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Mihir S Sharma: The toxic temptation of targets

Forget the 'Doing Business'rank; we will know India is a better place to do business only when exports begin to boom

Mihir S Sharma 

Mihir S Sharma

The World Bank’s Doing Business 2016 report is out, and India has moved up four places in the rankings, to 130th in the world. The government has made much of the fact that this reverses a four-year decline. But the truth is that, first, the method of evaluation has changed, so we can’t make that sort of inter-temporal comparison easily; and second, a few steps up and down aren’t unusual, if you look at past reports. What matters is whether there is a new and sustainable trend.

But, either way, it’s worth considering why and how much the Doing Business report matters. This year, India did marginally better essentially because its score on power connections for new companies in Mumbai and Delhi – the only two areas covered by the survey – jumped up. How? Well it isn’t clear what the Mumbai distribution company, or discom did – the report merely says “it improved internal work processes and co-ordination”, which is definitely a bit of hand-waving. The Delhi discom, however, “eliminated the internal wiring inspection”, which is a genuine improvement.

One has to ask, though: is that step – even though a clear improvement – really major enough to be the motive force behind a jump in India’s overall ranking? This is the problem with such indices: they can be hugely sensitive to relatively minor changes. Even more interestingly, a news item from the first days of June in the Economic Times – when the “most recent round of data collection was completed”, according to the World Bank – quotes an officer from one Delhi discom, BSES, as saying changes were “part of its efforts towards” improving India’s rank in the Doing Business report.

This is a familiar situation, I suppose – is anyone who’s been through the Indian education system unfamiliar with our tendency to game the exam rules, rather than do the really hard work? International development experts, such as recent Nobelist Angus Deaton, have often noted an unfortunate side-effect of lists of targets: developing-country policymakers can game those targets, instead of creating a broader improvement in the environment those targets are supposed to sample.

The only way out of this problem is, in fact, to have a clear sense of what ends the state is working towards, and a theoretical framework on how to get there. This helps policymakers at all levels choose their own priorities, and take decisions that mutually reinforce each other.

In other words, the government should not be working towards getting a higher Doing Business rank; it should instead recognise that a higher Doing Business rank is merely a side-effect of being a better place to do business overall. And it should have a clear sense of what type of actions will make India a better place to do business overall.

Unfortunately, this sense – of the direction that co-ordinated policy action should take – is missing at the moment. One worrying example from recent days is the government’s new draft of a “capital-goods policy”. The idea is to help create a capital-goods sector. That is, of course, the target, and it’s a good one. The problem, however, is that – absent an understanding of how that can be achieved bottom-up – the draft policy attempts to game the target.

These are the problems the draft policy sees: that the government’s procurement policy doesn’t have enough incentives for domestic capital-goods companies; there are “inadequate fiscal incentives”; that "limited positive bias is provided for domestic value-addition"; and, of course, import tariffs are too low. And, in effect, it concludes that, if Indian capital-goods companies are struggling because of imports from outside, they should be protected from those imports.

To that end, it lists a series of disquieting steps, including interest and tax subsidies as well as “domestic value-addition” requirements for public procurement and for high-tech or high-value imports. Instead of deregulation – which should be the thrust of any policy that tries to invigorate a sector and make it easier to do business in it – new regulations are proposed “to stop usage of spurious spare parts which reduce equipment life” and “to regulate import of second-hand equipment". Is this draft policy the product of the same government that believes in making it easier to do business?

The history of economic development is rife with countries that have claimed to be “pro-business” by protecting business from external competition. These efforts all failed – including in India. What has worked and does work is export-oriented reform. Create the enabling environment through deregulation and investment that allows the better Indian companies to compete overseas. Don’t look at other people’s targets; look instead at what your better exporters want in order to expand merchandise exports to, say, Africa.

Rather than targeting the Doing Business ranking, the government should be looking at other, more real, numbers: export growth. But exports have, unfortunately, been declining precipitously over the past few quarters. Nor is this because of weak world demand; a country that has only two per cent of world trade can hardly blame a shrinking pie for its inability to capture a bigger slice of it.

It seems India is a victim of its own size. It imagines that the vastness of its internal market is sufficient to allow for the expansion of a manufacturing sector. It is extraordinary that this delusion has persisted so long, in spite of 70 years of our economic history serving as evidence to the contrary. A policymaker in the 1950s may have had some excuses for making this error, but not one in 2015.

The curse of market size leads to a deadly arrogance. It leads to domestic companies insisting on exclusive rights over the domestic market; and it leads to India’s government assuming that foreign companies and countries will negotiate on India’s terms.

Indeed, such an import-substituting worldview is even stranger in a time when supply chains are getting ever more diffuse. How, precisely, will Indian exporters succeed if they have to struggle with regulations and tariffs on what they import from the company a step before them in a global value chain? In today’s world, the “domestic market” and “exports” cannot be as easily separated – not if you want productive, job-creating companies that manage to grow through plugging into the world economy. Forget the Doing Business rank; we will know India is a better place to do business only when exports begin to boom.

The official reaction to the signing recently of the Trans-Pacific Partnership by economies comprising 40 per cent of world GDP was indicative. The only concern was: will India lose its current export markets? And the assumed answer was: since we have some free trade agreements with some TPP signatories, we needn’t worry. The real question was never asked: thanks to the TPP, will Indian exporters lose the ability to grow into markets they do not currently have?

If the government had a clear and comprehensive understanding of how manufacturing growth and jobs-intensive development actually happens, it would be panicking about the prospect of losing avenues for export growth. You cannot substitute targets on PowerPoint presentations for that understanding. It is that understanding which is essential when it comes to picking priorities and co-ordinating a government-wide effort.

The TPP is just the beginning of a new trade world, one in which regulations will be set, and contractual disputes settled, in a manner beyond the control of any one country. India is not prepared for this. Instead, its government is going in the opposite direction: the new capital-goods policy wishes to “define specific Indian standards and local certification for foreign players to participate in Indian bids”.

For anyone working with a framework, the TPP is the big news of the past month. For those working just with targets, it’s the Doing Business report. As soon as possible, India’s government needs to stop being the second type of policymaker, and become the first.

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First Published: Thu, October 29 2015. 21:50 IST