Rising through the ranks
Source: By Madan Sabnavis: The Financial Express
Improvement in World Bank Doing Business ranking has been one of our stated goals. Against this background, the advancement to rank 63 is satisfying. The objective is to improve this rank further to under-50—this will be commendable when reached. The broader question is whether this has really helped to increase investment flows, and if not, does it serve any purpose?
The Economist has always maintained that India, China, and Russia have made this achievement their sole goal, putting in all efforts to work on the formula that goes into giving this rank, and is, hence, against its spirit. However, a better rank, just like an improvement in the sovereign credit rating, enhances the stature of the country in the global arena. Is there anything wrong in this approach? Probably not, because as the World Bank uses a common yardstick for evaluating countries on their ability to improve the doing business climate, any work done should be welcomed. Hence, if we have moved up from rank 130 in 2015 to 63 in 2020, it is certainly something to be proud of. Besides, it also needs to be accepted that high ranks in doing business cannot be the preserve of developed economies alone.
The score looks at 10 essential indicators when ranking a country, and includes parameters such as starting a business, getting necessary permits, credit, protecting investors, taxes, foreign trade, insolvency, etc. Contracting with the government is a new variable mentioned this time and will get included in subsequent surveys. While individual ranks are provided for each parameter, the consolidated rank is based on the weighted average score.
Our rank today is very good when it comes to protecting minority investors (13), getting electricity (22), getting credit (25), and construction permits (27). There is work to be done in case of enforcing contracts (163), registering property (154), and starting a business (136). With the IBC progressively catching on, and GST getting into place, there is evidently reason to believe that the target of 50 should be achieved in the next couple of years.
The World Bank admits that there are limits to this methodology because it covers limited cities in a country, and, hence, cannot capture all aspects of regulation in federal structures. Therefore, if Mumbai and Delhi are the cities chosen, things could be very different in the rest of the country—the primary cities or centres are taken to be representative of the entire country.
There are two aspects to this rank change. First, targeting the World Bank rank is a very good guide on what governments should do to ease the business environment. It actually sets a template to be pursued so that policies are focused, and effective. Very often, due to legacy issues, one may not be aware that there are, say, 50 permits needed for getting a construction go-ahead. Once the template is used, the government can consciously remove those that make little sense, and, hence, improve the environment for entrepreneurs. In the absence of such a tested template, governments may often skip certain steps due to ignorance.
The second aspect is the impact of the same. It has been observed that the overall investment rate in the country has been virtually stagnant at 28-29% after being at a level of 34-35% before the slump began. Hence, if one juxtaposes the continuous improvement in ranking on this scale to the actual investment taking place at the macro level, there is not much of a correlation. This is not surprising because the decision to invest depends on several practical factors, which cannot be part of any formula. Even if demand conditions are set aside, for example, while India scores well on the parameter of getting credit, which is based on the institutional set-up for the same, banks may not be willing to lend for investment due to the NPA issue, or the ALM mismatch, or higher risk perception. Therefore, even though there are no physical barriers to borrow money, the willingness to lend is missing. Also, while doing business formula captures the banking set-up for investment, the bond market, which is still not evolved to cover sub-investment grade projects, matters.
Similar parallels can be witnessed in other parameters, too. Our rank in terms of resolving insolvency has improved manifold to 52 due to the implementation of the IBC. The World Bank scale would look at the structure put in, which is fairly comprehensive, and covers all aspects in terms of having a process in place, including time taken for resolution, and addressing insolvency at the limit. However, at the practical level, if cases exceed the 270 days limit, or get stuck in the litigation process, or the realisation rate falls sharply, the success of resolving insolvency would be low relative to the structure created. But, the ease of doing business score does not capture this aspect.
From a global perspective, it has been observed that India has had a very steady flow of foreign investment—both FDI, and FPI. Improvement in overall rank does matter as these investors are constantly assessing the environment, and any investment in a company that has plans involving permits is of high priority for them. Similarly, investors would also be looking at the issues of enforcing contracts, and resolving insolvency. FPIs would be interested in the issue of protection for minority investors as this is an indicator of how markets are governed. Therefore, the individual scores and ranking of these parameters will be studied closely.
Hence, the process of cleansing the system of unnecessary hurdles is essential, and does help in the long run. It does lower the cost of doing business, and would, hence, make projects more profitable, especially as a number of these investments involve both time, and costs. Following the World Bank formula should, however, not end in just bettering the rank but also ensuring that the same is translated across all states and cities, so that investment gets fair treatment everywhere.
Two things need to be persevered with. The central government has already got into the act of getting states to improve their own business environment. This removes disparities, and, in a way, the business arbitrage that exists, where some provinces are more open to investment than others. Bringing about competitiveness among states is a good idea so that they clean up their houses to attract private investment. Second, the government can now target bringing about changes in the policies/regulation regarding those parameters where we do not do well. This will help lubricate the environment that supports future investment.
[printfriendly]
