Article by Avirup Bose on "Don't lose sight of the big picture" - Business Standard

December 12, 2016 | Avirup Bose

The recently released World Bank ‘Ease of Doing Business’ rankings, where India has made an embarrassingly low improvement by a single rank, despite robust efforts made by the federal government, provide us with an opportunity to introspect if the government’s efforts are in the right direction. Very early in the tenure of the Modi government, the prime minister had openly committed to adopt policies that will catapult India within the top 50 ranks of the World Bank index by 2017. Based upon the 2016 rankings, this has clearly not happened. India currently ranks 130 among 190 countries, which are ranked by the World Bank and also holds the lowest rank among its BRICS peers.
 
Since the release of the ranking, there has been a flurry of news stories fretting over India’s relative bad performance. Members of the federal government have expressed doubts that the World Bank has not taken into account several of the reform efforts initiated over the past year and fairly, the Bank claims that it needs to wait for the effective implementation of the proposed/launched reform measures.

But why is this ranking important for India and by obsessing on the World Bank benchmarks are we missing the real purpose for which the government committed to improve India’s rank in the first place, i.e.,  to make India an attractive investment destination. It is vital to understand that although the 11 parameters that the bank considers for ranking economies, including procedures for starting a business, dealing with construction permits or obtaining electricity connections are indicators of how easily businesses in India can administratively operate, several macro-economic/regulatory issues which are vital for positioning an economy as an attractive investment destination, are beyond the ranking’s methodological scope. No doubt India should make efforts to improve its rank but a better performance does not singularly translate the attractiveness of the economy as an investment hub.
 
As evidence, seven of the countries ranked within the top 10 of the World Bank’s ranking are not the top investment destinations of the world as per a 2016 UNCTAD report. Only the economies of USA, Singapore and Hong Kong are both attractive investment destinations as well as economies where doing business is easy. In-fact, as per UNCTAD’s rankings India has climbed 5 spots on the FDI rankings since 2013.
 
The World Bank itself in its 2005 ‘World Development Report’ indicated the factors that are essential for improving a nation’s investment climate - by providing enhanced opportunities and incentives for firms to invest productively, create jobs and expand – these factors which directly impact a firm’s expected profitability are influenced by the costs, risks, and barriers to competition. Firms will shirk from investing into a jurisdiction where macro-economic/regulatory factors contribute in enhancing economic costs or risks of doing business. For example, an economy with archaic labour/industrial laws, without a robust IPR regime, a stable and predictable regulatory framework, or greater public infrastructure, will add more costs and enhance the risks on the capital of the investing firms. Therefore, ‘ease of doing business’ is just one factor which contribute towards building a mature investment climate and not the only one. India should not get blind sighted of this larger picture.
 
India ranks abysmally at 37 out of 38 countries on the 2016 ‘Global Intellectual Property Centre’s IP index’ and 66 among 128 nations on the 2016 ‘Global Innovation Index’ (despite making much improvements from its 2015 ranking). Securing a stable IPR and an innovation climate is an equally important and challenging requirement for transforming the doing-business climate for India and should be of equal focus for the federal government. So the fretting over missed opportunities for improving India’s ranking needs to be contextualized with the larger efforts that India needs to embark upon to transform the economy to a premier investment hub.  
 
Another issue that needs quick attention in India’s quest for improved ranking is the role of the state governments. Out of the 11 grounds on which the World Bank rank countries, several of them require implementation at the level of India’s state governments. For example, efforts for easier access to electricity or quicker construction permits or registration of properties are governed by state laws and even the mandate for quicker enforcement of contracts is an issue which will be required to be dealt at the level of district and state high courts rather than at the level of the federal judiciary.  Similarly, how quickly one can start a business requires the effective implementation of the provisions of the new Companies Act, by the state level Registrar of Companies. For example, as per government estimates, due to reforms undertaken pursuant to the enactment of the new Companies Act, the timeframe for getting a company incorporated is 1.86 days, however, the World Bank based upon stakeholder feedback found that it took two to seven days for incorporating a company. Therefore, like everything else the devil lies in the detail, implementation of reforms by Indian states is as much a factor for the improvement of India’s ranking as the enactment of pro-business policies/laws by the federal government.
 
The government’s efforts of continuously ranking states on a 340-point business reform action plan and a recent commitment by the Indian Commerce Minster to enhance the federal government’s engagement with the states (on securing better implementation of the World Bank’s ranking matrixes) seems to be measures in the right direction.
 
 
Avirup Bose is an assistant professor of competition law at the Jindal Global Law School