Saturday, 22 April 2017

Ease of doing business to economic prosperity

Choropleth map of the World Bank's Doing Business index from "Doing Business 2017"
The ease of doing business index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.
  • Economic activity requires a streamlined regulatory environment and transparent policies and accessible to all.
  • Entrepreneurial activity is a support to economic growth. Higher entry rate of new businesses cultivates competition and innovation. The entry of new firms into an economy creates jobs, contributes development of the private sector and economic growth.
  • Ease of doing business indicators are (1) starting business (2) registering property (3) dealing with construction permits  (4) getting electricity (5) getting credit (6) protecting investors (7) paying taxes (8) trading across borders and (9) enforcing contracts (10) resolving insolvency. 
  • Good governance is essential for businesses. Transactions costs are lower when regulations are simple, transparent and predictable. Entrepreneurs do not have to waste resources on red tape enabling anyone to do business without having to resort to connections or informal payments.
  • Ease of Doing Business has significant effect to economic growth.
  • In developing economies competition, growth and job creation are formed in the informal sector regularly because of too much bureaucracy and regulation. Informal sector firms lack access to the opportunities and protections that the law provides but even firms operating in the formal sector might not all have equal access to these opportunities and protections.
  • Since the introduction of the economic reforms in 1978, China has become the world's manufacturing center, where the secondary sector (comprising industry and construction) represented the largest share of GDP. In spite of its slowdown, mainland China is still a main driver of global GDP expansion, accounting for a larger share of world economic growth than the rest of Asia combined.
  • Dealing with construction permits and getting credit have negative effect to GDP. Registering property and trading across borders have positive effect. Getting credit has negative effect to GDP. Registering property has positive effect to GDP. Trading across borders has positive effect to GDP. 83% of the total variation in the economic growth can be explained by the changes in the indicators of ease of doing business specifically dealing with construction permits, getting credit, registering property and trading across borders.
  • Other indicators such as enforcing contracts, getting electricity, protecting investors, paying taxes, resolving insolvency, and starting a business have no significant effect to GDP. This implies that even if it is easy to do business under these indicators, it has nothing to do with GDP.
  • Singapore has the easiest to do business and has the best regulatory performance in doing business in Asia. China produces the highest level of GDP. 
Ever since Modi has become PM in 2014, nothing much has happened for improving 'ease of doing business ranking' which was 130. India had been downgraded in the 2016 to 131. In 2017, India's ranked climbed to 130 out of 190 countries in the World Bank Group's annual report.  India has made a substantial improvement in some areas such as electricity connection, but slippage in other areas, including payment of taxes and enforcing contracts, prevented improvement on the rankings that is followed widely by global investors. The World Bank acknowledges several successes since Mr. Modi took office in 2014. Still, due to even-larger improvements in other economies, India’s ranking in several areas fell this year. On the ease of starting a business, it slipped to 155th from 151st. On dealing with construction permits, it stumbled to 185th from 184th. On paying taxes, it held steady at 172nd. The report’s authors acknowledge that the ranking doesn’t reflect all the progress India has made recently in improving the business environment. Lawmakers have recommended the implementation of a large number of reforms across all states, going beyond the scope of Doing Business. It takes Mumbaikars 14 procedures and about a month to start a new company.

New Zealand tops this year’s ranking, dethroning Singapore to two. UK is ranked 7, USA at 8, Russia at 40, China at 78, Sri Lanka at 110, Egypt at 122, Pakistan at 144, Bangladesh at 176 etc indicates India has to long way to go for economic growth and prosperity.

With in Indian states, AP and Telengana have jointly topped the 2016 ease of doing business rankings, while last-year's topper Gujarat slipped to the third spot. The rankings are on the basis of a 340-point business reform action plan and their implementation by the States for the period from July 1, 2015 to June 30, 2016.

My View:
India's current years credit ratings are just a notch above 'junk status'. Efforts to enhance ratings during 2016 due to higher GDP growth rate & lower inflation rates were brushed aside by Moodys citing huge national debt and fragile public sector banks with Rs.7 lakh crores NPAs which needs huge recapitalization for stay put into business. Credit rating enhancement is at least two years away. The demonetization debacle has further complicated matters. Modi embarking on high speed reforms like GST etc are likely to create confusion & chaos with high inflation in short run while long run impacts are uncertain. In short, India is experiencing uncertain future on economic front with Brexit, H1B visa issues, unencouraging FDIs despite invincible political authority Modi enjoys.

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