The ease of doing business rankings explained
A Breakdown of the rankings and how India can improve further.
Hi Vivek,
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Happy Diwali!
So the rankings of the ease of doing business are out and India has jumped 14 places from last year to become the 63rd easiest place to do business in. From being rank at 142 in 2015 to the present rank, the rise is pretty commendable. But I see much is misunderstood about the rankings and the purpose it hopes to serve.
What does the ease of doing business index hope to achieve?
Well, the index, published by the World Bank attempts to benchmark the regulations only directly affecting businesses. They do not take into account the macroeconomic indicators of the economy’s health.
Used on the scores of each country, they are then ranked.
To start with, it’s more like ease of doing business in Delhi and Mumbai. These are the only two places in India that are surveyed and based on them, the whole of India is ranked. Put together, these two cities comprise a little over 10% of India’s GDP.
One may ask if the rules and regulations applied equally across the whole country and therefore, surveying just these two cities must be sufficient. The answer to it is NO. Many of the index components include questions on regulations that are controlled at the state or the municipal level and so will vary from place to place.
Let’s step back a little. Let us have a look at the various components of the index and see if they are managed at the state, municipal or the union government level. Based on that we will have a fair idea of how representative these rankings are for the whole country.
The index gives equal weight of the scores for the following 10 factors:
Starting a business
Dealing with construction permits
Getting electricity
Registering property
Getting credit
Protecting investors
Paying taxes
Trading across borders
Enforcing contracts
Resolving insolvency
The following table shows India’s rank in all the parameters considered. Those Highlighted in green indicate a significant improvement and those in orange represent those that have gotten worse.
Starting a Business:
The number of procedures, time taken for permits, cost and minimum capital are parameters considered for this ranking.
The improvement in ranking in 2015 is mainly attributed to a reduction in the registration fees alone. This registration is required to be done with the ministry of corporate affairs, govt of India and so is applicable across the country. But this in itself is not a reform per se.
The next major improvement we see in in the year 2019 when the banking improved from 156 to 137. This is attributed to a simplified application form, which is applicable across India and the other reason is the abolished site inspection in Mumbai alone. Clearly this second reform does not apply to the whole country.
Dealing with construction permits:
The number of procedures, time taken for permits, cost and building quality control are considered for this ranking. Building permits are typically given at the local government level.
A major jump can be seen in the ranking 2019. This is explained by faster and less expensive permits and the introduction of decennial liability and insurance. This improvement, as said earlier are due to changes in processes at the local governments and so this jump from 181 to 52 may not be applicable across the country. The ranking saw a further improvement in 2020, this is due to further easing of the procedures, again, exclusive just these two cities.
Getting Electricity:
The number of procedures, time taken for permits, cost and reliability of supply & transparency of tariffs are considered for this ranking.
In India, the distribution of electricity is managed by the respective state-owned distribution companies. For 2016, the report says, “ The distribution company in Delhi made the process for getting an electricity connection simpler and faster by eliminating the internal wiring inspection by the Electrical Inspectorate. The utility in Mumbai reduced the procedures and time required to connect to electricity by improving internal work processes and coordination.”
The 2017 jump to rank 26 is mainly attributed to streaming of process of getting a commercial connection, exclusively in Delhi. Again, a very high jump from 137 to 26 in two years is commendable, but it does not represent the picture for the entire country.
Registration of Property:
The number of procedures, time taken for permits, quality of land administration are considered for this ranking.
Registration of property is again mainly managed by municipal governments and so and change is the ranking of this parameter will not show the changes for across the country.
We also see that the ranking has gotten worse from rank 92 in 2014 to 154 in 2020. No explanation is available in the reports for the fall in ranking, which might indicate that other countries have reformed faster than India, thus leaving India behind.
Protecting investors:
Conflict of interest regulation, shareholder governance, and minority investor protection are considered for this ranking.
The 2015 report states, “India strengthened minority investor protections by requiring greater disclosure of conflicts of interest by board members, increasing the remedies available in case of prejudicial related-party transactions and introducing additional safeguards for shareholders of privately held companies.
This reform applies to both Delhi and Mumbai.” India saw its ranking fall to 13 this year this may be due to the changed composition of the metric. But the rank is still impressive.’
Paying Taxes:
The number of payments, time taken for filing, tax rates and post-filling formalities are considered for this ranking. The improvement in 2018 is mainly due to GST and electronic payments to be made to Employees provident funds. These changes are applicable across India and so accurately represents India’s actual performance.
Trade across borders: Number of documents, cost, and time necessary to export and import are considered for this ranking. India saw a sharp improvement in 2019 to 80th rank. The 2019 report on ease of doing business notes, “India reduced the time and cost to export and import through various initiatives, including the implementation of electronic sealing of containers, the upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures.
This reform applies to both Delhi and Mumbai.” These reforms seem to apply across all the cross border trade and so this improvement can be felt across the country.
Resolving Insolvency:
The time taken for recovery, cost, recovery rate and strength of the insolvency framework is considered for this ranking. The Insolvency and Bankruptcy Code,2016 is seen as a major step in improving recovery from defaulting borrowers. The 2018 improvement can be attributed to the enacted of this law.
The 2020 report notes, “India made resolving insolvency easier by promoting reorganization proceedings in practice. India also made resolving insolvency more difficult by not allowing dissenting creditors to receive as much under reorganization as they would receive in liquidation. This reform applies to both Delhi and Mumbai.”
The ranking of two factors, namely, ‘Getting Credit’ and ‘Enforcing Contracts’ has not changed much over the years and much need to be done to improve the ranking in enforcing contracts.
So, all in all, the ranking of India in ease of doing business may not be uniformly applied across the country. While the improvements in trading across borders and insolvency can be applicable across the country, the improvement in construction permits and electrical connections can be majorly attributed to the local governments.
Places of Improvement and How to get there?
While not taking anything away from how far India has moved up on the ease of doing business ranking, I look at how India can rank better few of the indices it lags.
Starting a Business: India has already eliminated the minimum paid-up capital needed to start a business, which helps in the ranking. One of the other solutions, that is in fact followed by a few state government in India is to have a one-stop timebound approval system. And in case the government fails to give all the requisite approvals, the company is deemed to have gotten the approval. Using IT solutions to integrating and fasten the approval process will also help improve the processes.
Registering Property: Like mentioned above, registering property is done by the local governments and the ‘Stamp Duty’ is one of the biggest sources of income for the government. This stamp duty is very high and thus leads to problems of people not registering, or rise in corruption, thus making the process opaque and shady. Like India has reduced its registration fees and simplified processes in other clearances, the same is to be adopted by the local governments as well. A lower fee will disincentivise corrupt practices and could lead to even more registrations, thus helping increase the size of the pie. This could also help increase the revenue from registration. Also, the costs of enforcement will go down.
Paying Taxes: Now this is a difficult nut to crack. The country has seen an indirect tax overhaul bout three years back which it is still adjusting to. This was the big move that was envisaged to drastically improve the indirect tax payment. the GST council has made a number of amends to the GST code to improve the efficiency, but the problem of high compliance cost still persists. Multiple tax slabs can be reduced to improve compliance. The recently announced face-less assessment and the reduced corporate tax rate should help improve India’s ranking.
Enforcing Contracts: This could be one of the single major reasons why foreign investment or even new investment within India is often slow. The culture of enforcing contracts is just not prevalent in the country. With governments, policies change. In many cases, these policies are applied retrospectively, which is unfair to businesses. A change in government could also mean change in those who are awarded contracts on various allegations. If an applicant goes to the court for relief, the delay in getting the court to come to a decision would be years and businesses simply do not have the time to hold up capital till then and in many cases go bust. In many cases, it was the courts that formulated policies on the distribution of recourses ( 3G, Coal) which in my view does not fall in the purview of the judiciary.
Even if the business contracts are not honoured by the governments, the courts should be in a place to effectively and in a timebound manner reach a judgement on a case. Special commercial courts, improved IT infrastructure, improving alternative dispute resolution mechanisms can help improve ranking. But a cultural change of honouring contracts must become a new normal in the country.
Regards,
Bheem
Disclaimer: All the views expressed above belong solely to the author, and do not represent those of the organisation he works in.
The Duologue is an effort by Vivek and Bheem to have a dialogue about varying topics.
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