World Bank Says It’s Easier Doing Business In India. But Is It, Really?

Posted by Ambar Sharma in Business and Economy
November 13, 2017

It is very hard to be seen as non-partisan. Even if you know you are one, to be seen as one, is another entirely different thing.

In short – India jumped 30 places in the rankings of  ‘ease of doing business’. From 130 to 100. Awesome. We are already receiving the highest investment in the world, in terms of FDI, for the second year running in 2016. Awesome. Now, you may try to break the FDI (Foreign Direct Investment) parameters down to say, well, the FDI is only for greenfield capital investments which would only generate low-level construction jobs and mid-level engineering jobs, in a time where high-skilled jobs are needed. If you concluded by pointing out that that is not really representative of the overall amount of FDI coming in the country, by investment portfolios, for example, you would be right, but slightly disingenuous. You would be slightly disingenuous because that does not tell the whole story.

You did not point out that the report itself mentions that developed countries still face high levels of risk and uncertainty. The investment in India was generated because of strong economic growth (before demonetisation). In 2016, the FDI by capital investment was $62.3 billion in 809 projects in India. For the record, for overall FDI, we are 9th overall in the world, which is one better than last year’s rankings. Pointing out how flawed rankings do not negate the effect and positive perception it generates among foreign investors is something we badly need as private investment has been falling down at record levels. Even our Gross Fixed Capital Formation (GFCF) was 37% in 2007 and is now at 27%.

Nuance, in that same way, must be applied to seeing the World Bank’s ‘ease of doing business’ rankings. The 10 parameters for this ranking are simple – how fast can a business be set up, how rigorously are contracts enforced in a country, is the tax code simple, can you get electricity for your business and is winding up (closing) your business straightforward, etc.

The full report describes how, for example, the Insolvency and Bankruptcy Code (IBC) passed in 2016 which allows a 180-day maximum timeline to dissolve a business which will be administered by professions in the insolvency industry has helped India in jumping 30 places. For the life of me, I could not understand why India did not have a proper code for failing or dissolving companies. At the same time, India still suffers from productivity issues and inefficiencies due to a still prevalent ‘Licence Raj’ according to the same report.

One thing to be understood is that the rankings are only measured for two cities – Mumbai (47% weightage) and Delhi (53% weightage). The rankings measure various things, however, out of 10, only six parameters fall largely under the domain or are granted by the central government. Getting electricity is done through the state electricity board, clearances for starting a business and registration of property also comes under the state government’s domain. Construction permits are the municipal corporation’s domain. Credit must be given to all and the blame must go to all. It also emphasises that all levels must work cohesively for economic reforms.

The rankings themselves are based on subjectivity. They are based on field surveys and interviews with specific companies like PwC India. However, they are very strict in terms of judging reforms, only, accepting those which truly show the ground reality such as the industrial sector, when out of 42 reforms, the World Bank only accepted two reforms fully.

The rankings can easily be manipulated as you only have to focus on aggressively improving the parameters of two cities. The government had only engaged the Delhi and Maharashtra (specifically, for Mumbai) governments as noted by the Standing Committee on Commerce. The ‘ease of Doing business’ indexes can be rigged to be improved greatly, which is what Russia did, by improving the select parameters of a few states rather than the overall business climate. How is the government engaging the weaker states (NER or the BIMARU states) to improve their ease of doing business? That is the bigger question.

India still has a long way to go. However, so many people are missing the perception about the rankings that generate positive growth at a time when it is desperately needed. When the rankings came out, the words ‘irrelevant’ and ‘biased’ were used a lot. The government still has not exempted small businesses from event-based filings which reduce the compliance burden at a time of transitional taxation system by the name of the GST. Our electricity generation has actually worsened this year. A great solution recommended by the committee is to create hubs from where entrepreneurs can draw electricity initially to commence their production, while utilities follow up and regularise the supply in specified time. We are already at a surplus in terms of electricity generation, what we need is to sort out our DISCOMS. Speaking of states, the average implementation by all states for State Level Business Reforms pushed by the Ministry of Commerce & Industry is 48.93%. This is not good. Better co-ordination between the Centre and states is required as it is the basis for the functioning of our federal structure.

Despite all that the government has not done and the weaknesses in the accounting of these rankings, India, at a time of slowdown, must appear as a friendly place to do business. What the government has done, is push for private investment by streamlining procedures. This incremental improvement is a great step in the right direction. Yes, India has certainly eased the doing of business.
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Image source: Sanjeev Verma/ Hindustan Times via Getty Images

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