How effective is the Ease of doing business index? – Explained, pointwise

Introduction

India improved its global rank in the World Bank’s Ease of Doing Business Index (EoDB) 79 positions from 142nd in 2014 to 63rd in 2020. But despite this, India’s gross domestic product growth (GDP) rate fell more than 4 percent points between 2016 and 2019. 

Similarly, private investment as a share of GDP also fell by over 3 percent points, from 25% of GDP in 2004-2013 to under 22% in 2016-2019. This data questions the relation between improvement in EODB and FDI in the country. 

About Ease of Doing Business Index (EoDB)

• The EoDB report was introduced in 2003 by the World Bank. The index aims to provide an assessment of objective measures of business regulations and their enforcement across 190 economies on ten parameters affecting a business through its life cycle.
• These parameters include,
  • Starting a Business,
  • Dealing with Construction permits,
  • Electricity availability,
  • Property registration,
  • Credit availability,
  • Protecting minority Investors,
  • Paying Taxes,
  • Trading across borders,
  • Contracts enforcement, and
  • Resolving Insolvency.

India’s performance in the recent EoDB Index

• In the recent World Bank’s Ease of Business rankings, India has recorded a jump of 14 positions at 63rd rank in 2020 report against its rank of 77 in 2019.
• India’s improved ranking was on the back of reforms such as (a)dealing with construction permits (b)trading across borders and (c)resolving insolvency.
• The turnaround time of ships in India has also almost halved to 2.48 days in 2018-19 from 4.67 days in 2010-11.
• However, India still trails in parameters such as Ease of Starting a Business, Registering Property, Paying Taxes and Enforcing Contracts.

Major reforms initiated by the government to improve EoDB in India

India’s rank on (EoDB) during 2010-14 was in the range of 131 to 142. But within a short span of time, India reached 63rd rank in 2020. This is due to the following major reforms,

1. The launch of web-based SPICe+ and AGILE-PROform has enabled new company incorporation in 3-steps as compared to the 14 steps process in 2014. It acts as a single form for company details.
2. The process of obtaining building permits and occupancy cum completion certificates has become simpler and faster in Mumbai and Delhi.
3. The number of days required for getting an electricity connection reduced from 105 days in 2014 to 53 days in 2019 in India.
4. Trading across borders has been made easier by the Electronic delivery of customs clearance copies.
5. Dedicated Commercial Courts with modern facilities in Delhi and Mumbai
   have been established for early redressal of commercial disputes.
6. Introduction of Insolvency and Bankruptcy Code 2016 is a major step forward in the Corporate Insolvency Resolution Process (CIRP).

Advantages of EoDB rankings

The rankings (Both global and internal) serve the purpose of simplifying the investment process. It helps the government to look inwards and weed out unnecessary laws, inspections and permissions/permits.

Any investor, instead of running pillar to post across multiple departments, will welcome a single-window system of clearing various proposals.

Problems with the concept of EoDB

• First, it is built on the false belief that less regulation is always better.  This myth was broken by the 2008-09 Global Financial Crisis.
• Second, it does not include any labour or environmental regulations. This is quite shocking in today’s world of rising inequality and threats from climate change.
• Third, it is easier to game the index without initiating sufficient reform. 
  • For example, U.P, with many poor indicators on education, skilled labour, power, and connectivity, suddenly jumped to 2nd rank within India in 2019 in the inter-state EoDB.
• Fourth, The EoDB Index does not reflect actual parameters of improving business and Investor interests. For instance, China tops when it comes to FDI inflows taking in $141 billion in 2019 despite being ranked 31 while New Zealand, No 1 in the EoDB ranking, managed FDI of just $5.4 billion, a tenth of what India got.
• Fifth, a higher EoDB ranking does not mean better business opportunities. The index does not give enough account to areas such as connectivity, strong eco-system, skilled manpower and lower cost of production, etc.
  • For instance, Tamil Nadu topped in the flow of investments, because it has good connectivity and enough skilled manpower.
  • This resulted in a situation where Uttar Pradesh got a much higher rank than the highly industrialised Maharashtra, Gujarat or Tamil Nadu.

Challenges faced by Indian Entrepreneurs

• First, labour costs appear to be lower in India, but not when it is compared to labour productivity. Only 4 percent of India’s labor force is classified as skilled. 
• Second, labour laws encourage firms to stay small — at under 10 employees to avoid a visit by a labour or tax inspector.
  • As a result, more than 70% of the manufacturing employment is in firms with sizes smaller than 10 — which cannot compete globally.
• Third, Land acquisition is not only slow but has become prohibitively expensive after the Land Acquisition Act of 2013.
• Fourth, the costs of capital remain very high because the banking system is awfully inefficient. The spread between lending and deposit rates exceeds 500 basis points (bps) — amongst the highest in the world. 
  • India’s banking sector spreads are higher than major competitors —Bangladesh, 350-400 bps, China, 300 bps.
  • Rising non-performing loans directed lending requirements and statutory liquidity ratio requirements explain these inefficiencies. 
• Fifth, India had a huge infrastructure deficit, which improved somewhat in recent years. India’s rank on the World Bank’s Logistics Performance Index has improved to 44. However, it still remains behind major competitors such as China, Malaysia, Thailand, and Vietnam.
• Sixth, petrol and diesel prices in India are higher than in all other emerging economies. Petrol is 20% and diesel 50% more costly in India than in China.
  • Further, governments often raise the price with a rise in Global prices, but seldom pass the real benefit of a global price fall.

Suggestions to improve Business in India

• The government has to understand that the EoDB is not everything when it comes to attracting investments. The government has to encourage States to develop other more important parameters that investors give a larger weightage to when deciding where to invest. Such as connectivity, strong eco-system, skilled manpower and lower cost of production, etc.
• The government also need to push the states that are lower down the order in the EoDB index. This will not only push towards competitive advantage but also help India to compete with other countries like Vietnam or Thailand.
• As India remains uncompetitive, it has raised tariffs hugely and dropped out of the Regional Comprehensive Economic Partnership. But this will not make the Indian industry more competitive globally. 

India must address the fundamental problems if it wants to emerge stronger after the pandemic and not back to the subpar 4-5 percent growth. The country needs at least 6-7 percent growth, and even higher if it wants to quickly recover the two years lost due to the pandemic.

Source: The Business Standard