Perspectives

Good may not be good enough to improve India’s Ease of Doing Business rank!

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The ease of doing business rankings for 2017 was recently released by the World Bank. It revealed that India has made a rank progress over 2016. That looks pale in front of the 12 ranks progress made in 2016.

The ease of doing business is a composite ranking on 10 parameters (shown in the table below). Though India has improved on the overall rank, its rank has gone down on certain parameters like starting a new business, dealing with construction permits and getting credit, where as it has gone up significantly on certain others like getting electricity and enforcing contracts.

It is to be noted here that India’s absolute performance (as measured in Distance to Frontier or DTF score) has risen across all the parameters (except three where it has remained the same). It’s the other countries who have done better and gone up in the ranking list.

It’s a competitive world and simply doing good is not good enough, a country has to do better than others in order to improve its rank.

ease-of-doing-business-dataSource – http://www.doingbusiness.org/data/ExploreEconomies/india

World Bank Methodology

Economies are ranked on their ease of doing business, from 1–190. A high ease of doing business ranking means the regulatory environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the aggregate distance to frontier scores on 10 topics, each consisting of several indicators, giving equal weight to each topic. The rankings for all economies are benchmarked to June 2016. Read the methodology, explaining how the ease of doing business rankings and the distance to frontier measure are calculated (PDF).

The distance to frontier score helps assess the absolute level of regulatory performance over time. It measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. One can both see the gap between a particular economy’s performance and the best performance at any point in time and assess the absolute change in the economy’s regulatory environment over time as measured by Doing Business. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represent the frontier. For example, a score of 75 in 2016 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time. A score of 80 in 2017 would indicate the economy is improving. Source – http://www.doingbusiness.org/ /rankings.

India’s Distance to Frontier score on most of the parameters have improved over the last one year.

The road ahead for India – Maximum Governance Analysis

The ease of doing business rank is going to be a key indicator of India’s ability to turn around the various initiatives to its advantage. Many of the key reforms started during the last one decade have evolved. Coupled with massive policy reforms undertaken by the current government, their effects shall come in the next few years. We believe that the cumulative effect of policy reforms, initiatives and capacity building for implementing them shall bring a big impact by 2018 and significantly improve our ease of doing business for 2019 (to be released in 2018). That in a way may serve as a holistic report card for the current government’s ability to help boost economy by building the right environment before the general elections of 2019.

Though there are multiple initiatives and reforms undertaken by the Government, we discuss here three domains of focus for improving India’s ease of doing business rank:

1. A huge opportunity remains in the areas of ‘enforcing contracts’ and ‘resolving insolvency’, both of which fall in the domain of Judiciary. A strong reform measure needs to be taken to bring down the cost of litigation and time taken for judgment and enhance the rate of recovery. India’s current DTF score on both the parameters is in the 30s and offers a big room for improvement. Government recently passed THE INSOLVENCY AND BANKRUPTCY CODE, 2016, which shall help improve the condition.

2. The second area needing great attention is that of ‘dealing with construction permits’, a domain of civic bodies. A large number of processes need to be completed (43 in Mumbai and 29 in Delhi) to get clearance for using physical sites for offices, warehouses, godowns etc. It requires simplification by reducing the number of processes and enhancing the speed of delivery.

3. The third area of big leverage is the ‘paying taxes’ domain. We believe with GST becoming a reality, the number of indirect taxes shall drastically reduce making it a lot simpler. The government is also planning to offer the businesses easier and convenient ways to pay GST.

As discussed in the article Unified Digital Identity for Ease of Doing Business, a big push to ease of doing business can be achieved by giving one single identity to the business entity. Rather than interacting with multiple departments of the government with multiple identities (as many numbers and passwords), can there be a single window, which allows to complete all the formalities of starting and running a business. The case of Singapore CorpPass is a great example. Even in India, the work has begin towards that end with Income Tax integrating with TDS portal and Ministry of Labour and Employment issuing one unique Labour Identity Number (LIN) to comply with as many as 44 regulations related to the work force. Another level of integration at the higher level may be required and add immensely to ease of doing business.

Last but never the least is the need for greater speed and agility in rolling out these reforms. As highlighted at the beginning of the article, it’s the relative progress vis-à-vis other countries that matters.

1 Comment

1 Comment

  1. Harsh Purohit

    October 31, 2016 at 2:41 pm

    wonderful analysis.legal reforms should be on the top priority.

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