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Ease of Doing Business and Getting the Right Indexes Right


Published with the kind permission of the author

Last night I commented on a TV channel about India’s climb up on the Ease of Doing Business (EODB) ladder. I congratulated the government but caveated that if it takes 180 days to get land registered and 156 days to get a building permit, that then that is the critical path line that determines the real EODB. It does matter if a bank sanctions a loan in 30 days, but what is the use if it doesn’t disburse the money till much later and then, given the liquidity crunch, often too little of it? How does it matter if EODB, which is mostly about government sanctions and processes, gets better when it is near impossible to get a trained machinist or an appropriately skilled engineer? The EODB index is meant to measure regulations directly affecting businesses and does not directly measure more general conditions such as a nation's proximity to large markets, quality of infrastructure, inflation, or crime.

The fact is that the ease of running a business is just as difficult as before with archaic labor laws, increasingly militant labor unions, undisciplined and low productivity labor, besides the regular rent collecting proclivities of government agencies. There is little sign this is improving. Nonetheless at a time when most indices are pointed southward an improving EODB is a cause for some cheer. 

A nation's ranking on the index is based on the average of ten sub-indices: These relate to time taken for starting a business; getting building sanctions, but not buying the land; getting a power connection; registering purchase of property; getting credit sanctioned; protection of investors; taxation; foreign trade; enforcement of contracts; filing for insolvency or forcing bankruptcy. All these steps should be about automatic, but they are not.

Each represents a rent collection point, which usually require bribes to move further. Our problem is not that we don’t have well worn procedural tracks. The problem is the vulnerability to extortion even for the routine and normal. Only going by shortness of procedures and whether the forms can be filled online will give us an erroneous feeling of comfort.

In the real India it still takes 156 days to get a building plan sanction, and 1445 days in the court to get a judicial verdict on a civil dispute. Incidentally India has shown improvement in only four sub indices, with the other six being as before or fallen behind. This suggests that declared reforms on insolvency, getting a company registration or SEBI regulations to protect shareholders have boosted our ranking without much change in the real world.

No Indian business can start or function without enabling agents or consultants. A large part of wealth of South Delhi is due to this activity. It’s the same in state capitals and district headquarters. Business consultancy masks many activities. The biggest among them is the business of liaising, and this is increasingly a part of the services corporate lawyers and chartered accountants offer. Very little has changed here. To judge by the EODB index is like judging a policeman for the cleanliness and crispness of his uniform rather than his proclivity to corruption and professional skills. 

There are indexes that are more relevant and more useful in setting national priorities. Recently the International Food Policy Research Institute (IFPRI) released the Global Hunger Index (GHI). The IFPRI report said: “India is ranked 100th out of 119 countries, and has the third-highest score in all of Asia — only Afghanistan and Pakistan are ranked worse.” The report further went on to say: “At 31.4, India’s 2017 GHI (Global Hunger Index) score is at the high end of the ‘serious’ category, and is one of the main factors pushing South Asia to the category of worst performing region on the GHI this year, followed closely by Africa south of the Sahara.”

India keeps a pretty low place in most development indexes.

In the world’s Human Development Index (HDI) India ranks at 131 out of 168 countries ranked, and is in the company of all other South Asian countries except Sri Lanka (73). Sri Lanka is better placed than even China, which is ranked 90. Only Kerala can be compared to Sri Lanka. The HDI of Kerala is India’s highest with 0.790, which would place it ahead of China, while the other end of the spectrum is Chhattisgarh with 0.358, which would place it just alongside Chad, one of the world’s poorest and most backward countries. At 0.790 Kerala would find a high place in the HDI list of nations.

Others indices are just as damning. India's abysmal track record at ensuring basic levels of nutrition is the greatest contributor to its poverty as measured by the new international Multi-dimensional Poverty Index (MPI). About 645 million people or 55% of India's population is poor as measured by this composite indicator made up of ten markers of education, health and standard of living achievement levels. 

The new data also shows that even in states generally perceived as prosperous such as Haryana, Gujarat and Karnataka, more than 40% of the population is poor by the new composite measure, while Kerala is the only state in which the poor constitute less than 20%. The MPI measures both the incidence of poverty and its intensity. A person is defined as poor if he or she is deprived on at least 3 of the 10 indicators. By this definition, 55% of India was poor, close to double India's much-criticized official poverty figure. Almost 20% of Indians are deprived on 6 of the 10 indicators.

This form of analysis gives us a set of measures that try to objectively lay a premise for performance. There are other evaluation yardsticks favored by somewhat self serving NGO’s like the World Economic Forum and trade unions like the CII, FICCI and ASSOCHAM. The most popular one is the index of Economic Freedom. This index is the lesser -known big brother of the World Bank’s EODB. Like Maruti is to Hanuman. But, what is Economic Freedom? 

The notion of Economic Freedom traces its origins to a series of seminars between 1986-94 sponsored by the Fraser Institute of Canada and hosted by Milton and Rose Friedman. Milton Friedman is a Nobel Prize winner in economics and his brand of economics stands at the most rightward fringe of the spectrum. His policy preferences have been criticized by a galaxy of economists, including John Galbraith and Amartya Sen, as insensitive to people.

The annual Economic Freedom of the World Report, ranks countries on their level of economic freedom. They had India at 111 along with the Bangladesh, Nepal, Iran and Pakistan, and way below countries with few real freedoms like UAE (11), Kuwait (19), Oman (20), Jordan (23) and El Salvador (56). Thus, while their index considers Saudi Arabia to be mostly free, it considers India to be mostly unfree, like China! Economic Freedom is not about good government. It is not even about economic achievements. It is about the least government and looking most business-friendly.

India’s tryst with destiny can only be halted by the unfulfilled aspirations of its wanting millions. Now think of this, India is the third largest economy in the world in PPP terms and it is predicted that by 2050 it will be a $30-55 trillion economy, depending on whose projections is music to your ears. 2050 is just 36 years from now and in a nations lifetime that is a mere blink. This is not daydreaming. In 1990-91 when PV Narasimha Rao first initiated the dismantling of the centrally planned state the GDP of India was a little over Rs.10 lakh crores. Today it is over Rs.160 lakh crores. Considering this, increasing twenty-fold in the next 33 years is really not a tall order. 

But we must first reduce the inequality between people and regions, lest they become even bigger and more contentious? Thus, HDI and GHI will determine India’s overall outcome and the quality of freedom, rather than EODB or Economic Freedom.