As per Desi Economists India’s Economy is on Ventilator. World Bank Presents a very Different Picture though

ease of doing business

Slowest quarterly growth in last three years!
98.96% of specified bank notes found their way back to banking system
Glitches in GST filing and woes of exports

Is there anything good about this economy to talk?

Have you ever questioned, despite slowest quarterly growth in 3 years why our stock markets are at their historical highs?

OR

Have you ever wondered, why our forex reserves have crossed $400 billion despite ‘so-called’ failure of big bang schemes and Indian economy in general?

Well, I will try to address those paradoxes in our economy.

Irrespective of the fact whether one is a staunch supporter of BJP/NDA or dead against it, one must admit the fact that FII (foreign Institutional Investors) and Domestic institutional investors are better informed and better equipped than anyone us reading this. Stock market is, almost always, a better indicator of how an economy is going to perform in near to long term future, after all, investment in a stock is betting for better prospects of a company. Recently, according to World Bank report, India has jumped 30 positions in ‘ease of doing business’ from 130 to 100 and that too without considering the effects of both demonetization and GST. What I am trying to say is, big investors and World Bank are better qualified than any of us to pass judgement on ‘how well our economy is doing’. Yes! Agreed, stock market rallies are based on various factors apart from fundamentals of an economy, at the same time we can’t ignore the changes of fundamental structure. Instead of discussing how great it is to have a surge in bigger than any other large economy, I will discuss what helped in achieving that jump and what do we have to do to grow it further.

To determine ease of doing business rank, World Bank considers ten different factors, ranging from starting business to resolving insolvency, in assigning rankings to countries.

In the following discussion, I’m going to discuss the factors which helped us improve our ‘ease of doing business’ rankings and the factors which let us down. India has improved rankings in 6 out of 10 parameters and is one of the top 5 performers of the year.

Let me talk about the positives first and we will eventually get to areas of improvement. We have witnessed the biggest jump in ‘paying taxes’ category (53 positions). World Bank quotes “India made paying taxes easier by making payment of EPF mandatory electronically and introducing a set of administrative measures easing compliance with corporate income tax.” The administrative measures like electronic verification of returns filed, linking of Aadhaar with PAN have certainly helped in easing the tax filing process. Reduction of corporate tax to 25% from 30% has certainly helped corporates to announce true to the form results with the decreased tax burden.

Insolvency and bankruptcy code (IBC) is certainly one of the most sought-after provision that India has been seeking and it clearly reflected in ease of doing business rankings (to 103 from 136). It is not only about how fast we can start a business, but also how fast an entity can windup its business in case of unfavorable conditions. We were not able to swipe a business unit out of its existence even though it made huge losses. That had been the single most troubling factor for the banks to recover defunct loans from troubled entities.

India has also shown strong growth in ‘Getting credit category’, precisely 15 places from 44 to 29. Getting credit and giving credit are both interrelated. Financial institutions will be reluctant to lend any fresh loans if they are uncertain about the principal amount they have lent. With the introduction of Mudra fund and IBC, banks and financial institutions are more confident about their lending. Though, currently, macroeconomic factors are not in favour financial institutions, with the infusion of fresh capital, banks are better equipped for the period to come. And, this particular ranking will only go up in the coming years.

‘Protection of minority investors’ has always been one of the strongest factor for India, yet, we have managed to improve our already impressive ranking of 13th to 4th. We have achieved this by increasing remedies available in cases of prejudicial transactions between interested parties.

Rankings under ‘Dealing with construction permits’ and ‘enforcing contracts’ have improved slightly due to implementation of less cumbersome online system that has streamlined the process and by implementing national judicial data grid which helps to generate case measurement reports on local courts respectively.

However, there are few areas of concern as well. We have fared poorly under ‘Starting a business’, ‘trading across borders’, ‘registering property’ and ‘getting electricity connection’ categories. Although we have improved in ‘dealing with construction permits’ and ‘enforcing contracts’ categories, we have a long way to go. Our aim is to crack into Ease of doing business – Top 30 by 2020 and it is not an easy task by any means.

We have to see at least 2 more similar jumps to reach there but it is unlikely given the fact we are closing in to General elections and generally a year before general elections is not good for economy in long run. Even if we may not able to get into the highly ambitious top-30 list of ease of doing business, our future is bright. World Bank report of 2017 doesn’t consider implementation of GST and RERA which can further enhance our ranking in the coming years, particularly GST. Although implementation of GST is not-so-great due to technical difficulties, it is a potential game changer which will boost ‘starting a business’ and ‘trading across borders’ categories.

We have to further simplify the regulations and streamline the license structure for starting a business. Responsibility in simplifying the process for starting a new business is not only lies with Union government, but also with state governments. ‘Trading across the border’ is another area where we are faring badly. With the implementation of GST, movement of goods across the ‘GST notified states’ has become much easier and faster.

However, there is a lot of room for improvement for exports and imports, be it time or cost or documentary compliance. Getting an electric connection is completely a state issue, and union government should put forth some rules and strict deadlines to get an electricity connection. Getting an electrical connection is a basic business need, and it can be addressed very quickly and easily. Our ranking of 26 is actually good when compared to other areas, yet, there is big room for improvement.