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Easy does it

Modi is right to focus on doing business now. However, his long-term focus should be on improving how business is done

The World Bank’s Doing Business (DB) report provides an annual ranking of 189 countries on the ease of doing business. The DB report has its origin in a paper written by Andrew Shleifer et al in 2002 called The Regulation of Entry. Rankings began in 2006. The ranking is based on a composite score that is an equally weighted average of 10 parameters. These are quantitative measures of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, minority investor protection, paying taxes, trading across borders, enforcing contracts, getting an electricity connection and closing a business. Scores are obtained by doing expert (lawyers, chartered accountants) interviews in each of the countries. In the World Bank’s own words, “for country authorities, it sheds a bright, sometimes unflattering, light on regulatory aspects of their business climate. For business interests, it has helped to catalyse debates and dialogue about reform."

Prime Minister Narendra Modi has made the task of improving India’s ranking from 142 to 50 a national priority to be achieved in three years. He has infused North and South Block with a sense of mission.

The poster child for improvement in the rankings is Russia, which moved from 112th place in 2012 to 62nd in 2014 and has its sights set on moving up to 20. One analyst explaining the dramatic changes says the “major" reforms enacted in Russia were to eliminate the requirement for a company’s founder to deposit capital before incorporation, simplify the transfer of property, and remove the need to notify authorities before opening a bank account. Rwanda has moved 100 spots over the last 10 years by tweaking regulation.

There are, of course, critiques of the DB approach. Lant Pritchett, a professor at the Harvard Kennedy School, and himself a former World Bank staffer, believes that a point estimate for each of the parameters based on a de jure standard could be wildly different from that experienced by firms. In other words, in practice, firms in emerging countries undergo a wide range of de facto experiences that cannot be captured by a single number. Technicalities aside, Pritchett suggests that governments could be distracted pursuing doing business reforms that do not change “how business is done".

So, is Prime Minister Modi right in so passionately committing to this idea?

There are two possible approaches. One is to make your way up the DB rankings, the other to figure out issues and fix them regardless of rankings. Ultimately, the ease of doing business is that which is experienced by firms, not that which is calculated by talking to “experts". Outcome, not input. The World Bank’s own annual enterprise survey is probably a more accurate reflection of this experience than the DB report.

Modi has the instinct of a good politician. He understands that a simple, single ordinal ranking has the power to rally his troops and capture investor imagination. The DB reports have not only caught his fancy, but that of other leaders (famously Vladimir Putin). It is a report that focuses on regulatory input: what a government can do versus what other actors in an economy can do. You can move in the rankings. Voila! Progress can be demonstrated.

Subliminally, there is also a change in political philosophy. The DB report is all about promoting a well-functioning, competitive private sector. The pejorative “suit, boot ki sarkar" can now be countered with a “rozgari badane wala sarkar" using the private sector as major partners in that exercise.

Modi’s real challenge will come if his team gets distracted with the minutiae of DB parameters and rests merely on improved rankings. Of the 10 parameters, India does very poorly on two—enforcing contracts and closing a business. For instance, an international arbitration panel recently asked Antrix, an Indian Space Research Organisation company, to pay $672 million to Devas Multimedia for unlawfully terminating its contract in 2011. Even though the government has withdrawn the cases related to minimum alternate tax and retrospectively amended the law, the basic instinct remains to force ham-handed, hastily thought-through actions on the private sector that often abrogate an explicit or implicit contract. The sanctity and enforceability of contracts is a fundamental tenet of a liberal economy, and India’s experience in this area has been rank poor. Converting the Union government’s distrust of the private sector into a fair, transparent partnership with a competitive and level playing field is non-trivial. Equally, for the Indian private sector to operate ethically and within the framework of law will require much introspection and action. Similarly, closing a business, no matter what its size, is a nightmare. A bankruptcy bill is likely soon, but it will take many years to season and mature.

Modi is right to focus on doing business now. However, his long-term focus should be on improving how business is done.

Only then can we all rest easy.

P.S. “Do the difficult things when they are easy and the great things while they are small," said Lao Tzu.

Narayan Ramachandran is chairman, InKlude Labs.

To read Narayan Ramachandran’s previous columns, go to www.livemint.com/avisiblehand

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