‘Doing Business’ Ranks Not a True Marker of Poverty & Unemployment

Making India great not only means making it to the EoDB top 100, but also making value-based changes.

Image used for representational purposes.

(Photo: iStock)

From IIT-JEE to top B-schools, from the list of the richest men to the most thriving of provinces – as a country, we are fixated on rankings and records. So much so that we hold more Guinness records than most countries.

This craving for ‘ranking’ is a result of our many characteristics. On one hand, we seek accreditation of reputed bodies and encourage people to make informed decisions; on the other hand, ranking often means hooking masses (often for electoral gains) with baits of tricky numbers and stats.

For now, let us delve into some details of a ranking system which has literally ‘accelerated’ the nation: the ‘Ease of Doing Business (EoDB)’ ranking.

Also Read: Ease of Doing Business Rankings Show No Political Leverage

The Value Proposition of the EoDB Ranking

While some ranking systems indeed feed our ‘cravings,’ some make telling contributions. ‘Doing Business’ (DB) ranking falls in the latter category. Into its teenage, it is now as much a popular yardstick as the UNDP’s Human Development Index (HDI), IMF’s per capita GDP ranking in Purchasing Power Parity (PPP), and IFPRI’s Global Hunger Index (GHI).

DB ranking is, however, characteristically different from others.

Over the years, the rankings have faced mild to severe criticism, mostly from the West, with allegations that it propagates free-market liberalism by insisting on ‘deregulation’ at the expense of quality and safety. Not only the West, even China (which was once ranked in the high 90s) was critical about the report’s wrong procedure.

Also Read: Explainer: What Improved India’s Ease of Doing Business?

Amid such sharp assertions, starting 2013, after Jim Yong Kim took over as the World Bank president, there has been a radical overhaul in its methodology. Today, it has become one of the flagship knowledge products in the field of private sector development and is claimed to have motivated the design of several regulatory reforms in developing countries.

One may attribute the following to DB ranking system:

1. Continually improved: It constantly improves its methodologies and indicators, what it calls ‘correction rate,’ between years (for 2017 it is 8.8 percent) over ‘Doing Business’ with unparalleled transparency.
2. Resourceful: Since its inception, plenty of academic and working papers have been written using the DB data.
3. Stimulating: It catalyses debates and dialogue about reform, provides global knowledge, and hand-holds the laggard states with reform recommendations and implementations.

Notwithstanding its values, it – like any benchmarking exercise – has many limitations, which the World Bank is very vocal and transparent about. Let us try to decode some aspects of the ranking system and analyse what India’s 30-rung climb (from 130 to 100) means.

Also Read: How to Propel India Into Top 50 in Ease of Doing Business Rankings

The Debate Around Two-City-Based Report

Source: Business Reforms Action Plan 2017.(Infographic: Rahul Gupta/The Quint)

India qualified to get coverage to two cities (Delhi and Mumbai) unlike many countries (population less than 100 million by 2013) where the DB evaluation was limited to just one city. Regardless, in India, the critics have reasoned that Mumbai and Delhi are perhaps the two best-managed cities and India’s DB ranking advancement does not reveal its larger business-readiness realism.

How valid is the argument?

Let's take a look:

1. First, only three metrics (out of 10) – ‘dealing with construction permit’, ‘getting electricity’ and ‘registering property’ – are absolute state or equivalent smaller body specific (such as municipality or utility boards). For most of the other indicators, the central government’s policies determine the ‘Distance to Frontier (DTF)’ score.
2. Second, as per the government’s (DIPP’s assessment) report of the Indian states and Union Territories (UTs) in 2016, the two states, with their representative cities in DB ranking, Maharashtra (10/31) and Delhi (19/31), rank much lower in India’s sub-national ranking compared to others. Hence, it is unreasonable to say that India has fared better because of apparent ‘outperformers’ – Mumbai and Delhi.
3. Third, the DB indicators are laid out in a manner that they capture the reforms taken by an economy in its entirety across diverse causal factors, such as a combination of central and state laws, efforts put in by both private and public entities etc. As WB’s report shows, the DTF scores and associated rankings of an economy varies significantly across topics, which means economies (cities) rarely score either universally well or badly.

Consequently, the argument that all of Delhi and Mumbai are better than other Indian cities does not hold. It is important to note that the government has been pursuing the World Bank for a while now to consider reforms undertaken across India and not just in Mumbai and Delhi as is being done currently.

Modi Government’s Role

For a long time, profit-making by businesses had been considered a curse in India and ease of doing business has mostly been the unease of doing business. Quite ironically, Mahatma Gandhi – who shares PM Modi’s Gujarati roots – believed it was difficult to conduct business in a strictly honest way.

Contrary to this Gandhian view, business is Modi’s most favoured subject.

Notwithstanding the state (even municipality) level improvement initiatives, the credit for India’s spectacular performance largely goes to the Modi government; it has fostered a culture of both competition and cooperation among the states.

On one hand, DIPP’s publishing the state assessment report is to name and shame the low-ranking states to push them to make changes. On the other, there is an instilled philosophy of cooperation among the states in mentor-mentee relationships.

The road to reforms was not devoid of obstacles. The government’s attempt to change the national land-purchase law and to harmonise taxes across India had met with a lot of opposition.

The government, however, showed great character in passing central legislation such as the Insolvency and Bankruptcy Code (2016), and allowing state-level reforms to supersede national law, as a way around many political holdups.

One must note that the GST hasn’t had any impact on this year’s ranking, which it is believed would influence India’s ranking positively in future.

India’s ‘True’ Position

For the government and a swathe of Indians, probably the pleasure (from this improved ranking) shoots from the thought – something the WB preaches — that better performance in DB is associated with lower levels of joblessness and poverty.

Conceivably true, however, we as a nation are yet to taste positive fallouts of any such possible parallels.

India ranks a hapless 131st among 188 nations in UNDP’s HDI. Between 2010 to 2015, India has moved only four places up the ladder.

In the GHI, between 2007 and 2017, India has slipped 6 positions to now rank a lowly 100th among 119 countries. These discouraging statistics are at odds with India’s rapid progression in the DB ranking.

One may argue that the benefits of India’s economic reforms would take some time before reflecting in other rankings. The present, however, poses some undeniable cynicism.

The government has taken this index with absolute gravity (with a lot of resources and stakes) since coming to power.

There’s nothing wrong with it. It is one area in which we are doing well and must continue to. Many other global leaders have similar ambitions, after all, a promising spot in the list is useful when pitching for FDI or aid.

However, when a measure like DB becomes a target of policy, it may cease to be a reliable guide. Research suggests that there are many examples where countries have sought to improve DB ranking in ways that have little merit.

Conversely, there are many relatively prosperous countries (high per capita GDP) which have been ranked lower in the DB index.

Countries with wide disparity between EoDB ranking and per capita GDP position. (Source: World Bank and IMF)(Infographic: Rahul Gupta/The Quint)

India must be cautious and sensible not to turn this into a ranking obsession. Making India great means not only making it to the EoDB top 100 (or 50) – with its glaring income inequalities – but also making value-based changes.

(The writer is an alumnus of SP Jain Institute of Management and Research and works as a management consultant. He tweets @ImDebnath. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same)

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