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IASbaba’s Daily Current Affairs – 2nd Nov 2017

ECONOMY

TOPIC:

General Studies 3:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

General Studies 2:

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Improved World Bank’s Doing Business (DB) rankings for India

In news:

The World Bank’s Doing Business (DB) rankings for 2018 have just come out and India has made a very significant jump, improving its rank from 130th in 2017 to 100th.
Not only has India improved its position in terms of rankings, which is relative, it has also made improvement in absolute terms, measured by the so-called “distance to frontier” metric.
Even though the DB rankings may not be the sole determinant for attracting investment, the improvement is likely to boost investor confidence as it reflects the government’s commitment to reforms.

Areas based on:

The World Bank’s rankings are based on the country’s performance in following areas:

Starting a business.
Dealing with construction permits.
Getting electricity
Registering property.
Getting credit.
Protecting minority investors.
Paying taxes.
Trading across borders.
Enforcing contracts; and
Resolving insolvency.

Measures taken by the government:

The improvement in rankings is the result of coordinated efforts made by the government over the past few years. According to the World Bank, India has adopted 37 reforms since 2003 and about half of them have been implemented in the last four years. The four parameters where there has been a quantum jump in rankings —resolving insolvency, paying taxes, access to credit and protecting minority investors — have all seen focussed efforts from the Centre both in terms of policymaking and in implementation.

“Make in India” program.
Simplification of tax procedures.
Bankruptcy laws and so on.
The rise in the insolvency ranking is directly attributable to the enactment of the Insolvency and Bankruptcy Code. The implementation of the bankruptcy code is a big boost, as it will help inefficient firms exit the market and improve overall allocation of capital.
Access to credit has been facilitated by the licensing of new entities such as small finance banks and payments bank, not to forget the MUDRA scheme.
One indicator that deserves special mention is the protection of minority investors. India is at the fourth position globally in this category. This is a huge achievement and the government and the securities market regulator deserve credit.
The Securities and Exchange Board of India is constantly working to enhance investor confidence. Implementation of the recommendations made by the Uday Kotak committee on corporate governance will further augment minority shareholder confidence in the market.
The DBP 2018 says: “India made dealing with construction permits less cumbersome by implementing an online system that has streamlined the process at the Municipality of New Delhi and Municipality of Greater Mumbai.
The online system has streamlined the process of obtaining a building permit, thereby reducing the number of procedures and time required to obtain a building permit in India.
On enforcing contracts- India made enforcing contracts easier by introducing the National Judicial Data Grid, which makes it possible to generate case measurement reports on local courts.
Some of the biggest hurdles that businesses face such as in registering property or securing construction permits fall under the realm of States. While the Centre’s ranking of States on ease of doing business has exerted some pressure, what’s encouraging is that States themselves are undertaking reforms as they compete for investment.

Way ahead:

While the government deserves credit for this impressive improvement in the DB rankings, it should not lose sight of the distance India still needs to cover. For instance, despite all the effort, India’s rank in dealing with construction permits is 181 among 190 countries. The time taken for enforcing a contract has, in fact, worsened from what it was 15 years ago. Consequently, India’s rank in this category is a poor 164.

Rather than depending only on the DB report, the government should understand the de facto situation faced by firms that wanted improvements in the country’s business environment.
In reality, these reports do not provide an accurate picture of a country’s business environment. The de jure rules of business that are captured by the DB reports and the de facto reality differ significantly.
In order to undertake effective policies to improve the business environment in India, we need to understand what causes it to be relatively good in some situations and poor in others.
A recently concluded NITI Aayog-IDFC study throws light on some of the broad trends in the country’s business environment, but fails to provide a deeper understanding of its causes due to the lack of a conceptual framework to analyse the data.
Policymakers should build on recent gains with an accelerated pace of reforms in areas such as land, labour and contract enforcement, which will help push investment and growth in the medium to long run.
The World Bank report flags the areas where the country lags – local entrepreneurs need to go through 12 procedures to start a business in India’s commercial capital, which is way higher than many high-income economies, besides cumbersome procedures for construction permits, registration of property and enforcement of contracts.
To improve the score related to registering property we need measures like updating and digitising land records, improving titling and streamlining procedures on transfer of property.
The kind of challenges that policymakers need to address includes-
Lack of awareness related to the single-window facility for setting up a business.
Labour- intensive sectors are constrained by labour market regulations. Finding skilled workers and dismissing employees are severe impediments.
Firms still face power shortages.
The implementation of the goods and services tax (GST) has not been accounted for in this year’s rankings. Therefore, if the problems associated with GST are addressed quickly, it is likely that the GST will help boost India’s ranking further next year.

Conclusion:

With its demographics, the size of the economy and a well-functioning capital market, India stands a real chance of projecting itself as a preferred destination for investments. The fact that China is likely to slow down further in coming years will also help India’s case.
Clearly, the more difficult reforms lie ahead with the low hanging fruit, mainly those within the ambit of the Centre, already plucked. The process of improvement has to be continuous and there can be no let up. Both the Central and state governments will need to work in a number of areas to improve India’s competitiveness.

Connecting the dots:

While the government deserves credit for the impressive improvement in the Doing Business rankings for 2018, it should not lose sight of the distance India still needs to cover.

Also read: “Ease of doing business” rankings: Critical analysis