India rises in 'Ease of Doing Business' rankings but misses a holistic view

Last Updated: Tue, Nov 06, 2018 16:37 hrs
Ease of doing business cartoon

The World Bank’s latest report on ‘Ease of doing business’ sees India ranked 77th out of 190 countries. This is a jump of 23 places from last year. Taking the last two years into account, India has made a significant improvement of 53 places. For the second year in a row, India is the top ranked economy in South Asia and third among the BRIC nations behind Russia and China. World Bank President Jim Yong Kim described India’s performance as a ‘historic and unprecedented achievement’ crediting the Prime Minister and his government. He also promised that the World Bank would continue to support the country’s initiatives on ease of doing business.

At a time when the rupee is weak and has performed poorly throughout the year and uncertainties on capital inflows and the current account deficit, the steady increase in the ranking signifies policy decisions that have eased some of the concerns. The states have also played a key role in realizing the importance of these rankings and healthy competition among states helps to improve the overall ecosystem. The Economic Times editorial points out the ease of doing business in the states –

…noteworthy is the deepening reforms momentum surveyed regionally, with Ludhiana, Hyderabad and Bhubaneswar placed in the top three places in the national ranking, much ahead of either Delhi or Mumbai”.

Last year, the government eased FDI rules across various sectors along with implementing GST and the Insolvency and Bankruptcy Code (IBC). With regards to GST, the report did not fully account for its implementations and effects for this year’s rankings as the deadline for tax related reforms was 31st December.

Let’s take a look at some of the parameters that helped India move up in the ranking. The IBC did play a small role and was taken into account in the parameter of resolving insolvency. On this, India’s ranking fell 5 places to 108. The other important indicators which contributed to India’s improvement in the rankings are relatively granular – “dealing with construction permits” and “trading across borders” which combined with others have propelled India up the charts.

In a country like India, cutting red tape and bureaucracy across sectors and across states isn’t an easy proposition, but some in the Industry and government are optimistic. NITI Aayog CEO Amitabh Kant was hopeful and lauded the Prime Minister and the government for taking the lead, saying in part, “It was Prime Minister Narendra Modi’s vision to reach within top 50 positions in 5 years. It is very important to reach within top 25 in 3 years”. Finance Minister Arun Jaitley echoed a similar sentiment saying in part, “Only a focused and a purpose oriented government could have achieved this”.

The report does have some limitations and caveats that need to be taken into consideration. Some parameters such as productive employment level, macroeconomic & political stability and the strength of the financial systems aren’t included. Also, the rankings were based on feedback and surveys conducted on two major cities – New Delhi and Mumbai, which do not necessarily represent the entire picture. Maju Varghese, Associate Director at the Centre for Financial Accountability, in a column for the Indian Express, explains the limitations of the report –

…should the ease-of-doing-business approach form the benchmark of measuring an economy’s success? The report actually is not about the business climate in a country; it merely looks into business regulations”.

An important point Varghese brings up is in easing regulations and granting permits. The example he cites is the Coastal Regulation Zone Notification 2018, which had changes made in its draft ensuring fast tracking single clearing systems. As pointed out, while this certainly signifies an easier process for doing business, it may result in projects getting the green light which are harmful to the environment. One of the changes was the removal of engaging with the public and other stakeholders for projects. An example of this is the unrest in Tuticorin months ago and the eight lane Chennai - Salem expressway that’s currently on the cards.

Going forward, the World Bank plans to introduce another parameter to assess a country’s standing with respect to ease of doing business – “contracting with the government”. Junaid Ahmad, World Bank's Country Director for India spoke to this point stating that this indicator was important because it accounts for a significant portion of GDP saying in part, “With public procurement being a major component of the GDP, government and public procurement system is going to be an important aspect in the ease of doing business”.

If India is to crack the top 50 in these rankings, China remains the biggest obstacle; it jumped 32 spots. It doesn’t have the red tape and bureaucracy that India has coupled with significant financial heft. It would be wise to benchmark India’s performance with its closest competitor. As Varghese points out in his column, the report and rankings shouldn’t be the only headline takeaway –

For sure, it is good to benchmark the country’s progress on various counts of starting a business, but it is also important not to lose sight of the fact that this does not measure macro stability policies and development of the financial sector…removing systemic constraints would help business and industry become more competitive”.

More columns by Varun Sukumar