Insights into Editorial: The ease of doing business: A confusing and difficult problem

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Insights into Editorial: The ease of doing business: A confusing and difficult problem


 

Introduction:

The World Bank’s Doing Business (DB) rankings for 2018, India has made a very significant jump, improving its rank from 130th in 2017 to 100th.
Not only has India improved its position in terms of rankings, which is relative, it has also made improvement in absolute terms, measured by the so-called “distance to frontier” metric.

Even though the DB rankings may not be the sole determinant for attracting investment, the improvement is likely to boost investor confidence as it reflects the government’s commitment to reforms.

The World Bank’s rankings are based on the country’s performance in following areas:

  • Starting a business.
  • Dealing with construction permits.
  • Getting electricity
  • Registering property.
  • Getting credit.
  • Protecting minority investors.
  • Paying taxes.
  • Trading across borders.
  • Enforcing contracts; and
  • Resolving insolvency.

 

Present Concern w.r.t Ease of doing business:

Why India continues to perform relatively poorly in many perception based surveys of trade facilitation and ‘open-ness’ despite all these major reform initiatives.

For instance, despite all the effort, India’s rank in dealing with construction permits is 181 among 190 countries. The time taken for enforcing a contract has, in fact, worsened from what it was 15 years ago. Consequently, India’s rank in this category is a poor 164 in that sector.

Methodology challenge-

Expand the coverage of the index to make it more real. The kind of laws the index looks at are at state level laws and not national laws. So more importance has to be also given to the state level exposures and business performances.

Need for factor market reforms-

The areas of making the land available should be improved from 190 days. Land allotment, construction permits should be encouraged. The labour reforms- in terms of hiring and retrenching mechanism should be there.

Cross border business: proper trade policy is required to enhance business opportunities.

The governance challenge:

Mismatch between the intent of reforms and quality of actual enforcement and transparency on the ground, — the governance challenge.

All businesses, Indian and foreign, complain that risk management and transparency related reforms that are boldly announced by senior officers in ministries are not adopted in spirit and content by their junior colleagues responsible for enforcement.

This is aggravated by the lack of a time-bound grievance redress mechanism, and the absence of independent ‘auditors’ who monitor on-ground enforcement quality and ensure there is accountability for poor decisions made in the field.

The design challenge:

Procedures are often designed to cater to the few instances of failure or non-compliance and not for efficiency and facilitation.

For instance, India is perhaps the only country in the world that requires a boarding pass to be stamped after security check at airports (earlier even luggage tags needed the stamp).

The management challenge:

There is a tendency to blame poor quality of government services on lack of infrastructure or human resources. This often over-looks the fact that there are many examples of better services with effectively less resources.

Take a very commonly discussed problem, the quality of policing in India. Yes, per capita police personnel deployed is one of the lowest in India. But this cannot be an excuse to make the simplest of tasks, the filing of a formal complaint (i.e. FIR), to become an insurmountable challenge for the common person.

 

Solutions:

The key to the puzzle lies in the fact that perceptions about India reflect the actual interface between investors and businesses interacting with regulators and government departments on the ground. It is on this ground level experience that India falters, even compared with countries in the wider Asia-Pacific region that are perhaps formally more trade restrictive, or have less transparent laws and regulations.

Prime Minister Narendra Modi and his Cabinet colleagues must be commended for their focus on incremental reforms that resulted in India breaking into the top 100 in the World Bank’s Doing Business rankings for the first time.

The government should understand the de facto situation faced by firms that wanted improvements in the country’s business environment.

In order to undertake effective policies to improve the business environment in India, we need to understand what causes it to be relatively good in some situations and poor in others.

A recently concluded NITI Aayog-IDFC study throws light on some of the broad trends in the country’s business environment, but fails to provide a deeper understanding of its causes due to the lack of a conceptual framework to analyse the data.

The implementation of the goods and services tax (GST) has not been accounted for in this year’s rankings. Therefore, if the problems associated with GST are addressed quickly, it is likely that the GST will help boost India’s ranking further next year.

To improve the score related to registering property we need measures like updating and digitising land records, improving titling and streamlining procedures on transfer of property.

 

Way Ahead:

With its demographics, the size of the economy and a well-functioning capital market, India stands a real chance of projecting itself as a preferred destination for investments.

The Ease of doing business rankings thus, should not be seen as the ultimate marker reform success. Likewise, investors who are considering the prospects for investment in India should recognize what the rankings do and do not tell us.

The process of improvement has to be continuous and there can be no let up. Both the Central and state governments will need to work in a number of areas to improve India’s competitiveness.

While we can truly be proud of the extent of India’s macro-policy reforms, it is time we started to focus on the micro-policies of enforcement.

Top down macro reforms can only be effective if they are twinned with bottom-up micro reforms. Unless the day-to-day experience of doing business improves, we will continue to under-perform relative to our true potential.

In a real-time financial ecosystem, we exist in what could well be the medieval ages. We can’t have a vibrant entrepreneurial ecosystem unless Indian entrepreneurs are given a level-playing field with global players. The time for that is today.