[Update] Ease of Doing Business Index (EODB) & India – Complete Analysis

EODB 2019 UPSC IAS
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Doing Business rankings was forced to be paused following the detection of data irregularities in the previous reports. Following the assessment of previous 5 years’ reports by the internal audit, alterations were found in data from Azerbaijan, the UAE, Saudi Arabia and China in 2018 and 2020 reports. The review process did not identify any further specific data irregularities beyond those affecting these countries. With India currently being at 63rd position, the government is striving towards addressing various hurdles that are preventing the country from reaching the top 50 in this index.

ease of doing business

What is Ease of Doing Business (EODB) Index? (Important for prelims)

  • The World Bank ranks the 190 countries on their ease of doing business based on 10 indicators across the lifecycle of a business as follows
    • Starting a business
    • Dealing with construction permits
    • Getting electricity
    • Registering property
    • Getting credit
    • Protecting minority investors
    • Paying taxes
    • Trading across borders
    • Enforcing contracts
    • Resolving insolvency
  • A high EODB ranking means the regulatory environment is more contributive to the starting and operation of a firm.
  • The top 3 countries in the index are Newzealand, Singapore, and Denmark, which retained their spots for a second consecutive year. The three countries are followed by Hong Kong, South Korea, Georgia, Norway, U.S, U.K, and Macedonia.
  • EODB data is used to make other key reports as well such as the World Economic Forum’s Global Competitiveness Index and Heritage Foundation’s Index of Economic Freedom.
  • The “distance to frontier metric” in the report is a measure to indicate how far an economy’s policies are from global best practices. This score helps assess the absolute level of regulatory performance over time.

EODB

What are India’s ranking and progress?

  • India jumped 23 spots from 100th last year to 77th this year.
  • India was at the 131st spot in 2016.
  • India has improved its rank by 53 positions in the last two years, and 65 positions in the last four years (2014-18).
  • India in the 2019 edition stands well ahead of South Africa (82) and Brazil (109) and is fast closing the gap on China (46) and Russia (31).
  • Now, India is the best-ranked country in South Asia and has almost caught up with other competitors like Indonesia (73) and Vietnam (69).
  • The World Bank report also recognises India as one of the “top ten improvers” in this year’s assessment, for the second consecutive time. India is one of only 9 economies around the world and only one in BRICS nations to be included in this list.

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How did India improve its ranking?

The 6 reforms recognised in this year’s report are

  • Starting a business
  • Getting electricity
  • Dealing with construction permits
  • Getting credit
  • Paying taxes
  • Trading across borders

The most dramatic improvements have been registered in the indicators related to “Construction Permits” and “Trading across borders”.

  • For construction permits, India has implemented an online single window system, introduced deemed approvals, and reduced the cost of obtaining these permits.
  • For trading across borders, India has reduced the time and cost for export and import by means of several key initiatives such as the implementation of electronic sealing of containers, the upgrading of port infrastructure and allowing electronic submission of supporting documents with digital signatures.

Measures that were taken on three indicators such as getting electricity, getting credit and protecting minority investors placed India in the top 25 with respect to these three indicators.

  • In the electricity sector, the time taken for getting a new connection has been minimised from 105 to 55 days.
  • For resolving insolvency, India has created a new Insolvency and Bankruptcy Code and quick recognition procedure for corporate debtors.
  • Furthermore, Mumbai abolished the practice of site inspections for registering companies under the Shops and Establishments Act.

Measures taken to reduce the time to start a business

  • In 2017, India made starting a business easier by entirely integrating multiple application forms into a general incorporation form.
  • India also replaced the Value Added Tax (VAT) with the Goods and Services Tax (GST) for which the registration process is faster in both Delhi and Mumbai, the two cities measured by the report.
  • Due to these measures, the time taken to start a business has been halved from 30 days to just 16 days.

On the distance to frontier metric,  India’s score improved from 67 to 60.

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What are the concerns with the ranking?

  • The continuous increase in the ranking of India is perhaps the best answer to questions with respect to the credibility of India’s reform agenda. Moreover, since the World Bank fixed May 1 as the deadline for measurement, various initiatives that were taken by the government after the deadline will only reflect in next year’s rankings including the full effects of GST and IBC (Insolvency and Bankruptcy Code).
  • But there are ailing concerns at the ground level which still needs to be addressed as follows.
    • For instance, enforcing contracts is the traditional aspect where India continues to lag behind and stands currently at 163.
    • In addition, despite the GST and IBC, India’s overall score on paying taxes and resolving insolvency stays at a very low level.
    • This reflects the extent to which the actual enforcement of these reforms needs to be made more effective.
    • Also, to attract new investment (foreign & domestic), various macroeconomic issues need to be resolved such as political and economic stability, law and order maintenance, quality physical infrastructure, and buoyancy in financial markets.
  • Major institutional and governance reforms not covered in the World Bank study needs to be taken for new businesses to start and grow.
  • Furthermore, these rankings are based on the improvement in two of the main cities namely Delhi and Mumbai, both of which benefit from being the political and financial capitals of the country. Only the rankings of these cities do not reflect the true state of the country’s economy. The reality in other big cities and smaller towns are most likely worse and were not considered in the ranking.

Also read: Data Localisation Issue – All that you need to know

Way ahead

The strong reform measures taken by the government to improve the business climate in India for small and medium enterprises started bearing fruit. It is also reflected in the government’s strong commitment to improving the business reforms at the state as well as at the district level. These efforts need to be sustained in order to help India maintain its goal of having strong and sustained economic growth. Based on the EODB ranking of two cities (Delhi and Mumbai), other states must prove that the rest of the country can also improve the ease of doing business.

Updates:

Why was the Doing Business report publication paused?

  • In August 2020, the World Bank paused the publication of its “Doing Business 2021” report because of the inappropriate alteration of the data from Azerbaijan, China, Saudi Arabia and the UAE in the 2018 and 2020 reports.
  • The temporary pause was to conduct systematic review and assessment of data changes for reports of the last five years.
  • The data collection process was assessed and corrections were made when needed.

Is this the first instance of manipulation of Doing Business report?

  • This is not the first time that the ranking faced such controversies.
  • In 2018, the then Chief Economist of the World Bank Paul Romer raised concerns regarding the possibility of the reports being vulnerable to “manipulation” by the bank’s staff who are politically biased/pressured.
  • However, the audit following this allegation failed to find political manipulation of the rankings.

What is the result of the internal audit?

After reviewing data irregularities, the World Bank released its updated Doing Business Report. Following are changes were made in the revised reports:

China:

  • In the original Doing Business Report of 2018, China scored 65.3 with global ranking of 78, identical rank as in 2017 report.
  • Irregularities found were affecting the Starting a Business, Getting Credit and Paying Tax indicators.
  • Following the corrections, the country scored 64.5, leading to its ranking to reach 85 during this period.

Azerbaijan:

  • In Doing Business 2020, Azerbaijan scored 76.7, with the inclusion of irregularities affecting the Getting Electricity, Enforcing Contracts and Trading Across Borders indicators.
  • Here, its global ranking was 34.
  • After corrections, the score is 78.5.

Saudi Arabia:

  • In the 2020 report, the score with inclusion of irregularities affecting the Getting Credit and Paying Taxes indicators was 71.6 with the global ranking of 62.
  • After correcting, Saudi Arabia scored 70.9.

UAE:

  • In the 2020 report, with the inclusion of irregularities affecting the Paying Taxes indicator, the UAE scored 80.9 with the global ranking of 16.
  • After correcting this irregularity, the country scored 80.8. However, its global ranking remained 16.

How did India fare during recent years?

  • According to the Doing Business 2020 report, India stood at 63rd position in the rankings among 190 countries.
  • In 2019 report, it was in the 77th position, a significant improvement from the 142nd position in 2015 report.

How is the government planning to improve India’s ranking?

  • The Department of Promotion of Industry and Internal Trade (DPIIT) plans to bring India to top 50 in the Doing Business Ranking by focusing on improving performance in the 6 laggard segments of the 10 indicators.
  • These 6 parameters include enforcing contracts, paying taxes, registering property, starting a business, trading across borders and resolving insolvency.
  • To improve performance in “enforcing contracts”, the government is going to constitute commercial courts with the help of the judiciary to fast-track cases.
  • In this regard, Delhi government has already approved the establishment of 22 commercial courts and Mumbai is to set up 16 of these courts.
  • Measures will also be taken to improve the quality index of judicial process and increasing awareness about electronic case management tool facility for judges and lawyers.
  • The government will also introduce pre-trial conference and encourage online filing and electronic summon.
  • To improve ranking in ‘paying taxes’ category, the government is planning to integrate Employees’ State Insurance (ESIC), Employees’ Provident Fund Organisation (EPFO), GST and professional tax with company registration under a single platform to simplify deductions from companies.
  • For ‘registering property’ criterion, the focus will on implementing new land titling legislation, ensuring timely disposal of property disputes and digitising land ownership records.
  • An independent grievance redressal system along with public availability of property dispute statistics will also be ensured.
  • As for “starting a business”, the government is planning to reduce the number of procedures from 10 to less than 4.
  • It also seeks to reduce the average number of days taken to establish a business from 18 days to just 6.
  • For “trading across the border”, the government seeks to reduce the average time taken for imports to 48 hours from 70 hours.
  • For exports, this will be reduced to 48 hours from 54 hours.
  • Manual clearances by officers will be replaced by automated approval.
  • Direct port delivery for imports and entry for exports will be raised.
  • For ‘resolving insolvency’, proposal is made to broaden the committee of creditors (CoC) by including operational creditors.
  • The CoC is in charge of approving resolution plans for stressed assets with a 66% majority. It currently consists of just financial creditors.
  • Apart from these six parameters, India’s rankings in the four others – protecting minority investors, getting electricity, getting credit and construction permit – are ranging from 13 to 27. There is limited scope for dramatic improvement in these parameters.

Practice question for mains:

What are the bases for assessment under Doing Business Report? Critically examine the measures that can be taken by India to reach top 50 in the Doing Business Report by the World Bank. (250 words)