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The article examines whether India has been proving a favourable alternative to China or not.

Is India becoming alternate supply source and investment destination?

• Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
• Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
• Those that do leave may not choose India as a relocation destination.
• Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
• They also see other Asian countries as more competitive.

India’s strengths

• Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
• Strong IPR: There is no threat of stealing of intellectual property rights.
• No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
• Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
• Domestic market:India’s well-off domestic market also attracts foreign investors.

Why China is a favoured destination

• China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
• China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

Way forward

1) Focus on the States

• India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
• Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
• India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

2) Focus on the policy framework

• India should take two great steps-
• 1) Reduce the number of investments needing approval by the Centre.
• 2)To increase intra-Ministry coordination on foreign direct investment policies.
• The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
• This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

Conclusion

A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

Background

• Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
• It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

Why India should be concerned

• Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
• India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
• Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
• The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
• Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
• During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
• The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

Does ease of doing business have predictive power?

• While India’s rank drastically improved, it has meant nothing on the ground.
• The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
• Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
• India’s import dependence on China has shot up.
• In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
• China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

Other flaws in the Index

• The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
• The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
• The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
• The World Bank conducts a global enterprise survey collecting information from companies.
• There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

Lack of theoretical basis: Major flaw

• There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
• Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
• Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
• To meet the ease of doing business targets, safety standards of factories are compromised.
• For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
•  However, no factory has complied with self-certification or submitted the third party certification.

Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

Conclusion

It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.