Ease of doing business: Take a bow Modi govt and push ahead with more reforms

Did India move up 12 spots or a piffling four in the World Bank’s Doing Business Report 2016 (DBR-2016)? That could well turn out to be the latest polarising debate in the country.

Well, as it turns out, it was just a four-point step up. But does that matter? The real point is – and no amount of carping by the current government’s numerous critics can change that – India moved up in rankings, after slipping for four years in a row.

 Ease of doing business: Take a bow Modi govt and push ahead with more reforms

Reuters

But first, let’s get this 12-versus-4 issue out of the way. In the DBR-2015 report, India was ranked at 142, which makes this year’s ranking of 130 look like a 12-point improvement. But in DBR-2016, the ranking was revised upwards to 134, which means the improvement was only four points.

Such revisions, based on data corrections, happen every year. In DBR-2014, India’s ranking was 134, which was revised downward to 140 in DBR-2015. This year, apart from data revisions there was also a methodology change.

Neighbourhood rival China actually slipped one place, with its ranking dropping from 83 to 84. This will no doubt give lots of glee to those who believe India is doing much better than China because the latter’s economy is slowing down.

The fact that China is up there in the 80s is a fact that will no doubt be glossed over, just as the fact that the Chinese economy is still several times larger than India is conveniently overlooked.

But rankings don’t tell the real story beyond a certain point, because if one country moves up, another will fall. Far more important is the score on the distance to frontier (DTF) parameter which shows how much countries have to measure up to the best performance target (set at 100) on each of the ten parameters in the doing business index. A higher DTF score means a country is closer to the ideal.

The ten indicators are starting businesses, construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.

India is certainly moving steadily up on this score. The report points out that “India is the South Asian economy recording the biggest increase in the distance to frontier score since 2004.” Its overall DTF score in 2004 was 40.7, it now stands at 54.68.

What has pushed up India’s score significantly? The report says, "one of the areas of greatest improvement has been starting a business" and the Narendra Modi government certainly deserves applause on this score, though the report does list things its predecessor did (cutting time from the process for obtaining a permanent account number, speeding up the process for obtaining a tax registration number, establishing an online system for value added tax registration etc).

The report cites the current government’s move on eliminating the paid-in minimum capital requirement and streamlining the process for starting a business. The DTF score on starting a business has improved significantly – from 68.42 in DBR-2015 to 73.59 in DBR-2016. The increase had been less between DBR-2014 and DBR-2015 - only three points.

The other big gain India made was in the getting electricity parameter. Its DTF score improved from 63.06 in DBR-2015 to 74.56 in DBR-2016 and the report commends steps taken by power utilities in Delhi and Mumbai to make getting a connection easier.

Unfortunately, on some parameters India has either slipped or just stood still (see table). The slippages are in significant areas – registering property, paying taxes and trading across borders.

In the last two, the central government can play a significant role. The DTF score on getting credit remains stubbornly at 65 and this is something the Reserve Bank of India needs to take a good look at.

No one can doubt the Modi government’s commitment to making it easier to doing business in India. The department of industrial policy and promotion has been at the centre of a slew of initiatives – giving life to the e-Biz platform which had been started by the UPA but had not gained much traction, scything forms for imports and exports (which makes the slippage on the trading across borders DTF score puzzling), making labour law compliance easier, among other things.

It has also been pushing the states towards reform, with the first big step being the ranking of states on ease of doing business that was unveiled last month. This is important because the states are where the bulk of regulatory hurdles are. What is hugely encouraging is that state governments are falling over themselves to outdo each other.

Yet, the business community still complains of lack of change at the ground level. Importers and exporters complain of harassment by excise and customs inspectors. The tax bureaucracy still has the potential to harass. So clearly, the intention is not getting transmitted to the field staff.

That, however, will not happen overnight. The Indian bureaucracy is a huge, complex machine where layers have been added over the years. Peeling these off and bringing about a mindset change will take time, a lot of time. Some states like West Bengal have already started training programmes for field level staff.

The methodology of the DBR means that it measures two cities on the ten parameters (Delhi and Mumbai in the case of India). In a large and diverse country like India, just two cities is not representative enough. Intra-country rankings show other states and cities faring much better. So it is quite possible that India is better off than the report portrays.

Given the huge implementation challenges involving multiple layers of the government and the fact that some reforms require legislative action that the opposition is just not going to allow, the Modi government’s desire to reach 50th rank in the DBR in two years still seems difficult. But the very fact of an improvement in ranking after four years and a two-point improvement in the DTF score is not something to be dismissed.

The Modi government needs to build on this, identifying the areas where India lags and working to improve on those. It can’t do this alone. State governments will have to put political differences aside and work in tandem as well. After all, they stand to gain the most when investors hot-foot it to India if rankings improve.

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Updated Date: Oct 28, 2015 15:06:28 IST