Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | Clearing the way for an investment uptick

India's rise in the Doing Business rankings sends the right signals for firming up investor sentiment

The World Bank Doing Business (DB) rankings for 2019 bring timely relief for the Narendra Modi government. Amid the government’s various skirmishes on the political and economic fronts, India has climbed 23 spots to rank 77th globally. This is a substantial jump in the rankings for the second year running; last year, India jumped 30 notches. The government deserves credit for this sustained progress. That said, it is also important to remember precisely what the rankings mean—and what they don’t.

This year, India registered improvement in areas like starting a business, dealing with construction permits, getting electricity, getting credit, paying taxes, and trading across borders. To the Modi government’s credit, it has undertaken targeted efforts to address shortcomings in these areas—for instance, the National Trade Facilitation Action Plan (NTFAP) 2017-2020 for increasing the efficiency of cross-border trade. Launched last year, it is putting in place the architecture for decreasing border and documentary compliance time, permitting exporters to electronically seal their containers at their own facilities, and reducing physical inspections to up to only 5% of all shipments.

Likewise, the implementation of the single-window clearance system for construction permits in Delhi and the online building permit approval system in Mumbai are important. The trajectory of the construction industry has a significant impact on the Indian economy—both in terms of its importance for job creation and its effect on upstream industries like steel and cement.

On other fronts, however, there has been stagnation or regression. Take the Insolvency and Bankruptcy Code (IBC), as critical a reform as any in recent times. India’s rank dropped from 103 to 108 here; its overall score did not decline significantly, but that is not something to celebrate. The sluggish rate of resolution of cases that have come under the IBC is becoming a major roadblock. And as Business Standard reported last week, of the 212 cases that have ended in liquidation—almost 80% of those that have completed the IBC process—the resolution value was greater than the liquidation value in 30 cases that ended in the latter anyway. Creditors choosing to take a deeper haircut, and the small percentage of companies going the resolution way, imply kinks in the resolution process that need to be worked out.

Then there is the goods and services tax (GST), perhaps the Modi government’s biggest achievement. There has been an improvement in India’s “paying taxes" score—the decline in its relative rank on this front notwithstanding—but it remains below 100. Besides, the number of hours taken in a year to file taxes rose to 275.4 from 214 last year. There are other hitches with knock-on effects as well. For instance, delays in GST refunds have constrained working capital for exporters. The Federation of Indian Export Organisations has stated that the process of input tax credit refund being partly electronic and partly manual has been the main impediment here. To be fair, the World Bank’s deadline for tax-related reforms was 31 December 2017, only six months after GST was introduced. It remains to be seen if next year’s report will show follow-through in addressing these flaws.

Such reforms are also important as a signalling exercise. The DB rankings have their limitations, as this paper has noted . They are restricted to findings in two cities—Mumbai and Delhi—and reflect the de jure state of affairs. Research in recent years shows that the de facto reality at the enterprise level may be significantly different and vary across states depending on governance quality and state capacity, among other factors. What the rankings do, however, is give investors a yardstick by which to measure government commitment to reforms. Such messaging is important; sentiment, not just fundamentals, matter for investment, particularly foreign direct investment.

In its August statement, the Reserve Bank of India’s monetary policy committee said that the persistent output gap had almost closed. There is still excess capacity, certainly, but it has been in steady decline for a while now.

Meanwhile, according to reports, the Union ministry of finance is likely to sign off on the second round of capital infusion for public sector banks towards the end of November. All of this lays the ground for an uptick in the investment cycle. The supply-side reforms the DB report looks will help clear the underbrush that could drag at it.

Could the government have done more to push India higher in the rankings? Tell us at views@livemint.com

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