Why India is disappointed with the Ease of Doing Business rankings

The past one or two years have seen India rise rapidly in various rankings:

India was the fastest riser, moving up 16 spots to 39th rank in the World Economic Forum’s Global Competitiveness Index

India’s rank improved by 9 ranks in Transparency International’s International Corruption Perceptions Index.

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India’s rank on the Global Innovation Index improved to 66th position, up from the 2015 rank of being number 81, after five years of continuous slide in its ranking.

India improved its ranking in the World Bank Group’s bi-annual “Logistics Performance Index 2016”, jumping from 54th in 2014 to 35th in 2016.

In November 2015, we had carried a separate report which documented India’s rise in over 7 different ranks worldwide. After seeing its Ease of Doing Business (EODB) rank slip from a high of 116 in 2007, to a low of 142 (134 as per revised methodology) in 2014, for the one year ended June 2015, India saw its rank improve to 130 (revised to 131) in 2015.

Going by the commitment and the efforts shown towards economic reforms, it was expected that India would show similar, if not much better progress this year too in the EODB ranks. In fact, India had even started a state-wise ranking system within India to make states more competitive.

But the release of the latest report by the World Bank shows that India managed to move just 1 place upward. The Government of India expressed its disappointment at this meager improvement, and listed out various reforms which they felt were ignored by the World Bank, which led to a poor improvement in the rank.  The common threads among some of these reforms were these:

1. The reform is still a work-in-progress which has not been fully implemented yet (for example, Insolvency and Bankruptcy Code, GST, etc.)

2. The reform has been implemented, but not been used by a substantial number of users, hence not considered by the World Bank (e.g. Introduction of online single window systems, Introduction and streamlining of INC-29 for company incorporation ,etc.)

3. The reform has been done, but the World Bank has not accepted the documentation (e.g. Elimination of the requirement of a company seal while applying for government registrations, Online registration for ESIC and EPFO registration, etc.)

Another factor which could affect India’s rank is the fact that the ranks are based on absolute scores, called Distance to Frontier, an absolute score that measures the gap between a country and the global best practice. So even though India may show a good improvement in the absolute score, its rank may not show commensurate increase if the other countries too put on a good score.

Absolute DTF scores
Absolute DTF scores

As the scores show, since 2014, India has been showing constant improvement in scores year on year, yet the ranks have not improved as much one would have expected.

Further, the studies conducted by the World Bank for this ranking system, are done only in Mumbai in Delhi. To that extent, this rank is essentially of EODB in Mumbai and Delhi rather than India. A quick look at the state-wise ranks of EODB show that if the surveyors had dipped the thermometer in say Andhra Pradesh or Telangana or Gujarat, instead of Delhi and Mumbai, the ranks could have been different:

DIPP Statewise Implementation Scorecard
DIPP Statewise Implementation Scorecard

The EODB rankings also provide granular data, sector-wise, and from this it is clear that India’s improvement this year, has been largely on the back of reforms in the Power sector, which showed a huge jump, as compared to others:

Granular break-up
Granular break-up

The Government’s response also mentions some of the reforms which should impact next year’s rankings. The prime game-changer among them is the ambitious GST. Although the Government feels this will impact the rankings next year, it seems highly unlikely since GST’s earliest implementation date is April 2017, just 2 months before the June 1st cut-off observed by World Bank for their findings. We may again see a scenario like this year, where a reform may have been brought in, but the World Bank doesn’t consider it.

Overall, the signs are encouraging, but also underscore the need to work at an even more frenetic pace. The difficulty of implementing country-wide reforms over a federal country like India can be highlighted by all the troubles faced by GST to become a reality, and the Government must tread this path for many such pan-India reforms.

co-founder, OpIndia.com

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