Not so easy business

India’s jump in Ease of Business ranking is welcome. But there is much that it does not capture

The improvement in India’s “Doing Business” rankings was quite a surprise, and among the few pleasant ones in recent weeks. What did the government do right? If business has become so much easier, why don’t we see a boom in new businesses and investment? Such questions are critical to help evolve a more focussed set of policy priorities for India.

The jump in the ranking, from 100 to 77, is correlated with an improvement in the ratings, a jump of 6.6 per cent over last year. This is the second year that India has seen a massive jump in the same ratings with its ranking going up by 23 places this year, on top of 30 places last year. In two years, therefore, India’s position has improved from 130 to 77. Of the 10 categories that together make up the aggregate index, eight saw some improvement over the last year, and two were the same. What was even more interesting was that construction permits and cross-border trade were two aspects that showed maximum improvement; index value for the two improved by 34 and 19 per cent respectively.

Notably, the ease of doing business survey does indicate that little has changed over the last year in some areas where India historically performs poorly — enforcement of contracts, paying taxes, and registering property stand out, in my mind. Each of these are multi-sectoral issues where improvements would require coordinated efforts across multiple layers of the government and, therefore, legal and procedural changes would be more complex. And while the slow speed of change is understandable, it is also true that these are important aspects where much action is required.

Do such rankings reflect the reality of business in India? The answer, in my understanding, is a partial yes. There has been, no doubt, a significant improvement in the paperwork associated with business in many areas of the government. Permissions and form submissions of various types have become much easier for those who keep good records. This is true both at the states and the Centre, and the improvement is therefore understandable.

However, the jump in the ratings is not aligned with the experiences of people conversant with the business climate. Construction, as a business, is typically not very easy to do and requires a multitude of submissions, permissions and even side payments. While some improvement has occurred across the country, the jumps appear to be non-commensurate with these improvements. It is possible that India is “gaming” the ratings. This is relatively simple to do and would require finding those elements within the ratings that are the easiest to change and focusing on those items, rather than taking on the more difficult ones.

Arguably, there is nothing wrong in this as long as it leads to a real improvement in business conditions and not just a numerical one. But on the other hand, gaming the ratings implies that an international agency is effectively setting the priorities of the government.

This is, of course, not to say that things are all made-up. Significant improvements are happening, and many of those are through improved use of information technology. We will find this across many government departments both at the central and state level. And they are steadily improving the ease of business in recent years. Such improvements have an instant impact in terms of costs of transactions. However, their impact on economic growth rates tends to be felt over a longer time period — and can sometimes take many years to be reflected in any measurable macro-economic outcomes. We must, however, recognise that dependence on IT has also perversely made things more difficult for those entrepreneurs who are less digitally able. This will no doubt change with time and familiarity, but it would require the government to constantly keep on working at making its IT-enabled interfaces more user-friendly for the small and micro-business entrepreneur.

What does this say of Make in India? Process changes such as those captured in the survey will impact in the long term, the short-term effect on investments and new business and employment growth will be limited. Those are more driven by macroeconomic conditions, labour climate, demand conditions, infrastructure issues etc.

But we must recognise that there is much that this ranking does not capture.

First, they do not capture the out-of-the process issues related to the daily running of a business, the various investigations conducted by the revenue department, or company law matters, or labour-related issues, or, for that matter, the various demands of the inspectors of quality and processes. Changes that can do away with such inspector raj require more than simply a technology infusion. They require a rethinking of the many rules and regulations governing this sector and the over-dependence on an ill-motivated bureaucracy and technocracy. India has been reluctant to address these issues for many decades because it involves the dirty job of clearing through the messy lobbying of many groups, both within and outside the government.

Second, the reality of business in India requires the entrepreneur to focus on a whole range of aspects not covered adequately in such ratings. For instance, businesses have a problem of employability, poor skills, corruption, and controls on internal trade, avenues for accessing capital for small and micro-businesses being some examples. Some of these issues are very India-specific and global comparability ratings will rarely capture them in the depth required.

Third, input costs, demand factors and infrastructure issues are another class of factors that ease of doing business does not intend to capture. While that enables it to retain its focus, these are important factors that impact both global and domestic investment.

To sum up, the ease of doing business ratings’ improvements are very welcome and are an affirmation of the changes occurring within both the state and central governments. The objective of improving India’s economic climate, however, requires the government to take on far tougher tasks, some of which are included in the ratings, but many are not. Finally, while we can and should celebrate the improvement, the focus and prioritisation need to remain on issues relevant for India, which may or may not be, captured in the ratings.

The writer is an economist and heads Indicus Foundation

Source: Indian Express, 12/11/2018