India can make it even easier to do business

Addressing three key issues will help it break into the top 50 of the World Bank rankings

Can India break into the top 50 of the World Bank’s Ease of Doing Business Index? After all, this was one of Prime Minister Narendra Modi’s aims when he took over in 2014, when the country was ranked 142. Last year, India moved to 100. This year — the ranking was released on October 31 — it moved to 77. Like all ranking scales, a jump from

142 to 100 is likely to have been easier than one from 100 to 77, which means breaking the 50-barrier will be tough. Still, it can be done. China was ranked 78 in last year’s ranking and moved to 46 this year. Overall, India’s score is at 67.23 against China’s 73.64 and a regional average of 56.71.

To improve its position, India should look at the areas where it needs to change. The World Bank ranks countries on 10 parameters, and, on five, India’s rank is low: Starting a business (137); Registering property (166); Paying taxes (121); Enforcing contracts (163); and Resolving insolvency (108). The corresponding scores are 80.96, 43.55, 65.36, 41.19, and 40.84. This would suggest that even radical reforms that help accelerate the process of starting a business are unlikely to help India move up the rankings — although it is nobody’s case that India should not work on making it easier to start businesses. On the tax front, similarly, it isn’t clear how much India can improve: the big issue is not the number of payments (13 a year, which compares well with the OECD average of 11.2) but the time taken (277.5 hours, which compares well with the regional average of 274 but is far higher than the OECD one of 159) and the total tax as a percentage of profits (52.2% as compared to 43.5 in the region and 39.8 in OECD countries).

That leaves three areas in which India can actually change things significantly for the better — and, which would also help it move up the rankings. On the property front, as expected, India fares badly on all aspects: the number of procedures (9 as compared to 4.7 in OECD countries); time (85 days as compared to 20); cost (7.5% of value against 4.2%); and the quality of the land administration index, a combination of “reliability of infrastructure, transparency of information, geographic coverage, land dispute resolution, and equal access to property rights” (9.5 on a scale of 30 as compared to 23). It is also no surprise that India needs to improve its record in enforcing contracts. It takes 1,445 days on an average for the civil resolution of contracts in India, as compared to 582.4 in OECD countries (even the regional average, 1101.6 is better). However, India does fare well on the quality of the judicial process (10.5 on an 18 point scale; the OECD number is a comparable 11.5). Reducing pendency is all it will take.

On the third parameter, resolving insolvency, India has made rapid strides with the passage of the Bankruptcy Code. Indeed, on a scale of 16, the World Bank ranking says India’s regulatory framework for insolvencies scores 8.5, as compared to 11.9 in OECD countries). But it takes 4.3 years on an average in India to resolve insolvencies, while it does only 2.6 years in the region and 1.7 years in OECD countries. To be sure, India’s insolvency code is still in its infancy, and the first cases under it were closed only this year, so it is a safe assumption that the country’s record on this front will improve. The bigger issue is the recovery rate, a measly 26.5 cents to the dollar in India as compared to 32.7 in the region and 70 in OECD countries. This could well be another indicator of the poor quality of the underlying assets in India — and suggests that the bad loan crisis affecting banks will require significant write-offs.

There are several changes that can be made in regulations and laws in all three areas, so, it is within the realm of the possible for India to enter the top-50 of the rankings. Improvements thereon would likely be incremental, with little separating the countries on most parameters. If India’s policy makers address issues on the three dimensions, it would become far easier to do business in India. And that — making it easier to do business — should be the desired end, though, not doing better in the rankings.

THE WORLD BANK RANKS COUNTRIES ON 10 PARAMETERS, AND, ON FIVE, INDIA’S RANK IS LOW: STARTING A BUSINESS (137); REGISTERING PROPERTY (166); PAYING TAXES (121); ENFORCING CONTRACTS (163); AND RESOLVING INSOLVENCY (108)