World Bank rankings on ease of doing business ignore the complexity of the Indian landscape. An indigenous framework is needed.
WAS IT A mistake for the prime minister to set his government the target of improving India’s rank order in the World Bank’s “ease of doing business” index from 131 to 50 within two years? I ask this question because the latest report published last month places India just one notch higher than what it was two years back. I also ask because the reaction to this report has been surprisingly defensive. The PM has directed the bureaucrats to explain the reasons for this laggard result and the steps that must be taken to improve performance.
I am of the view that the PM should not peg his objective of improving business conditions on the world bank index. My reasons are three-fold. First, the World Bank index is based on limited data. Second, there is a disjunct between the complexity of our polity and the simplicity of the Bank’s methodological approach. And third, numbers are easy to misrepresent. They seldom tell the full story.
The PM should direct his officials to prepare an indigenous “ease of doing business index” based on the government’s prioritisation of sectors and businesses and the key factors required to attract investment into these priority sectors.
The World Bank report is based on data gathered from just Mumbai and Delhi. Yet the language in which it is reported suggests it is reflective of conditions across the country. Further, the index is derived by looking at 10 sub indices. The final score is an average of the scores for each of these sub indices. Several of these, like registration of property, ease of getting a construction permit, payment of taxes, securing an electricity connection and acquisition of land, are matters over which the Centre has only partial control. It cannot “ease” the business conditions in these areas without the support of the state governments. Given the number of states that are not under the control of the BJP, it could be argued the PM was setting himself up for disappointment. Finally, it is always easy to misrepresent a number. The fine print of the World Bank report does spell out the assumptions and conditions that underpin the derivation of its rank ordering, but in the subsequent commentary these caveats are given short shrift. In fact, they are almost always fully distilled out. The discussion is invariably focused around the number, which is the rank.
Doing business in India is unquestionably difficult. The PM is right to exhort his colleagues to replace the red tape with the red carpet. This said, the government should not strap its policy objectives onto the coattails of generic and broad-based parameters developed by international institutions. It should contemplate instead the creation of its own indigenous index focused on improving business conditions for identified companies in priority sectors.
What should be the government’s priority for private sector investment? One could offer several answers but for the purpose of elaborating the above point, let me suggest the emphasis should be on labour intensive manufacturing industries and clean energy. I am not suggesting physical (housing, roads, ports, pipelines, etc) and social (education, water, health, etc) infrastructure or distribution and delivery systems (cash transfers) because whilst these are of crucial importance and in desperate need for investment, I do not believe the private sector will invest in these sectors. This is because the return on investment will be low and the banks will not extend credit — at least not until they have recovered the loans made for such infrastructural projects during the period 2003-2011.
Next, what are the major obstacles impeding the flow of capital into manufacturing and clean technology? Three major blockers stand out. One, land acquisition. This is because land records are imprecisely recorded and this embroils prospective investors in a tangle of agents, petty bureaucrats, lawyers and politicians. Two, the inadequacy and poor quality of essential infrastructure (water, housing, electricity, roads etc). This adds to the costs of production and erodes competitiveness. Three, the lacunae regarding intellectual property rights, fiscal stability and contract sanctity. This deters investors from investing in R&D and setting up technology centres.
The answer to the above two questions offers guidance on the derivation of an indigenously relevant “ease of doing business” index. To increase the inflow of capital into labour intensive manufacturing and/ or energy related technologies, the government should track an index that is influenced by progress on matters related to the digitisation of land records, availability of water, travel time from point of production to port of export, availability of skilled labour, rules relating to taxation, IPR and so forth.
This index should be developed by third party, non-partisan, non-government technocrats and its details should be in the public domain. The data should be published periodically and the government should be monitored and evaluated against the progress made along the scale of this index. I am not suggesting that the World Bank index be completely ignored. For in the absence of anything else, they are a check against complacency. But I am suggesting that indices like those prepared by the Bank should not be the pivot around which policy is framed; nor should they be the cause of distraction from the more important task of identifying and removing the obstacles in the way of significant and disproportionately impactful private sector investment.
This article first appeared in the Indian Express on November 7, 2016. Like other products of the Brookings Institution India Center, this article is intended to contribute to discussion and stimulate debate on important issues. The views are of the author(s). Brookings India does not have any institutional views.