India lags in ease of doing business

India lags in ease of doing business

New Delhi: Doing business in India last year became more difficult because other countries pulled out all stops to make starting and running a business easier as a way to fight the economic downturn.

“This has been a record year for reforms," Washington-based Dahlia Khalifa, economist and author of the International Finance Corp.’s (IFC) Doing Business 2010 report, said over phone on Wednesday after its release.

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The report, which ranked the ease of doing business in 183 countries between June 2008 and May 2009, said India’s rank had slipped by one place to 133.

According to Khalifa, though India reformed the environment for business last year, it was “relatively outperformed by others". Reforms are critical in the current phase because when the environment to run a business is made easier, it tends to act as a shock absorber in a crisis, she said.

“If governments in China, India, Indonesia and other lowly-ranked economies can lower their high costs of doing business, the path to achieving living standards comparable with middle-income economies would be far smoother and most likely quicker," said Nikhilesh Bhattacharyya, associate economist at Moody’s

IFC’s annual Doing Business report presents a worm’s-eye view of the business environment. It does not capture macroeconomic and political factors that may influence business decisions.

Singapore, New Zealand and Hong Kong were the world’s top-ranked economies for the second consecutive year in terms of ease of doing business.

The 2010 report showed countries from sub-Saharan Africa were the most enthusiastic reformers even if they were not the top-ranked economies.

Rwanda, which was locked in civil conflict in 1990s, was the leading reformer last year. Of the 10 indicators such as ease of starting a business used by IFC, African nations topped in terms of annual progress in six indicators.

Generally, countries in Eastern Europe and Central Asia have been the most enthusiastic reformers since IFC first published its report in 2004.

According to Khalifa, consistency, a long-term view and comprehensiveness are key traits seen in countries with a high ranking. Rwanda, which was ranked 67 last year, has been working on reforms for 10 years, she added.

Across the world, the two most popular areas of reform have been the ease of starting a business and convenience in paying taxes. Both areas are critical for small and medium businesses, which are the focus of the report. “We are not looking at mega companies," Khalifa said, explaining small enterprises have a significant propensity to create jobs.

Khalifa said IFC’s report did not equate deregulation with ease of doing business. For instance, when IFC ranked countries for reforms in ease of starting a business, the focus was on streamlining procedures through single-window clearances and enhancing the efficiency of the bureaucracy.

India’s ranking last year in ease of starting a business slipped three places to 169, but it saw improvement in convenience in paying taxes. In the area of taxes, India’s ranking improved two places to 169.

According to Khalifa, one indicator where India made progress last year was in improving procedures involved in closing a business. Here, India’s ranking improved four places to 138.

India strengthened the process flowing out of the 2002 Securitization Act, which helped the country improve its ranking in closing businesses. Quickening insolvency process frees up assets for use by others, Khalifa said. Last year, India increased the number of judges handling solvency cases by one-third and streamlined processes to file for bankruptcy, she added.

Among the 10 indicators studied by IFC, India performed best in credit accessibility, where it was ranked 30. It performed the worst in enforcing contracts, where it was ranked one from the bottom at 182. In South Asia, Pakistan was the best performer and ranked 85.

Graphics by Ahmed Raza Khan/Mint