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India has jumped up 30 spots in the World Bank’s Ease of Doing Business Report that was released today (31 October). India now finds itself ranked at the hundredth place as opposed to 130 in last year’s report.
India stands out this year as one of the 10 economies that improved the most in the areas measured by Doing Business.
Ease Of Doing Business Report, 2018
The report ranks New Zealand, Singapore and Denmark as the top three countries by ease of doing business. Ranked at 78 – 22 places ahead of India – China has not improved its ranking.
India’s ‘Distance to Frontier’ (DTF) score increased by 4.71 points to 60.76, against China’s increase of 0.40 points. The DTF score helps assess the absolute level of regulatory performance over time. It measures the distance of each economy to the “frontier,” which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005.
Finance Minister Arun Jaitley said that India’s 30-place elevation is the highest jump that any country has ever made in the index. He also said that it was a clear and big acknowledgement of the structural reforms that government has been undertaking in the last 3 years, the government has been making efforts to simplify procedures which led to improvements in many areas.
India saw the biggest jump in the criterion of paying taxes, moving up 53 places on the back of improvements to the taxation system.
A study on India, for example, shows that inefficient licensing and size restrictions cause misallocation of resources, reducing total factor productivity by preventing efficient firms from achieving their optimal scale and allowing inefficient firms to remain in the market. The study by the World Bank showed that removing these restrictions would boost total factor productivity by an estimated 40-60 per cent. India also streamlined the business incorporation process by introducing the SPICe form (INC-32), which combined the application for the Permanent Account Number (PAN).
Appreciating India’s new insolvency law as well as the zeal to resolve non-performing assets (NPAs), the World Bank had the following to say.
India also strengthened access to credit by amending the rules on priority of secured creditors outside reorganization proceedings and adopting a new insolvency and bankruptcy code that introduced a reorganization procedure for corporate debtors. In India the establishment of debt recovery tribunals reduced non-performing loans by 28% and lowered interest rates on larger loans, suggesting that faster processing of debt recovery cases cut the cost of credit.
The World Bank also complimented India for easing tax compliance on businesses due to the implementation of an online platform for the payment of the Employee Provident Fund as well as the introduction of administrative measures to ease income tax compliance.
So what did India do in the last financial year that caused such a massive change?
Setting up a business was made easier by merging the applications for a Permanent Account Number (PAN) and Tax Account Number (TAN) as well as improving the online platform for applications. Mumbai merged the applications for Value Added Tax (VAT) and Professional Tax (PT) which helped further.
Easier construction permits, by simplifying the procedure to obtain a building permit with an online system in Greater Mumbai and New Delhi.
Access to credit was strengthened by amending the rules on priority of secured creditors outside reorganisation proceedings and the new insolvency law that provides a time limit and clear grounds for relief to the automatic stay for secured creditors.
Protections for minority investors were strengthened with more remedies available in cases of prejudicial transactions between the transacting parties.
Easier Tax Payments by requiring Employees Provident Fund payments to be electronic, and introducing administrative measures making it easier to comply with corporate income tax rules.
Trade across state borders was made quicker by reducing the time taken to comply with import regulations at Nhava Sheva port. In Delhi and Mumbai, eliminating merchant overtime fees and an increase in electronic and mobile platforms compliance of both export and import regulations.
Enforcing contracts with the the introduction of the National Judicial Data Grid (NJDG) in Mumbai and Delhi made it easier to enforce contracts because local courts can now generate case management reports.
Resolving insolvency with the new insolvency and bankruptcy code that introduced a reorganisation procedure for corporate debtors and enabled continuation of the debtor’s business even during insolvency proceedings in Mumbai and Delhi.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.