Ease of doing business: Govt deserves credit; next key step should be reforming babudom

When a journalist from a leading daily asks World Bank officials, at a press conference on the Doing Business Report 2018 (DBR2018), about rising intolerance and ease of doing business, you get a drift of how the narrative will go.

Yes, India is still facing a lot of real problems – economic and social – and some imagined ones too. Yes, the over-the-top hype of the report by this government is a tad embarrassing. But none of this can take away from one bald fact – India has jumped up 30 places in the World Bank’s Doing Business rankings (and nor should the government and ruling party brandish this report to deflect attention from the real problems). Importantly, it has also improved its distance to frontier (DTF) score (which now stands at 60.78) by 4.61 percentage points over DBR2017 and 5.99 percentage points over DBR2015.

(The DTF improvement is much more when compared to 2014, but there have been some methodology changes since then, so that of earlier years is not strictly comparable in all parameters. Rankings are relative, scores are absolute and the DTF score shows distance from an ideal situation.)

And all this does have to do with the slew of business-friendly reforms that have taken place since 2014. That’s why there has been an increase in DTF scores on all 10 parameters that constitute the index this year. On most, the upward movement has been slow and steady since 2014, but there has been a big jump over the last year in paying taxes (a 18 percentage points increase due to online processes and payments) and getting credit (10 percentage points).
The report, as government spokespersons have constantly pointed out, has put India in the list of 10 countries that have done the most reforms in the past year (India has done eight, the highest ever by it since DBR was started in 2005). One can detest all that the Narendra Modi government stands for, but one cannot deny that its obsession with global rankings has made it single-mindedly focus attention on business-friendly reforms at the Centre and the states, the complicated structure and glitches-ridden implementation of the goods and services tax (GST) notwithstanding.

Exulting is good but it is time to get over it fast, lest it turn into complacency. Fortunately, all the big guns of the government who were on television acknowledged that there were areas where India was still lagging and promised to work on these. And when they do that, the focus should not be on next year’s DBR, but on ensuring the reforms are reflected on the ground. Let us not forget that the Ease of Doing Business: An Enterprise Survey of Indian States, a joint endeavour of the NITI Aayog and the IDFC Institute, released two months back, showed that businesses were not experiencing the ease of doing business that state governments say they had implemented.

But not everything is in the central government’s hands. Dealing with construction permits is one such area, since these permits are really a local government issue. India scored 39.86 this year (after languishing at 37.16 for three years) and this is a huge distance from the ideal score of 100. Three months and 30 procedures to get a construction permit is way too much. Improving this is not just needed from the point of view of next year’s DBR, but also to give a boost to the construction sector, the biggest employment generator.

Another problem area is registering property where India scores only 47, which is slightly up from 46.83 in 2017 but is lower than the 51.2 score of 2015. If businesses are going to take upwards of two months to clear eight procedures, this is going to be a dampener for new businesses. This, too, is something state governments and local bodies need to act on.

The judiciary too has to be got on board. Enforcing contracts is one area that foreign companies wishing to do business in India will be looking at closely and seeing that it takes four years (1445 days) to enforce a contract may put them off. India scores only 40.76 on this. Progress on this parameter has been slow – the score was 36.13 in 2016 and 38.9 in 2017.

Finance Minister Arun Jaitley did reel out various initiatives the government has taken and is taking – commercial courts, amendments in the Arbitration Act, arbitral centres etc – but what remains to be done is huge. Judicial reforms and understaffing in lower courts need to be addressed urgently and this is something the government cannot do entirely on its own.

Even on the parameters where India has done well, there is enormous scope for improvement. Why, for example, should it take one month to start a business (the IDFC enterprise survey shows it takes 63 days in Tamil Nadu and 200 days in Kerala and Assam)? Why should it take 45 days to get an electricity connection?

The Modi government has used the DBR indices to work out sub-national ease of doing business index, prodding states to compete with each other (Anette Dixon of the World Bank singled out Rajasthan for praise at Tuesday’s press conference). That has led to some scything of red tape, though businesses (especially small and medium ones) say much of this is cosmetic.

Small businesses, especially, still have to deal with a lot of regulatory cholesterol, and much of this may not be captured by either the DBR or the sub-national index. That is why regular enterprise surveys are also important. Remember, it is small and medium businesses which will generate the bulk of employment – jobs continue to be the biggest challenge facing the country and this government. This sector has been hit hard by demonetisation and GST and needs a lot of nurturing and hand-holding. Getting various babus off their backs is very important.

And this shows the need for the most important reform that is not on the radar at all – administrative reforms. The higher bureaucracy may buy in to global rankings, but the lower bureaucracy is simply not bothered. It just wants to hold on to its powers to harass and make money and businesses say putting processes online does not increase transparency or reduce corruption beyond a point. This needs to be tackled urgently.

The focus of business-oriented reforms needs to move from merging processes or putting them online to questioning the very need for many permissions. The Factories Act, Shops and Establishments Act and several other rules and regulation need a serious review and trimming.

Above all, the DBR and the sub-national ease of doing business rankings are all about business-friendly measures. And there is a point beyond which these cannot be pushed so long as the state is over-interfering in economic activity. The Modi government has been more business-friendly than most other governments, but it now needs to be pushed to become more market-friendly.