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  1. How to improve ease of doing business: Engaging business a must

How to improve ease of doing business: Engaging business a must

It is a mistake to assume that mechanically undertaking a laundry list of reforms will automatically guarantee a good rank

By: | New Delhi | Updated: November 3, 2016 7:06 AM
Union minister Nirmala Sitharaman tweeted that she was ‘disappointed’ with the rank. (Reuters) Union minister Nirmala Sitharaman tweeted that she was ‘disappointed’ with the rank. (Reuters)

These are sombre times for the department of industrial policy and promotion (DIPP). Two years ago, it had been tasked by the prime minister to haul India’s Ease of Doing Business rank from 142 to the top 50. However last week, when the World Bank declared the latest rankings, India limped up only one spot from last year to 130.

The government reacted outraged. Mandarins at DIPP complained that some of its biggest reform pieces went unnoticed. Union minister Nirmala Sitharaman tweeted that she was ‘disappointed’ with the rank, echoing similar concerns. News reports suggest that PM called a meeting of all secretaries and chief secretaries and asked for a report within a month, explaining the poor rank.

A part of the outrage is justified. As I had argued in a recent piece; for a country of the size and complexity of India, the reforms that the DIPP has managed to push in the past two years; could very well be adopted as a model by other federal countries. DIPP has cleverly managed to spark a race of sorts among states across party lines to improve ease of doing business, by devising a way to rank states based on their success in implementing a prescription of 340 different pieces of reform. Esoteric to the World Bank rankings—that incidentally only covers the cities of Mumbai and Delhi—DIPP has been trying to understand and target the analytics behind India’s historically poor rank. The word on the street is that a number of important reforms were being pursued in both these cities, and the whole government machinery was jerked into action to impress the World Bank inspectors. A part of DIPP’s surgical efforts to correct the index; Mumbai and Delhi governments can boast of simplified processes around electricity connections, building approvals, licensing norms; as well as a host of government services migrating to online platforms.

After all, India ranks 25th in getting electricity; up from 51 last year. Surely the bureaucracy is doing something right!

Nevertheless the headline figure of 130 is definitely poor reading, and DIPP is right to feel a pang of disappointment to find that at the end of the year, it doesn’t have a good statistic to adequately sum up its efforts to the layman.

Since rankings have been declared, there has been a lot of analysis done around why the rank has remained so low despite all that the government has done. DIPP has bemoaned that steps like the GST and the new bankruptcy code were introduced too late to be included in this year’s survey. There is a statistical angle too. The rankings are relative, so another diligent competitor country doing similar reforms can theoretically frustrate the Indian government’s efforts in bettering its rank. Also every year the World Bank introduces new tweaks in its methodology—so countries often run the risk of getting judged in areas they hadn’t bothered reforming from the year before.

If it’s of any consolation, Somalia joined the World Bank ranking for the first time this year as the 190th country—so more competition!

Understandably, sceptics will argue that these factors should only be affecting the rank at the margins. And they have a point. If the government had indeed attacked the major problem areas that were highlighted in last year’s performance; then it somehow seems inexplicable that India is still at almost the same place.

It is a common misconception that the World Bank conducts its survey simply by going to government offices and being told of the number of days that needed for a tax refund, or the number of steps required to start a business.

Instead, World Bank argues that rules and reforms written on paper need not mean that they are actually followed in practice. So despite what the government of any country claims; the World Bank also talks with the private sector to check if those reforms are indeed living up to their promises.
This could very well be the missing jigsaw piece that explains India’s poor rank. After reviewing the government’s evidence, the World Bank inspectors would have visited local businesses in Mumbai and Delhi to cross-verify. And there, they must have been told that nothing much has changed on the ground.

In fact, in a rather obscure part of their website, the World Bank has made public the list of these external practitioners that they had consulted for India this year. Scroll down the list, and most of them seem to be accountancy, architecture, tax, legal, and business consulting firms. Basically the ‘agent’ firms that businesses end up hiring to avoid the unpleasantness of dealing directly with the government.
And herein lies possibly the greatest loophole in the Indian government’s otherwise energetic plan to improve ease of doing business. That much of the reforms have been undertaken without actually consulting the very businesses they are meant to benefit!

Government departments will argue that they indeed consult industry. However, most of these consultations generally happen with high profile captains of industry associations – and it is usually a very cordial dialogue between the two, as opposed to one where they strongly challenge the government. So the small businessman who struggles with the local rent seeking inspector; or with the obnoxious tax officer holding back his VAT refund, or is running in circles around a department that is sitting on his approval documents ad infinitum—never really gets consulted.

Instead bureaucrats huddle in their own cocoons and decide on behalf of that small businessman; what they think should be excellent reform items for him! And then, once the reforms get implemented; no one in the government bothers to take his feedback on whether these are helping him or not.

So a state could be spending a lot of time and money behind a sparkling new online single window as per DIPP’s recommendation, but local businesses may hardly be using it. Meanwhile they could still be harassed by dozens of other problems, that the government has no clue about. So, naturally when World Bank inspectors come calling; businesses continue to have an Oliver Twist narrative to tell them.

All countries that do well on ease of doing business charts crucially have well-established mechanisms of dialogue between businesses and regulators—brokered either by government or quasi-government channels. Business feedback is immensely important for ease of doing business.

Central and state governments in India need to establish similar committees comprising of key bureaucrats, industry experts and regulatory consultants—empowered to pro-actively hold consultations with businesses across different sectors. They should then have the authority to collate all the feedback and approach the relevant departments with reform advice. This way the forum remains official, yet relatively neutral, giving businesses confidence to be more open and articulate. Meanwhile, the government will have a valuable tool to regularly check with businesses if the reforms are indeed working for them.

It is a mistake to assume that mechanically undertaking a laundry list of reforms will automatically guarantee a good rank. Instead the government also needs to back it up with a good business engagement strategy.

Reforms don’t equal rank. The correct equation is : Reforms+Impact =Rank!

The author is a senior economic adviser to a foreign mission,based in New Delhi. Views are personal

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  1. C
    Chetan Isharani
    Nov 3, 2016 at 3:37 am
    Organised extortion by the police and govt agencies plus no recourse to courts equals to an impossible situation. No business can thrive without rule of law and until structural police and court reform is carried out its impossible to create a business friendly environment.
    1. K
      Nov 3, 2016 at 2:26 am
      According to a technocrat, one of the major irritants of doing business in India, is the number of (around) items, subject to tax deduction income-tax at source. This should be reduced to (say) one or items (ries and interest), following the practice universally followed. While it is the duty of businessman to pay tax on his income and s, it is the duty of tax-authorities to collect tax from others. This responsibility cannot be shifted. Detailed list of all transactions can be demanded: it is the duty of tax collectors to proceed against the counter-parties.
      1. Ranbir Sethi
        Nov 4, 2016 at 7:23 am
        I am not a business man, I am not a politician or with strong political leanings, I am not a bureacrat, I am an ordinary citizen who speaks from his limited experience with the Government's statements and actions. There is a huge disconnect which needs to be bridged to improve world rankings for ease of doing business in our Country. There is no gainsaying that the rankings arrived at by the World Bank are disappointing. We need to look within. The Government may well have done everything right to ease the business environment, but, like most other pronouncements by the Government, we fail in follow up action to ensure that the policies directed by the Government are actually implemented in the right spirit. We need to have a better system to ensure compliance of Government policies.

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