PM Modi's real task for easing business in India begins now

If PM Modi wants to achieve the aim of getting India into the top 50, he might have to aim and jump even higher

Two recently released reports – one of which relies on the other’s data gave two completely contrasting pictures of India’s economic progress.
 

The World Bank’s Ease of Doing Business Report 2016, released on October 25 ranked India 130 out of 190 countries. The World Bank report ranks India below nations like Tonga, Uganda and Papua New Guinea in the ease of starting a new business, which is the primary indicator used in the index.
 

Now consider the World Economic Forum’s (WEF) Global Competitiveness Index released a few weeks ago in September. The index relies heavily on the World Bank report to derive its conclusions. This index ranked India 39 out of 138 nations in terms of competitiveness. Somewhere down the line it seems, the government’s public relations outreach worked at WEF but not at the World Bank.
 

 

Contradictions and anomalies apart, the poor show of India in the World Bank report hide even harsher truths. While India has done all it could to rank 130 out of 190 nations, the real uphill journey for making it easy to do business in the country has just begun.
 

The report suggests that India has already reaped the rewards of development initiatives of the past. The biggest improvements that helped India reach this rank have come through improvements in health and the education sectors. These improvements have largely come in the last decade rather than last few years. The improvement in infrastructure was largely witnessed during the Manmohan Singh led UPA-1 government, faltering during UPA-2 before showing signs of improvement under the Narendra Modi led NDA government that came to power in 2014.
 

Financial market development too peaked in 2007 and has been on the downhill since then, according to the report. India’s per capita GDP (in Purchasing Power Parity terms) also doubled during the 10 years of UPA rule from $2576 to $5672. This was achieved despite the fact that a rise in global commodity prices had led to spiraling inflation during the last years of the UPA-2 government. Easing commodity prices, including low oil prices, have made things easier for the present government.
 

India amended the Hindu Succession Act in 2005 making it easier for women to inherit property that led to an increase in the education level of females. The task of overhauling the Companies Act to make it easier for companies to do business and make them more accountable was also started in 2004 when UPA-1 assumed power. The task of notifying the amendments is still a work in progress even though the bill was passed in 2013.
 

Now for the hard part. The report notes that one of the major challenges for India to improve its rankings is the absence of a unified tax on goods and services across the country. The Modi government which is all set to roll in the Goods and Services Tax (GST) from next year might have completely undercut its own objectives.

As Business Standard pointed out today (Who Killed GST? ) , the new GST may just be a name changing exercise. Instead of a single tax rate to make it easy for businesses, the Modi government is planning to introduce seven different rates under the garb of GST.
 

The report also suggests that India’s financial market development has dipped significantly as compared to a decade ago. This has been reflected in the large Non-Performing Assets (NPAs) of banks and the need for recapitalizing them has grown significantly.

Getting India’s banking system back on track would be a gargantuan task for the new government, with many banks failing to recover their losses despite new measures announced by the Reserve Bank of India (RBI) to tackle the problem.

And even though Digital India is a focus area for the Modi government, the report suggests that India has stagnated in terms of technological readiness. This would severely impact businesses in India who no longer rely on cheap labour.
 

The low lying fruits of development have already been plucked. That has enabled India to be ranked 130 out of 190 nations in the Ease of Doing Business Index. If PM Modi wants to achieve his government’s aim of getting India into the top 50 in the next few years, he might have to aim and jump even higher.