The message in the numbers

The International Finance Corporation's report, "Doing Business 2007", has bad news for India. Despite all the reforms of the past 15 years, India is still a poor performer when it comes to important issues like the time taken to start or shut down a business. It's not just the time, but also the cost""it still takes over 35 days to launch a business in India and, if you add up the cost of this lost time, it equals nearly three-fourths of the country's per capita income. Add another 20 days to comply with licensing requirements, 1,420 days to enforce a contract, and so on, and it is obvious that this high cost of setting up businesses has an impact on job creation and GDP growth. It is no surprise then that India is ranked a poor 134th out of 175 countries. That is better than the 138th rank achieved last year, but India lags China by as many as 41 places. Obviously, the "second-generation reforms", which have been talked about for more than five years, without much action, have to be priority for the country's reformers since there are huge efficiency gains to be made.

This is not to argue that India does less badly on some parameters. Thus, setting up a business in India may be time consuming, but the number of days taken is down from last year's 71 to 35, and it now takes exactly the same amount of time to set up shop in China (which was at 48 days last year). Similarly, it takes 264 hours to file and pay taxes in India, against an average of 290.4 hours for the Asia-Pacific region.

Having understood the message in the numbers, it is still relevant to ask what these rankings really mean, other than the obvious opportunity cost involved. The picture is unclear and it does not help that different surveys have vastly different and sometimes conflicting rankings""the World Economic Forum's Business Competitiveness Index, which reflects the operating environment for firms, says India (31st) is streets ahead of China (57th) last year, but the World Economic Forum's Growth Competitiveness Index puts them level (China is 49th and India is 50th). As for the IFC, China's ranking at number 93 is way ahead of India, but how does anyone explain Pakistan's 74th rank? It would seem therefore that these rankings are not taken very seriously by those pumping in billions of dollars each year into China and virtually nothing into Pakistan.

A better way to look at the rankings and the opportunity cost these entail is to measure the difference between the relative advantage a country offers and the opportunity cost of doing business there. So, if a company (either foreign or local) gains $100 by assembling a laptop in China instead of doing it in the US, and the cost of China's regulations works out to $30 a laptop, investments (FDI and local) will still go up greatly. The trick is to ensure that the cost of doing business reduces faster than the comparative advantage disappears. This is why investors continue to put money in Bangalore""the infrastructure problems are huge, but the gains from getting reasonably-priced people with a particular knowledge set are much greater. The other important issue is of granularity: people don't invest in just China, they invest also in Guangdong or Shanghai; they don't invest only in India, they invest specifically in Bangalore or Gurgaon. Last year, a Chinese scholar used the Fraser Institute's (Economic Freedom Index) tools to measure the Economic Freedom Index for various provinces and found that Guangdong, which is ranked No. 1 in China, got a score of 9.74; Zhejiang, which is next, has a score of 9.1; and Shanghai, which is No. 4 has a score of 8.54 compared to Tibet's (the last) 2.05 and China's overall 5.98.