01 November 2016
India’s brush with reality
Source: By Jayachandran: The mint
Reading the World Bank’s much awaited “Doing Business 2017” report from India’s perspective can be a disorienting exercise. The report is fulsome in its praise of various reforms undertaken by the Narendra Modi government. It recognizes reforms under four of the 10 headers—a press release by the ministry of commerce and industry said this is the highest number achieved yet by India—it ranks all economies on. The “distance to frontier” (DTF) score—used by the World Bank to measure the distance between each economy and the best performance in that category—has improved for seven of those 10 headers. The report especially lauds India for achieving significant reductions in time and cost to provide electricity connections to businesses. But for all of this, India has moved up just one notch—from 131 to 130—in the overall rankings.
The expectations were far higher given Modi had made this a top priority. So what went wrong? First, some of the reforms undertaken missed this year’s bus—this report accounts for reforms which had been implemented by 1 June 2016. Indian officials are now expecting a bounty in next year’s report. India also hopes that the insolvency and bankruptcy code will be implemented before the cut-off date for next year’s report but that may be too optimistic. The code’s implementation may take a few more years and India will continue to score poorly on the “resolving insolvency” parameter.
Second, one particular change in the ranking methodology seems to have done considerable damage to India’s improvement prospects. The World Bank has included a new criterion “postfiling index” under the header “paying taxes”. Used in the report to measure the efficiency of “processes that occur after a firm complies with its regular tax obligations”, the post-filing index is a criterion in which India finds itself fourth from the bottom. Only Afghanistan, Timor-Leste and Turkey fall behind.
Third, there are other countries too trying their best to climb up the ease of doing business rankings. In fact, the report mentions that the number of countries that have implemented at least one reform have increased from 122 to 137. In 2015-16, it says, 137 economies implemented 283 business regulatory reforms—an increase of more than 20% over last year. The improvement in DTF scores of the top 10 performers identified in this report ranges from 5.28 of Brunei Darussalam to 2.05 of Bahrain. India’s DTF score improved by 1.34.
The gulf that will matter at home is not the one between India and Brunei or, for that matter, even between India and Pakistan—the latter features among the top 10 performers but is still behind India at the 144th rank. What will matter is the huge distance between India’s current rank of 130 and Modi’s target of breaking into the top 50 by 2018. While his attempts may have been sincere, to Modi’s detractors the whole campaign was never anything more than a public relations exercise under the name of “Make In India”, with a slick website and a felid as the logo to boot.
In light of the target, which seems unrealistic, four points can be made. One, while setting an ambitious target around a rank-based system can help rally the bureaucracy like nothing else; it should not be as way off as this one is proving to be. Modi should not forget that a key aspect of political leadership is expectation management. Two, Modi should despatch a couple of envoys to Georgia and Kazakhstan each. In 2006, Georgia’s rank was 100; this year it ended up at No.16. Kazakhstan (now ranked 35) joined Georgia among the top improvers for the fourth time in the last 12 years. These two countries show that significant strides can be made if the target timeline is reasonable enough.
Three, these rankings cover only the two cities of Delhi and Mumbai. A ranking of states last year showed the states of Gujarat, Andhra Pradesh, Jharkhand, Chhattisgarh and Madhya Pradesh leading the charts in implementing business reforms. Therefore, India’s overall position may well be better than what this latest report shows. There is also a lesson here that India should not just go for the ticking-the-box approach. The government should implement reforms at the Centre and encourage all the states to do the same even if many of them will not be counted in the World Bank rankings.
Four, any ranking process has its limitations. The World Bank’s “Doing Business” report clubs the emerging markets together with advanced economies, the war-torn together with the Scandinavian serenities. Such an approach gives a grand ranking system but is hardly useful in predicting, for instance, the flow of capital. While New Zealand may occupy the first rank and India the 130th, it can be safely said that the latter will attract far greater foreign direct investment in the coming year. Even among the Brics (Brazil, Russia, India, China, South Africa), India would appear the real straggler if the “Doing Business” report is to be believed. Most analysts would say, instead that, it is the shining survivor of the five-member group.
The flaws of the ranking system, however, do not mean that India should not try and improve its position in areas identified by this report. India has a long battle to fight against red tape and targeting improvement in the “Doing Business” rankings should be part of the battle plan.