India and the Ease of Doing Business

Can India jump 80 spots and land within the top 50 within the span of a year? Isn’t the target unrealistic? Not if sources in the Union Commerce Ministry and the DIPP are to be believed.

Dec 29, 2016 04:12 IST others Dr. Sunil Gupta |

Vendors selling their products near Ganga river
Last year, when the World Bank  revised its rankings for ‘Ease of Doing Business’, India slipped from 130th to 131st position, after having moved up 12 spots the year before. Then, when this year’s rankings were announced, we recovered one place to land at 130 - signifying a marginal improvement - which, of course, was unsatisfying given that the Centre and the state governments had already embarked upon certain critical measures in a bid to improve the ranking. Now, the latest news on this front is that India is eyeing a place within the top 50 in the world in ‘Ease of Doing Business’ index next year, which if achieved would be a quantum leap of 80 spots. The Department of Industrial Policy and Promotion (DIPP), backed by other key ministries, would be spearheading the required efforts towards achieving this laudable goal.
 
Now, the question is whether this is doable? Can India jump 80 spots and land within the top 50 within the span of a year? Isn’t the target unrealistic? Not if sources in the Union Commerce Ministry and the DIPP are to be believed. It seems most of the groundwork has already been completed during the first half of this year. However, many of these measures being at the initial stages were not taken into account by the World Bank as they were yet to be implemented in the focus areas for their ranking - Mumbai and Delhi - when the World Bank completed its last survey.
 
As such, a crestfallen Union Commerce Minister, Nirmala Sitharaman, had taken to Twitter and posted, “Disappointed at our rank this year. Many of our reformatory steps were after World Bank deadline. Hopefully, with other steps, will help next year.” This was just after the World Bank’s Doing Business Report 2017 published in October this year put India at the 130th spot among 189 countries. With that tweet, Sitharaman indicated she was not one to give up. And by clubbing together efforts and measures, she is planning to go for a major push to lift the rankings of India in the ‘Ease of Doing Business’ index. So, what exactly went wrong this year?
 
An official of the Union Commerce Ministry revealed that though a slew of proposed reforms was initiated, many of them could not be implemented before June 1, 2016, and thus were not taken into account while finalising the 2017 rankings. If they had been, then India would already have forged ahead leaving many other countries behind in the World Bank Group’s rankings this year itself. “But the way things are being taken forward, all measures that were not accounted in the rankings this year coupled with other measures that are being taken now, a spot within the top 50 is not unreachable,” he explained.
 
“The Indian economy and legal situation are being taken on the right path, and our situation should improve much if the Union government can implement reforms it has already set in place before next June,” the official elaborated.
 
According to government sources, some important measures that missed being factored in the ranking this year include enactment of the Insolvency and Bankruptcy Code, the Constitutional amendment for enacting Goods and Services Tax, introduction and streamlining of INC-29 for company incorporation. These were not factored because the World Bank needs more than 50% users to have adopted the system by June 2016.
 
Except in the case of the GST Bill, by next June the requisite criteria would have been fulfilled with regard to other measures. Due to the June cut-off and other applicable parameters, the World Bank Group also did not take into account measures like online registration for ESIC and EPFO, online filing and payment of returns at EPFO. However, the bank has assured that this will be reflected next year.
 
Besides other such measures that had been ignored but would be reflected in next year’s ‘Ease of Doing Business’ index, the Union government has also announced a slew of forthcoming measures that will further improve India’s position. These include demonetisation, implementation of the bankruptcy code and also a single form for company incorporation, ease and streamlining of Customs regulations to enhance cross-border trading, the introduction of paperless court procedures and systems, digitisation of all encumbrances and records of rights of land for the last 30 years, etc.
 
Given the inevitable delay in implementation of things in India, we actually missed the bus this year, but if the reforms are continued, making it to the top 50 is not undoable. It can make a staggering difference if just the Goods & Services Tax (GST) regime can be implemented before next June, which now seems to be a difficult task. 
 
Why is the 'Ease of Doing Business’ ranking so important for us? Lately, one of the principal reasons that the ‘Ease of Doing Business’ index is gaining so much media attention could be because of the comparative positioning of India and Pakistan, coupled with India’s radical improvement vis-a-vis Pakistan’s loss of rank.
 
In the 2015 report, Pakistan was at 128 rank, while India was at 142. In the 2016 report, India moved up by 12 spots to bag 130, and even in the 2017 report it maintained the rank of 130. Meanwhile, Pakistan slipped down from the 128 position to rank at 144. The 2016 place, however changed to 131 from 130 after revision, and this is why ranking at 130 in 2017 is being seen as an overall improvement of one position.
 
Furthermore, the ‘Ease of Doing Business’ report by the World Bank indicates that the change of guard at the Centre has helped India move ahead and change its rank from lagging behind Pakistan, to steaming ahead of it. In the Indian context, this development matters very significantly.
 
However, there is no place for complacency as according to the World Bank’s Ease of Doing Business Report 2017 published in October 2016 even countries like Bhutan (73), Vietnam (82), Kenya (92), Indonesia (91), Philippines (99), Nepal (107), and Sri Lanka (110), are way ahead of India in the rankings. Thus, one of the primary reasons why the Union government is going all out to improve India’s ‘Ease of Doing Business’ rankings is because its current rank is quite embarrassing.
 
Why do we say this, despite the World Bank Group report showing that India is improving not only overall, but also in Distance to Frontier (DTF) points in most sectors? This is because, despite the visible improvement, the major rank advancement of India depended upon the performance of the electricity companies distributing power in Delhi and Mumbai. Their performance added 25 points to India helping to make up for lag and poor performance in other parameters.
 
However, in many sectors and parameters that are essential to ‘Ease of Doing Business’ like ‘starting a business’, ‘getting credit’, ‘dealing with construction permits’, ‘protecting minority investors’ and ‘resolving insolvency’, the rankings have slipped. This is where our country needs to focus now.
 
Just for registering a business unit in India there are so many processes, complications and barriers to be overcome, which keep on increasing, because of which our rank slipped by 4 points in ‘starting a business’ parameter. However, the NDA government at the Centre cannot be blamed for this as some of the formalities such as issue of trade licence, professional tax related documentation, etc have to be done at the local level of municipal corporations, which tend to create significant headaches. 
 
We also have to read between the lines and ponder on reasons why economies like Brunei, Indonesia, Pakistan and some others were acclaimed for their significant improvements over last year in the report. Also worrying is that on the parameter of paying taxes we stand at an appalling 172nd place. PM Modi’s main area of concern has been bringing about transparency in the economy so that tax evasion can be checked. But an economy that is so incompetent in collecting taxes can never expect its tax bracket and exchequer to see a promising hike. Rationalization of tax rates and efficiency in collection, more so in the post-demonetisation period, should be the next aim of government.
 
The most painful area of failure is on account of ease of starting a business where we slipped 4 places. While on one hand, the Ministry of Skill Development and Entrepreneurship is paving way for a learned and capable youth who can independently work for the economy, dream of starting a business and turning it into a viable project, on the other hand, won’t come true unless registration of a company and other forms of businesses is made as simple as starting a website today. This needs concerted improvement in the MCA’s online portal and simplification of forms and guidelines.
 
In the ranking of states released in a separate report that assessed states on 340-points reform action plan, Telangana and Andhra Pradesh have bagged the first place jointly. Renowned for their pro-business policy actions, the states set an example for others and a collective deliberation including central and state governments can bring out areas where corrective actions must be focused. Important to note that while these two states had an implementation rate of near-100 percent for reform agenda, some states like Kerala, Tripura and Goa could not even achieve 40 percent implementation. That many states aren’t heeding to the call of cooperative federalism and inclusive development remains an area of concern.
 
Coming back to India’s 130th ranking, the challenges are many, including the World Bank’s way of doing things, and that only implementation of measures in Delhi and Mumbai would count in the rankings as these are the focus areas. However, each of these cities come with their own implementation mechanism through civic bodies and local or state governments without whose full cooperation, taking India forward in the rankings may be difficult.
 
First of all, one needs to understand that the ‘Ease of Doing Business’ index is all about rankings given by the World Bank Group to countries based on the bank’s parameters, which take into account only company structures - the ease of starting and running a company, however small it might be – given the prevalent legal, administrative, economic and infrastructural environment.
 
How is this measured? By sample surveys of one or two cities with the highest economic movement and flux in a country - it hardly represents the situation in the rest of the country, though it can be taken as a reference frame in the sense of ‘the morning shows the day’. 
 
The value and significance of the World Bank’s ranking lie in the fact that it lays down in concrete terms the minimum essential areas where improvement is required, where slipping ranks can be fatal for a country’s economy and shows where the country has been able to make progress. It helps to set targets, create acceptable situations in specific pockets of the economy, and then try to replicate success across the country.
 
The parameters and methodology the World Bank uses is of its own and only reflects specific circumstances that may not match the situation faced by the majority of businesses in the pocket of the economy it studied. For example, when measuring the difficulties or ease of doing business in these two cities, Mumbai and Delhi, the World Bank considered the situation of a limited liability company or its equivalent, which has either five married men or five married women as its directors - all of who are in monogamous relationships. 
 
There are many other criteria the World Bank uses - like the company memorandum of association must be at least 10 pages long, or that the company must have at least 10 to 50 employees within a month of commencement of operations - these may seem totally out of tune with the real business endeavors, but they have to be adhered to, because every country has to meet them in order to be ranked. Moreover, such ranking not only brings prestige but also assures the international community that it is much safer to invest in a particular country as compared to others. For India, from the way things are shaping up it seems being able to emerge among the top 50 may not be an impossible task.
 
The author, Dr. Sunil Gupta is former Director of Punjab National Bank and Dena Bank.

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