Ease of doing business in India worsens, World Bank, RBI on same page

So Reserve Bank of India Governor, Raghuram Rajan, didn’t surprise anyone with his credit policy announcements today. Everyone was expecting the policy rate to be hiked and that is what he did. Now there will be endless debate on whether this will affect growth and whether the central bank should be so focussed on fighting inflation as it clearly is under his watch.

Coincidentally, the World Bank-International Finance Corporation’s joint publication, Doing Business 2014 also released today. And once again, as it happens every year, India figures somewhere at the bottom. This year, it ranks 134. (This is lower than last year’s ranking of 131, but this could well be because more countries have been added to the list). Even among the eight South Asian countries, India ranks sixth, with its rank much below the regional average of 121.

What’s the connection between the credit policy and the Doing Business report? On the face of it, not very much. The credit policy is about macro issues - inflation, growth, current account deficits. The Doing Business report is about extremely micro issues like business regulations, registering property, construction permits and the like.[caption id=“attachment_1200841” align=“alignleft” width=“380”]  RBI Governor Raghuram Rajan. Image courtesy PIB[/caption]

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But getting the micro issues right can sometimes help address the macro issues as well. The central bank has to do a tightrope walk between growth and inflation, but it can be no one’s case that both are its headache alone. The policy environment also needs to address these issues. It is very clear that high inflation is driven largely by food inflation and that this, in turn, is mainly due to supply side constraints – constraints which are just not being addressed even though it is very obvious what they are and how they can be overcome.

Similarly, it is also amply clear that it is not high inflation alone that is dampening growth. Growth is also being affected by lack of investments – companies are just not spending money on new projects or expansion of existing projects. The high cost of money, because of a hawkish monetary policy, is just one reason for the poor investment climate. The other is the difficult operating environment. Growth cannot come in a difficult business environment.

This is where the Doing Business report becomes relevant. The report looks at how countries have performed on 10 indicators – starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting investors; paying taxes; trading across borders; enforcing contracts; and resolving insolvency. These indicators broadly cover all the areas that make doing business easy or difficult. Unfortunately, India does not fare well in many of these areas. There are only two areas where its record is creditable. One is getting credit, where it ranks 28 and the second is protecting investors where it ranks 34. Interestingly, these are both areas that are overseen by strong regulators working with a large measure of independence – the Reserve Bank and the Securities and Exchange Board of India.

But it trails even some of its South Asian neighbours, which are much smaller economies, on most of the other indicators. It is the worst performer in South Asia in three indicators. These are starting a business (it ranks 179 globally), dealing with construction permits (182) on this score and enforcing contracts (186 in the global ranking). The only other country to trail in three indicators is Afghanistan! Worse, India’s ranking is much below the regional average for South Asia, which is 86 in starting a business, 114 in dealing with construction permits and 137 in enforcing contracts.

Reforms in most of these are not ideological issues and do not require political consensus or legislative changes that could become hostage to political stand-offs. They just require a realisation on the part of policy makers and implementers at all levels-national, state and local government-that the problem of economic revival and robustness is not just that of the central bank or the Union finance ministry alone. Each of them will have to address the non-political, non-controversial issues like clearances, permissions, infrastructure that fall within their respective purviews.

In the wake of the credit policy, there will be renewed demands for the government to make some big announcements or make some grand gestures to perk up investor interest. The focus will perhaps be on easing caps and restrictions on foreign investment or announcing some big infrastructure projects. But there will be little point in ending restrictive conditions on FDI in retail if getting licences to set up a store is going to be extremely complicated.

It will not be possible to reform all the areas that the Doing Business report highlights overnight. Even if the reforms are fast-tracked, the benefits to the macro economy may not come overnight. But in the obsession with the macro, we should not lose sight of the micro.

Seetha is a senior journalist and author.