Ease vs cost of doing business

Context: While India has improved its ranking in the Ease of Doing Business (79 positions from 142nd in 2014 to 63rd in 2019, this has not resulted in economic growth and increased investments.

Background:

• India’s gross domestic product growth (GDP) rate fell more than 4% points between 2016 and 2019.
• Private investment as a share of GDP fell by over 3%  points, from 25% of GDP in 2004- 2013 to under 22% of GDP in 2016-2019.

Flaws in World Bank’s Ease of Doing Business Index (EDBI):

• Not effective:India was able to attract considerable investment — both domestic and foreign from 2004 to 2013 — even when its EDBI score was low.
• Based on the principles that less regulation is always better — it is downright dangerous, as shown by the experience of the Global Financial Crisis in 2008-09.
• Does not include any labour or environmental regulations: Which is shocking in today’s world of rising inequality and threats from climate change

Various costs which neutralise the positive impact of EDBI

• Non-competitive industry: India has faced premature de-industrialisation because the costs of doing business are much higher than its competitors.
  • On paper, labour costs appear to be lower in India, but labour productivity is even lower.
  • Only 4% of India’s labour force is classified as skilled. In addition, labour laws encourage firms to stay small — at under 10 employees to avoid a visit by a labour or tax inspector.
  • More than 70% of manufacturing employment is in firms with size smaller than 10 — which cannot compete globally.
• Land acquisition: Land acquisition is not only slow but has become prohibitively expensive after the Land Acquisition Act of 2013.
• High cost of capital: The spread between lending and deposit rates exceeds 500 basis points (bps) — amongst the highest in the world. 
  • India’s banking sector spreads are higher than major competitors —Bangladesh, 350-400 bps; Thailand, 320 bps; China, 300 bps; Vietnam, 250 bps; and Malaysia, 150-200 bps. 
  • Rising non-performing loans directed lending requirements and statutory liquidity ratio requirements explain these inefficiencies.
  • As a result, India’s credit-to-GDP ratio has stagnated at around 50% for the last decade — whereas that of Vietnam, China, Malaysia, and Thailand is well over 100%.
• Huge infrastructure deficit: 
  • India’s rank on the World Bank’s Logistics Performance Index has improved to 44th — but still remains behind major competitors such as China, Malaysia, Thailand, and Vietnam.
  • The cost of infrastructure to Business remains high due to cross-subsidies –
    •  Electricity prices in India are low for consumers at 8.6 cents/kWh, but very high for industry at 11.7 cents per Kwh much higher than in China, Indonesia, Thailand, and Malaysia.
    • Petrol is 20%, and diesel 50% more costly in India than in China — another energy importing country.
• Low technology access: India prides itself on being an IT leader — but the reality is IT access in India is low at around 55%— on a par with Pakistan, much below China, Vietnam, Malaysia, and Indonesia, which are at 80% or higher.
• Low Research and Development: India is falling behind other competitors as its R&D expenditures at 0.6% of GDP compare very unfavourably with China’s at well over 2% of GDP.

Conclusion: The excessive focus on the EDBI has become a substitute for addressing the fundamental constraints faced by entrepreneurs and the real costs of doing Business. India must address these costs if it wants to emerge stronger after the pandemic