[Burning Issue] Ease of Doing Business in India

India ease of doing business rank jumps 23 places to 77 in World Bank’s Doing Business 2019 survey


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Behind India’s leap in ease of doing business

Context

  • India’s rank in the World Bank’s Ease of Doing Business 2019 survey climbed 23 places to 77 among 190 countries surveyed, making it the only country to rank among the top 10 improvers for the second consecutive year.
  • Last year, India saw a record jump of 30 places to reach the 100th position in the rankings.
  • New Zealand topped the list of 190 countries in ease of doing business, followed by Singapore, Denmark, and Hong Kong.
  • The United States is placed eight and China has been ranked 46th. Neighbouring Pakistan is placed at 136.

Areas where Ease of Doing Business Concentrate

  • Ease of doing business: Harmonization of laws, procedures and rates of tax, will improve the environment of compliance as all returns to be filed online, input credits to be verified online reducing need to deal with different tax authorities. It would also discourage mere ‘invoice shopping’.
  • This is a dynamic process and it reflects performance in various parameters for doing business in comparison to other countries.

Ease of Doing Business Index Indicators

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

(Each one of these indicators carries equal weightage.)

What is measured

  • The EODB study tries to capture the experience of small and mid-sized companies in a country with their regulators, by measuring the time, costs and red tape they deal with.
  • To collect data, it empanels experts from the largest business cities in each country, with Mumbai and Delhi surveyed in India. It has many rounds of interactions with them — typically lawyers, business consultants, accountants, freight forwarders, government officials — who can capture the experience of multiple businesses.
  • Over 13,800 experts participated in the 2019 study, from June 2, 2017 to May 1, 2018. Each country is assigned a rank out of 190 based on the total score it earns on 10 key aspects of doing business.
  • The indicators considered now are: starting a business, getting construction permits, securing electricity, registering property, getting credit, protecting minority investors, paying taxes, cross-border trade, enforcing contracts and resolving insolvency.
  • In short, the World Bank’s intent is to measure a country’s progress on a few ‘doing business’ indicators in great depth, without trying to be comprehensive about the indicators or striving for a statistically large sample.
  • The above facts make the shortcomings of the study obvious. In India, it may not reflect the experience of partnership or proprietorship firms that dominate the small business space, or those located in tier 2 or tier 3 towns.
  • With the ten indicators measured by the study well-known, it is also easy for governments to specially target these areas for reforms.
  • But the EODB rankings do serve as the most trusted ready-reckoner for foreign investors looking to set up shop in a country. For that reason, this is an achievement for India to celebrate.

What improved

India’s climb in the 2019 rankings seems to have come mainly from sharply higher scores on two ‘doing business’ indicators — securing construction permits and trading across the borders. It also made smaller improvements in starting a business and getting credit.

The sharp rise in the ranking will burnish the reformist credentials of the present government.

  • The number of days taken to Start a Business dropped from 30 to 16.
  • The number of days taken to obtain Construction Permits dropped from 144 to 95.
  • Border compliance for exports dropped from 106 to 66 hours.
  • Border compliance for imports dropped from 264 hours to 96 hours.
  • In the electricity sector, the time taken for obtaining a new connection has reduced from 105 to 55 days.

Further, India now ranks in the top 25 in the world on three indicators

  • Getting electricity,
  • Getting credit and protecting minority investors,
  • Department of industrial policy and promotion.
  • In dealing with construction permits, India has implemented an online single window system, introduced deemed approvals and reduced the cost for obtaining these permits.
  • For resolving insolvency, India has put in place a new Insolvency and Bankruptcy Code and time bound reorganization procedure for corporate debtors.
  • Upgrades in port infrastructure, a move to online documentation and facilities for exporters to seal their containers on their own, helped.

What didn’t change

  • While India managed dramatic changes in some indicators, there were others where its scores barely budged.
  • Its score remains dismal on registering property, where it ranks 166. While it takes 69 days to register a piece of property and costs about 8% of its value in India, the norm for OECD countries is just 20 days at half that cost. New Zealand gets this done in a single day.
  • The other vexatious aspect that most business folk will readily identify with, is paying taxes. Despite the advent of GST, India has remained a back-bencher on this at a rank of 121. A typical Mumbai-based firm makes 13 tax payments a year, spends 278 hours on this and coughs up 52% of its profits.
  • But businessmen in Hong Kong make just three payments a year, those in Singapore spend just 49 hours paying taxes. The average tax rate across global economies is less than half of the Indian rate!
  • India also fares poorly, at rank 163, on enforcing contracts. While enforcing a claim through the courts in Mumbai takes 1,445 days and costs 31% of claim value, OECD nations manage this feat in 582 days at a cost of 21%.

 What will be the outcome of this Ease of Doing Business Index report?

  • It is significant for countries like India, where foreign investors and Governments look at the investor-friendly measures and this index is considered to be the one which reflects the ground reality.
  • In today’s capitalistic society (market economy with safeguards for vulnerable sections), this assumes significance as FDI flows are considered necessary for the growth of emerging economies.
  • Multilateral lending institutions like World Bank, IMF look at these parameters and suggest measures for improvement before giving financial help to the emerging economies/underdeveloped countries.
  • Simplifying FDI process by abolishing FIPB (Foreign Investment Promotion Board) as a result, more than 90% of FDI inflows are now through automatic route.

However, the report does not truly represent the status of economic reforms taken by India

For instance:

  • One particular change in the ranking methodology seems to have done considerable damage to India’s improvement prospects.
  • India ranks fourth from the bottom under the header “paying taxes”. Inclusion of new criterion ‘post-filing index’ has much to contribute to this.
  • The rankings cover only the two cities of Delhi and Mumbai. However, the reforms are being carried on all across India. In fact, states like Andhra Pradesh, Telangana have done remarkable efforts in economic reforms.
  • There is increasing competition from other countries who are trying to improve their rankings as well.
  • India has recommended the World Bank that reforms undertaken in the entire country and not just in Delhi and Mumbai be considered for the “Ease of Doing Business” Index.

To improve ranking, there must be an additional effort in strengthening our weakest areas:

Dealing with Construction Permits (181/190)

  • States have aimed to reduce time and costs for obtaining building and construction permits and introduced the provision of deemed approvals.
  • To expedite the building plan approvals, inspections are being integrated and made risk-based.

Enforcing Contracts (164/190) – Enforcing Contracts has suffered owing to lack of a well-defined system for dispute resolution.

  • National Judicial Data Grid is being introduced which serves as a monitoring tool to identify, manage and reduce pendency of cases.
  • Several states have established dedicated Commercial Courts at the district level to ensure speedy resolution of commercial disputes and have published model contract templates.
  • They are also implementing e-Courts, entailing facilities such as e-cause lists, e-payments, e-filing and e-summons.

Starting a Business (156/190)

  • Supply side reform is important – focussing on the micro regulatory regime — such as making it easy to start or close down business. It is here that India still has a lot of ground to cover, as local entrepreneurs would testify.
  • The World Bank report flags the areas where the country lags — local entrepreneurs need to go through 12 procedures to start a business in India’s commercial capital, which is way higher than many high-income economies, besides cumbersome procedures for construction permits, registration of property and enforcement of contracts.

Institutional Challenges in the Indian system

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

  • A high level of discretion still exists with the officer enforcing rules on the ground.
  • 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.

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

Management challenge: There is a tendency to blame poor quality of government services on lack of infrastructure or human resources. This often overlooks the fact that there are many examples of better services with effectively fewer resources.

Way Ahead

While vigilance is the call of the hour, we should also recognize that an improved in ranking is not an end in and of itself.

For attracting new investment, both foreign and domestic, several macroeconomic issues have to be addressed.

These include political and economic stability, law and order maintenance, quality physical infrastructure, and buoyancy in financial markets.

Major institutional and governance reforms not covered in the World Bank study remain prerequisites for new businesses to start and grow.

India may have the advantage of a large domestic market, and our efforts to improve our ease of doing business rankings may be finally yielding results, but there is still a lot of work ahead.

Conclusion

India saw a similar improvement in the “trading across borders” section to 80th position from 146th a year ago.

Other Initiatives like digitization, e-visas, infrastructure status to Logistics, Start-up India, announcement of National Intellectual Property Rights (IPR) policy.

This improvement was made possible by:

  • Reducing the time and cost to export and import through various initiatives, including the implementation of electronic sealing of containers,
  • Upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures under its National Trade Facilitation Action Plan 2017-2020.

India is one of only nine countries around the world and only one in BRICS to feature in this list

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