The ranking vindicates the reformist measures of the Modi government. But further improvement requires vanguard action from states and local governments.
The Ease of Doing Business global ranking is 15 years old. The rank is based on 10 indicators, which are measured on business scenarios in one major city of a country. For larger countries, two cities are chosen, which in the case of India are Mumbai and Delhi.
So, for whatever improvement we have seen in India’s rank, we should thank the state and local governments for doing their bit too.
For instance, one of the indicators (or metrics) deals with the ease of getting construction and building permits. This is surely in the domain of local government procedures and efficiency. On this metric, India’s rank is 181 out of 189.
On the other extreme is a metric called protecting minority shareholders’ rights. This is the domain of national legal and regulatory framework, and here India ranks an astonishing 4, even ahead of countries such as Canada, Hong Kong and Britain.
The overall ranking is a composite of the 10 metrics weighted equally. India’s rank has jumped by 42 positions in just three years, and this performance is astounding. For a large country, it is truly impressive. The ranking depends on relative performance of all the other 188 countries. They are all striving to improve their business climates and the ease of starting, sustaining and closing a business in their jurisdictions. So, improvement in rank calls for doing better compared to your own past record, as well as outpacing improvements in all your peers. Hence the achievement is impressive.
Of course, it is inherently unfair to compare small countries such as New Zealand (rank 1, population 4.7 million) or Singapore (rank 2, population 5.6 million) with a large country such as India. In fact, the top two ranked countries do not even add up to one large city in India’s sample of two cities. This is a well-known drawback of such global rankings, which compare “flags and not noses”.
There was a time when the four fastest growing large economies, Brazil, Russia, India, China (BRIC) were all ranked somewhere around 130 to 140 in EoDB. If ease of doing business is all about enhancing economic growth and people’s incomes, it appeared as if the low ranked BRICs were doing okay nevertheless. But all the BRIC economies have improved their ranking substantially, with Russia leading the pack at rank 35 and China at 75. Apart from the BRICs, the one large country, which has jumped up in ranking is Indonesia. Indeed, this year’s EoDB report observes that most emerging market economies have improved their performance substantially.
It must be pointed out that EoDB rank does not consider and is not constrained by local labour laws. So, having lax labour laws and employment standards does not mean it is easy to do business in that geography.
India’s most spectacular increase in ranking has come in the taxation metric. And considering that this ranking predates the roll out of the Goods and Services Tax, a landmark reform, the ranking can only go up now.
Most of the improvement is in areas where policy, reform or administration are in the domain of the central government. To that extent the ranking vindicates the reformist measures undertaken by the Modi government — insolvency and bankruptcy code, new monetary policy framework, GST, auctions, FDI, access to electricity. But further improvement requires vanguard action from states and local governments.
The EoDB ranking methodology allows us to disaggregate at the sub-national level. India has already started an interstate competition of EoDB ranking, which is spurring much needed reform, governance improvement and administrative efficiency at the state and local level. When India makes it the top 50 in the rankings, that achievement will owe much to the cooperation and initiatives of states and cities as well.