A ‘social’ index for Ease of Doing Business

The Modi government, willy-nilly, promoted “competitive federalism” among States through its “Make in India” initiative, with the apparent objective to improve the nation’s rank in World Bank’s Ease of Doing Business (EoDB).

The States responded positively and happily jumped onto the bandwagon to woo investors to invest in their jurisdictions. The initial recommendations from the PMO on 98 reform measures in 2014, based on the 10 business topics tracked and monitored by the World Bank’s doing business report, was later extended to 340 points encompassing a Business Reform Action Plan (BRAP) for the Indian States. This was construed as pertaining to “58 regulatory processes spread across 10 reform areas that cover lifecycle of a business”.

There are two clear concerns against this. First, it is uncertain whether such indicators that essentially call for reducing the “transaction costs” from the governance perspective adequately capture the on-ground conditions of doing business, as has been pointed out by a recent publication by the Asia Competitiveness Institute (ACI), National University of Singapore.

Second, in no way, can these conditions adequately represent the overall business environment that can woo investors: these reflect very few partial conditions.

History and political environments have a massive bearing on business environment. As an example, the hostile business environment prevailing in the 34 years of rule of the Left Front in West Bengal left the State languishing, despite late attempts toward revival by CM Buddhadeb Bhattacharya.

The situation has not improved much despite the present West Bengal government’s excellent performance in BRAP implementation. On the other hand, despite Odisha’s inclement natural conditions and Maoist threats in certain corners, the stable State government has been able to woo private investors thereby converting underdeveloped districts to engines of development.

Our contention is that EoDB, as per the World Bank definition is reductionist, and in no way, a true reflection of ground reality. This position has also been taken by the ACI, which has come up with its own index on ease of doing business on the basis of three broad parameters:

Attractiveness to Investors, Business Friendliness, and Competitiveness Policies. This is definitely a substantial improvement over the World Bank’s one!

Based on our ongoing research, we suggest that the States should concentrate on the UN sustainable development goals (SDG) as major enablers of business competitiveness. With this hypothesis in mind, we developed an SDG index for 23 States. This is a weighted index considering 14 of the 17 SDGs based on 76 indicator variables’ normalised values.

These 14 goals reflect the status of SDGs’ achievement in States by taking into account parameters that are characteristic of the socio-economic fabric of the nation. This is a clear improvement over the one developed by NITI Aayog on two grounds: (a) the “ad-hoc”-ness in weight determination of the component indicators has been removed through statistical methods like principal component analysis, (b) the crucial ‘climate action’ goal, blatantly neglected by the NITI Aayog, has been incorporated in our index. The ranks of the States are the ones given in the accompanying table.

As such, there is a two-way causality between business performance and SDGs. While, the role of the private sector and multilaterals is being seen as important drivers for achieving SDGs globally, the private sector is transcending the unidimensional goals of short-term profit maximisation, and focusing on sustainability parameters in an attempt to create a long-term business strategy. This is because SDGs create enabling business conditions through the following ways.

(i) Decreasing long term risks: Addressing SDGs help in tackling long-term risks emerging from environmental, political, and social dimensions, while protecting market competitiveness ahead of required policy implementations. This reduces long-term “transaction costs” for businesses.

(ii) Governance: Transparency in sustainability risks and impacts, as a positive externality of achieving SDGs, leads to decrease in information asymmetry, thereby creating better governance processes.

(iii) New business opportunities: Business solutions, aligned with the SDGs, have huge potential of market expansion, revenue maximisation, and job creation, through partnership creations at various levels.

(iv) Competitiveness: Deepening partnerships for SDGs and integrating them in national and corporate budgets can help in increasing business competitiveness, market resilience and company goodwill.

The above contention is based on the premise that SDGs address the input and product market conditions through bolstering the potentially available capital classified in four types, namely, physical capital, natural capital, social capital and human capital, which are critical inputs to businesses to thrive.

Almost all the SDGs are embedded in one form of capital or the other, i.e., human (SDGs 1 – 5: reflecting on poverty, hunger, health, education, and gender equality), physical (SDGs 8 and 9: employment, growth, industry, innovation and infrastructure), natural (SDGs 14 and 15: life below water and land respectively) and social (SDGs 10 and 16: social institutional variables etc).

Interestingly, our econometric analysis shows that the SDG index, devised by us, is a statistically significant causal variable explaining the Ease-of-Doing-Business Index, as developed by the Asian Competitiveness Institute (ACI).

We also find a significant causal relation between this index and per capita foreign direct investment (FDI) in the States, indicating that financial capital gets drawn towards those destinations where enabling business conditions are already created through prevalence of the four types of capital.

The above argument buttresses our contention that SDGs should be treated as important cornerstones of “competitive federalism” in the Indian context, rather than the World Bank-DPIIT metric of EoDB, or any other development parameter.

This is from two perspectives. The first is from the perspective of attracting businesses and financial capital. The second is from the perspective of looking at development through a holistic lens bringing in the efficiency, equity, and sustainability concerns in one frame.

Ghosh is Director, ORF Kolkata, Bhowmick and Saha are Research Assistants, ORF Kolkata. Views are personal.

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