Every country seeks maximum foreign direct investments (FDI) for fast economic growth. This can happen only if the foreign countries are sure of a conducive environment to do business. This environment has got to be hassle-free, and free from corruption to ensure fast and efficient business dealings. As the World Bank ranks 190 countries, investors have a comparable template to make cross-border investment decisions. The ranking provides a significant input to their decision- making process.
It is no mean achievement that India has moved up 53 ranks in two years ~ 2016-2018 ~ in the World Bank’s Ease of Doing Business Index. Its present rank is 77th. More remarkably, it stands out among the top five reformers among 190 countries, its score up by 6.63 points to 67.23. The four countries whose scores have jumped are Afghanistan, Djibouti, China and Azerbaijan.
This implies that an improvement in rank is based on India’s absolute performance, and not on the under-performance of other countries. The survey, which is however restricted to Mumbai and Delhi, mentions reforms across 10 parameters, of which India has done well in six. These are starting a business, dealing with construction permits, getting electricity, obtaining credit, lowering taxes and trading across borders.
The number of days taken to start a business has dropped from 29.8 to 16.5 between mid-2017 and mid- 2018. Likewise, the number of days required to obtain construction permits has dropped from 143.8 to 94.8; border compliance for exports from 106.1 hours to 66.2 hours and imports from 264.5 hours to 96.7 hours. There has, however, been a setback in the time taken to register property and pay taxes.
Since this is the first “Doing Business” report on the advantage of GST, the latter comes as a surprise; it suggests that glitches in GST need to be ironed out. But as the Finance Minister has said, India seems to have ‘cracked the code’ in moving up the rankings ladder. There can be no denying that both GST and the Insolvency and Bankruptcy Code, if properly implemented, will go a long way in improving the business climate.
India’s rank is below 100 in five parameters ~ “starting a business” (137), “enforcing contracts” (163), “registering property” (166), “paying taxes” (121) and “resolving insolvency” (108). By amending the Commercial Courts Act, the government facilitated the establishment of commercial courts in 250 districts. If these courts dispose of cases faster, India may rank higher on this parameter next year. To improve on the other parameters, ownership and titles need to be online.
Last year, the country amended its insolvency and bankruptcy code, which prevented willful defaulters from buying up any of their own troubled assets at discounted rates. That strengthened access to credit as “secured creditors are now given absolute priority over other claims within insolvency proceedings,” the World Bank report said.
The other areas of improvement included simplifying India’s complex tax structure that made it easier to pay taxes. Initiatives implemented under the National Trade Facilitation Action Plan 2017-2020 improved the efficiency of cross-border trading and reduced the time taken to meet compliance requirements, the report said.
However, the index does not take qualitative factors into consideration. The notion of a supportive business environment cannot be seen in isolation of a country’s health and education indices, its political climate and the robustness of key institutions.
Oddly enough, India’s improved ranking coincides with an extraordinary discord within the premier investigative agency called the Central Bureau of Investigation and between the Centre and the Reserve Bank of India. Fringe elements in the political spectrum have disrupted business activity in Gujarat, Maharashtra and elsewhere, upsetting free movement of labour.
A government that promised ‘minimum government and maximum governance’ seems to evoke fear among sections of industry. A liberal regulatory environment must be accompanied by transparency and consensus in policymaking. An index that takes social and physical infrastructure as well as grievance redressal systems for all stakeholders into account would be more insightful.
The index has evoked criticism in the past, notably by this year’s Nobel Prize winner Paul Romer who has claimed that its methodology was biased. Critics have argued that the report does not take a nuanced view of regulation. While certain regulations can hold up day-to-day operations of a business, some rules are needed to protect public goods as well as vulnerable groups. However, for a bureaucratised nation such as ours, the Ease of Doing Business index provides significant benchmarks.
India did make the task of starting a business easier by integrating multiple application forms into a general incorporation form. It enforced GST, for which the registration process is faster. As many nations have cut down on procedures to improve their rankings, India needs to effect drastic changes to rank higher. World Bank factors in the cost of starting a business as a percentage of income per capita. India’s low income per capita makes the cost look higher.
We also need to focus on the operational aspects of the business and permission or compliances required to carry out dayto- day operations. There are certain basic principles that need to be adopted in letter and spirit to further simplify the regulations as was highlighted in various reports earlier.
First, wherever the rules and Acts allow devolution of power at the local level, the powers must be devolved to decentralise the system for faster decision-making. The project proponent need not be advanced to the Centre or State for permission.
Second, different regulations that serve the same purpose should be combined to save time and energy. There is need to have an integrated environment clearance/ permission system. Third, a mechanism must be formulated to ensure that exemptions are based on the risk involved.
Enforcement should be riskbased and proportionate and not influenced by the whims and fancies of the decision-makers. Fourth, a credible third-party mechanism should be introduced under each rule and Act to put in place a simpler compliance process for setting up and operating a business enterprise.
India has lowered regulatory barriers in accord with the best international practices in certain spheres. The States are also lowering these barriers and simplifying their regulatory regimes. Such steps have helped them to attract investments. It is imperative to expedite the required changes to reach the top of the ‘ease of doing business’ ranking, which will help boost investments and, in turn, GDP growth.
India is currently battling a volatile rupee and a widening current account deficit while gearing up for next year’s general elections.
The writer is retired professor of International Trade. He may be reached at [email protected]