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What's Choking India's Rise in Ease of Doing Business?

What's Choking India's Rise in Ease of Doing Business?
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

India’s Ease of Doing Business (EODB) ranking slingshot to 131 last year from 142 in 2014, thanks to the immediate reforms kicked in by the Modi government, after coming into power. However, as the dust of the economic euphoria settled down, despite a barrage of new initiatives pressed into action over last 12 months, it has failed to translate the impact onto the rankings this year.

This sounds even more disappointing if one looks at India’s ranking five years back, which was 132 in 2011. This year it stood at a baffling 130. The country has failed to make any significant headway in easing out the business climate despite the clamor we hear on the ground.

The sentiment was echoed when commerce and industry minister, Nirmala Seetharaman, tweeted out her dissatisfaction. “Disappointed at our rank this year. Many of our reformatory steps were after WB (World Bank) deadline. Hopefully, with other steps, will help next year.” The government is hopeful of a marked improvement next year, with the impact being visible on the ground over the next 12-month period. “We are working hard on all the reforms. It depends so much on methodologies, and also how other countries are performing. We are working very hard and will continue to do so,” says Ramesh Abhishek, Secretary, Department of Industrial Policy and Promotion (DIPP).

The government had earlier set the target for breaking into top 100 ranking this year, which the government has now failed to achieve, and top 50 ranking by 2018. Going by the current pace of execution and amount of impact of the reforms on the ground, the under-50 target is nothing short of a miracle. “Breaking into top 50 is not at all far fetched as a large number of initiatives have been taken on the ground. You will see the reality of it or impact of it over the next few months,” says Rita Teotia, Secretary, Ministry of Commerce and Industry.

While the economic mood of the country is largely optimistic but it certainly has an air of cautiousness and economists see this quite pragmatically. Among India’s noted economists and former chief economic advisor to the government of India, Arvind Virmani, says, “I have said from the beginning that under-50 target is very ambitious, given that some of the elements (of reform) depend on state governments.”

Virmani, nonetheless, doesn’t want the rankings to be the measuring stick for economic reforms. “It’s misleading to compare the latest ranking with what it was two years back because a new item, ease of paying taxes, has been added to the overall measure. This is an issue in which India is at the bottom of the rank, and on which progress has been slow,” adds Virmani.

Abhishek, at a recent event, announced that the Ministry of Corporate Affairs is coming up with SPICE (Simplified Performa for Incorporating Company Electronically) – an e-form for incorporating companies electronically to eliminate several other forms.

Work of Fiction
Despite the huge significance of the rankings, there is also an element of fallacy in it, given the fact that the rankings take into account information from Delhi and Mumbai to judge the entire country. More so, the sample of the population from which information is gathered isn’t all-encompassing and includes certain people in the business ecosystem.

“EODB rankings are fictitious because they are based on a survey of certain business managers. The sample is very unrepresenting as these managers may not visited India,” says Partha Ray, Professor of Economics, Indian Institute of Management- Calcutta.

The areas where India scores high as per Ray, includes getting credit (because our banking system is healthy) and protecting minority investors rights, which mean we have never confiscated foreign investors’ assets or nationalized their foreign company without giving compensation. However, what’s holding India back, points out Ray, is the lengthy judicial process in namely registering property, getting electricity. Other problems are a lack of labor reforms and lack of a proper bankruptcy law.

People have a feeling that it is difficult to enter India but it is even more difficult to come out of India. Hence we get a huge amount of foreign portfolio investments but we do not get required amount of foreign domestic investments. The recent inflection point in the form of passage of Goods and Services Tax, to create uniformity in the taxation system will certainly help push India’s rank. However, that’s
turned out unexpected with four tax slabs of 5, 12, 18, and 28 per cent instead of a single slab. Though recommendations have been made to revise the rates.

The counter-argument to the entire question of ranking is that India isn’t a small country and hence the pace of reform shouldn’t be compared to others at least developing nations. Hence, it can either be a trap to work for improving rankings or as simply as a motivator to act swiftly. But, it is certainly not the be all and end all.

(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)

 

 
Edition: May 2017

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