Ease of Doing Biz: Move fast on the reform front

Business

A perceptible improvement to India’s ranking in the World Bank’s ‘ease of doing business’ (EDB) index is a welcome sign. Amid a gloomy economic environment, India has continued its upward march in the EDB rankings. With its rank climbing, the country has managed a quantum jump in its relative position over just a four-year span from 130th place in 2016 to 77th in 2018 and 63rd in 2020 (among 190 economies).

Increasingly though, it is becoming difficult to reconcile the ‘all-is-well’ scenario painted by India’s performance in the EDB rankings with the marked deterioration in business sentiment on the ground. India’s latest wins in the EDB rankings come at a time when its Index of Industrial Production has gone from expansion to contraction, credit flow to the industry has all but seized up and RBI surveys have noted a marked dip in business expectations on order flows and output.

Reforms in land management and enforcing contracts could be the next big measures through which India can better its EDB ranking, said World Bank President David Malpass. In its latest global report, the World Bank placed India at 163 and 154 positions, respectively, on enforcing contracts and registering property.

India needs to provide adequate resources to commercial courts at the district level for judgements to flow faster. “Small claims courts are needed to help people enter into contracts which they know can be enforced,” he said. “With regard to land management reforms, digitisation of the land data and making the data readily available throughout India would facilitate the buying and selling of land,” Malpass said.  India rose 14 places in the 2019 index, inching closer to its target of being counted as part of the top 50 clubs.  

But, Malpass said, India was on the right track, being among the 10 best-performing economies for three straight years. “A country’s competitiveness is partly due to ease of doing business but also due to macro-economic stability, skills of the workforce and whether investors finally chose to invest there,” the World Bank president, said.

Also, he pitched for the growth of private banks as well as stricter regulations for non-banking financial companies (NBFC), which he said might entail some risk. World Bank currently has 97 projects with over $24 billion committed in the country and Malpass said existing programmes would continue. He added the body’s funding for India might grow by an estimated $5-6 billion annually.

It is notable that while India’s ranking has improved impressively in the last few years, there is much scope to enhance the EDB with proactive policy action, such as in the domain of enforcing contracts, registering property and starting a business. It should then be eminently possible to move into the top 50 of the global index, and, in the foreseeable future, to the top 30.

For instance, on the ‘getting credit’ parameter, while India has a relatively high rank of 25, the fact is that the banking and financial sector faces rising contagion risks and requires sustained reform measures to better allocate resources economy-wide. Consider another parameter, ‘getting electricity’, for which India’s current rank is an impressive 22. Recent schemes to universalise access to power certainly seem to have helped matters.

It is glaring that under at least four heads enforcing contracts, registering property, starting a business, and paying taxes — the scenario has hardly improved, as per the latest scores. For example, for enforcing contracts, India’s rank was 163 among 190 economies last year. Ditto this year. It implies much time and cost overruns in resolving commercial disputes, which is certainly not conducive for a thriving business environment. The way forward is to carry out long-pending reforms of judicial processes to do away with routine legal delays.

Similarly, India still scores very low when it comes to registering property. The figure has barely improved to 154. High stamp duty rates seem a perverse incentive to undervalue and underreport real estate transactions. There remains a host of rigidities in housing and real estate that need to be reformed to promptly do away with extensive opacity.

Online format

India also scores lowly for starting a business, a poor 136. Its global rank has only moved just one notch in the past year, and primarily due to the decision to abolish filing fees for the simplified online format for incorporating a company and its memorandum and articles of association. Other countries seem to have done more.

As for paying taxes, India’s score has risen somewhat to 115. But we can, and need to, further simply the indirect goods and services tax (GST) regime, and make taxes, both on income and consumption, easy and taxpayer-friendly. The average time for filing taxes can be significantly higher in lower-middle-income economies like India.

India’s high global rank in dealing with construction permits, 27 in the ranking, is a reflection of recent reform measures in the two mega-urban centres, and may not quite hold nationwide. The way ahead is to have reforms in place to better coagulate funds for built spaces. Further, while our rank for resolving insolvency is a credible 52, the fact remains that bankruptcy resolution. India needs to move faster on the reform front, to attract global savings and investments. The available data suggest that the resources required for starting a business can be considerably higher in the lower-income economies.

It would stultify entrepreneurship and risk-taking, and, thereby, discourage profit earning. We need to policy-induced much greater EDB to boost entrepreneurship nationally. It would lead to better employment opportunities, higher tax revenue for the government and also give rise to improved personal income.

 

(The writer is former senior professor International Trade and member of Vivekananda International Foundation, New Delhi)

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