BEHIND INDIA S LEAP IN EASE OF DOING BUSINESS
- November 13, 2018, 4:27 pm
India’s leap in the World Bank’s Ease of Doing Business rankings this year has slipped under the radar, in the cacophony over demonetisation and the RBI-Centre spat.
The country has, in fact, been one of the biggest ‘improvers’ in the 2019 study, with its rank shooting up from 100 to 77, among 190 countries. This is quite a big jump, given that its rank crept up from 142 to 100 in the four years from 2015 to 2018.
WHAT IMPROVED FOR INDIA
India’s climb in the 2019 rankings seems to have come mainly from sharply higher scores on two ‘doing business’ indicators — securing construction permits and trading across the borders. It also made smaller improvements in starting a business and getting credit.
While India managed dramatic changes in some indicators, there were others where its scores barely budged.Its score remains dismal on registering property, paying taxes and enforcing contracts. .
SHORTCOMINGS OF THE STUDY
The indicators considered for the study are: starting a business, getting construction permits, securing electricity, registering property, getting credit, protecting minority investors, paying taxes, cross-border trade, enforcing contracts and resolving insolvency.
Instead of looking at whether reforms were actually implemented, and in what manner, the World Bank just takes governments’ words for it. Theoretically, GST was supposed to make it cheaper to do business and boost economic growth by simplifying tax payments. But even the government has admitted that the implementation was poor. GST has hurt business and destroyed jobs, which is the opposite of making business easy. It has made paying taxes not easier, but more difficult. Yet, the World Bank rewards India with a higher score on the basis of intention, not outcome.
Another example is the recent bankruptcy law. While it looks good on paper, it remains to be seen how it is implemented. Yet the World Bank improved India’s score on the basis of a non-implemented reform.
2.Sample Selection Bias
The index is constructed using only one city for most countries, and two for more highly populated countries like India. It used data from Mumbai and Delhi, which are in no way representative of the entire country. Being the largest and wealthiest cities, they have better infrastructure, legal systems, government services, and so on.
India ranks high on a parameter like getting electricity if we consider Mumbai, which enjoys 24/7 electricity. But a majority of the country gets electricity only for a few hours a day, if at all. Getting a connection outside of big cities is also a huge hassle. If the World Bank were to use the exact same methodology on a sample of randomly selected towns and villages, India’s score would be much lower in every category.
Stemming from the sample selection bias is another big problem. Mumbai and Delhi are mostly service sector economies, as opposed to agriculture or manufacturing. Since there are fewer regulations on the service sector, this makes doing business in Mumbai or Delhi easier.
One of the main things required for starting a business is real estate. How easy it is to acquire property influences a country’s score on the index. Acquiring property for a service-oriented business is very easy. But for setting up a factory ,huge land requirements is necessary . But the government has decreed that farmers may not sell their land for non-agricultural purposes, such as manufacturing, without permission from government.A huge paperwork or corruption will take place to set up a factory . The World Bank’s index fails to reflect this.
This is an important detail because the service sector creates very few jobs, relatively. Software firms and restaurants, while very profitable, cannot employ tens of millions of youth. Only factories can generate gainful employment for these people.
In order to standardize data across countries, it makes several assumptions, some of them quite ridiculous.For example, it assumes that all business is subject to similar tax treatment. That is demonstrably false, especially in larger economies like India. The government imposes additional levies on products government deems “sinful”, such as alcohol, tobacco, and even my beloved aerated drinks.
Next, there are tax breaks for certain sectors, or for doing business in certain areas like Special Economic Zones (SEZs) or in the North-Eastern states. This backdoor central planning is problematic and should result in a lower score from the World Bank. The fact that they’re not results in some bizarre rankings.
5.Error by Omission
The single largest cost of running a business is typically labor. Regulations such as minimum wage, paid maternity leave, and so on increase the cost of hiring employees. More labor laws mean that business is more difficult. Yet, the Ease of Doing Business Index does not include labor regulations as a component. If it were included, India would have a much lower score since it has highly restrictive labor laws.
In short, the World Bank’s intent is to measure a country’s progress on a few ‘doing business’ indicators in great depth, without trying to be comprehensive about the indicators, or striving for a statistically large sample. The above facts make the shortcomings of the study obvious. In India, it may not reflect the experience of partnership or proprietorship firms that dominate the small business space, or those located in tier 2 or tier 3 towns.
A BETTER ALTERNATIVE
With the ten indicators measured by the study well-known, it is also easy for governments to specially target these areas for reforms. But the EODB rankings do serve as the most trusted ready-reckoner for foreign investors looking to set up shop in a country.
Given the long list of problems with the World Bank’s Index, following the Index of Economic Freedom, which is published annually by the Heritage Foundation would be better scenario. While taxpayer-funded organizations such as the World Bank do their best to make big government look good, voluntarily-funded think tanks like Heritage do a more sound analysis.
The Index of Economic Freedom overcomes the flaws and gives a more accurate picture of the economy. Also, the fact that India has an abysmal ranking of 143 on that index will wipe the smile off politicians’ faces and remind them that there is far more scope for reform than they think.