At the Vibrant Gujarat Global Summit 2019, Prime Minister Narendra Modi stated that his government has made doing business in the country “easier, cheaper, faster and smarter”, reflected in World Bank’s Doing Business rankings. India climbed 65 places in this global ranking from 142 in 2014 to 77 in 2018. Besides the recognition of being a “top improver” in this regard, three international organizations, notably, the IMF, UN and World Bank have also recently given their imprimatur to the India growth story as the world fastest growing major economy for the current and next three years.
However tempting this might be to infer, there is no direct relationship between the higher Doing Business rankings per se and India’s growth trajectory of 7.3 to 7.4 per cent projected by these international agencies. The former just give a snapshot of the business environment for investors – with Mumbai and Delhi–centric indicators like the ease of starting and closing a business, dealing with construction permits, cost and time taken to get an electricity connection, registering property, the number of documents and the average cost of containers for export and import shipments and enforcing contracts.
India’s Prime Minister Narendra Modi, for his part, has attached great importance to these global rankings and desires the country’s ranking to be in the top 50 next year. When he assumed office in May 2014, his priority on the economic front, no doubt, was to arrest the deterioration in business environment that set in during the UPA regime. All businesses - domestic and foreign - found it hard to invest due to problems with clearances and regulatory hassles, thanks to policy paralysis. To make a difference to this state of affairs, he forcefully emphasised at various fora the need to make the country an easier place to do business.
The dramatic improvement in India’s overall ranking from 2014 and 2018 was due to the ease of securing construction permits, getting an electricity connection and trading across borders and less for enforcing contracts. For construction permits, the improvement in India’s ranking was from 184 in 2014 to 52 in 2018, thanks to procedural tweaks whereby the number of procedures, time taken and cost of obtaining construction permits reduced in Mumbai and New Delhi. The South Delhi Municipal Corporation thus stated in ads that approvals, from sanction to completion, would be available in just 59 days.
India’s global rankings have moved up 65 places, but do they correlate with an improvement in the ground realities of doing business? Not necessarily.
Consider a metric that Modi used at the summit, notably, foreign direct investments. The term of his government attracted FDI of USD 239.7 billion or 42.5 per cent of foreign investments that the country received in the last 18 years, according to the Department of Industrial Policy and Promotion (DIPP). If such investments are surging in, why then has the DIPP not published any such numbers from August 2018?
There has been a sharp reduction in greenfield FDI announcements due to difficulties in doing business, regulatory uncertainty and land acquisition problems. Many big-ticket investment plans did not materialise or were shelved. Some investors chose to cut their losses and left the country. Repatriation and disinvestments by foreign investors reached a high of USD 21.5 billion in 2017-18, according to RBI data. Interestingly, FDI inflows into the country were higher when our global Doing Business ranking was relatively lower than when it improved in 2018.
While streamlining of procedures and digitization of paperwork improve India’s ranking, the India growth story depends on a more stable policy and regulatory framework. For instance, what sort of signal is conveyed to foreign players in e-commerce like Amazon when FDI policy guidelines are suddenly changed midway and rules tightened up?
Domestic small and medium businesses, for their part, are struggling with labour law requirements and predatory practices of what was known as ‘inspector raj’ and complying with the Goods and Services Tax. The problems of land acquisition have bedevilled many investment projects and made land for industry prohibitively costly to acquire. Rather than breaking into the top 50 countries on the ease of doing business, it is these reforms that are needed to kickstart more investments to sustain India’s global growth ranking.
(The author is an economics and business commentator based in New Delhi. He can be contacted at firstname.lastname@example.org)