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Will Ease of Doing Business in India Translate to Ease of Living?

Professor of Finance , XLRI, Jamshedpur
Dec 14, 2017 10:57 AM 6 min read

Will Ease of Doing Business in India Translate into Ease of Living?


Editor’s Comment: 2017 has proven to be a mixed bag for the Indian Economy. Doomsday stories circulating in the aftermath of demonetization and GST took a narrative turn with India jumping 30 places on World Bank’s “Ease of Doing Business” Rankings to enter the top 100 club. With the GDP numbers looking better at  6.3% vs 5.7% in Q1 and Moody’s rating upgrade, India's perception to say the least is on the right track. However, it remains to be seen if Ease of Doing Business translates into "Ease of Living" for the common public.


As elections near in multiple states, Narendra Modi has reasons to smile. The opposition which was finally gaining ground attacking the government on its two key economic reforms – demonetization and GST, was struck down by the twin blows – a massive 30 rank increase in Ease of Doing Business Index and the recent Moody’s India upgrade.


The ruling party was quick to capitalise on these improvements and has likely succeeded in covering the scars of demonetization and GST implementation woes. The PM promptly highlighted that an improved ranking not only benefits businesses but also common lives. Speaking at a conference, “India’s Business Reforms", along with the World Bank CEO, Modi said that ‘Ease of Doing Business leads to Ease of Life’.


How true is this claim? The World Bank, in its Ease of Doing Business index calculation, takes 10 indicators into account. These indicators are – 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. Some of these indicators are equally important for the common man as they are for a company. For example, the ‘Getting Electricity’ indicator, where India has made steady progress from 137 in 2015 to 29 in 2018, depends on the number of power outages, prompt notification about planned outages, compensations in the case of outages, prompt communication about tariff change and the professional handling of installation and maintenance.


The World Bank questionnaire further includes the ease of getting a right-of-way clearance, and on who is responsible in case of an incident related to faulty internal wiring. It’ll be interesting to note that the average time to obtain an electricity connection in Delhi is 45 days as of World Bank 2018 data, which is more than 20 days less than the average in OECD high income economies.


Two areas where India made big leaps are Paying Taxes Index and Getting Credit Index. In Paying Taxes Index, India leaped 53 places, from 172 to 119, whereas in the case of Getting Credit, it moved from 44 to 29. The improvement in Paying Taxes Index was attributed to the increasing penetration of digital mechanisms. The World Bank study was conducted before GST; hence the impact of GST is not reflected in the 2018 rankings. The ability to pay and file taxes online was a key measure of how the state is doing in this area. Without doubt, the ongoing process digitisation, not just limited to tax filing, has saved the time and effort for both companies as well as the common people. Similarly, an improvement in the credit availability is a positive sign for not just the companies, but the general public as well.


However, there are parameters where India continues to do below par. In the registering property indicator, India has slipped from 139 to 154. The indicator takes into account the reliability and transparency of the property registration system, cadastral/mapping system, legal system, dispute resolution mechanisms and equal access to land. Any improvement in these areas is beneficial not just to corporates, but to the general public as well.


The equal access to property rights index takes into account whether married/unmarried men/women have equal ownership rights over property. While it is understandable how this can influence Ease of Doing Business - it also serves as an indicator of the state of progressive rights in our country. Land record keeping has always been a messy business in India, however new solutions are emerging. Telangana government is already using blockchain technology, the same technology that powers cryptocurrencies like Bitcoin, for maintaining digitised land/revenue records. Such progressive measures will simultaneously improve general public life and the Ease of Doing Business Index.


Does the improved Doing Business Index indicate a better future?


The upbeat waves within business circles after the jump in Doing Business Ranking is under the hope that this warrants a better future. India has been struggling from severe unemployment issues with predictions that the manufacturing sector will see 30-40% reduction in jobs in a year. The Modi government expects the 30 places jump to send signals around the world that India is becoming more business friendly. The government expects increased FDI as a result, leading to the creation of adequate well-paying jobs which will Ease the Life of struggling youth. Ultimately, the enthusiasm shared by the general public about India’s jump is under the same belief that it will bring in more capital and subsequently, employment into India.


However, examples around the globe do not point to this conclusion. In the last 10 years, the biggest leap in Doing Business Rankings was made by Rwanda, which improved its ranking from 139 to 67 in 2009-10 period. Rwanda has continued to increase its ranking and is currently at 41. It is interesting to note that FDI – Net inflow as a % to GDP fell from 2.21% in 2009 to 0.73% in 2010. It has subsequently risen and as per the latest figures - stands at 3.04%. Azerbaijan also made such a leap, where it climbed 63 points from 96 in 2008 to 33 in 2009. FDI Net Inflow as % of GDP fell from 8.16% in 2008 to 6.5% in 2009.


Source: World Bank


Amongst the top 10 achievers in Ease of Doing Business Rankings, 7 actually slipped in terms of FDI Net Inflows. Clearly, improving Doing Business Rankings has not helped these countries attract Foreign Direct Investment. In fact, data shows that majority of them have become worse off. Montenegro, a country which improved its ranking by 46 places, shows an FDI inflow decrease by 17.6 percentage points in 2006-16 period. 

Source: World Bank


The country’s Ease of Doing Business index does not seem to reflect economic growth either. 5 out of the top 10 achievers in Doing Business rankings has an average growth rate of under 3.2. These countries, despite improving their rank by over 40 points have been unable to justify the impact with their economic growth. This too, is not a good indicator for India which is celebrating its 30-place rise in Doing Business rankings.


However, these statistics have to be taken with a pinch of salt. None of these 10 countries are in any way, comparable to India. While it may be possible that investors turned a blind eye over the achievements of these smaller economies, it would be hard to think they would do the same with a $2.26 trillion economy. Hence, it would be amateur to write-off India’s Doing Business achievement as a paper victory.


The world has noticed India’s accomplishment. No other country has improved as much as India did in the last one year. Furthermore, the jump has helped India crack the Top 100, which may have its psychological effect as well. The Doing Business rankings, combined with the Moody’s ratings increase, are indicators that India is moving in the right direction. But whether the public will benefit from these is yet to be seen.


Co-written with Sravan J S, XLRI Jamshedpur