Digital governance: Administrative reforms can boost productivity

A recent International Monetary Fund (IMF) working paper on India shows that digitising public administration is not just about better governance. It also improves productivity. Examining reforms in the state-level business environment between 2010 and 2015, the paper finds that states that undertook greater digitisation in public administration — across tax filing, permits, inspections, dispute resolution, and single-window systems — saw higher productivity growth among microenterprises. Significantly, productivity gaps among firms narrowed, pointing to a better allocation of resources.   This finding goes to the heart of a longstanding structural problem in India’s economy: Pervasive informality. A significant share of India’s small businesses is still unregistered. These firms dominate employment and contribute substantially to manufacturing output and exports, and yet remain small and fragmented. The reasons are not hard to identify. High compliance costs, complex regulations, weak contract enforcement, and discretionary bureaucratic processes make formalisation unattractive. For a small firm, the fixed costs of dealing with the state can be disproportionately high. Staying informal thus becomes a rational choice. This also explains why average firm size in India remains small and why firms often hesitate to scale up. Growth brings visibility, and visibility brings regulatory burden, which also explains the “missing middle” — a vast number of tiny enterprises and a handful of large firms, but relatively few mid-sized ones. In such an environment, productivity suffers not only because firms are small but because capital and labour too are misallocated across firms.   In this context, administrative reforms matter most, and digitisation reduces some of the friction. By moving processes online, standardising procedures, and limiting discretion, it lowers compliance costs and curbs rent-seeking. For microenterprises, this can be transformative. It levels the playing field and allows more efficient firms to compete and grow. The results are visible not just in average productivity gains but in the reduced dispersion of productivity across firms. The paper finds that improvement is linked to better capital allocation, suggesting that reforms indirectly strengthen how resources flow within the economy. Reforms have been implemented across a diverse set of states, suggesting no strong link between a state’s initial level of development and its adoption of reforms.   India’s push for ease of doing business over the past decade, particularly the 98-point action plan launched in 2015 by the Department for Promotion of Industry and Internal Trade and the World Bank, appears to have delivered tangible benefits. The country has seen improvement in how businesses interact with the state. Interestingly, the paper also notes diminishing returns as reform intensity increases, suggesting that early-stage digitisation yields the largest dividends. This makes the case for prioritising lagging states and sectors where basic administrative friction remains high. The broader lesson is clear. Administrative reform and digitisation can, to an extent, help address deep structural problems, including low productivity, high informality, and firms’ reluctance to scale up.