Twenty-five years ago, there would have been no interest in a subject such as the ease of doing business in India. What mattered then was the level of protection the closed economy provided and the ability to negotiate industrial approvals from Udyog Bhawan. Much water has since flown down the Yamuna. India has a more market-centric economy; there is a high degree of openness to foreign investment; business decisions are taken mainly on commercial considerations and the ability to compete in the marketplace; capital and technology move globally in search of friendly and salubrious environments. Inevitably, the ease of doing business becomes an important consideration for those looking for investment opportunities.
Given the global interest, the World Bank group has been mapping this theme for the last 13 years. “Doing Business: Measuring Regulatory Quality and Efficiency”, the annual report of the Bank, evaluates regulations that enhance business activity and those that constrain it. It studies 11 areas of the life of a business. These cover the spectrum from starting a business, obtaining necessary permissions, getting credit, protecting minority investors and taxes to enforcing contracts and resolving insolvency.
Presenting these indicators in quantitative terms, it compares and ranks 189 economies from one to 189. A high ease-of-doing-business ranking (say, one) implies that the regulatory environment, relative to other countries, is conducive to the starting and operation of a local firm.
The Union government has, over the years, done a fair amount of regulatory easing to reduce the burden on those willing to test their animal spirits in India. However, keeping up with the Singapores of the world remains a challenge.
That is the paradox. India is one of the fastest growing economies in the world. The high potential driven by a robust middle class, cost competitiveness and a large talent pool makes it one of the most attractive destinations. Yet, according to the World Bank’s report for 2015, it was ranked 142 out of 189 countries in the overall ease of doing business index. This put India lower than the other BRICS and substantially lower than China.
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The Narendra Modi government has been aggressively focusing on this aspect, with a view to re-energising the economic engine. As a result, the index ranked India 130 — up 12 places — in the 2016 annual report. This is by no means a small achievement for a large economy and was made possible by electricity reforms, making starting a business easier, etc. Buoyed by the improvement, the government is now aspiring to be in the first 50 countries over the next few years.
Is this a realistic goal? To assess this, it would be necessary to look at the components of the index. As can be expected, little less than half of the parameters such as construction permits, electricity connection, registration of property, etc, fall within the domain of state governments. The others — starting a business, paying taxes, enforcing contracts, insolvency, protection of investors, etc — fall directly or indirectly within the purview of the Union government.
The first implication for doing better in the class, therefore, would be that the Union government alone cannot manage this. It has to be a collaborative partnership between the states and the Centre.
The second takeaway seems to be that the low-hanging fruit has been plucked. It is now the thorny areas of legislation that need to the pursued.
The third takeaway is that the worst performance is in areas such as contract enforcement, payment of taxes and handling insolvency. The government is rightly pursuing legislative changes in all these areas to improve the playing field.
Last, the unusually high ranking that India gets for investor protection (eight) is evidence of the robust regulatory architecture and maturity of the Securities and Exchange Board of India. What this also shows is that getting to the upper end of the league tables is not very difficult if the institutional machinery is empowered and effective.
What more can be done to improve further the ease of doing business? First, the binding constraints seem to be land, taxation, contract enforcement and resolving insolvency. The Union government, as mentioned, is already focusing on policy and legislative changes in each of these areas. However, what remains to be seen is the implementation of the good intentions of the government. The best policies very often get reduced to nought if the implementation is not in harmony with the broad objectives of the stated policy.
Second, the government needs to genuinely partner with the states — or, at least, some of the key ones — to deliver last-mile connectivity to facilitate operations on the ground. The hackneyed idea of a “single window” may still be worth re-visiting.
Third, the interface with government needs to be reduced or minimised. More importantly, it should be through an electronic format, which would make it more transparent and less burdensome in terms of time and money.
Last, the staff and officers who handle these initiatives need to be chosen with care and given the right orientation. Needless to say, the front office of any organisation forms the first and most lasting impression on the minds of those at the window.
In the ultimate analysis, a favourable business environment is a sine qua non for a healthy economic landscape. The ease of doing business index is only a measuring tool; genuine improvements are critical which, in any case, will be rewarded by stakeholders. It is immaterial if the efforts receive a renewed thrust in the budget or outside of it. The need and challenge is, as the slogan goes, to “just do it”.