BUSINESS
20/11/2018 3:26 PM IST | Updated 20/11/2018 3:28 PM IST

How Modi and Jaitley Gamed The World Bank's Doing Business Rankings

BJP government adopted a competitive-exam strategy to improve India's rankings, meeting minutes and official correspondence show.

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The Modi government has prioritised minor institutional and procedural tweaks to game the ranking system, rather than embark on a bold agenda of economic reform as promised.

NEW DELHI — Prime Minister Narendra Modi's unhealthy obsession with the World Bank's Doing Business ranking hijacked India's reform agenda over the course of the Bharatiya Janata Party (BJP) government's four-year tenure, according to hundreds of pages of meeting minutes, interviews with key players and official correspondence reviewed by HuffPost India.

The documents reveal how the Modi government first sought to lobby the World Bank into changing its methodology to reflect a better rank for India. When that didn't achieve any significant success, the government prioritised minor institutional and procedural tweaks to game the ranking system, rather than embark on a bold agenda of economic reform as promised.

This monomaniacal focus on putting India among the top 50 countries in the ranking, economists said, gave the World Bank disproportionate influence in India's economic reform process. It has also revived a persistent concern that the Modi government preferred to focus its energies on optics instead of actual governance and reform.

This monomaniacal focus on putting India among the top 50 countries in the ranking, economists said, gave the World Bank disproportionate influence in India's economic reform process

"If you keep on finding the easiest things to change, then you are effectively letting the World Bank's ratings decide what kind of changes you want, rather than deciding what is your own sense of priorities," said Laveesh Bhandari, an economist and director of the Indicus Foundation, who had written a column for The Indian Express outlining these concerns.

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Reports published immediately after India's dramatic rise up the rankings— from 142 to 77 over four years— have surmised as much. But this is the first comprehensive account that relies on previously unreported documents—accessed through the Right To Information—to provide a blow-by-blow account of how Finance Minister Arun Jaitley and officials in the Prime Minister's Office adopted the "competitive exam", tuition-centre approach familiar to most Indians eager to improve their rank in a competitive setting.

"You have literally to crack the code," Jaitley said, at a self-congratulatory press conference on 31 October, the day when the latest ranking showed India rising up to the 77th position from 100 last year.

Yet cracking the code, former bureaucrats involved in the process said, wasn't necessarily good for the economy, much like cracking the board exams isn't a good indicator of actual learning.

"If we are improving our position, why are we not getting more investment?" said Arvind Mayaram, who served as Finance Secretary for the first few months of the Modi government's tenure before he was shunted out to the Tourism Ministry.

"I would only say that the proof of pudding is in the eating. If the investment rate was around 38% of the GDP in 2011, obviously ease of doing business must have been much superior then than it is in 2018, when it is around 27%," Mayaram said.

Cracking the code, former bureaucrats involved in the process said, wasn't necessarily good for the economy, much like cracking the board exams isn't a good indicator of actual learning.

Amitabh Kant, a Modi favourite and former secretary of the Department of Industrial Policy and Promotion (DIPP), pushed back at this characterisation of his government's performance.

"A lot of work has happened in the past four years on business reforms and the rankings are a reflection of that," said Kant, now CEO of the NITI Aayog.

Yet much of this work, HuffPost India found, was akin to rearranging the procedural deck chairs on the listing ship of India's faltering economy.

Preparing to crack the code

On 26 December 2017, Jaitley held an important meeting at his ministry's office in North Block with the Modi government's most senior bureaucrats—revenue secretary Hasmukh Adhia, DIPP secretary Ramesh Abhishek, economic affairs secretary and former World Bank Executive Director Subhash Chandra Garg, among others—to address a pressing problem.

The World Bank had moved the "cut-off date" for finalising the Ease of Doing Business Report 2019 by a whole month. As a consequence, "the time available to introduce reforms is shorter by a month", said DIPP secretary Abhishek, according to meeting minutes reviewed by HuffPost India.

Abhishek could not be reached for comments on this story.

The timeline and sequencing of the so-called reforms being discussed in the meeting, the minutes make clear, were not dictated by political considerations, discussions with coalition partners or, heaven forbid, an overarching economic vision or strategy. Rather, the reform process was treated like a World Bank-provided syllabus to be completed on time.

The World Bank would send out its questionnaires to respondents by February 2018, said Abhishek, and "it is therefore important that these reforms are implemented at the earliest". The questionnaires Abhishek referred to are sent to select businessmen, analysts and other private parties to corroborate claims of reforms made by governments.

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There are 10 quantitative indicators which the bank considers, including the ease of starting a business, getting construction permits and trading across borders, among others, for a mid-size firm, and each indicator is scored and ranked separately. These scores are then aggregated into an overall score for each country. Across the world, the Bank measures performance on the 10 indicators in two cities in the case of all large economies—in India, these cities are Mumbai and Delhi.

The agenda of Jaitley's meeting was to ram through as many quick changes as possible.

To be sure, many of the changes sought in the meeting could have real benefits for a few. But while the government's attempts to reduce red tape were laudable, analysts said, they were not a substitute for macro-economic reform.

At Jaitley's meeting, for instance, proposed "reforms" included eliminating the need for a company seal or rubber stamp to open a bank account, and eliminating the need to submit a cancelled cheque as part of the employee provident fund application process.

His bureaucrats quickly identified streamlining cross-border trading as an easy way to improve rankings. Thus the department of revenue eliminated the need for traders to submit hard documents, and tried to improve the capacity of the online customs payment gateway.

According to the minutes, Gopal Krishna, Secretary of the Shipping Ministry, said the Jawaharlal Nehru Port Trust, which handles about 40% of India's oceanic trade, would digitise import and export related documentation. Interestingly, the port had made the same claim in 2015 for exactly the same reason .

The focus on cross-border trade would pay off handsomely for the government, as India's rankings in this specific indicator jumped to 80 in the Doing Business Report 2019 that was released on 31 October. A similar improvement of construction permit procedures saw India's ranking jump from 181 to 52.

Another area of focus was the time and paperwork needed to start a new business.

At the meeting, Abhishek said India needed to reduce the number of official procedures to start a business to six, and the number of days to complete these procedures down to five, to rank amongst the top 50 economies.

At the time, it took 30 days to start a new business, and required 11 procedures in Mumbai and 12 in Delhi.

The latest report shows the government managed to eliminate one step by reducing procedures to 10, and also seemingly reduced the time required to 16 days for Delhi and 17 days for Mumbai. The rank for this indicator also jumped up by 21 ranks to 137 in the latest report for the preparation of which this was a key meeting of top officials.

On that afternoon, the meeting concluded with Jaitley telling the senior officials to submit an action-taken report on the points discussed by 31 January 2018.

Bhandari, the economist, said that allowing minor procedural changes to disproportionately influence the rankings in a significant way was not the government's fault, but a flaw in the way the rankings were designed.

This flaw, Bhandari said, could skew reform priorities away from comprehensive measures that could help the economy as a whole—like improving contract enforcement, skilling and employability or internal trade—towards quick fixes that result in an inordinate rise in the rankings but narrowly affect particular sectors like construction, for instance. Thus he cautioned against resorting to this approach repeatedly.

ASSOCIATED PRESS
World Bank President Jim Yong Kim, left, with Indian Prime Minister Narendra Modi in New Delhi in July 2014.

How the efforts began

Jaitley's 26 December 2017 meeting was one of the most recent instances of an approach adopted immediately in the aftermath of the 2014 general elections which installed a new bunch of decision makers on the Raisina Hill.

On 16 July 2014, two months after Modi swept to power on the promise of bringing jobs, investment and prosperity, his Principal Secretary Nripendra Misra held a meeting in the PMO to discuss a "concrete strategy for moving up India's rank" on the EODB index with the secretaries of the corporate affairs ministry, department of economic affairs, DIPP and the ministry of commerce, according to meeting minutes reviewed by HuffPost India.

"The meeting focused on the more immediate and quickly doable process improvements." Dr KP Krishnan, an official representing the department of economic affairs in the PMO meeting, subsequently summed up in an internal noting.

Interestingly, one of the tasks discussed at this meeting involved the streamlining and digitisation of customs documents within one month, a "reform" measure that was also discussed in the December 2017 meeting with Jaitley.

In what would become a familiar pattern for the Modi government, the Information and Broadcasting Ministry was tasked with "Preparation of literature and preparatory activities for global campaign to be taken up on to priority".

Crucially, all attendees were told to keep the World Bank abreast of all the good work they were doing.

"It was emphasized that all these measures should be brought to the notice of the World Bank. All concerned should engage with the World Bank in this regard," the minutes read.

Two weeks later, on 29 July 2014, though they were not discussed in the meeting, the government announced changes to three central labour laws. The Indian press immediately hailed the changes as transformative; yet the government was sorely disappointed to learn that the World Bank was only planning to consider reforms made before 1 June 2014.

Mayaram, the then Finance Secretary and Kant, the then DIPP secretary, were tasked with writing to the World Bank to plead for the deadline to be extended, and the new reforms to be taken into account, so the government could show an immediate improvement in India's business environment in the Doing Business Report 2015, which was scheduled to be released a few months later. The PMO kept a close track of this.

"It is learnt that the DBR, 2015 is at the stage of drafting and consolidation," Mayaram, the then Finance secretary wrote to to MN Prasad, Executive Director of the World Bank for Bangladesh, Bhutan, India and Sri Lanka, on 21 August 2014. "In this regard, it is important that the reference period for documenting reforms in the report is extended to the middle of August, 2014 (instead of 1st June, 2014) to cover the recent reform measures also."

Kant, for his part, lobbied Kaushik Basu, then senior vice president and Chief Economist at the World Bank.

"The new Indian government is deeply concerned about India's low ranking on the ease of doing business as reflected in the "Doing Business 2014" report published by the World Bank Group," Kant wrote in a letter dated September 10, 2014 and reviewed by HuffPost India. "I would like to emphasise that the methodology adopted to arrive at the rankings needs to be further refined so as to paint the correct picture. Drawing conclusions based on the studies conducted in only two cities, namely, Mumbai and Delhi, overdependence on the regulations in place for small and medium enterprises and responses received from a narrow set of services users such as lawyers, accountants and brokers, inadequate appreciation of factors impinging on general business climate such as conservation of environment & ecology may lead to skewed conclusions, especially for a country like India with a huge geographical canvas dotted by varying shades of regulatory mechanisms."

Incidentally, this is one of the most persistent critiques made by independent experts about the ranking to this day.

Despite these letters, the World Bank refused to extend the deadline or change its methodology as per India's demands and in October 2014, when the Doing Business Report 2015 came out, India's EODB ranking actually fell from 134 to 142.

Methodology issues

The Modi government, in its initial years, also sought to lobby the Bank into changing its methodology while seeking to rise up the ranking at the same time. In its official communications, it also compared the World Bank methodology with the World Economic Forum's Global Competitive Index and was favourably inclined towards the latter as it showed a better rank for India.

In his 21 August 2014 letter to the Bank's Executive Director, Mayaram requested for a meeting with the "senior management" of the Bank with a delegation of Indian bureaucrats led by Kant to impress upon them India's urgent concerns.

"We must effectively engage with the World Bank to convince them about the need to change the methodology so that the DBR reflects India's position more correctly," Mayaram wrote, referring to the Doing Business Report by its initials. Official correspondence, released under the RTI, shows while Kant did not go for a meeting with the Bank's Chief Economist Basu, he wrote the above quoted letter lobbying for a change in the methodology.

When India's rank improved marginally from 142 to 131 in October 2015 but still remained far from the ambitious target of top 50 countries set by Modi, senior government officials took to writing petulant letters to World Bank officials and to each other, questioning the basis of the rankings.

On 1 April 2016, for instance, Revenue Secretary Adhia wrote to the then World Bank Executive Director for India and other South Asian countries, Subhash Chandra Garg, saying, "Whether we look at the Doing Business Report in relative terms or absolute terms, the findings seem seriously skewed."

(In July 2017, Garg would be repatriated from the Bank to the Indian government, where he was appointed as economic affairs secretary in the Finance Ministry.)

In September 2016, anticipating a lacklustre ranking for India on the index, DIPP Secretary Abhishek wrote to then economic affairs secretary Shaktikanta Das, expressing his disappointment with the World Bank team for relying on the opinions of chosen respondents on the reforms process, rather than on government data.

"It was evident from the discussion that the Doing Business team is giving more credence to unsubstantiated averments of a few dozen respondents over the actual system log and individual case-wise database running in thousands of sheets" Abhishek wrote to Das following a video conference with the World Bank team to discuss the points of contention about reform claims made by the government for the then upcoming 2017 report, according to his letter dated 26 September 2016, reviewed by HuffPost India.

So, on 25 October 2016, when much to the government's embarrassment, India's rank improved by one spot from 131 to 130 despite hectic lobbying, Modi went on the warpath.

An official statement released by the PMO on 26 October 2016 about Modi's sixteenth interaction through PRAGATI, a platform for the PM's direct review meetings with officials, said, "Mentioning the World Bank's latest Report on Ease of Doing Business, the Prime Minister asked all Chief Secretaries and all Secretaries of the Government of India to study the report, and analyze the potential areas where there is scope for improvement in their respective departments and states. He asked for a report from all concerned in this regard, within a month, and asked the Cabinet Secretary to review the same thereafter."

In November 2016, Modi would announce demonetisation—now almost universally acknowledged as a terrible idea. Meanwhile, the government lobbied relentlessly with the Bank, according to a senior government official with knowledge of the matter.

"Fact is, this government pleaded with the World Bank quite vehemently and initially, Amitabh Kant was at the vanguard of it. Indian government's persuasion has worked," this official said. He explained why he felt that Indian government's "persuasion" (he chuckled at the word "lobbying" while saying this) worked with the Bank, "We are one of the largest borrowers which means that the interest we pay to the bank greases its salaries. So obviously there is a lot of clout that India also has over the bank."

"If the Prime Minister also tells the President that look, this is not right, India should be better than what you are showing," the official continued. "They also oblige."

Whether we look at the Doing Business Report in relative terms or absolute terms, the findings seem seriously skewed: Revenue Secretary Hasmukh Adhia

Over the next two years, the government's efforts bore fruit. From 2014 to the most recent report that came out early this month, as India's rank jumped from 142 to 77, the government changed its views on the Bank's methodology.

In late 2014, Jaitley told Parliament in a written reply to a question from a parliamentarian that the "government has indicated its concerns about the indicators used, methodology, sample size, use of ranking, neglect of qualitative and country specific business environment, etc. to the World Bank."

This November, as the government's five-year effort at lobbying the bank paid off, Jaitley hailed the ranking as the product of "independent research" based on "objective criteria".

"Only a focussed and a purpose oriented Government could have achieved this," Jaitley concluded.

Hindustan Times via Getty Images
Small and medium sized businesses feel demonetisation and GST have adversely affected their prospects.

An undesirable dream?

As the Modi government continues to invest efforts into improving India's Doing Business rankings keeping in mind the target of joining the top 50, some question if the government should really care so much about what is ultimately an arbitrary index produced by a multilateral lending agency.

"They should be able to tell the investors which is a good country to invest in, right?" the former finance secretary Mayaram said about the ranking. "But if your methodology is flawed then it has no value. That's what I said then and I still hold it today that there is not much value because the methodology is flawed."

The 2019 ranking for instance, put China—arguably the one place where the world has done the most business in the past decade—at 46, while Rwanda is ranked 29th.

"If you consider yourself as the six largest economy or, by PPP, third largest economy in the world, then for you to get very upset or excited about what ranking the World Bank or World Economic Forum, or anyone else does, it only shows a little lack of confidence," Mayaram concluded.

Mumbai-based independent analyst Hemindra Hazari said he was struck by India's improved rankings in context of a difficult time for small and medium size Indian companies.

"If it is in terms of the large corporates, then it is perhaps possible that they have seen an improvement in the business," Hazari said. "But when you talk about MSMEs, in the last two years, our dear government has given two mortal wounds in the form of demonetization and implementation of the GST."

The elaborate filing requirements of the Goods and Services Tax had hurt medium and small enterprises while demonetisation had hamstrung their cash flows, Hazari said and added, "I would think it is surprising if the MSMEs have said that their ease of doing business has improved."

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Yet, Modi and his government have been quick to market this improvement in India's rank on an index prepared for mid-size firms operating in two of the most prosperous cities of India as evidence of an actual improvement of economic conditions across the country.

On 3 November, for instance, Modi said, the rankings are an "indicator of India's strengthening economy and quick progress". He said this while answering a question posed by a BJP volunteer from Korba, Chattisgarh, who wanted to know the relevance of the rankings in the life of the 'common man'. Modi further said that the improvement in rankings over four years by almost half —going from 142 in 2014 to 77 in 2018—shows the Indian economy had improved twice over ever since his government was sworn in, and this marked a definitive change from the previous government. He also told party volunteers from election-bound Chattisgarh, Madhya Pradesh and Rajasthan during the online interaction that he wants the BJP volunteers to keep track of good news about the country and ensure that they repeatedly speak about it among people, presumably voters.