Business Standard

How India jumped 23 stops on ease of biz ranking

- NITIN SETHI & ABHISHEK WAGHMARE

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 labour 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 Bankruptcy Code (IBC) 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 mediumsize­d domestic building company to build a 1,300 square meter or above two-storied warehouse on a land it already owns in the periurban 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.

A comparison with the ranking of 2018 (for 2017) shows that the number of permission 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 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 tonnes of containeri­sed 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 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 midsized domestic corporates.

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 ??  ?? 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)
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)

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