Above: PM Narendra Modi with US business leaders in Washington, DC/Photo: UNI
While there is a modest improvement, it is still hard to do business in India. For the regulatory burden to be reduced, the obtrusive government, conflicting regulations and the stifling bureaucracy need to undergo a change
By Sanjiv Bhatia
The World Bank puts out an annual ranking of 190 countries to measure the ease of doing business in each country. Called the “Doing Business Index”, the yearly rankings are meant to measure regulations that directly affect businesses. A high ranking signifies that it is easier to start and operate a business.
The index is generated through a survey which consists of a questionnaire sent out to expert contributors (lawyers, accountants, etc) who deal with business regulations on a day-to-day basis. The data collected is then further verified through conference calls with the survey participants and country visits by the World Bank team.
The number one ranked country in 2018 was New Zealand where it takes half a day to set up a new business. India ranked 77th on the index, a significant improvement over the 100th rank it had in the 2017 survey. Since the Modi government came to power in 2014, India’s ranking in the Doing Business Index has improved by 65 places from 142nd to 77th.
As the ease of doing business ranking largely measures improvements in the regulatory burden, the Modi government deserves credit for easing this burden on Indian companies. In 2014, it took 35 days to start a business in India. Today, it takes about 29.8 days—still a far cry from the 6 hours it takes in New Zealand, or the 1½ days in Canada, or the 2½ days in Singapore and Australia. But it is an improvement nonetheless.
Critics argue that much of this improvement reflects the advancement in digital technology and online processing of applications rather than a reduction in the regulatory burden and governmental coercion faced by businesses in India. They cite the evidence that since 2003, when the first index was released, the global average in the time required to start a business has dropped from 50.78 days to 19.15 days, a significant improvement worldwide, and not just in India alone.
The Doing Business Index, which is based on an equally-weighted average of 10 indicators, shows that India’s 2018 ranking improved in eight out of 10 indicators from 2015 (see box). However, the ranking for registering property deteriorated from 121 to 166, while that for protecting shareholders remained unchanged at seventh position. The most significant improvements have come in the reduced number of procedures and the cost and time that it takes to obtain construction and electricity permits. Big problems remain with registering of property, enforcing contracts, paying taxes and resolving insolvency. A simpler GST and an improvement in bad loans could lead to improvements on both counts in future rankings.
Comparison of countries using global rankings like the Doing Business Index has now become an essential tool for governments, voters, NGOs, civil liberty advocates and policymakers. There are currently about 170 such global indices that provide easily understandable quantitative ratings of government activities and policies.
Country rankings, however, need to be interpreted with caution. Rankings are ordinal numbers (1st, 2nd, 3rd, etc) and unlike cardinal numbers (1, 2, 3), they only show the relative difference between two rankings. A nation ranked 30th is better than another ranked 60th, but not twice as good. Also, a country’s rank may sometimes improve not because of anything it is doing right, but because of a relative deterioration in other countries. An example of this is the Ease of Doing Business Index in which India’s rank has fluctuated several times from 116 to 142 over the last 10 years. Is this fluctuation just statistical noise or does it reflect an underlying change?
World Bank chief economist and winner of the 2018 Nobel Prize in Economics Paul Romer recently resigned from his position at the bank stating that he had lost faith in the integrity of the Doing Business Index, suggesting it was politically manipulated. Two researchers at the Center for Global Development, Justin Sandefur and Divyanshi Wadhwa, have shown that India’s rise in the Doing Business rankings is mostly an artefact of methodological and sampling changes. They recalculated the rankings and found that India’s jump is a more modest five place improvement in ranking as opposed to the 23 points claimed by the World Bank Doing Business ranking system.
Another criticism of the Doing Business Index is that it is generated using data from Mumbai and Delhi, two cities with better infrastructure, legal systems, government services, etc, than the rest of the country. Does an improvement of 113 places on getting electricity, based on a survey in Mumbai which gets 24/7 electricity, reflect the reality of the country? Clearly not, and as Sandefur and Wadhwa pointed out, if the World Bank were to use the same methodology on a sample of randomly selected towns and villages, India’s score would be much lower.
Other valid criticisms of the Doing Business rankings include the fact that they don’t capture the implementation of reforms. Theoretically, GST makes paying taxes easier, but in reality, its shoddy implementation in India has hurt business and destroyed jobs. Paying taxes is now considerably harder and not easier, yet the Doing Business ranking rewards India based on intention, not the actual outcome. It also ignores labour regulation as a component. It is generally acknowledged that India’s archaic labour laws are the primary detriment to ease of doing business in India. Surveys of foreign firms wanting to invest in India repeatedly cite restrictive labour laws and weak contract enforcement as the biggest impediments to doing business in India. India ranks 163rd on contract enforcement, among the worst ranked in the world. We can all agree that it is challenging to do business in an environment where contracts cannot be effectively enforced, irrespective of how easy it is to obtain electricity or construction permits.
Critics also point to the fact that the Doing Business Index is a theoretical construct with little correlation to reality. If it is easier to do business in a country, then foreign investment in it should increase. But that has not always happened. Russia’s ranking climbed to 31st from 121st seven years ago and Nigeria has jumped 43 places in the latest ranking. Yet, foreign investment eludes these countries. The same pattern exists in India—the Ease of Doing Business ranking has improved from 142nd in 2015 to 77th in 2018, yet foreign direct investment as a percent of the GDP has dropped from 2.09 percent to 1.48 percent over the same period.
Given these problems with the Doing Business Index, economists prefer to use the Index of Economic Freedom, which is published annually by the Heritage Foundation and the Wall Street Journal. The Index of Economic Freedom is a more comprehensive index and provides a more accurate and unbiased picture of how free an economy is from regulatory burdens. India ranked 130th out of 186 countries in the 2018 Index of Economic Freedom, an improvement of 13 places from 2017. But, it is still classified as a mostly unfree country and while it is developing into an open-market economy, the progress is slow and traces of its past autarchic policies remain.
There is no doubt of a modest improvement in India’s business climate, but the slow pace of change is hard to explain. If one can start a new business in half a day in New Zealand, why can’t India emulate those practices? Reducing the regulatory burden isn’t rocket science—the US now has a new policy regarding regulations where for every new regulation introduced, two regulations must be removed.
India’s biggest problem has been and still is its big obtrusive government that mires individual creativity, innovation and personal growth with its voluminous, meaningless and often conflicting regulations and its stifling bureaucracy. Its political and bureaucratic elite still control all levers of power and reward themselves and their crony capitalist friends. While the world turns over new entrepreneurs almost every day, most of India’s business is still controlled by the same families who have been in control of large swaths of the Indian industry for decades.
Despite what the rankings claim, the reality is that in India, the rules still favour only a few. Those who know how to game the system live in riches, while the rest of the country struggles for basic needs. By all accounts, therefore, India is still an extractive economy in which a small group of people has the ability and power to exploit the rest.
There is only one way to change India: A complete change in mindset about the role and need for extensive government interference in our lives.
—The writer is a financial economist and founder, contractwithindia.com