The World Bank, at the behest of the commerce and industry ministry, has recently ranked 17 Indian cities, from as many states, according to its Ease of Doing Business indicators. Ludhiana tops the list and Kolkata is at the bottom.
They say in economics, the questions never change. So when, back in the 1980s, the Peruvian economist Hernando De Soto subtitled his book The mystery of capital with the query Why capitalism triumphs in the west and fails everywhere else, he was asking a question development economists have wrestled with for decades. The broad answer, institutions, was not new either?indeed Douglas North would soon win a Nobel Prize for having said so. Nevertheless there was something starkly different this time around. De Soto showed? by actually starting a business!?that an entrepreneur in Peru needs 289 days to register a business, and almost seven years to get the permit to build. It?s just plain torture to start and run a formal, law-abiding, tax-paying business in most developing countries. Little wonder the system does not work.
In 2004 the World Bank, building on subsequent work in this area by Harvard?s Andrei Shleifer and his coauthors, began publishing its annual Ease of Doing Business rankings. Currently the rankings cover 181 countries and the ease of ten business activities: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The objective is not just fact-finding, but fostering competition in reforms in all of these countries, particularly those at the bottom of the list.
The rankings highlight business-friendly reforms. It may sound na?ve to expect entrenched third world governments to react to such third-party national rankings. But one only has to look at the uproar and anti-corruption drive in Bangladesh after being branded the most corrupt country by Transparency International for several years in a row, to realise that such rankings do have policy consequences.
Perhaps expectedly, India has not fared too well in these rankings. Its current overall rank is an unenviable 122 with out-of-the-top-100 scores in six out of ten dimensions. Its worst relative performance occurs in ease of enforcing contracts (180) and the ease of paying taxes (169). Policy discussions and business lobbying, typically in New Delhi and Washington DC, often refer to these figures. A closer look at the dimensions, however, reveal that many of them involve the states and therefore require reforms at that level to bring about change.
It is this context that lends significance to the recent within-India rankings. The number of procedures, time taken and costs involved for each dimension indicate wide inter-state ranges and throw some surprises. Indeed these, rather than the overall ranking itself, should be the real takeaways. The cost estimates include only the applicable fees and not the bribe element that may be substantial and may vary considerably across states. The intercity ranges for the time taken for each activity, however, are quite instructive. A construction permit takes about 80 days in Hyderabad but needs over four times the period, 258 days, in Kolkata. One can register a property in 26 days in Gurgaon, but it would take nearly five times that, 126 days, in Bhubaneshwar. Ports naturally have an advantage when it comes to foreign trade but Ahmedabad comes in at the third position, reflecting perhaps Gujarat?s superior road infrastructure. Paying taxes consumes 233 hours of a Jaipur businessman?s time but as much as 405 hours of that of his counterpart in Patna. Enforcing a contract takes 600 days in Guwahati and 1,420 in Mumbai, perhaps a function of population per judge. Closing a business takes too long everywhere?from 6.8 years in Ahmedabad to 10.8 in Kolkata.
It is easy to quibble with the survey. Breaking down business into separate activity components, quantifying essentially qualitative experiences with wide within-category variations, combining component scores in a meaningful way and relying on ranking rather than scores, are all ambitious tasks fraught with judgment calls. But there is no denying that it provides a roadmap for change to states serious about industrialisation.
States today compete fiercely for industry. This should lead to reforming business conditions on the ground that affect all entrepreneurs rather than taking the easy way out by giving land and sops to favoured industrial houses for marquee projects. The Singur story is an example at hand. The report points out that since 2006, 9 out of 10 cities covered in this report and an earlier one on South Asia carried out some business-friendly reforms. It is perhaps telling that notwithstanding all the noise about the efforts at industrialising Bengal, the only exception is Kolkata.
The author teaches finance at the Indian School of Business, Hyderabad