BUSINESS

Why India's Ease Of Doing Business And Rule Of Law Are Unlikely To Improve Much

Global reports shame India.

27/10/2016 8:25 AM IST | Updated 27/10/2016 9:02 AM IST
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Davor Pavelic

Yet again, two global reports have placed India in the bad company of nations—ease of doing business and rule of law. For doing business, India is ranked 130 and, for rule of law, 66. Of course, the country can be happy that Pakistan fares worse on both counts.

In terms of aggregate numbers, the Ease of Doing Business Index doesn't literally translate into the apparent health of India's economy, most probably because of its sheer size; but to be listed below its small south Asian neighbour Nepal is no crowning glory, that too after all the noise of "Make In India" and the good governance pitch in the last two years.

India has been at this ignoble position for a long time, except that it moves up or down a few points, because the inherent weakness of the country doesn't seem to go away. Despite all the song and dance of the BJP and its government since Narendra Modi took over, the core of India hasn't changed much.

Still Hard To Set Up Business In India

As the reports show, it's still hard to set up businesses in India, to get construction permits, to get electricity, to register property and so on. In terms of rule of law, India is still saddled with corruption, poor order and security, poor record of fundamental rights, and opaque governance.

These rankings might not affect the present level of investment, because all that the global capital needs is handsome returns, but they will certainly prevent India from achieving its full potential and rising to a respectable club. Not all the way up to the company of rich nations, but at least alongside the small Malaysias and Thailands of the world—a place that one can be more proud of.

As the reports show, it's still hard to set up businesses in India, to get construction permits, to get electricity, to register property and so on. In terms of rule of law, India is still saddled with corruption, poor order and security, poor record of fundamental rights, and opaque governance.

The Central government is not very happy with the report by the World Bank (WB) because it counters the narrative that it has built up over the last two years. Commerce Minister Nirmala Seetharaman tweeted: "Disappointed at our rank this year. Many of our reformatory steps were after WB deadline. Hopefully, with other steps, will help next yr."

The Economic Affairs Secretary also echoed her sentiments. Their grouse is the same—that the World Bank, the author of the report, didn't find many good things they did. Their expectation is also the same—that they would do better next year.

Ranking Unlikely To Improve Much

Despite all the good intention and probably hard work, the ranking is unlikely to improve much because India is not a single unit, but an agglomeration of its states. In fact, that't what the Constitution of India also says. If India has to perform as a single unit and do better in such indices, majority of its states should do well. With such massive disparity across all indices of development and governance, is it even remotely possible?

For instance, int the seven categories that make the Ease of Doing Business Index, not even one is exclusively the domain of the Centre. Some of them have more to do with the Centre while some with the state, but an investor cannot do without the active support of the state. Narendra Modi and his government may have the best of intentions to attract global capital and people, but it's the state satraps that decide whether they will finally set shop in India or not.

Take a look at the first and most important category listed in the report—starting a business. Many of the steps in this category pertain to the Central government and apparently take only a few days; but there are many others for which the investor needs to deal with the state and municipal authorities. According to the report, on an average, they take many more number of days.

"Dealing with construction permit" is the second most important category. This is as crucial as "starting a business" and it's entirely a prerogative of the state and local governments. If the state government is not keen, the investor's journey ends here. It's not surprising that this is the category that takes the maximum number of days, number of procedures and cost.

Even with their best efforts, can Modi, Seetharaman and her officials improve the overall situation if the states don't cooperate and stay where they are? No. Will the states change? No, because politicians in the states still belong to the license-quota raj of the past.

Had the Indian states cut down on the number of procedures, days and cost, the Ease of Doing Business Index will dramatically improve and India will be up by several notches. For instance, the value of the cost of dealing with construction permits in Chennai, which incidentally is at the 15 position among a listed 17 cities in India, is 831.7 while that of OECD countries is only 1.6. Registering property, another important category, is also under the purview of the state governments.

Even with their best efforts, can Modi, Seetharaman and her officials improve the overall situation if the states don't cooperate and stay where they are? No. Will the states change? No, because politicians in the states still belong to the license-quota raj of the past. Without their patronage, no business can be set up in India. Ultimately, any business has to land on state soil and that doesn't happen without the blessings of the Chief Minister and the state government. The components of the report proves it beyond reasonable doubt. Without dismantling this, India will remain where it's today.

Strategic Location

The role of the states is also visible at the disaggregated data. The report provides the "subnational" ranks of 17 cities in India that's very illuminating. Among these famed economic hubs, Kolkata is the worst for starting a business while Mumbai is the worst for dealing with construction permits. Any surprises there?

Similarly Chennai is the third worst place (at number 15) for starting a business and at 16 for registering property. In contrast, Arvind Kejriwal's Delhi offers the best experience of starting a business.

Therefore, in terms of the overall Index of ease of doing business, obviously cities such as Chennai, Kolkata, Kochi, Patna, Bengaluru and even Mumbai are not at the top, but Ludhiana, Bhubaneswar and Hyderabad are. Whether these cities do better business than their worse-behaved counterparts is, however, another question, because it's always not the ease of business, but their strategic location, that makes places attractive to investment. The sad part of the whole equation is that places with such historical advantages are falling behind because of state governments.

The states have a far more important role on critical areas such as corruption, order and security, and fundamental rights because it's they who deliver governance and services to the people of India.

The situation is no different for rule of law as presented by the report by the World Justice Project as well. The states have a far more important role on critical areas such as corruption, order and security, and fundamental rights because it's they who deliver governance and services to the people of India. Other categories such as civil justice, criminal justice and informal justice that the report relies on also are handled by the state governments. In fact, almost all aspects of the rule of law report depend on the states. Unless all the Indian states rise together, India as a whole will continue to sink in the eyes of the world.

The disparity among the states will continue to be India's burden when it comes to indicators of development. The performance of India in Human Development (HDI) or the Millennium Development Goals (MDGs, which have now been repackaged as Sustainable Development Goals) has been bad because some states have terrible records while others have done well. As long as this lopsided performances continue, presenting a common face is erroneous and misleading.

Some parts of the country will do well in human development, while others will ace in industries and businesses. Some will do well in both. Some, meanwhile, will continue to wallow in grime and crime.

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