As India does well in its Ease of Doing Business rankings, a comparison with the evolving business environment in Asia, China in particular, must propel it to promote reforms across the country rather than confine it to commercial hubs, writes B Shruti Rao
The news of Prime Minister Narendra Modi’s meeting with the Department of Industrial Policy and Promotion (DIPP) to brainstorm on breaking into the top 50 rankings of World Bank’s Ease of Doing Business (EODB) report comes at an interesting time. Within months of assuming power in 2014, the Prime Minister had announced his Government’s resolve to improve India’s EODB ranking. Over the years, both the Finance and Commerce Ministers have reiterated the Government’s commitment towards the same, and not without results.
As India vies for the top spot in the Foreign Direct Investment (FDI) confidence index in light of the US-China trade war, a comparison between the evolving business environment of Asia’s largest economies becomes inevitable. The sharp rise in the Ease of Doing Business rankings of these two Asian behemoths comes after a long period of stagnation and can be credited to the persistent focus on improving the regulatory environment of the economies under the leadership of President Xi Jinping and Prime Minister Narendra Modi.
Consequently, in the 2018 Ease of Doing Business World Bank report, India jumped 23 notches to rank 77 from its earlier 100th position. China jumped a staggering 32 notches to rank 46 from its earlier 78th position. The hike became even more striking as both countries had stagnated in the rankings for much of the last decade before new leaders took over the helm. India rose by 65 counts under Prime Minister Modi and China by 53 under President Xi.
In this year’s assessment, China is the second top improver (after Djibouti) while India is the only economy (along with Djibouti) to make it to the list of top 10 improvers for a second consecutive year. One might critique the Prime Minister for showing excessive interest in this rather straightforward metric, but addressing administrative hurdles and red-tapism affecting businesses lead to corresponding benefits to other aspects of the economy as well.
Nobel economics laureate Robert Lucas had once quoted: “Once one starts thinking about actions to accelerate economic growth, it is hard to think about anything else.” This powerful observation aptly explains the Prime Minister’s focus on improving the EODB ranking. The improvement is not only a harbinger of increasing FDI, but there also exists a strong correlation between the rankings and the GDP per capita income of nations.
To highlight this link, consider a research published in The Wall Street Journal by John Cochrane. It was seen the higher a country’s Distance to Frontier Ease of Doing Business score, the higher was its per capita income. The Central African Republic scored a dismal 33 and had an annual per capita income of just $328. Other scores were: India (50.3, $1,455), China (61, $7,000) and the US (82, $53,000).
A comparison on Doing Business parameters: India leads China only under two heads: Getting credit and protecting minority investors. On the other hand, China leads in the rest eight. Thanks to SEBI’s initiatives and the Companies Act clauses on disclosure of dividend distribution policy, mandatory audit committee approval before related party transactions and increased redressal avenues, India has a near perfect score in protecting minority investors and is ranked seventh. The establishment of debt recovery tribunals reduced non-performing loans by 28 per cent and lowered rates on larger loans. Faster processing of debt recovery cases has cut the cost of credit.
This year in starting a business, China improved its ranking by almost 100 spots and is now ranked 28 while India, with its cumbersome incorporation norms, holds the 137th position. It has much to learn from China’s ‘One Window, One Form’ and five-in-one business license reforms that have reduced the duration for registering a business from 22.9 to nine days. In enforcing contracts, while China is ranked sixth, India at 163, occupies a spot in the bottom 15 per cent of the countries. Only an overhaul of India’s complex judiciary processes and contract laws can elevate it from the bottom of the pile.
In getting electricity, China has jumped from rank 98 to 14 in a year by introducing a mobile application for customers to obtain connections and resolve connectivity issues. India can incorporate similar reforms under the umbrella of its digitalisation drive. India’s worst performance is in the metric of registering property, wherein China is ranked 27th and India 166th. Focussed reforms to improve transparency of information and reliability of infrastructure are a must.
India’s most significant jump was in dealing with construction permits (from rank 181 to 52). For obtaining building permit, India implemented the Single Window Clearance System in Delhi and the Online Building Permit Approval System in Mumbai.
Ease of Doing Business ranking has proved to be an impetus for India to compete for a more efficient regulation. Although the parameters considered in the ranking are necessary, they cannot be considered as sufficient drivers of economic growth. Macro-economic conditions, like cost of labour and capital, and socio-economic factors, like political stability, must also be considered.
The World Bank report is not a portrayal of the national business environment of the countries as it looks only at domestic small and medium size enterprises in the largest business cities. The interpretation and implementation of policies across the nation can vary widely. An exemplar for India can be China’s approach to emulate the success of its Shanghai City Council’s Action Plan for EODB across the country. Reforms undertaken in Delhi and Mumbai should be promoted nationally. Till then, the Elephant must keep its steady pace to catch up with the slithering Dragon.
(The writer is Research Fellow, India Foundation)
