Ease of doing business: Creditable progress, but now comes the hard part

India has climbed 14 spots to stand 63rd in World Bank's Ease of Doing Business ranking, but the momentum must be backed by stable policy

India has made creditable progress in the World Bank’s Ease of Doing Business (EoDB) rankings, clocking in at number 63 in 2019 from 77 in 2018, and bettering its position on seven of the 10 parameters. The EoDB has been one index in which the National Democratic Alliance government has recorded consistent improvements. Since 2014, the country has jumped 79 notches up the rankings, a reflection of one of Prime Minister Narendra Modi’s key initiatives. The principal drivers of this improvement has been the Insolvency and Bankruptcy Code, which saw India move up 56 ranks on the parameter “Resolving insolvency” between 2018 and 2019. Technology has also played its part, with the move towards e-filing of construction permits, property registration, and paying taxes accounting for improvements on these parameters. Taken together, these are impressive achievements and in that sense, India has earned its position on the list of “economies with the most notable improvements” for the third year in a row at number nine. The cautionary note, perhaps, is that it shares this listing with countries that can be scarcely described as open, liberal economies — Saudi Arabia, Bahrain, and Kuwait, all monarchies, Pakistan, a failed state, and China, a dictatorship. 

The obvious anomaly in India’s eye-catching EoDB performance is that little of this is reflected in growth and employment-accelerating investment. Stripped of reinvested and other capital — a definition that was introduced during the United Progressive Alliance — growth in foreign direct investment (FDI) has been anaemic at best, and in 2018-19 it actually shrank, albeit by a marginal 1 per cent. The data on industrial investment proposals recorded by the Secretariat of Industrial Assistance shows that the number of proposals and investment, though rising, is still to reach even the modest 2013 levels, an indication that investor confidence has never matched the buoyancy of the EoDB rankings. Exports have scarcely grown. Though the improvements in the disaggregate rankings are commendable, they are in, a sense, low-hanging fruit. Weaknesses on three EoDB parameters on which India has made no progress or done worse — enforcing contracts (163, no change), getting credit (22 to 25), protecting minority investors  (7 to 13) —  suggest themselves as the more difficult agendas that the government needs to tackle on a war footing. They reflect the serious flaws in India’s judicial system and a crisis in the financial sector. Recapitalising zombie state-owned banks, merging poor and well-performing banks without detaching them from government interference, and proposing to amalgamate defunct public sector telecom companies do not reflect the kind of bold, reformist mindset that India had come to expect from this regime.

The mismatch between India’s EoDB performance and economic growth is also the result of variables that are not captured by the index. Maverick economic policy must rank as the principal failing: The twin shocks from the 2016 demonetisation and the accelerated timetable for introducing a poorly designed goods and services tax in mid-2017 followed by rising protectionism are all part of the problem. The most recent example of sending, at the behest of a domestic lobby, investigatory letters to foreign-owned ecommerce majors Amazon and Flipkart for details of their festive season sales is unlikely to enhance investor confidence. In short, the government needs to look beyond the EoDB for sustained economic growth.