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India climbs up the ladder at Doing Business Report

Context

  • The World Bank Group’s Doing Business 2018 report ranks India at 100 out of 190 countries.

Introduction:

  • This year’s report from the World Bank has been titled Reforming to Create Jobs.
  • The report ranks India at 100 among 190 countries. Last year, India was ranked 130.
  • India’s upward jump in ranking is based on the underlying improvement in the distance to frontier (DTF) score– an absolute measure of progress towards the best practice-in the report.
  • India recorded the fifth highest change in DTF score and found a place for the first time in the top ten economies improving the most in a given year, in the report which is into its 15thedition.
  • The ease of doing business ranking compares economies with one another; the DTF score benchmark economies with respect to regulatory best practice.
  • According to an output-outcome framework document prepared by the government, India is seeking to reach the 90th rank in 2017-18 and 30th by 2020.

Key changes that spurred India’s latest ranking

  • The introduction of the new insolvency and bankruptcy resolution process.
  • Simplifications in the payment of statutory dues such as provident fund contributions and corporate taxes.
  • Easier access to credit

Doing Business report:

  • Doing Business report measures aspects of regulation affecting 11 areas of the life of a business, and India made eight reforms across these areas last year, the highest number for the country in a single year.
  • India is one of the three countries last year that undertook reforms in as many as eight areas.

Reforms noted by the report:

  • Faster permits for construction, combining the application for the Permanent Account Number (PAN) and the Tax Account Number (TAN) into a single submission, reduction in the time needed to complete the applications for Employee’s Provident Fund Organization (EPFO) and the Employee’s State Insurance Corporation (ESIC), reduction in export and imports border compliance costs and improved access to credit are among the reforms noted by the report.
  • The establishment of debt recovery tribunals reduced non-performing loans by 28% and lowered interest rates on larger loans, suggesting that faster processing of debt recovery cases cut the credit.
  • India is now in the middle of the list, moving up from the last quarter but still it is at the place where there is scope for improvement.
  • There are still significant changes possible; thought the change this year is significant, both in relative and absolute terms.
  • The reforms have been broad-based encompassing wide range of areas including taxation, finance, legal and administrative procedures.
  • With GST, the government has laid the foundation for a more efficient indirect tax system and with the enactment of Insolvency and Bankruptcy Code, India now has an efficient institutional mechanism for easing of business exit.

What is Ease of Doing Business Index?

  • The Ease of doing business index is an index released by the World Bank Group in its Doing business report.
  • Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights.
  • New Zealand has topped the Ease of Doing Business rankings in 2017.

What are the indicators on which this index is calculated?

  • Starting a business
  • Dealing with construction permits
  • Getting electricity
  • Registering property
  • Getting credit
  • Protecting investors
  • Paying taxes
  • Trading across borders
  • Enforcing contracts
  • Resolving insolvency

Where does India stand in the Ease of Doing business index?

  • India ranked 130 among 190 countries however, has not made any improvement from the last year as its rank has been downgraded to 131.
  • This lack of improvement in the rankings though Indian Government was hoping to jump substantially this year has triggered a strong reaction and disappointment.
  • Though several reform measures have been taken by the Government, it feels they are not reflected in these rankings.
  • The only bright side in these rankings is that India has improved substantially in getting electricity for businesses and enforcing contracts.
  • Out of the 10 parameters, India has slipped down in 5 parameters and on other 3, there is a status quo.

What are the significance?

  • The huge improvement in ranking and score will immediately boost investor sentiments.
  • The latest report validates the commitment of the government to fast-tracking economic reforms, addressing red tape and facilitating business, which it has undertaken in mission mode over the last three years.
  • It will help India in moving the right direction and in creating the kind of channels that will attract foreign direct investment.

Why India should not base its result on basis of this index?

  • World Bank index is based on limited data.
  • There is a disjunct between how things get done in India and Bank’s methodological approach. Many achievements have not been covered by the report due to methodological issues.
  • According to DIPP, Online filing and payment of returns at the Employee Provident Fund Organisation has been implemented, but it was not considered by the World Bank, even after it shared “logs and voluminous evidence” of the same.
  • Bank’s report is based on data collected from very few cities.
  • Centre has only partial control over several of these sub-indices as it needs states support to bring the required legislations.
  • It does not directly measure more general conditions such as a nation’s proximity to large markets, quality of infrastructure, inflation, or crime.
  • Rankings are incompletely reflective of the significant transformation in the overall business environment in key areas such as openness to FDI, online procedures, MSME facilitation

What are the loopholes in the ease of doing business index?

  • In India’s case, the business environment in only Delhi and Mumbai are used to compile the national ranking.
  • These rankings also focus a lot more on the laws and rules that are on the books and do not necessarily capture the daily experiences of businesses.
  • The World Bank said while there has been substantial progress, India still lags in areas such as starting a business (156), enforcing contracts (164) and dealing with construction permits (181).

Larger challenges

  • The enforcement of contracts now takes longer than it did 15 years ago.
  • The procedures to start a business or secure a construction permit remain cumbersome.
  • Mumbai and Delhi cannot host the kind of large factories that India needs to generate adequate employment.
  • It is critical to have procedural reforms reach the surroundings and a road map be drafted for the larger legislative changes needed in matters such as land acquisition.
  • While foreign investors are important, the importance of domestic businesses cannot be ignored.

Distance to Frontier

  • The distance to frontier score helps assess the absolute level of regulatory performance overtime.
  • It measures the distance of each economy to the “frontier”, which represents the best performance observed on each of the indicators across the economies in the Doing Business sample since 2005.
  • An economy’s distance t frontier is reflected on a scale from 0 to 100, where o represents the lowest performance and 100 represents the frontier.

Conclusion:

  • The government initiated an online single window clearance system for faster approvals of building plans. This will presumably lead to obtaining building permits faster
  • The Government should not be obsessed about this Index although all other BRICS nations are ahead of India.
  • It should go ahead and keep on doing what it thinks is necessary for betterment of small and medium enterprises in coordination with the state governments.
  • However, setting a national target of attaining a certain rank has also helped in bringing consensus across other parties involved like state governments and judiciary to improve overall environment of India in doing business.
  • A lot of the parameters on which our rankings are poor are the ones where the processes are yet to be modernized.
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