Was it a mistake for the PM to set his government the target of improving India’s rank in the World Bank’s “Ease of Doing Business” index from 131 to 50 within two years? I ask this question because the latest report published last month places India just one notch higher than what it was two years back and that despite the efforts of the government. I also ask because the reaction to this report has been surprisingly defensive. The PM has directed the bureaucrats to explain the reasons for this laggard result and the steps that must be taken to improve performance. I am personally of the view that the PM should not peg his objective of improving business conditions on the World Bank index. My reasons are three-fold. First, the World Bank index is based on limited data. Second, there is a disjunct between the complexity of our polity and the simplicity of the Bank’s methodological approach. And third, numbers are easy to misrepresent. They seldom tell the full story.
My view is that the PM should direct his officials to prepare an indigenous “ease of doing business index” based on the government’s prioritisation of sectors and businesses and the key factors required to attract investment into these priority sectors.
The World Bank report is based on data gathered from just Mumbai and Delhi. Yet, the language in which it is discussed and reported suggests it is reflective of conditions across the country. Further, the index is derived by looking at 10 sub-indices. The final score is an average of the scores for each of these sub-indices. Several of these sub-indices like registration of property, ease of getting a construction permit, payment of taxes, securing an electricity connection and acquisition of land are matters over which the central government has only partial control. It cannot “ease” the business conditions in these areas without the support of the state governments. Given the number of states that are not under the control of the BJP, one could argue that the PM was recklessly ambitious in setting a target whose attainment depended on the cooperation of the state governments over whom his writ did not run. Finally, it is always easy to misrepresent a number. The fine print of the World Bank report does spell out the context, assumptions and conditions that underpin the derivation of its rank ordering but in the discussion on TV and the commentaries in the press these caveats are given the short shrift. In fact, they are almost always totally distilled out. The discussion is almost always focused around the number (i.e. the rank). It was no surprise, therefore, to find the government on the backfoot in the discussions on the latest report despite the fact that it has made material progress over the past two years in improving the operating conditions .
Doing business in India is unquestionably difficult. The PM is right to exhort his colleagues to replace the red tape with the red carpet. This said, I do not think the government should strap its policy objectives onto the coattails of generic and broad-based parameters developed by international institutions. It should contemplate instead the creation of its own indigenous index focused on improving business conditions for identified companies in priority sectors .
What should be the government’s priority for private sector investment? One could offer several answers, but for the purpose of elaborating the above point, let me suggest the emphasis should be on labour-intensive manufacturing industries and clean energy. I am not suggesting physical (housing, roads, ports , pipelines, etc) and social (viz education, water, health, etc) infrastructure or distribution and delivery systems (cash transfers or staunching leakages) because whilst these are of crucial importance and in desperate need of investment, I do not believe the private sector will invest in these sectors. This is because the return on investment will be low and because the banks will not extend credit—at least not until they have recovered the loans made for such infrastructural projects during the period 2003-2011.
Next, what are the major obstacles impeding the flow of capital into manufacturing and clean technology. Three major blockers stand out. One, the acquisition of land. This is because land records are imprecisely recorded and this embroils prospective investors in a tangle of agents, petty bureaucrats, lawyers and politicians. Two, the inadequacy and poor quality of essential infrastructure (viz water, housing, electricity, roads). This adds to the costs of production and erodes competitiveness and three the lacunae regarding intellectual property rights, fiscal stability and contract sanctity. This deters investors from investing in R&D and setting up technology centres.
The answer to the above two questions offers guidance on the derivation of an indigenously relevant “ease of doing business” index. To increase the inflow of capital into labour-intensive manufacturing and/or energy-related technologies, the government should track an index that is influenced by progress on matters related to the digitisation of land records; the availability of water; the travel time from point of production to port of export; the availability of skilled labour; the rules relating to taxation, IPR and so forth. This index should be developed by third party, non-partisan, non-government technocrats; its details should be in the public domain; the data should be published periodically and the government should be monitored and evaluated against the progress made along the scale of this index. I am not suggesting that the World Bank index be completely ignored. For, in the absence of anything else, they are a check against complacency. But, I am suggesting that indices like those prepared by the Bank should not be the pivot around which policy is framed; nor should they be the cause of distraction from the more important task of identifying and removing the obstacles in the way of significant and disproportionately impactful private sector investment.
The writer is chairman of Brookings India and senior fellow, Brookings Institution. Views are personal.