The business of ranking

Rating states by business-friendliness must be rigorous

The intent behind the proposal of the Department of Industrial Policy and Promotion (DIPP) to make public an annual World Bank-style Doing Business ranking of Indian states is more than welcome — it is also overdue. If it is done rigorously and properly, such a ranking could serve as a useful complement for investors to the World Bank annual inter-country ranking. Naturally, the bank’s exercise cannot, understandably, capture the particularities of India’s 29 states and seven Union Territories. The World Bank exercise is a “best-case” scenario based on doing business in Mumbai, traditionally India’s most business-friendly hub. The country’s stubbornly poor global ranking – among the bottom 50, the worst performer among BRICS competitors – would be worse if it factored in an average of India’s major cities. States, too, vary widely in their Doing Business regimes, as any domestic investor can testify — historically, for instance, Gujarat is considered a benchmark that few states have been able to equal. Prime Minister Narendra Modi is all too aware of India’s low rank and has resolved to bootstrap it to among the top 50. But this ambitious target for a country as diverse as India cannot be achieved without the participation of all the states, whether ruled by the Bharatiya Janata Party or otherwise. So given the groundswell of investor interest in India largely because most competing economies are slowing, providing investors with updated data of a more granular nature would be invaluable.

The obvious caveats to this exercise are how far the government is prepared to ensure the independence and credibility of the data. The DIPP is an arm of the government and the rating system should be so robust that it should always remain immune to political pressure to present data in ways that might suit the ruling regime. This is also true, of course, of the National Institution for Transforming India, or NITI, Aayog, which could be part of this or a related endeavour. Though it is not strictly comparable, the example not so long ago of the head of a Congress-affiliated think tank being pressured after the institution published data showing Gujarat leading an index of economic freedom should be borne in mind.

The methods used, however, should be immune to common problems with such rankings. For example, relying on self-filled questionnaire answers from state bureaucrats – apparently the currently preferred method from DIPP – will lead to rankings with only a tenuous link with reality. Instead, a genuine investigation of the nature of the laws and processes that lie behind the self-assessments will be necessary. The DIPP officials claim a ranking of this nature will trigger “healthy” competition among states. It must then be designed to avoid promoting unhealthy competition — competitive giveaways and tax breaks of the kind offered for the Tata Nano car project in West Bengal and later Gujarat that could be detrimental to some states’ financial stability. The ranking would also do well to go beyond the standard matrix and parameters used by the World Bank to include assessments of political stability and availability of quality social infrastructure, both of which are as critical to a corporation’s investment plans as land acquisition and inspection regimes, as the former chief minister of West Bengal, Buddhadeb Bhattacharjee, discovered in his state in 2011 and Nitish Kumar may have begun to realise in Bihar.