seal certain documents, with wax, with the imprint of the East India Company. The British are gone, the East India Company is, too, but the act remains on the books.

If all of this is too complicated, business experts say, a frequent practice is to offer local government officials a small bribe.

Much has been done in the past decade to simplify business rules here - to the applause of the World Bank and foreign investors. The new government last month made clear that economic reform would be its top priority. But the challenges of giving India an economic makeover are vast. For one, many bureaucrats like to keep things as they are, since it is how they derive their power and income. Also, many rules protect Indian businesses from foreign markets, and removing them is cause for concern.

But as a new World Bank report makes clear, India must improve its investment climate soon - from easing regulations to improving roads, airports, and power grids - or it will remain mired in poverty for another century at least.

"Until India does more to simplify its regulatory environment and improve its infrastructure, it will never achieve [the government's goal of] 8 percent growth," says one Western diplomat based in Delhi, speaking privately. Many businesses are bullish on India today because of the potential they see, he adds, but "few of those businesses are finding profits today."

India's government leaders - many of whom set India on its current reform path after a 40-year flirtation with socialism - seem to recognize how much work they have to do. Last month, Montek Singh Ahluwalia, the chairman of the Planning Commission, India's top economic panel, admitted that it would be difficult to meet his own government's goal. But he promised more reforms and economic benefits to follow.

Meanwhile, as foreign investors have pumped nearly $3 billion in investments this year, India-based businesses complain that the country is still far too regulated. In a survey of business owners conducted for the World Bank, 51 percent of respondents said that regulations and corruption were "major or severe obstacles to growth." One-third also cited poor infrastructure, such as bad roads or unreliable electricity. On average, Indian manufacturers face 17 significant power outages per month, versus one per month in Malaysia and around five in China, according to the report. "As a result, almost 61 percent of all Indian factories run their own generators. That's a duplication that adds nearly 20 percent to many businesses' operating costs," says Priya Basu, who wrote the report.

The greatest regulatory impact comes from setting up businesses and closing them down. It takes a staggering 89 days to get government clearance to start a business, compared with 41 days in China and 30 days in Malaysia. And it takes 10 years to complete bankruptcy proceedings in India, compared with 2.4 years in China.

India has made progress over the past decade. The rate of overstaffing - a result of labor laws that make it difficult to fire workers - has dropped from 16.8 percent to 10.9 percent since 2001. The number of days it takes for a shipment to clear customs has gone from an average of 10 days to 7.3 days.

But Bibek Debroy, author of "In the Dock: Absurdities of Indian Law," says that the sheer number of regulations here leads to corruption. "With the multiplicity of laws and regulatory agencies, you have greater compliance costs," he says, using a euphemism for "bribe." "At least if we begin to see some movement on reform, then give it three or four years, and these issues will no longer be that important."

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