Doing business in India is not as bad as World Bank suggests

The World Bank's Doing Business survey is perhaps the most widely cited and internationally recognised indicator that gauges a country's business environment. But if a new study is to be believed, these influential surveys do not accurately reflect the hurdles companies face in actually doing business. The reality is more nuanced than what these surveys portray.

A study carried out by Mary Hallward-Driemeier, a World Bank economist, and Lant Pritchett, an economist at Harvard University, compares the data gathered through the Doing Business surveys and the Business Enterprises surveys, both carried out by the World Bank. The authors examined three indicators - the time spend on obtaining construction permits, starting a business or getting an operating licence and the delay in importing goods - and found that the average time taken for these activities was "much, much less" in the Enterprise Surveys than in the Doing Business Surveys.

The difference is staggering. In the Doing Business report, the median time reported for obtaining construction permits in developing countries is 177 days. In Enterprise Surveys, it is 30 days. Similarly, time taken to import goods in the Doing Business surveys is estimated at 21 days. In the Enterprise Surveys, it's a mere 6.25 days.

What explains this difference? The authors' explanation rests on the chasm between regulations and the capacity of the state to actually be able to implement them. State capacity, especially in developing countries, simply does not exist to be able to enforce regulations effectively. As a result, companies are able to find creative ways to circumvent cumbersome regulations.

Differences in how data are collected in the two surveys seem to sit well with this explanation. The Doing Business surveys are based on information gathered from lawyers and accountants on the time it would take to legally comply with all regulations on starting a firm, dealing with construction permits, getting electricity, registering a property, paying taxes and so on. Countries are then ranked on the basis of this information.

On the other hand, the Enterprise Surveys directly ask firms about the actual time they take to deal with regulations. Thus, while the former provides estimates of what should ideally be the time taken to comply with a set of rules and regulations, the latter provides a more real picture, one grounded in reality. This is why differences crop up between the two estimates. As the authors say, "In practice, firms in developing countries are often able to sidestep the de jure legal rules, which make intuitive sense because many developing countries have low rankings by international standards in categories like rule of law, bureaucratic quality, government effectiveness, and control of corruption." But Arindam Guha, senior director at Deloitte, India, differs. "Limited capacity in government institutions acts more as a bottleneck and leads to further delays, which is why some states require significantly less time for the approval cycle," he argued.

Part of the difference between the estimates could also be attributed to differences in definition of the three indicators. As Guha says, "In the Doing Business report, construction permits cover the entire cycle starting from approval of building plans to obtaining a completion or occupancy certificate, including water connection whereas the Business Enterprises survey only limits itself to construction-related permits." Even if one accounts for this, differences between the two estimates are likely to remain.

The study raises a larger, more perplexing, issue. The entire argument for improving a country's rankings is predicated on the belief that it will lead to an improvement in business environment, which would facilitate greater investments. But the study challenges this premise. It finds that changes in the reported Doing Business durations are not strongly associated with changes in actual durations as reported in the Enterprise Surveys. This suggests that an improvement in Doing Business rankings might not necessarily translate to a more conducive business environment.

The authors contend that "given our evidence, it is a completely open question how reforms that altered the Doing Business indicators will actually affect the investment climate that most firms actually experience."

While this might seem to challenge the purpose of the Doing Business surveys, there are strong arguments to be made in favour of continued reliance on these surveys. First, these surveys help identify areas where regulations need to be simplified. As Chandrajit Banerjee, director-general, CII, says, "Even if this (the Doing Business survey) is not entirely accurate, it does provide us a bearing on what are our strengths and shortcomings." Second, these rankings do have a signalling effect. A better rank is likely to improve the perception among investors.