Ease of doing business in India: Myths and realities

The World Bank released its annual ease of doing business report a few weeks ago. The report entitled “Doing Business 2020: Comparing Business Regulation in 190 Economies” suggested that India had jumped 14 places (from 77th rank in 2018) to take the 63rd rank in 2019 in the World Bank’s ease of doing business ranking among 190 countries.

The government functionaries right from the prime minister down to the finance minister and others were quick to latch on to this straw and proclaim to the world and Indians as to how “well” the Indian economy is doing and that we are on course to realise the dream of a $5 trillion economy by 2024.

God knows what has happened to the other goal of ‘doubling farmers’ incomes by 2024’ about which a lot was said by the prime minister and BJP president Amit Shah during the general elections held in 2019.

According to a news release, Finance Minister Nirmala Sitharaman, citing the report, stated that India had improved in seven out of 10 indicators and has moved closer to international best practices. However, the report shows an improvement in only four out of 10 indicators. She further stated that India was on course to achieving the 50th rank and ranked among the 10 top performers for the third year in a row.

Despite the World Bank report’s rosy picture, reality speaks otherwise and points to an all-pervasive gloom about the prospects of the Indian economy and for businesses. India’s GDP, exports, production and investments in critical sectors, credit availability, employment opportunities and consumer demand is shrinking.

Rating agencies such as Fitch have cut down the growth forecast for India to 4.6% in the financial year 2019-2020 as against 4.9% by Moody’s and 5.1 % by the Asian Development Bank. If one considers the fact that the methodology to compute GDP was changed by the Modi government, India’s actual annual GDP growth rates may even be below 4 %.

Even the International Monetary Fund which had been betting high on the prospects of the Indian economy, has downgraded its expectations although it still forecasts India’s GDP at 6.1% in 2019. A National Sample Survey Organisation (NSSO) Report on unemployment which was withheld prior to the last general elections, revealed that the unemployment rate in India at 6.1% was the highest in the last 45 years.

The NSSO consumer expenditure data for 2017-18 which is being withheld as per media leaks, indicate a decline in average monthly consumer expenditure which would imply that poverty has increased after the present government came to power. If true, this would mean that poverty which has been consistently declining in India post-1991 has got reversed.

The latest available poverty data based on NSS consumer expenditure data is available only up to 2012. Statistical reports and data on different sectors which used to be regularly released to the public in the last 70 years is now being withheld or managed to hide the reality about the state of the economy.

Arvind Subramanian, former Chief Economic Advisor to the Modi Government, based on his recent study, states that the Indian economy is “now in the ICU”. Former RBI Governor Raghuram Rajan has stated that the Indian economy is in recession. Even the World Bank now concedes that “India’s cyclical slowdown is severe”.

If one reads the World Bank’s Ease of Doing Business report, especially its methodology for ranking countries based on the 10 indicators, one will be aware of its severe limitations especially in drawing inferences about the state of the business environment in different countries.

The ranking of different economies with respect to the indicators is based on a case study of a standardised business unit and covers only one or two cities in each country. For India, the report only covered Delhi and Mumbai.

How can these two cities be representative of the business environment for a large and diverse country such as India where the business environment varies from state to state. Moreover, how realistic is this standardised business unit and does it represent only large businesses?

MSME ignored

The report does not seem to cover micro, small and medium enterprises (MSME) which contributes 45% of total industrial employment, 50% of total exports and covers 95% of all industrial units in the country.

It also ignores the informal sector. The report is mainly based on a reading of the laws and regulations in respective countries and information canvassed from a survey of private sector practitioners, mostly legal experts, and government officials.

Surprisingly the survey does not cover owners of businesses who are best placed to report on the ease of doing business. There is also no information as to how these respondents were selected. Government officials will only parrot out what the regime of the day wants to hear.

Indians are well aware of the wide gap between regulations and its actual implementation. Although India has shown an improvement in four indicators - starting a business, dealing with construction permits, trading across borders and solving insolvency, for six other indicators - getting electricity, credit, registering property, protecting minority investors, paying taxes and enforcing contracts, there is no improvement.

The overall ease of doing business index computed in the report is just a simple average of the scores for the ten indicators which is questionable since it gives equal weight to all the indicators. Perhaps, the most poignant depiction of the real state of the ease of doing business in India is the sad story of a NRI businessman in Kerala who committed suicide recently frustrated with the years of delay in getting clearances from the local panchayat for his enterprise.

(The writer is an economist)