The ball is in the states' court

Why achieving Prime Minister Narendra Modi's goal of raising India's rank in ease of doing business depends on how states perform

India’s rank on the ease of doing business index has jumped by 30 notches. Released early this month by the World Bank as part of its 2018 report on doing business, the index now places India at the 100th position among 190 countries covered by it. 

This is a significant achievement. Not just for having gone up by an unprecedented 30 notches, but also for improving its rank on the “distance to frontier” index from around 55 to 60. The “distance to frontier” index measures distance from the top performer on the index, whose point is measured at 100. This means that both in absolute and relative terms, India has made progress.

This performance has now kindled hopes of further improvement in India’s rank on the ease of doing business index. The new target is to reach the 50th position. 

It is important to add a caveat here that improving ease of doing business alone doesn’t always lead to more investment, both domestically and from overseas destinations. For investment to rise on a sustainable basis, it is equally, if not more, important to improve infrastructure — both economic and social — provide cheaper sources of capital, ensure the availability of skilled manpower and maintain macroeconomic stability as well as growth. 

Nevertheless, it is important to set such goals and even more important is the need to evaluate how feasible it will be for India to rank among the top 50 countries in ease of doing business. A closer look at the 10 parameters on the basis of which the ease of doing business index is framed, therefore, becomes necessary.

Of these 10 parameters, five belong to areas where central laws and procedures decided by New Delhi play a critical role. These are — paying taxes, resolving insolvency, getting credit, protecting minority investors and trading across borders. Barring one parameter on trading across borders, India’s rank in all the others has improved significantly.

This has happened because of digitising tax payments, legislating the Insolvency and Bankruptcy Code, expanding the banking network with the help of technology and increasing protection for retail and minority investors. More simplification and improved execution of policies by the Union government in the areas of insolvency resolution, banking network and minority investors will certainly help India improve its rank in the years ahead. What will also help is expeditiously reforming India’s foreign trade policies, particularly with regard to trade facilitation, which have so far been lagging.

But compare these tasks to be performed by the Centre with those of the state governments under the ease of doing business index and you will realise why improving India’s overall rank will be a tough task. Of the 10 parameters, five are under the policy domain of state governments and these pertain to starting a business, getting electricity, registering properly, dealing with construction permits and enforcing contracts.

State governments are responsible for improving all these parameters including enforcement of contracts, which is largely the responsibility of the lower level of judiciary. In two of these parameters, India’s rank is quite low at 164 for enforcing contracts and at 181 for obtaining construction permits. In respect of the remaining three parameters, India’s rank in each of them has fallen — starting a business, getting electricity and registering property.

In other words, the states will have a critical role in helping India achieve a higher rank in the ease of doing business index. The Centre, of course, will have to maintain the good work in the areas that fall under its domain. But if states do not chip in with better governance procedures in the setting up of new businesses, providing electricity connections, enforcing contracts, issuing construction permits or registering property, there is little the Centre can do on its own to quickly move India up the index on ease of doing business. 

This imperative will become more critical when the World Bank expands the coverage of its survey to include the governance system prevailing in eight cities, and not just focus on the existing two cities of Delhi and Mumbai. More attention will also have to be paid to the state-level ranking on ease of doing business. The last ranking was done for 2016 and regular state-level rankings should help usher in competition among the states. Without that, Prime Minister Narendra Modi’s dream of India figuring among the top 50 countries in ease of doing business may not be realised.