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India has climbed up the World Bank’s ‘Ease of Doing Business’ Index from 142nd position to 130th. The Modi government now wants India to rise to the 50th position. This would mean more reforms for attracting foreign investors to India. While it is true that the Ease of Doing Business Index is important for attracting foreign investors as they usually track such indices, it is not true that this index alone reflects the real business environment of a country.

Basically Ease of Doing Business is related to a country’s regulatory regime — less the regulations on doing business, the higher is its rank in the index. If there were no regulations in a country, it would qualify to get the highest rank. Many countries which are quite at the bottom when ranked according to GDP are high on Ease of Doing Business index, like Rwanda, because of fewer regulations.

The index involves criteria relating to starting a business, dealing with construction permits, getting electricity, registering property, trading across borders, enforcing contracts, resolving insolvency, protecting minority rights of investors, getting credit and paying taxes.

In a country like India, there have to be regulations. Otherwise, there would be chaos and an unmanageable state of affairs. Also, developing countries must have more regulations than developed countries because some regulations are bound to be flouted.

India has done well in the ‘protecting investors’ indicator’. This indicator means that it is now easier for shareholders to sue company directors for ‘misusing corporate assets’. This move by the government may lead to reducing some forms of corruption. But it also means that there would be stronger ‘shareholder value’ laws which will prevent corporations from doing anything that might compromise their short term profits, such as giving higher wages or giving back something to the community.

The index would improve if taxes are zero or low, wages are low, there are no customs hassles at the borders and fewer regulations in the purchase of land. Protecting indigenous communities owning land is not considered a plus point. But regulations that protect creditors and investors and empowering them to acquire land are considered good.

Even though the index favours countries with low taxes, it does not take into account the fact that these also hurt people in the long run because it means the government does not have enough revenue to pay for essential infrastructure, education and healthcare. Countries with value added tax are placed lower than countries without it. Yet VAT is important for countries which find it hard to collect income taxes. It also does not cover important elements of business climate like security, corruption, market size, financial stability, infrastructure, social cohesion and skills of the labour force.

India’s rank has improved on the basis of it having a more business friendly atmosphere in starting business and ‘getting electricity’. But getting electricity connection is different from having a regular and reliable supply of power. In the recent Budget the government has pledged to electrify all villages by 2018. That should be good for business but what counts in the index is whether there are inspections of wiring when business enterprises get electricity connections. India climbed up because the Delhi Discom ‘eliminated internal wiring inspections’.

The Japanese brokerage firm Nomura recently said “compared to other emerging markets, India’s ranking lags behind peers the most in dealing with construction permits, enforcing contracts and resolving insolvency”. Indeed the important Bankruptcy law is waiting to be passed by the Parliament. It is an exit law that will benefit both domestic and foreign business. It takes years otherwise for businesses to close shop and leave.

The government has made the process of starting a business easier and has eliminated the requirements for paid in minimum capital and a certificate to commence business operations. This has indeed streamlined the process of starting a business. Land acquisition bill however has not been passed as it is controversial. It will have to take into account the rehabilitation of the displaced and dispossessed people, an issue which is hanging fire. It cannot be passed unless this important problem is duly addressed.

The credit market criterion is also something that India has improved upon. This criterion is based in part on how the legal rights of borrowers and lenders are protected. It does not take into account the access to credit by small borrowers or the general allocation of credit in the country. The Budget made provision of Rs 25,000 crore for recapitalizing public sector banks which are in trouble. It should make a difference to credit availability to firms but it won’t make a difference to the India’s ranking in the index.

Is improving the index so important compared to the pressing and urgent problems in the country? Agricultural stress and farmers’ suicide are important problems and the Budget 2016 has allocated Rs.360 billion to agriculture, rural credit and infrastructure. But this will not go towards making India climb up in the ranking.

Similarly the Government’s laudable increase in expenditure on health and skill training of the labour force is likely to improve the quality of labour force. If there is a skilled and disciplined labour available like in China, FDI would definitely come. Otherwise FDI will come and use capital intensive techniques and rake in profits which would be remitted abroad. What is India’s gain in such ventures? It is better to encourage domestic industries which will invest their profits in India.

Exports need better infrastructure and quality control and improved competitiveness and not just hassle free customs clearance at the borders. They depend on roads, ports and airports. But India’s huge budgeted expenditure on infrastructure (Rs. 2.2 trillion) will also not make India climb up in the Ease of Doing Business.

Nor will India earn brownie points for macroeconomic stability. It was with difficulty that the fiscal deficit target of 3.5 per cent was met. It meant sacrifice on other important items in the budget like capital expenditure. This kind of financial stability ought to improve the image of India in the ‘Ease of Doing Business’ index but unfortunately it will not. Also India’s current high GDP growth should be go towards attracting FDI but it will not help India climb up the index!

Jayshree Sengupta
29 March 2016
(This commentary originally appeared in The Tribune)

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