Column: Doing business index a wake-up call

Written by Madan Sabnavis | Updated: Nov 4 2013, 23:20pm hrs
The World Bank Doing Business ranking is controversial because all those countries rated in the lower order do not like it and feel that the methodology is suspect. However, based on a relatively objective criterion, the World Bank ranks countries on how easy it is to start and close a business and traverses through a set of 10 parameters. The latest report for 2014 is quite timely given the uncertainty on the economic front and, in a way, is a revelation as we get to know where we stand.

There have been several discussions on the myriad issues relating to delays in getting papers moving and consequently, delays in getting projects started on account of an impasse at the decision-making level. Quite clearly, a domestic investor knows that there are issues here when it comes to clearances. There is also flip-flop on policy when it comes to FDI as that means going through Parliament. Even if these concerns are kept aside, how do we fair in the ordinary course of business life

Indias rank comes down by three notches from 131 to 134 in a set of 189 countries. This is significant for two reasons. The first is that we are moving down the echelon which will affect our own long-term attractiveness for investors. The second is that we are placed even lower than countries like Bangladesh, Kenya, Honduras and Egypt. Also, while we do like to compare ourselves with the others in the BRICS group all the time, India is placed uncomfortably low in the list. South Africa leads at 41, followed by Russia at 92, China, 96 and Brazil at 116. This relative scale is certainly not something to be proud of and the fact that there is a downward movement indicates that we need to address these issues, else we would be the outlier in the BRICS group.

The picture is also quite disappointing if one considers the individual ranks across the 10 parameters. We do very well on two counts, which have helped to keep our ranking where they are. The first is access to credit, where we are placed at 28, and the other, in terms of protecting the investors, we are placed at 34. Quite clearly, the financial sector is our strength, and the credit should go to Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) for keeping us ahead of the other nations. In fact, the orderly development has ensured that we have not felt any primary effects of any global economic crisis.

The other 8 variables tell a disappointing story. Our rank is 186 when it comes to enforcing contracts, 182 for getting construction permits, 179 for starting business, 158 for paying taxes. We do better than our overall rank in case of trading across borders (132), insolvency laws (121), getting electricity connection (111) and protecting property (92). It is well known that banks struggle to get their debtors to pay up and the laws are skewed in their favour. Also, the red tape and the antiquated procedures make getting clearances difficult. Therefore, these numbers do not really surprise.

An interesting statistic pointed out by the World Bank is that last year, 114 countries brought in 238 changes in their regulations to enable convenience for business. These reforms were across all these 10 variables so that there would be fewer hassles for those doing business. Unfortunately, India does not feature here, meaning that there has been virtually no conscious effort made to address any of these issues, which has in turn led to a slide in the rank as other countries moved ahead. In fact, 29 countries have brought in 3 or more reforms to improve their systems.

The World Bank, in this report, also calculates the potential for every country and then shows how far the country was away from this ideal situation across the time period of 2005-2013. Here, India has moved ahead in case of starting business (still less than 70% of potential), credit access (above 80%), payment of taxes (just above 50%), trading across borders (a little above 60%). At the cumulative level, the nation has come to around 55% of the potential, which is not saying much.

This is where the irony lies. We have seen a lot of foreign interest in the economy notwithstanding the tardy nature of our administration as well as the controversies surrounding the allocation of public wealth. Investors do see a lot of potential in the country given the size of the population, growing incomes and severe lacunae in various sectors which makes investing an attractive option. The developed countries are already operating at a plateau level of capacity utilisation where incremental growth can only be marginal. This is where size matters and China and India are the two potential markets for such investors followed probably by Brazil. At the domestic level, business normally takes in these factors as a part of their costs and plan accordingly.

Intuitively, it can be realised that if we are able to address these ten issues, we can make India an even better business destination and lower the cost of doing business, which will help entrepreneurship develop. Today, we are all talking of focusing on inclusive growth where the SME segment is often spoken about. These units encounter these challenges along the way making it difficult for them to break even.

In fact, if one looks at these ten elements of what can be called the superstructure required to do business, 6 of the 8 issues can be addressed relatively easily. These are: starting business (single window clearance, which admittedly we have been talking for long but not doing much), construction permits (should be automated and driven by rules), getting electricity connection (need to streamline procedures), protection to property (have clear property laws and amend all dated regulation), and payment of taxes (online payments with less human intervention and collection of tax source to avoid post-payment ambiguity). The issues on insolvency and enforcement of contracts, which are related to one another, have to be taken up at a higher level since it requires our judicial processes to be revamped. Seeking redress today is time-consuming as banks grapple for a solution with their NPAs.

Rather than being critical of the World Bank Report, we need to treat this as a wakeup call to reform our procedures and rules for doing business as the economy is quite literally, to use the clich, at a crossroad. Foreign investors should feel reassured when they bring in their dollars, and Indian enterprise should not be looking outside the frontiers in desperation which has already begun and needs to be reversed. It would then be a win-win situation for everyone.

The author is chief economist, CARE Ratings. Views are personal