Incentivising reforms

India became the world’s sixth largest economy in 2017 at $2.6 trillion. More recently it jumped a massive 23 places to reach 77th rank in the World Bank’s Ease of Doing Business rankings — marking a cumulative jump of 53 paces over the last two years.

While India remains vulnerable to global risks, crude price hikes and a reviving US economy, the improvement in rankings amidst capital re-routing is noteworthy. The key to India’s success lies in foreign direct investments (FDI) inflows, which touched $45 billion in FY2017-18 and $13 billion in the first quarter of FY2018-19 alone. Apart from reformist policy measures and FDI liberalisation, India is now globally recognised as a strong investment destination. This has also been recognised in the report.

Apart from easing FDI reforms, last year also saw the implementation of the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC). This was followed by online single window model for faster clearances and compliances. The progress made in the rankings is a reflection of such reform measures undertaken over the last year and not necessarily the implementation. For example, the resolving insolvency ranking has actually declined since last year even though the code itself has been lauded. Significant gains were made in parameters relating to “trading across borders” and “construction permits”, two basic items which were fraught with complexities. The construction permitting process has been streamlined by implementing the single-window clearance system and the online building permit approval system. Some of these gains have accrued due to increased digitisation, inclusivity, and greater emphasis on infrastructure development.

The jump in ranking provides a boost to potential investors. This improvement can also be seen as an incentive facilitator and is likely to be followed by further measures to ease business regulations, making a steady move toward matching international best practices. With an increased focus on building domestic growth momentum, India can well achieve a ranking within top 50 by next year. However, this will require not just increased focus on reforms but also a faster pace of implementation and compliance.

What has come as a surprise, however, has been a decline across parameters such as paying taxes, registering property, and resolving insolvency. This could be due to insufficient accounting of the full effects of some of these reforms in this year’s ratings. So the ranking may improve next year when the impact of these reforms are fully captured. Despite the roadblocks, the overall message is a net positive for India as it provides a measure of the government’s commitment to reforms.

But these rankings do not take all macro fundamentals into account. Some crucial factors including productive employment, skills pool, and macro-economic stability are left out. But the road ahead is likely to get harder. India will have to consider bolder measures including accurate digitisation of land records and simpler tax structure.

The next set of agendas has to focus on some specific areas. These include inefficient licensing and size restrictions that have led to misallocation of resources and have reduced total factor productivity. Procedural barriers to starting a business and cumbersome tax litigation processes are also big hurdles. A lot will now depend on not only the pace of reforms but also its implementation.

Chakravarty is Partner and Lead Economist Deloitte India, and Aggarwal, Economist Deloitte India

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