Ease of doing business: The truth behind India's phenomenal rise

India could do even better next year if the two structural reforms - Goods and Services Taxes and the Insolvency and Bankruptcy Code process - stabilise and get counted in next year's rankings, say Nitin Sethi and Abhishek Waghmare.

Illustration: Dominic Xavier/Rediff.com

India moved 23 stops up the charts to reach 77 on the Ease of Doing Business (EODB) ranking.

A closer look at the methodology of the ranking suggests, India did so by focusing its energy on improving performance on some narrow specific criteria that the ranking system tracks.

It also suggests that India could do even better next year if the two structural reforms - Goods and Services Taxes and the Insolvency and Bankruptcy Code process - stabilise and get counted in next year's rankings.

The EODB rankings, much like many other cross-country studies, come with their peculiarities.

They require comparable criteria and parameters that can be tracked across all kinds of economies.

The World Bank says, “The focus is deliberately narrow to allow the comparability of 190 economies.”

The ranking, it notes, “does not measure the full range of factors, policies and institutions that could affect the quality of an economy's competitiveness. ...for example, capture aspects of macroeconomic stability, development of the financial system, market size, or the quality of the labor force.”

India’s leap up the ladder in the EODB 2019 (conducted for 2018) was aided largely by improving how India deals with construction permits.

The Doing Business Score improved within a year on this count from 39.69 to 73.81 (the best being ranked 100). A 34 per cent improvement.

The second most valuable push up came from improvement in how India trades across borders. This criteria saw the score improve by 18.90 per cent.

There was a surprise in store as well. The two big-ticket structural reforms - introduction of the Insovency and Bankcruptcy Code nearly two years ago and the introduction of Goods and Services Tax in the last fiscal - did not aid India’s case.

The scores for ‘resolving insolvency’ and ‘paying taxes’ remained stagnant this year.

But, first, how did India improve scores on construction permits and international trading.

While assessing the ease of construction permits, the EODB team asks how easy it is for a medium-sized domestic building company to build a 1,300 square meter or above two-storied warehouse on a land it already owns in the peri-urban area of the country’s largest business city.

In India’s case the score was calculated after considering both Mumbai and Delhi.

Picking up this specific criteria, the World Bank then sees how many procedures are required, how much time does it take, what is the cost of compliance in comparison to the cost of the warehouse and what is the quality of the building.

Comparison with the ranking of 2018 (for 2017) shows that the numbers of permissions required, the days it took to get them and the cost of compliance were all substantially improved upon in the two cities of Mumbai and Delhi, the latter achieving a higher improvement.

Several of these improvements were city specific and would not necessarily be visible in other parts of the country.

While measuring the ease of doing international trade, the ranking system measures how much time and cost does it take to meet border compliances, to prepare documentation, and for domestic transport for both import and export.

For imports a standardised shipment of 15 metric tons of containerized auto parts is considered from the country that exports the largest value of auto parts.

For exports, the ranking system assess ease for exporting the good that is most exported (by value).

In India’s case the assessment was done for Nhava Sheva port for Mumbai and from Mundra for Delhi.

The goods assessed were electrical machinery export to US and auto parts import from Korea.

India reduced the time and cost to export and import through various initiatives, including the implementation of electronic sealing of containers, the upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures.

These set of changes worked for both Delhi and Mumbai.

Unlike the improvements in construction permits these were relatively more widespread as they impacted beyond the specific goods and ports under study.

The story on how EODB scored India on dealing with corporate insolvency is rather different.

The World Bank sends a questionnaire for the government to fill up on each of the criteria.

When using an example that fits the assumptions the World Bank puts in measuring the efficacy of insolvency, the government cited how a case of a hotel-owning company might wind through the Debt Recovery Tribunal functions rather than the Insolvency and Banking Code (IBC).

But, in other sections of its answers the government detailed the functioning of the IBC.

The criteria heavily depended on what are the recovery rates from the insolvency process. With the Indian government offering the same example it had for past two years - from the operations of Debt Recovery Tribunal, India’s scores remained relatively stagnant on this count.

The other count on which India suffered was the scoring on how corporate India pays different direct and indirect taxes.

The index uses the example of a mid-sized domestic company to understand how tax compliances work.

Using this as a template, data was collected for the calendar year 2017.

This ensured that the changes introduced through GST into the indirect tax collection regime were not adequately reflected in the measure.

In addition, while measuring change in tax rates, the ranking did not take into consideration that introduction of GST would reduce the net tax burden as it allows for input tax credit.

The indirect tax compliance is only one of the parameters the EODB studies when assessing how a country scores on ‘paying taxes.

Therefore, next year India’s score on this count is bound to increase to the level that indirect taxes weigh into the consideration for assessing overall tax regime for mid-sized domestic corporates.