The author has worked with Deccan Herald for two decades, and also with various TV channels such as al-Jazeera and CNN. He currently heads the Eastern Bureau of Parliamentarian
The latest World Bank report on Ease of Doing Business 2019, released last week, must have warmed the cockles of the Indian government. The report put India at a rank of 77, the highest in South Asia and up from 100 last year. “India, with six reforms, is among the top-ten improvers for the second consecutive year,” the report said.
What has made India jump 23 places up in the World Bank’s Doing Business Index? No, it’s not poverty alleviation measures or bringing a significant percentage of people above the poverty line or making a robust growth on the industrial index. On the contrary, India, according to World Bank, has made it easier to undertake a business, deal with construction permits and could now facilitate quick cross-border trade.
The ranking evaluates countries on ten parameters – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. A higher score on each one adds to improvement in overall rankings. India has shown an improvement in six of the ten parameters, with the most being on ‘construction permits’.
India’s ranking in dealing with construction permits—one of the ten benchmarks the World Bank evaluates—jumped to 52 from 181 last year. “India streamlined the process of obtaining a building permit and made it faster and less expensive to obtain a construction permit,” the World Bank report said. “It also improved building quality control by introducing decennial liability and insurance.” According to the Bank, the Modi government has overhauled the country’s indirect tax structure by introducing the Goods and Services Tax, brought in a new real estate law and consolidated the numerous bankruptcy laws into one.
The other factor which contributed significantly towards improvement in ranking was in trading across border which improved by 66 places to 80, owing to various initiatives taken to reduce the time and cost to export goods.
Finally, the most notable (controversial though in view of what former RBI governor Raghuram Rajan had described) improvement has come through the Goods & Services Tax (GST), which did not figure in last year’s ranking, and the Insolvency and Bankruptcy Code. The GST made it easier to start businesses as it integrates multiple application forms into a single general incorporation form, World Bank said, adding that this speeds up the registration process. India, the report said, has not only made paying taxes easier, but also made it less costly by reducing the corporate income tax rate and the employees’ provident funds scheme rate paid by the employer. “Secured creditors are now given absolute priority over other claims within insolvency proceedings,” the report maintained.
WB’s Clay Feet
Many would feel or might claim as well that the improved ranking is likely to boost the sentiment of Prime Minister Narendra Modi’s government ahead of the general elections slated sometime next year; more so, because the BJP government has been facing flak for rising fuel prices and falling rupee. But a closer look will reveal that World Bank’s perception of doing business might not always provide the real picture.
First, the assessment is based on the feedback from enterprises of only two cities, Delhi and Mumbai. Among the Indian metros, Delhi is just an average performer and Mumbai is little higher on the scale so far as the ease of doing business is concerned. According to an annual ranking done by World Bank itself for the Government of India, the top five states in terms of ease of doing business are: Andhra Pradesh, Telengana, Haryana, Jharkhand and Gujarat. And there has been no mention of either Delhi or Maharashtra!
Secondly, questions have been raised over the methodology adopted by the Bank for arriving at the rank. In fact, its former chief economist Justin Sandefur had expressed his reservations over the methodology to rank nations on the Doing Business Index. According to Sandefur, a senior fellow at the Center for Global Development, who made an in depth analysis of the historical rankings, India’s extraordinary jump in rankings was only visible due to a change in methodology.
Thirdly, from its inception, civil society organisations (CSOs) have been critical of this influential publication for promoting one-size-fits-all solutions to development. CSOs argue that the Bank and sometimes, International Monetary Fund(IMF) use the DBR (Doing Business Report) to promote deregulation and neo-liberal reforms, based on the unfounded claim that more ‘business friendly’ regulations play a key role in lowering income inequality; because it does not take into account the social or economic benefits of regulation and costs of de-regulation.
According to Simeon Djankov, the creator of the Doing Business series, “Reforming in the areas measured by Doing Business can be particularly beneficial to employment creation when those reforms take place in the areas of starting a business and labor market regulation.”
Responding to this claim, Matti Kohonen from Christian Aid, UK stressed that, “This micro-level view is often at odds with a macro-level perspective, where something that may be beneficial at an individual firm owner level (e.g., lesser labour regulation), may hurt macro-economic objectives – such as greater labour productivity through upskilling of committed employees”. He also added: “Recent macro-economic perspectives on women’s labour market participation, and tackling inequality may be at odds with the entire DBR.”
Some of the top economists feel that the DBR’s ranking of nations tends to be based on narrow business interests over those of citizens and countries. For example, according to the International Trade Union Confederation (ITUC), eight out of the DBR 2017’s “top 10 improvers” had poor or worsening performance on workers’ rights. This is clearly the case in India with the ruling party’s own labour union calling for a major strike on the issue of more jobs being marked “temporary”. “The government’s labour policy has hugely damaged the interests of the working class,” says its labour union leader.
According to UK-based charity CAFOD’s research, the DBR failed to match the priorities needed for small private sector enterprises to grow. These include ensuring adequate funding for small enterprise support programmes and public services, as well as recognising informal workers’ organisations and collective bargaining processes.
Everywhere in India today, traders are ruing the welcome they had offered the GST and demonetisation, which has ruined them totally. The Indore trading community says it sees no reprieve.
“We are all long-term BJP supporters, but this time most of us will vote against Modi,” said a trading community leader. And in south India, Tirupur’s once Rs 42,000 crore textile hub is facing a wipeout. An Indian Express report says: “Before November 8, 2016, K S Ramdas, 48, the small stitching unit he has run next to the Old Bus Stand near Tirupur town for 20 years, employed around 15 women workers and made an average of Rs 20,000-25,000 every week. Now, he and his wife, the only remaining workers at the unit, struggle to make Rs 2,000 in two weeks.” Ramdas is not afraid to tell the authorities he can’t pay the Goods and Services Tax (GST) on the raw material he uses, Ramdas says. “There is nothing left after stitching, transportation, buying other materials and paying our loans.”
Peter Bakvis of ITUC commented on Inequality.org that, “giving better scores to low-tax venues is in clear contradiction with the World Bank’s stated objective of giving governments the means to provide essential public services, especially to the poor, and reducing inequality”. Despite a series of methodological changes in 2015 after extensive criticism of the report from the Bank’s own Independent Evaluation Group (IEG), these civil society critiques still stand.
The DBR itself noted, “Economies with poor quality business regulation have higher levels of income inequality on average.” Hence, cautioning against the Bank’s jump from correlation to causation, Bakvis pointed out that the 20 top DBR countries are almost all advanced economies while the bottom 20 countries, including Afghanistan, Venezuela, Somalia and Yemen, are in severe civil or political conflict.
It may be true, as the report claims, that “economies with better business regulation have lower levels of poverty, on average”. The fact is that China and Vietnam’s significant progress on poverty reduction was accomplished without DBR promoted policies. And this naturally brings into question the report’s implicit link between deregulation and decreased poverty.
For example, while India has improved significantly in the DBR rankings, according to a 2017 research by Lucas Chancel and Thomas Piketty, income inequality in India is at its highest since 1922. The DBR is overlooking the importance of gender equality. It’s not possible for India to become a global economic power if half of its population is ignored, and not given more economic opportunities. This claim has been supported by data from the World Economic Forum (WEF), which showed that India fell 21 places to 108 in the 2017 Global Gender Gap Report index even as its DBR ranking improved.
What is amazing is the DBR gives points to Modi’s India totally falsifying ground reports, like the ‘huge improvement’ in the realty sector. Going by the World Bank report itself, in some areas, India’s rank has worsened. In registering property, the country’s ranking fell to 166 from 92 when Modi took over. It takes over two months in India to register for property and the procedures end up costing almost 8 percent of the property value. India’s rank with regard to protecting minority investors fell from fourth in the world to seventh, with very little improvement in reforms. Similarly, in paying taxes, the ranking slipped by two places to 121 this year. Then, enforcing contracts still remains a huge problem, with the country’s rank at 163. As per the World Bank report, enforcing contracts takes more than three years to mature and it ends up costing a third of the claim value itself.
“Registering property and enforcing contracts have been two major challenges in the last four years,” Ramesh Abhishek, secretary of the Department of Industrial Policy and Promotion, admitted. Conceding that it is one of the more difficult reforms which is being put in place, he claimed that the government `is on track and it is just a matter of time before they show up in the ranking.”
According to him, the government is in the process of drafting an industrial policy which will become a roadmap for sustainable growth of all business enterprises in India.
However, the World Bank has since defended its stand; the practice of calculating the rankings based on the data culled from two cities of each country, stands without a change and for India, these are Delhi and Mumbai. The only change that has taken place is rechristening of the “distance-to-frontier score” into “ease of doing business score” to reflect its “main purpose of measuring the absolute progress”. This, the bank claimed, happened without any change in the actual calculation.
The Huffington Post in an incisive report says: “Prime Minister Narendra Modi’s unhealthy obsession with the World Bank’s Doing Business ranking hijacked India’s reform agenda over the course of the Bharatiya Janata Party (BJP) government’s four-year tenure, according to hundreds of pages of meeting minutes, interviews with key players and official correspondence reviewed by HuffPost India.
“The documents reveal how the Modi government first sought to lobby the World Bank into changing its methodology to reflect a better rank for India. When that didn’t achieve any significant success, the government prioritised minor institutional and procedural tweaks to game the ranking system, rather than embark on a bold agenda of economic reform as promised.”
India, on its part, has also been pressing for inclusion of more Indian cities for assessment of the ranking in order to make it more representative of business conditions across the country. If cities like Bengaluru, Chennai and Ahmedabad were included, it would have improved this year’s rankings by a much higher margin. But the measure, if taken, could spell another trouble for India: the formula of inclusion of more cities will apply to all the other countries ranked and may benefit them too.
And at the end, India might run the risk of slipping to lower ranking in the ease of doing business index.