 "Rita Ramalho")
The recent World Bank annual ranking of countries on Ease of Doing Business used surveys in Delhi and Mumbai to rank India 130th of 190 countries. RITA RAMALHO, the Washington-based manager of the Bank’s Doing Business programme, explains the basis and related matters to Indivjal Dhasmana. Edited excerpts:
Critics say the Bank surveys only Mumbai and Delhi to give a ranking to India.
Doing Business focuses on regulations that affect small and medium-size enterprises in 190 economies across 11 areas. For most economies, the data refer to the largest business city. For 11 economies with a population of more than 100 million as of 2013, Doing Business also collects data for the second largest business city. It is correct that in the case of India, data are collected for Mumbai and Delhi.
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In reality, business regulations and their enforcements might differ within a country, particularly in federal states and large economies. But, gathering data for every relevant jurisdiction in each of the 190 economies covered is not feasible. Where policymakers are interested in generating data at the local level, beyond the largest business city (or two cities), Doing Business has complemented its global indicators with subnational studies. In fact, since 2005, the subnational Doing Business reports have covered 438 locations in 65 economies. Seventeen — including Egypt, Mexico, Nigeria, Philippines and Russia — have undertaken two or more rounds of subnational data collection to measure progress over time.
What more reforms would you suggest to bring India's ranking within 50 nations, as our government is striving for? By when do you think these reforms could come?
Each Doing Business indicator relates to a different aspect of business regulations. The distance-to-frontier scores and rankings might vary considerably across indicators for each economy. India has an overall distance-to-frontier score of 55.27, meaning it is more than halfway from the worst to the best performance. At the same time, its distance-to-frontier score is 32.75 for resolving insolvency and 32.83 for dealing with construction permits, which show more room for improvements.
Therefore, it is a welcome move that the government has embarked on reforms to overcome the hurdles, including an insolvency and bankruptcy code, which will overhaul a 60-year-old framework for company liquidation when it comes into effect. And, expanding the online plan sanction from residential buildings to commercial and industrial buildings.
How will the new goods and services tax (GST) improve India's ranking in the next round, if it is implemented from April 2017?
The data for paying taxes in Doing Business 2017 refer to January to December 2015. With this in mind, our team will monitor the introduction and implementation of India’s GST, and its impact on the data, and updating the measurements in future reports, when applicable.
On protecting minority investors, India's ranking went down from 10 in the 2016 report to 13 in the 2017 one. However, India had enacted an amended Companies Act, which has a clause to protect minority shareholders. Was that taken into account?
Doing Business closely follows and analyses that legal and regulatory changes in India. Doing Business 2015, for example, celebrated the enactment of the Companies’ Act, 2013, as a reform. Thanks to the Act, India’s distance-to-frontier score, an absolute measure of progress towards a best practice score of 100, on the Protecting Minority Investors indicator increased from 65 in Doing Business 2014 to 73.33 in Doing Business 2015. Since then, the team has not identified new developments that affect the areas measured by the indicator and India’s score remains 73.33 in Doing Business 2017.
Specifically, the Companies Act, 2013, brought Indian companies in line with global best practice—particularly regarding accountability and corporate governance practices—and ensured that businesses contribute more to shared prosperity through a quantified and legislated corporate social responsibility requirement. Ranked at 13 out of 190 economies, India is the top performer in protecting minority investors in this region and among the best globally. The slight drop in ranking on the indicator is due to the fact that other economies amended their laws and regulations more recently and three of them passed ahead (of India).
According to your methodology, you don't take into account only enactment but rely primarily on end users. The government has taken quite a number of initiatives but it might take some time to reach the ultimate beneficiaries. Do you think India's ranking will improve by reforms taken as of now with a lag?
Doing Business has two broad types of indicators—those that measure the complexity and cost of business processes and those that measure the strength of legal institutions.
Indicators of the first type — such as the time and cost that the entrepreneurs spend in practice to start a business and obtain construction permits — aim to promote efficiencies in transactions handled by the government. To evaluate that, Doing Business selects experienced respondents who routinely administer or advise on the legal and regulatory requirements in the specific areas. For example, incorporation lawyers and property lawyers are selected to answer the questionnaires related to starting a business and registering of property. Licensed architects and electrical engineers are selected to answer the questionnaires related to dealing with construction permits and getting electricity.
Often, a lag of implementation is observed from the time when laws and regulations are first adopted until they are fully implemented with direct impacts on the private sector end users in practice. However, we’d like to highlight that the government’s continuous efforts in some areas have already shown impact on the Doing Business data. For example, in 2014/15, the utility in Delhi made the process for getting an electricity connection simpler and faster by eliminating the internal wiring inspection by the electrical inspectorate. The utility in Mumbai also reduced the procedures and time required to connect to electricity by improving internal work processes and coordination. Moreover, this year, the utility in Delhi further cut the time to connect to electricity by 76 days and lowered cost by 580 per cent of income per capita by allowing consumers to obtain connections for up to 200 kilowatt capacity to the network. These efforts have paid off — in 2015/16, India ranks 26th globally on the Getting Electricity indicator, among the best globally.
Does the Bank find a gap between what the government says on ease of doing business in India and end-users?
As mentioned earlier, Doing Business collects data from local experts such as lawyers, architects, electrical engineers, accountants, freight forwarders and other professionals. Particularly, our team also visited Delhi and Mumbai in July, during which the local experts corroborated that India made tremendous strides in getting electricity, paying taxes, trading across borders and enforcing of contracts in 2015/16. At the same time, they also informed the team, during the visit and subsequent follow-ups, of the challenges that remain in other aspects of the business regulations. The governments also submitted queries on the data and provided new information to Doing Business, which the team carefully reviewed, validated and responded to, through written correspondence, video conferences and in-person meetings with government representatives.
The Bank has included women’s participation in businesses on three parameters for ranking. India's Companies Act has made it mandatory for companies to include at least one woman in the board of
directors. This has found mention in the Bank report. Would it lead to increased ranking of India in the future?
This year, Doing Business added specific gender components to three indicators. The Starting a Business indicator now measures gender-specific procedures such as documents or permissions required to leave the home, obtain national identification or own a business. The Registering Property indicator now measures whether unmarried men and unmarried women—as well as married men and married women—have equal ownership rights to property. The Enforcing Contracts indicator now measures whether a woman’s testimony carries the same evidentiary weight in court as a man’s. The participation of women in boards of directors is not a parameter included in this year’s measurement.
Our government has been saying that foreign investors find it attractive to invest in India, compared to other countries. However, in trading across borders, our ranking only slightly improved, to 143 from 144. Do you think foreign investors would still find it attractive to invest in India?
First, while many policy makers have associated improvements in the Doing Business indicators with greater inflows of foreign direct investment (FDI), the methodology focuses on small to medium-size domestic firms. But, the indicators could be a useful signal to foreign investors of the overall quality of the business environment. And, some laws might indeed affect foreign-owned firms in the same way that they affect domestic ones. Additionally, Doing Business does not measure all aspects of the business environment that matter to companies or investors. For example, it does not measure the size of the market or macro economic stability, both of which are important to FDI.
To be able to interpret an economy’s performance on Doing Business, we should go beyond the ranking and also look at the distance-to-frontier score. While ranking measures performance only relative to that of other economies, the distance-to-frontier score is an absolute measure of progress and can provide information on how the absolute quality of the regulatory environment has improved over time, too. In fact, India’s distance-to-frontier score on Trading Across Borders went up from 56.45 in Doing Business 2016 to 57.61 in Doing Business 2017. This means that in the past year, India has made substantive improvements in the area of exporting and importing in absolute terms. This absolute measurement matters more because it is the reality India’s exporters and importers live in.
More specifically, since April 1, the Customs Electronic Commerce Interchange Gateway portal allows for e-filing of an integrated customs declaration, bill of entry and the shipping bill. This reduces the time and cost for export and import documentary compliance. It also facilitates data and communication exchanges between applicants and customs, reducing the time for export and import border compliance. Additionally, an Integrated Risk Management System is fully operational and ensures all the consignments selected are based on the principle of risk management.
You have not entirely factored in the bankruptcy and insolvency code. Will that significantly improve our ranking next year?
Doing Business acknowledges the government’s continuous efforts to improve its insolvency legal framework. However, data for resolving insolvency in Doing Business 2017 capture only legislative and regulatory reforms adopted and fully implemented in practice by June 1, 2016.
Insolvency practitioners in India confirmed to Doing Business that the parliament had passed the code on May 11 and published it in the Official Gazette on May 28. Pursuant to Section 1(3), the code will come into force on a date the central government may provide by notification. In addition, the subordinate regulations under the code are yet to be framed, without which it cannot become operational. The tribunals to administer the code are yet to be fully formed, too. Doing Business will continue to monitor legislative developments in India related to insolvency regulations and update the measurements in future reports, where applicable.
