Parthasarathi Shome: Cross-country ease of doing business

It is disconcerting that India's ranking hardly improved in 2016-17

As 2016 nears its end, the World Bank has just published the cross-country Doing Business Database 2017, the basis for the assessment here. India’s ranking has changed from 131 to 130 out of 190 countries. This is not good news in the midst of the challenges of demonetisation and its likely short-term dampening of gross domestic product (GDP) growth that will take time to recover. Unless there are countering improvements such as in ease of doing business, growth will be a mounting challenge in the short to medium run, as is already being talked about in government circles.

Table 1 shows ease of doing business rankings for the US, the UK and BRICS, since they are trading partners as well as competitors. India lingers at the bottom. While these countries have all worsened a bit – other than, of course, China – India remains last. Further, Table 1 reveals the UK and the US as holding the seventh and the eighth ease of doing business ranks respectively, while Brazil (123rd) and India (130th) are close competitors at the bottom. Thus, there is no need to justify legitimate worries regarding the unlikelihood of success of India’s current attempts for Make in India.

Table - Ease of doing business

The stubbornness of India’s low overall ease of doing business ranking leads one to examine India’s ease of doing business component indicators (Table 2). Amazingly, getting electricity has improved by a whopping 25 ranks, taking India to the 26th rank out of 190, while the next best is for enforcing contracts (by 6 ranks), nevertheless keeping India at the 172nd rank. Disappointingly, there has been no improvement at all in the ease of paying taxes, languishing at 172nd rank. And dealing with construction permits has worsened (by 1 rank), with a present rank of 185th. 

Since, in this jumble of numbers, the improvement in getting electricity stands out, it calls for an examination by a fine-toothed comb (Table 3). Four criteria —number of procedures, days needed for connectivity, cost as per cent of income per capita, reliability of supply — define electricity and an averaging procedure yields its score (the same process is used to derive scores for all indicators). 

Table 3 shows the electricity scores for the worst and best global performers, together with how India’s scores fit in between. It reveals that India is much better than the worst and has actually improved significantly during 2016. The flip side is that electricity seems to be explaining much of why India has maintained its overall ease of doing business position at 130. Otherwise its ranking would certainly have worsened.

Accordingly, Table 4 calculates what the ease of doing business rankings would have been without the electricity indicator for the sample countries. The procedure removed the score for electricity from the total of 10 ease of doing business indicators and recalculated the score as an average of the remaining nine indicators. India is revealed to decline to 143rd rank from 130. South Africa, the US, and China would improve in their ease of doing business rankings; the UK would remain the same; Brazil and India would worsen; India, the most. Thus the electricity indicator is really the supportive criterion that has kept India at its 130 score –however low is may be considered – for, otherwise, it would have fallen even more, to 143.

This is alarming forgovernment’s attempt to attract investment. The government can emphasise start-ups and incentives but, in a globalised world, there remains little incentive to investin India when, for example, a depreciated pound sterling makes it more attractive to invest in UK, a point I made in my 6 September 2016 column in this paper. This is on top of the UK’s high ease of doing business ranking of 7. Indeed, to elaborate, Figure 1 shows how a stable location for ease of doing business should appear to a potential investor: The 2016-17 changes are the least for the UK for the 10 component indicators while those for Brazil, China and India vary a lot.  

To conclude, even the low ease of doing business rank of India has managed to maintain itself due to the electricity indicator. It is worth emphasising that India’s ease of paying taxes has not improved. Other important criteria such as dealing with construction permits, resolving insolvency, getting credit, or starting a business have worsened — a far cry from policy declarations. Unless sharp improvements in ease of doing business are achieved, any dream of manufacturing occupying a significantly higher per cent of gross domestic product (GDP) will remain just that.

Cross-country changes in indicators