World Bank’s recently published ‘Doing Business Report 2018’ upped India’s ease of doing business rank to 100 this year. While India is still a long way from making it to the top 50 (which is the Modi government's goal), this remarkable jump by 30 ranks suggests that the business slumber party is over and work to creating a business-friendly environment is actually on in India. Also, India figuring as the only economy in South Asia to join the list of the 10 top improvers in the 2018 report and Moody's upgradation of India's sovereign rating could mean an early Christmas for Modi-land. Has India's business climate remarkably improved in a matter of just a year? If yes, what are the parameters that have helped us make this remarkable leap?
Interview by By Indranil Das, Executive Editor| December 2017 Issue | The Dollar Business
The date October 31, 2017, was a remarkable day for the Modi-led government, as the World Bank published the 2018 edition of Doing Business report announcing that India is now a member of the top 100 club in the Doing Business rankings. The cricket-loving nation that we are, we sure were happy to hit a century. As everybody surely knows by now, India jumped by 30 places in the ease of doing business rankings to the 100th position out of 190 countries, the highest jump for any nation this year. The jump was a great morale booster for the government which had been at the receiving end of criticism, especially when it came to handling the nation's economy. GDP and job growth were both lack-lustre and economists and industry were blaming it on the double whammy of the ill-conceived demonetisation initiative and the hastily implemented Goods and Services Tax (GST) reform. There was more good news in the offing. Just a fortnight later, the government received another shot in the arm when Moody’s Investor Service upgraded the Government of India’s sovereign ratings by two notches, from Baa3 stable to Baa2 positive.
Rankings & Ratings
While the twin good news does call for celebration, let us first look at what the improved ratings and rankings really mean. Moody’s rating (of Baa2) for India, which was last upgraded in 2004 to Baa3, simply means that the government is now in a better position to repay its debt, and should be able to therefore negotiate better debt terms from external lenders, which should in turn lower cost of India's infrastructure projects. More foreign direct investment (FDI) is also expected to flow in, as some investors who don’t invest in countries having a rating of below Baa3 will now invest in India. Moody’s upgraded rating indicates that India’s growth prospects are a strong in the medium-term.
The Doing Business ranking by the World Bank on the other hand shows how much regulatory environment in a country has changed over a year relative to that in other economies. The agency, this year, has overhauled its methodology by focusing on “Distance to Frontier (DTF)” scores. According to the World Bank, “The DTF score helps assess the absolute level of regulatory performance over time. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and 100 represent the frontier.” And the difference between an economy’s DTF score in 2017 and 2018 reports illustrates the extent to which the economy has closed the gap over the past year. India’s DTF score increased to 60.76 this year from to 56.05 last year.
However, the change in methodology, brings into question whether the rankings of Doing Business 2018 are at all comparable to that of Doing Business 2017. When The Dollar Business sought clarity on the comparability issue from Charlotte Nan Jiang, Senior Member, Doing Business team, World Bank, she said, “With regards to the issue of comparability, the rankings are calculated for the current year only and therefore, previously published rankings are not comparable. Year-to-year changes in the number of economies, the number of indicators and methodology changes affect the comparability of rankings from previous years.”
What ever be the intricacies involved in a changed methodology and therefore comparability, a jump of 30 ranks is by no means a small achievement. This specially at a time when the government was being roundly criticised by the opposition and the industry on its handling of the demonetisation initiative and the implementation of GST. This was validation for the government, and that too from independent international agencies, that the government was on the right path when it came to economic reforms. It was also a cause for the industry to cheer, as this would mean that investments both domestic and foreign would sooner rather than later start flowing in.
Goods Acknowledged
As we celebrate our improved ranking in the Doing Business report, let us look at what the World Bank report really said about India this time. What were the factors and parameters that helped us take this giant leap?
The Doing Business report ranks a nation based on 10 parameters, that includes aspects such as: processes, cost and time to start a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, ease of paying taxes, ease of trading across borders, enforcing contracts and resolving insolvency. To India's credit this time, of the 264 reforms that were implemented by 119 economies to ease doing business, that the Doing Business report takes into consideration, India implemented 9 reforms and emerged as the only South Asian country amongst the top 10 countries showing remarkable growth.
India showed significant improvement in distance to frontier (DTF) scores in parameters like ease of paying taxes and getting finance.
According to the report, India’s improved ranking can be credited to improvement in various aspects pertaining to the DTF (distance to frontier) level – a score to provide an absolute measure on how close or how far an economy is from the best regulatory practice (a maximum score of 100) in different business-related aspects. According to the report, this year, India saw improvements in tax compliance, recovery of debts, the introduction of online procedures, strengthening infrastructure at ports for exports, labour reforms, etc. India also made starting a business faster by merging the applications for the Permanent Account Number (PAN) and the Tax Account Number (TAN), and by improving the online application system. Worth mentioning also is the fact that while the study did not take into consideration the GST bill, the World Bank lauded the GST initiatives and observed that the path-breaking tax reform in coming years would not just help improve tax compliance but would also help in curbing the growing problems of non-performing assets by bringing in more transparency into the system. The tax reform is also expected to improve our ease of paying taxes score in the next edition of the report.
The World View
The government is happy, and the industry is optimistic, but what does the international community think of the big ‘jump’? According to Katherine Hadda, Consul General at US Consulate General at Hyderabad, the big jump signifies the increased confidence of American companies opening and expanding their operations in India. “Today, more than 600 American companies operate in India. So I think the numbers and the steps American businesses are taking to increase their footprints in India really speak for themselves, and based on the enthusiasm I personally see here from American companies, I can say for sure, the effects of business-friendly national and state-level policies are definitely being felt," affirms Hadda. UK India Business Council (UKIBC), which helps Indian and UK businesses to collaborate, also believes that the rankings are an indicator of the government's commitment towards reforms. UKIBC in a communiqué to The Dollar Business states, “We have seen a genuine commitment from both the Central and state governments to improve the operating environment across the country.”
Kevin McCole, Chief Operating Officer of UKIBC, though had a note of caution and adds, “The reported changes are yet to be filtered to the day-to-day operational level of the bureaucracy. Thus, the next leap forward should be to reduce such challenges for businesses, exporters and foreign investors.
Echoing similar thoughts, Kazuya Nakajo, Chief Director General of Japan External Trade Organisation (JETRO), tells The Dollar Business that the improved rankings are a clear indicator of the improved environment in the country when it came to ease of financing, transparency and access. Coming from the agency that represents Japan, which is the third-largest source of FDI for India, this is a sure signal that India's improved Doing Business rankings has been able to boost investors confidence on the country. Worth noting here is the fact that in the recent past there have been instances of red-tapism that have affected big-ticket investments from countries like Japan. A case in point could be the Delhi-Mumbai Industrial Corridor – a $100-billion project in which Japan holds a 26% stake – that for years now has been plagued by delays, red tape and disputes over land acquisition issues. Nakajo feels that while the improvements are laudable, “to maintain the momentum, India needs to keep on creating a higher reputation in all areas requiring course corrections”. Similar thoughts have also been expressed by H.E. Alphonsus Stoelinga, Ambassador of Netherlands to India, who when asked about the factors that hinder FDI inflows into the country says, “Cumbersome procedures and an unpredictable business environment are the two factors that in my view still play spoilsports to the cause of smooth FDI inflows into the country”.
Industry cautious
So, while we now know that the international community is fairly convinced that the country is taking corrective measures to improve the ease of doing business in India, let us look at what the Indian industry thinks about this improved ranking. Will the rankings actually help our exports grow? According to Ajay Sahai, CEO of the Federation of Indian Export Organisations (FIEO), both the new improved ranking in Ease of Doing Business and credit rating by international agencies are clear indicators that the business climate in the country is improving on year-on-year basis. “The improvement in getting credit, paying taxes, getting electricity, protecting investor’s right and enforcing contracts are important for stakeholders in foreign trade also,” feels Sahai. Calling the reform process a continuous process, Sahai hopes that the government would continue with reform process ‘particularly on those parameters where the index still ranks India lower amongst 190 countries’.
Speaking on similar lines and on a rather optimistic note, Charlotte Nan Jiang, Senior Member, Doing Business team, World Bank says, “For the past two years, India has implemented reforms in the area of trading across borders by taking several measures including the use of electronic platforms and improving administrative efficiency. However, there is still room for improvement”.
Devil is in the detail
While numbers in the report clearly suggest that the government has taken firm steps to improve the business environment in the country, is the improvement enough to propel India into the big league? Has business environment across the length and breadth of the country really changed? And how do we stack up against our peers and competitors?
Let us first delve deeper into what the new report highlights and what it fails to. First and foremost, the report is based on data surveys of business conditions in Delhi and Mumbai for a typical mid-sized firm only, and might not be the true representation of lakhs of firms (both small and large ones) spread across the length and breadth of the country. The World Bank though defends the methodology of selecting two major business centres by saying that it is the case with all economies. Well, anyone who does business in India knows that doing business in Dimapur in Nagaland is a far cry from doing business in Mumbai!
Secondly, since June 1 has been the cut-off date for ranking, the havoc caused by the hasty GST implementation, was not factored in this year. Had the responses factored in the troubles that the industry went through in the initial phases of GST implementation, the results could have been quite different. That said, both industry and experts agree that these were teething troubles and in the long run GST will pay big dividends to the economy and improve the business environment of the country.
The other place where the report falls short is in comparing a complex economy like India to that of say a Singapore or a Bhutan. Critics may say that just the sheer size of the economies and geographies make them non-comparable. Julius Sen, Associate Director and Senior Programme Adviser, International Trade Policy Unit, London School of Economics, talking about the value and comparability of such rankings says, "As with all such indices, it should be possible to make improvements. But even then, the argument will be that each country is unique in terms of history, culture, systems, geography, politics, etc., which of course is true. But imagine if you are big international investor or business and you want inputs to base your investment or expansion strategy on, where would you start if you didn’t have these indices?" Most experts agree that investors won't start pouring in funds just looking at the overall ranking. They will go into each parameter and do their own due diligence, but then the overall ranking is good place to start.
Let us now talk about how we stack up against our peers. If we take the example of BRICS, of which India is an integral member, India still lags far behind most of its fellow BRICS peers. This time, Russia topped the BRICS with a ranking of 35, followed by China (ranked at 78) and South Africa (at 82nd rank). The only factor that goes in India's favour when it comes to these nations is that India has shown more improvement over the past four years than the other BRICS members and Brazil (ranked at 125) was placed lower than India.
If we talk about our peers in the larger Asia region, we notice India, this time was outranked by a host of Northeast and Southeast Asian economies. These include: South Korea (4), Hong Kong (5), Taiwan (15), Thailand (26), and Japan (34) all figuring in the top 50. Even countries like Vietnam (68) and Indonesia (72), whose economies are somewhat similar to ours, have outranked us this time. Worth also taking account is the fact that countries mentioned above are also India’s closest competitors as export centres in world trade. Some of them are also competing for the same FDI pie. So, while we have improved a lot, the fact remains that there is a lot of ground to be covered before India can shake off its legacy of bureaucratic babudom and red tapism and become really business friendly. The devil as they say lies in
the detail.
Ground reality
Another factor that needs to be taken into consideration while analysing the report is the difference between intent and reality. While Charlotte Nan Jiang, of the Doing Business team, lauds India’s various recently introduced measures aimed at curtailing down the ‘time to export’ and ‘cost to export’ factors, the reality faced by exporters is quite different. Ports remain congested and clearing customs remain a cumbersome task. While, as per Jiang the online Single Window System for approvals such as Common Application Form (CAF) has streamlined the business processes countrywide, K. K. Lalpuria, Executive Director at Indo Count Industries Limited, feels otherwise. According to him, the IT infrastructure of the government still lacks the required levels of robustness. Citing recent teething hiccups faced as a result of GST’s introductions, he says, “During pre-GST era, we used to file online for the duty drawback refunds and only one document was required for the online filing and the company used to receive the refunds in a matter of 6-7 days, now post GST, a small part of duty drawback is refunded through online filing, and the balance is being done through manual filing. The manual filing is a cumbersome procedure and has increased the time of refund by the government to around 3-4 months”. He also highlights that the Customs “ICE GATE Systems is not robust enough to handle peak loads and is prone to hanging.” Many exporters, despite the government's various announcements for actualising E-governance goals and a push for a digital economy, are still not able to upload shipping bills and eventually end up facing long delays. “Eventually, we have no option but to resort to manual intervention,” rues Lalpuria.
Achilles heel
So, what are the areas that need improvements to make life easy for India's businesses (and exporters as a whole)? The Doing Business report provides a guideline for it.
India's ‘starting a business rank at 156 out of a total of 190 countries is abysmal to say the least and validates the industry’s complaints regarding the prevalence of license raj and red-tapism.
According to Puran Dawar, Regional Chairman, Council for Leather Exports (CLE), and President of Agra Footwear Exporters and Manufacturers Chamber (AFMEC), “Though the government seems committed to removing bottlenecks, bureaucratic red tape and issues in licensing procedures are rampant across the spectrum. The key problem in dealing with the government machinery is that there seems to be no accountability nor a timeline fixed to expedite the industry’s demands,” says Dawar while adding that, “the mindset of the officials is to find technical or other reasons to block the industry's demands. Unless this changes to a mindset where officials find clauses under which our requests can be facilitated or accommodated, things won’t improve.”
And this is not the case with the smaller industries only. Big, iconic, high value projects too have been mired in similar problems. Take for example, the scrapping of the proposal of setting up of 12 million-tonnes-a-year steel plant with an investment of around Rs.52,000 crore in Odisha by POSCO, the world’s fourth-largest steelmaker. The proposal, which had initially been put forth in 2005 by POSCO, was scrapped in 2017 after 12 long years that saw several twists and turns, as it ran into trouble due to problems in land acquisition - a sure a sign as any that the country has to work harder to remove regulatory hurdles for land acquisition. And not just that, if a project that large and backed by big investors can take 12 years just to be scrapped, what signal does it send out to smaller investors?
Besides improving on time and cost to start a business, the areas that require immediate attention are enforcing contracts and trading across borders - both factors that are important to the foreign trade community. Of these 'enforcing contracts' has been a major worry for foreign firms that want to do business in India or with Indian companies. The country has such a huge inventory of unresolved civil lawsuits, that it is almost impossible to receive justice let alone receive it in time.
While the country has jumped 30 ranks in the overall rankings, it's lowly rank when it comes to enforcing contracts has kept many large investors away.
When it comes to trading across borders, where we are ranked 146th, the issue is of even more importance to the foreign trade fraternity. How can a country, which wishes to become a major exporting nation and a reliable supplier in the global manufacturing value chain, afford to rank so low? How serious are we about foreign trade? Our performance in logistics does not suggest so. Our cost of logistics as percentage of total cost remains way higher than that of our peers. Our roadway and railway projects that are aimed at goods transport are way behind schedule, and the less we talk about the congestion at our ports the better. According to Ashok Rajani, Chairman, Apparel Export Promotion Council, despite government announcing that all the country’s leading seaports and airports will move to a 24x7 customs clearance operation some two years back (effective from December 31, 2015) thus reducing time and costs, the real status of India’s ports is still a far cry from the ideal vision. “Nhava Sheva, the largest container port in India is marred by multiple issues. Despite a 24x7 mandate, the irony is that there are bureaucratic hurdles galore at the port; weekends are off for the staff there, shipments are regularly stopped for one reason or the other. Inspections take a lot of time too," says Rajani.
Rajani's sector that reported a y-o-y decline in exports of 39% (in $ terms), during October 2017, has recently apprised the Chief Economic Advisor to the Government of India, Dr. Arvind Subramanian, of the hardships faced by the apparel exporters of the country. According to Rajani, till the time the government does not come up with a broad-based conducive pro-trade policy, backed equally by supportive, pro-trade legislations such as GST, factors such as the 'time to export' and 'cost to export' would continue to remain high in India. Conforming to Rajani’s views, Lalpuria of Indocount says, "For us, ease of business means a better trading ecosystem with good services, but at the moment we face many hiccups – there are congestion issues at ports like JNPT and often we find the port gates jammed as there is lack of infrastructure to handle our shipments.”
The government has reiterated the need for bringing down country’s logistics cost from an existing 14%. Unless that happens, the country will not be able to give a competitive edge to its exporters. As per an ASSOCHAM-Resurgent India joint study, India can save up to $50 billion if logistics costs are brought down from an existing 14% to 9% of GDP. Further, currently, India lags far behind in ports and related logistics infrastructure too. In India, against a share of 9% of railways and 6% of roads in the GDP, the share of ports currently stands at a mere 1%.
Unlike the Indian scenario, China’s key manufacturing hubs are close to major ports, which help its exporters to save costs too. The much-touted inland waterways can be a game changer in this regard. There are takeaways to be drawn from the success stories of China, South Korea, Japan and Singapore where the ports have been instrumental in leading the country’s economic growth roadmap. In this, the government's ambitious Sagarmala project that is aimed a harnessing at port-led economic growth, along with a focus on developing economic corridors and logistic parks on national highways, could be some of the big-ticket endeavours that have the potential to make a difference in turning around the fortune of India’s ease of doing quite considerably.
Marching ahead
A country like India still has a long way to go before it can actually be termed as an actual improver on any business friendliness index. What cannot be overlooked is the fact that in India over 93% of the workforce remains in the unorganised sector. As per the Economic Survey 2015-16, the informal sector accounted for 90% of jobs through the period 2004-05 to 2011-12. And this trend was supposed to increase marginally to 92-93% in 2017, according to a report by the National Commission for Enterprises in the Unorganised Sector (NCEUS). Worth noting is that this is the very section that has been hit hard by GST and the demonetsation drive! It is unclear how much of this segment is appropriately reflected in the World Bank ranking or gets reflected in any other similar ranking for that matter.
To really usher in an era of business friendly governance, instead of sitting on its laurels, the government has to work on both the guidelines provided by the World Bank as well as the feedback from the business community to bring in policies that inspire the confidence of investors on the country. The government has announced that its goal is to be ranked amongst the top 50 in the world. A laudable goal no doubt, but the road will not be easy. While jumping 30 ranks from 130 to 100 is in itself an achievement, moving up the ranks will come even harder. What is more as that key indices like time and cost to start a business are also important factors that will decide the fate of the government's flagship projects like 'Start-up India' and 'Make-in-India'.
The government has made all the right moves when it comes to reforms. Not so with their implementation. If we need to make a significant leap from our present ranking, execution will be key, and that is when we will see inclusive and sustainable economic growth and investors lining up to do business in and with India. The government has to understand that more than glorified rankings, reality matters more. Do you think China ever cared about any ranking on any Doing Business parameter while enroute to becoming the superpower it is today? It made progress that included smaller, unorganised business units and China Inc. alike.
Having said that, of course we are waiting for the day when we celebrate a half-century. Rankings aren't everything perhaps but we should be proud when we are headed for the summit. That India has moved up the order in Doing Business report this year is an indication - albeit with a narrow viewpoint given the limitations of the study - of how the world views the nation's objectives. We however should be a nation of early movers and adopters; not early celebrators.
TDB: India’s has climbed 30 places in the Ease of Doing Business ranking. How will this impact the economy?
Ajay Sahai (AS): India’s surge in the latest World Bank Report on Ease of Doing Business from 130th rank to 100th rank has come at the most opportune time when the impact of constructive disruptions like demonetisation and GST are gradually withering. What is more reassuring is that India is amongst the top 10 “improvers” globally, having done better in eight out of 10 business indicators. This is a very important signal that India is moving in the right direction and creating the kind of channels that will attract foreign direct investment. Such improved ranking provides impetus to investment, both internally and through FDI/FII routes. However, we should continue with the reform process, particularly in those parameters where the index still ranks India lower amongst 190 countries. The reforms are a continuous process which is all the more necessary as other countries are also undertaking many radical reforms to improve their ranking. In my view, the government's commitment to bring India into the top 50 in ease of doing business ranking is both commendable and required to provide an enabling eco-system for trade and industry to prosper.
TDB: Does the improved ranking along side an improved credit rating by Moody's provide opportunities for improved growth in foreign trade too?
AS: The improved ranking in Ease of Doing Business and Credit Rating by international agencies are clear indicators that the business climate in the country is improving on a year-on-year basis. The improvement in getting credit, paying taxes, getting electricity, protecting investor’s right, enforcing contracts are all important for stakeholders in foreign trade too. However, I would like to add that this is just one of the factors that impacts foreign trade. There are numerous other factors such as the growth of global trade, movement of the exchange rate, logistics cost, infrastructure which are equally vital for growth in foreign trade. This sector is hugely important not only for managing the foreign exchange of the country, but also for employment generation in the country. Many of the important sectors of exports like textiles, handicrafts, gems & jewellery, marine & agriculture are major creators of employment. There is a need to nourish and nurture these sectors.
TDB: Going forward, can India maintain this new-found momentum? What role do you envision for India’s Exim sector when it comes to promoting ease of doing business?
AS: As mentioned before, reforms are ongoing and must be pursued with greater zeal. There is a need to look into land and labour reforms to unleash the true potential of this great nation. Going forward, Exim sector should be the driver of Indian economy. If the country has to exhibit double-digit growth, exports should clock 15-20% annual growth. India’s GDP growth story in the first decade of the 20th century owes its success to a spectacular growth in exports. Our share in global merchandise exports is 1.7% and in services 3.4%, but our country has the wherewithal to take our combined share to 5% of the global trade in the next 10 years.
TDB: Leaving aside the thumbs up by the World Bank, what challenges still persist for the exporting fraternity?
AS: The exporting community is saddled with heavy logistics cost, high transaction cost, high rate of credit and infrastructure inadequacies. Our transaction cost, though having come down due to the introduction of EDI, is still much above the international benchmark. The cost of credit in India is about 5% more than most of our competing countries. The infrastructure, particularly the roads, which carry two-third of our exports need immediate attention. It is quite heartening that government has realised to have a holistic view on logistics and created a separate Department of Logistics. I am sure, this will provide focused attention to logistics. However, we have to look into the structural issues that are reducing the competitiveness of our exports as reflected in a recent report by CRISIL.
TDB: Are these ratings a true representation of the ground reality in India? Critics say these ratings are based on data taken from just Mumbai and Delhi. Also factors such as demonetisation and issues arising out of GST’s rollout have also not been factored in this time. Your thoughts?
AS: One has to compare apples to apples. If the past ratings were based on findings of Delhi and Mumbai, subsequent ratings also have to reflect improvement in these cities. However, World Bank can include other cities, provided it has the necessary manpower. The introduction of GST may not have fallen in the period adopted by the World Bank. I am hopeful that procedural and technical challenges relating to GST would be overcome shortly. When in the next edition of the Doing Business Report this revolutionary tax reform is considered, it will hugely improve India’s ranking in Ease of Payment of Taxes. There are numerous reforms that helped create a better business climate but have not been factored in this edition. I am sure these will be considered in the next edition of the report, thereby assisting the country to climb up the rankings.
TDB: India has moved 30 places up in the ease of doing business index. How important is this for an economy like India?
Charlotte Nan Jiang (CNJ): The results show that India is committed to improving its business climate. A continued process of improving the regulatory framework that affects local business can contribute to stronger entrepreneurial activity in the country. When smart regulations help reduce the regulatory burden for small businesses they are able to focus their resources and energy on increasing their productivity and expanding their markets and ultimately creating more jobs.
In Doing Business 2017, the authorities focused on some medium-to-long term reforms, which were complex but with significant potential impacts on businesses down the road. In the 2018 study, the initiatives have started to show impact. For example, India introduced the online Single Window System for approval of building plans and several other services through the Common Application Form (CAF). This online system allows for the submission and approval of building plans prior to requesting the building permit. It has also streamlined the process of obtaining a building permit.
TDB: The Doing Business rankings 2018 are based on the Distance to Frontier scale. How different is this from the previous methods? And doesn’t it create inconsistencies while comparing to previous rankings?
CNJ: The distance to frontier (DTF) score provides an absolute measure on how close or how far an economy is from the best regulatory practice (a maximum score of 100) in the different areas covered by Doing Business. And the difference between an economy’s DTF score in 2016 and 2017 illustrates the extent to which the economy has closed the gap over the past year.
With regards to the issue of comparability, the rankings are calculated for the current year only and therefore, previous published rankings are not comparable. Year-to-year changes in the number of economies, the number of indicators and methodology changes affect the comparability of rankings from previous years. For example, in recent years, Doing Business introduced improvements to all of its indicator sets. In Doing Business 2016, dealing with construction permits, getting electricity, registering property and enforcing contracts introduced new measures of quality, and trading across borders introduced a new case scenario to increase the economic relevance. In Doing Business 2017, paying taxes introduced new measures of post-filing processes.
TDB: Many criticise that the rankings judge countries on a universal scale and may not be a true representation of a country’s ‘business conditions’. Your comments?
CNJ: Doing Business measures business regulations and their enforcement for local firms. The indicators are built on solid background papers, which identify policies and practices that governments should focus on for economic outcomes. The choice of indicators has also been guided by extensive economic research and firm-level data, specifically data from the World Bank Group’s Enterprise Surveys.
Doing Business does not measure the full range of factors, policies and institutions that affect the quality of an economy’s business environment or its national competitiveness. The focus is deliberately narrow to allow the comparability of 190 economies. It does not, for example, capture aspects of macroeconomic stability, development of the financial system, market size, the incidence of bribery and corruption or the quality of the labour force. Ensuring comparability of the data across a global set of economies is a central consideration for the Doing Business indicators. We believe that the report is a very useful tool for governments that want to help SMEs grow.
TDB: Which, according to you, have been the red flag areas that India needs to work on?
CNJ: India’s weakest performance is in the areas of dealing with construction permits and enforcing contracts. In dealing with construction permits the costs associated with the regulatory steps to build a commercial warehouse are much higher than in OECD high-income economies. In Mumbai and Delhi these costs amount to 22.5% and 23.9% of the warehouse value respectively, while the cost is only 1.6% in OECD high-income economies. In the area of enforcing contracts, it takes almost three times in India to resolve a commercial dispute between two businesses (1,445 days) compared to OECD high-income economies (577.8 days).
TDB: Some critics in India are of the opinion that the rankings provide only a large city perspective, while a country’s true potential lies in many of the lower rung cities. Your take?
CNJ: It is true that business regulations and their enforcement may differ within a country, particularly in federal states and large economies. In the case of India and for 10 other economies with a population of more than 100 million, as of 2013, the coverage was expanded since the Doing Business 2015 report to include the second-largest business city as well. While some of the regulations measured by Doing Business depend on the authorities at the local level, many other laws and regulations are of national scope and therefore applicable to every jurisdiction. In this respect, using the largest business cities as a proxy for the entire national territory continues to provide relevant insights on the regulatory climate for the economy. Moreover, where policymakers are interested in generating data at the local level, beyond the largest business city, Doing Business has complemented its global indicators with subnational studies. For example, six economies completed subnational studies this year: Afghanistan, Colombia, three EU member states (Bulgaria, Hungary and Romania) and Kazakhstan.
TDB: One of the 10 parameters is cross-border trade. What have been India’s strengths and weaknesses on this parameter. What aspects need to be worked on?
CNJ: For the past two years India has implemented reforms in the area of trading across borders by taking several measures including the use of electronic platforms and improving administrative efficiency. In Doing Business 2018 India reduced import border compliance time in Mumbai by improving infrastructure at the Nhava Sheva Port from 283 days last year to 265 days now. Export and import border compliance cost were also reduced in both Delhi and Mumbai by eliminating merchant overtime fees and through the increased use of electronic and mobile platforms.
However, there is still room for improvement. The time for border compliance for imports and exports (including time for customs clearance, inspections by the relevant authorities and port handling) is above both the regional average for South Asia and the average for OECD high-income economies.
TDB: Indian government has announced a more liberal FDI policy, making it easier for foreign companies to establish local units or invest in existing businesses. Still, many foreign investors are wary of investing in India. Critics say that an improvement in India’s Ease of Doing Business ranking is a small drop in a large ocean. Please comment.
Julius Sen (JS): Although I largely agree with the critics, creating the right conditions is a process that takes time and is not always easy to manage in a complex federal system, and in a situation where investments are usually in an international currency and not your own. Everyone knows that the Ease of Doing Business index is being gamed, and that improvements are not really substantive. At the same time, foreign investors also play a game with governments like India that need foreign investments. We need to bear in mind that many of these foreign investors are actually Indian companies that have shifted money offshore, and are thus looking for a double benefit. On the one hand they escape taxation, and then hope to extract more favourable terms to bring the money back in.
TDB: Many reports suggest that improved rankings have little or no corelation to improved GDP and FDI. Despite this data many countries and companies look towards these reports for basing their policy and investment decisions. What makes this ranking so important?
JS: Like all global indexes or rankings, the World Bank's Ease of Doing Business rankings are at some level superficial. But like credit rating agencies they provide some insights into the conditions of an economy and help determine the cost of borrowing by helping to assess risks. Investors still need to do their own due diligence relating to their specific investment ideas, but this is sometimes a useful starting point. For the exercise to be meaningful, it may be useful to create an independent Ease of Doing Business index for the states and union territories of India. This would actually be more useful for many international and national investors.
TDB: A recent Carnegie India paper stated that in order to create an effective trade policy, India needs to implement corresponding effective economic domestic reforms. Do you agree with this statement?
JS: I agree that there has to be better policy alignment between domestic trade and economic policies, and international commitments. The best way to do this is to take the regulatory principles of the WTO and transpose them into India’s domestic policy framework. This is however an immensely complex task because of the way the Constitution of India is structured, especially with respect to the special provisions relating to tribal states and Jammu & Kashmir, scheduled castes and scheduled tribes. A complex, sensitive and delicate task to be sure, but certainly necessary.
TDB: The Ease of Doing Business rankings include different countries with different economic situations. Many criticise that the rankings judge these countries on a universal scale and may not be a true representation of an improvement or decline in a country’s business conditions. Do you agree wit the statement?
JS: Yes, certainly. As with all such indices, it should be possible to make improvements that respond to the points you have mentioned. But even then, the argument will be that each country is unique in terms of history, culture, systems, geography, politics, etc., which of course is true. But imagine if you are big international investor or business and you want inputs to inform your investment or expansion strategy, where would you start if you didn’t have these indexes?
TDB: What is your take on World Bank’s ‘Ease of Doing Business’ ranking and Moody’s upgraded sovereign ratings for India?
Anwar Shirpurwala (AS): The improved Ease of Doing Business ranking and Moody’s upgraded rating are definitely very important for the country as well as the industry as these help us to set up benchmark and also set us on the course of correction. As these are not the internal assessments and being conducted by independent international bodies, these are quite significant. These ratings and rankings give a clear roadmap or a direction to the country – in what direction one should move, what are the steps a country should take to keep on improving.
TDB: Does improved rating and ranking provide opportunities for better growth?
AS: I think the ratings are largely a depiction of business environment in a country. Any domestic or international company needs a basis on which it can set up a business or invest in a country. These ratings and rankings are about how smoothly one can operate its business in that country.
If you look at how India is moving from the first time the rankings were announced, you’ll find out that more and more parameters are being added and the rankings are getting improvised. It’s a gradual process of improvement.
Being a representative of an industry, when I look at an overall perspective, I think the improvement in India’s ranking is a good sign for businesses. I think it would give a positive sign to investors, businesses and to the country as a whole.
TDB: Critics say that a ranking based on the business environments of only Mumbai and Delhi is not a true representations of the ground realities. What is your take on this?
AS: It is very easy to criticise. There is no system which is completely fool-proof. Those who are criticising should provide practical suggestions as to how to make the Ease of Doing Business rankings more relevant.
TDB: When it comes to ease of doing business, India still lags on some parameters. How can we improve further?
AS: According to me, every single parameter is important. I believe the government has already taken a note of the parameters where we are lacking. From all the interaction which I have with the government, I clearly see the spirit of doing better.
TDB: Does the impact of these rankings and ratings differ from sector to sector?
AS: It is obvious that some sectors find there is no impact but some may find its positive impact. I look at the rankings optimistically. For our sector, improved ranking gives a sense of confidence to our investors. It is a sign that we are moving in the right direction.
TDB: Can India sustain this momentum? What role can private sectors play in improving our rank?
AS: I think what is important to see is how the ratings change next year. It is easy to move from 130th rank to 100th rank, but coming under 50 is a much tougher task. We have to see how things shape up in the coming years.
In fact, I believe, India can sustain this momentum but we have to work harder. The rankings are based on the government policies that are aimed at creating a conducive environment for doing business in India. In such type of rankings and ratings, private players don’t have a direct role to play. But if businesses are provided with a conducive environment to grow, they will contribute to the economy. If business grow, then better jobs will come in and the economy will grow.
TDB: India has seen an improvement in its ranking in the latest World Bank Ease of Doing Business report. Is this a sign of better days to come for the Indian economy and the trade communities?
Madan Sabnavis (MS): The World Bank rank is a reflection of policies that have been put together to foster businesses. This said, the flow of foreign investment is not decisively determined by this rank. Foreign Portfolio Investment (FPI) is driven by the state of equity markets and valuations as well as interest rate differentials between the world and domestic markets. Foreign direct investment (FDI) is based on long-term plans and while a better rank due to better policies will help at the margin, we cannot expect enormous amounts to flow in immediately. Over the long-term, as reforms keep pace, FDI will tend to increase. In terms of trade, specific trade enhancing policies have to be viewed rather than the overall rank.
TDB: How important are these ratings when foreign investors look to invest into a country? Are there any particular parameters (of the 10 used for the ranking) that have a bigger impact on a country’s position when it comes to investment and trade potential?
MS: Foreign investors look at the overall ranking to get an indication of the direction of reforms. They look at individual ranks when it comes to specific decisions. Further, they look at specific conditions in the location where they are investing. It must be remembered that the ranking is based on the environment in Mumbai and Delhi and does not cover other centres. Property, construction, electricity, etc., conditions vary across cities as states have different rules. At times, investors look at just the headline numbers of ranks and take a call. But there are different rules for different industries that matter. For example, if one wants to invest in telecom, the rules prevailing here matter more than generalised ranks. But as a whole, a better rank is good for the image of the country.
TDB: Some critics are of the opinion that these rankings do not provide a realistic picture of the economy. How do you perceive such criticism?
MS: The criticism is not well founded. World Bank has an objective measure of gauging the ease of doing business environment across all countries. India has done remarkably well on some of these parameters and that is why we have jumped 30 ranks. There can be no debate on this. As long as the rank was low, it was never pointed out by critics that the criteria was not realistic. When we talk of the economy there are other factors concerned like GDP, infrastructure, currency, etc. But then that is a different set of issues. The World Bank ranking is directed at policies for doing business where there has been substantial improvement. We should not mix the two issues.
TDB: There has been an increased focus on opening up sectors for FDI and increasing exports. What role will the improved ranking, latest Moody’s rating upgrade and the change in FDI policy play in expanding our GDP?
MS: In the long run, they all help. Moody’s ranking is important as several investors take a call on destination, based on country rating. Change in FDI policy takes care of the pull factor. But, foreign investors look at different markets and opportunities and put money where it works the best. Thus, the immediate impact may be muted. We did ease FDI norms in defence and railway equipment, but that has not led to increase in investment. It takes time and we need to have enough investable funds in the world market. World Bank ranking, as mentioned before, is a broad indicator of policy and more than the rank the specific parameters matter when it comes to FDI.
TDB: Does an improved ranking and credit rating provide opportunities for improved growth in foreign trade too?
Rajoo Goel (RG): An improved ranking and credit rating for India creates a positive impression in the minds of global investors with respect to the overall ‘ease of doing business’ in the country. This is likely to result in higher investments in trade, business and manufacturing in the country, including greenfield projects. A better business environment resulting from better tax administration, improvement in the enforcement of commercial law, easier cross-border trade, availability of power will surely give a fillip to domestic as well as
foreign trade.
TDB: Going forward, what challenges do you foresee for the exporting fraternity, particularly in your sector, when it comes to foreign direct investment inflow into the country?
RG: Imports and exports are an essential part of successfully operating electronics sector. This sector is technology intensive and being part of a globally integrated value chain is dependent on FDI to a large extent. In my view, a better business environment will now give an advantage to the Indian entrepreneur to leverage better terms of engagement with foreign trade partners. Having said that, I would like to add that the velocity of investment deals will ultimately depend on the parties involved in each instance of FDI and the inherent strength of the business case made out by the concerned partners.
Further, exporters in India continue to face challenges with respect to Goods and Services Tax (GST) and high cost of finance vis-à-vis competing nations. Thus, these and several other issues need to be addressed on an urgent basis. Going forward, our focus should be to better our global rank.
TDB: As per critics, the World Bank ranking cannot be said to represent a pan-India business sentiment as it is based on data from just two metros – Delhi and Mumbai. Factors such as demonetisation and issues arising out of GST’s rollout have also not been factored in this time. Your thoughts.
RG: Of course, there continue to be many day-to-day business challenges in the short- to medium-term that will need to be addressed, especially to facilitate the growth of the MSME segment of the electronics sector. Changes in the legal/regulatory environment, such as the roll-out of the GST, is a step in the right direction and will play out to India’s advantage in the long-term. Having said that, many GST-related issues persist and may take another 6-12 months to get sorted out, as these relate to an understanding of the system, the IT infrastructure requirement and the tax rates, which even after the recent announcement of major corrections by the GST Council are anomalous in some cases. Further, digitisation of financial transactions has to be a gradual process, and it would be much better and effective if such a change is embraced voluntarily by the sector rather than forced upon.
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