Every year, policymakers and business analysts wait in anticipation for the World Bank to release its latest Ease of Doing Business rankings which are meant to indicate which countries make it easiest to set up and run businesses.
In India it isn't just used as an indicator: It's an aim. The current Bharatiya Janata Part-led government has made improving India's ranking a specific objective that it is actively working towards. Finance Minister Arun Jaitley took no time in hailing the government’s reforms when the latest rankings were released late Tuesday night, with India ranked at 130, jumping four places from the previous year. Jaitley said he hoped the rankings will further improve in the future once the World Bank accounts for more efforts made by the government.
While a better ranking on the index does provide the ministers with bragging rights, is that all there is to it? The World Bank's index is taken seriously by countries the world over and yet many have complained that the rankings rarely reflect on-ground business conditions which aren't easily quantified.
What’s Ease of Doing Business any way?
First published in 2003, the Ease of Doing Business Index is a World Bank project that looks at small- and medium-sized firms in countries across the world and tracks how easy or difficult it is for them to operate. The index factors in regulatory procedures, legal loopholes and the cost of doing business to arrive at a comparative ranking which provides a snapshot of a country’s business friendliness.
For instance, India has jumped four places this year to end up at the 130th position from the 134th place last year implying that some processes have eased up for business owners over the past year.
The index, however, is only useful when looked at in comparison to a country's peers. For instance, India’s neighbour Nepal, an economy much smaller in size and trade links, has outperformed on almost all major indicators and finished up with a 90th rank in the latest report while Sri Lanka also did better at 111th position.
What is it not?
Even though an improvement in a country’s rankings provides the ruling dispensation with an opportunity to flaunt its efforts on easing business environment, the World Bank itself suggests against overemphasizing the rankings. “While Doing Business is a powerful tool for catalysing reforms in business regulation the indicators are not used by policy makers as the only source in structuring reform programs,” it says on the Doing Business website.
The organisation also adds that the report doesn’t really cover every aspect of a business’ operation since it looks on 11 topics which are narrowly and specifically focussed on looking at regulations and the red-tape aspect of operating in a given economy than a ground-level report on how each company/sector operates.
“Doing Business does not measure all aspects of the business environment that matter to firms or investors – or all factors that affect competitiveness,” it says. “It does not, for example, measure security, macroeconomic stability, corruption, labor skills of the population, underlying quality of institutions and infrastructure or the strength of the financial system.”
How do they determine Ease of Doing Business?
While it’s the final index that’s generally reported in the press and used to make comparisons, it is the product of a score called Distance To Frontier. This score ranks economies against the best performers in the segment across indicators such as registering a company, getting clearances, electricity access, getting credit and taxation among others.
The score largely looks at the regulatory sides of things and benchmarks the progress made by economies over the years, thus helping one make a comparison of the progress in absolute terms.
For instance, India’s Distance To Frontier this year was 54.68%, increasing only 2.01% from last year. This score measures how far an economy is from achieving the best practices benchmark. Hence, India is almost 45 percentage points away from the frontier. The frontier here refers to the highest performance recorded by an economy in the specific sector which becomes a benchmark.
As an example, consider India’s DTF score on resolving insolvency filings by companies which is among the lowest at 32% indicating there’s a long way to go while the score for starting a business is 73% implying that the country is doing substantially better here as compared to other areas.
An important point to note, however, is the fact that India is among the 11 select economies where two major business centers are considered instead of just one. This also helps put in perspective how business conditions can differ even within the same country.
For instance, construction permits remain a problematic nightmare for firms in India where it could take 147 days and 40 procedures in Mumbai or 231 days and 28 procedures in Delhi to get a go-ahead
Should we pay attention to it?
Though Ease of Doing Business is an efficient and largely comprehensive indicator of regulatory conditions in a country prevailing over the years, even the World Bank warns against falling in a rat race to compete with peers on the basis of these rankings.
It suggests that countries that have done better on the rankings are not the ones who started out with the aim to improve their rankings but the ones which had larger reforms and economic competitiveness on agenda. Other studies have suggested its focus on regulatory conditions, as opposed to actual business experience, can obscure what it is really like to work in business in these countries. Nevertheless, it forms a good basis to track regulatory reforms initiated by a country over the years and how it stands compared to its neighbours and peers.
The index’s limitations, however, are criticised in equal measure by both the economists as well as the government.
"I am grateful that the World Bank has recognised that India is now becoming an easier place to do business... I believe that this 12-point movement does not reflect the full pace of reforms that we have done," Jaitley told ET Now adding that future rankings will take in account the reforms put in place in recent times and reflect these changes.
Meanwhile, economists and business owners argue that the index doesn’t really mean that on-ground business environment has improved by a whole lot.
“Even if your ranking has increased from 134 to 130, you are still very close to the bottom. It is unlikely that investors will invest just by seeing this,” Himanshu, Associate Professor at Delhi’s Jawaharlal National University told Mint. “As it is, the indicators used may not be very appropriate to gauge the business environment.”
In India it isn't just used as an indicator: It's an aim. The current Bharatiya Janata Part-led government has made improving India's ranking a specific objective that it is actively working towards. Finance Minister Arun Jaitley took no time in hailing the government’s reforms when the latest rankings were released late Tuesday night, with India ranked at 130, jumping four places from the previous year. Jaitley said he hoped the rankings will further improve in the future once the World Bank accounts for more efforts made by the government.
While a better ranking on the index does provide the ministers with bragging rights, is that all there is to it? The World Bank's index is taken seriously by countries the world over and yet many have complained that the rankings rarely reflect on-ground business conditions which aren't easily quantified.
What’s Ease of Doing Business any way?
First published in 2003, the Ease of Doing Business Index is a World Bank project that looks at small- and medium-sized firms in countries across the world and tracks how easy or difficult it is for them to operate. The index factors in regulatory procedures, legal loopholes and the cost of doing business to arrive at a comparative ranking which provides a snapshot of a country’s business friendliness.
For instance, India has jumped four places this year to end up at the 130th position from the 134th place last year implying that some processes have eased up for business owners over the past year.
The index, however, is only useful when looked at in comparison to a country's peers. For instance, India’s neighbour Nepal, an economy much smaller in size and trade links, has outperformed on almost all major indicators and finished up with a 90th rank in the latest report while Sri Lanka also did better at 111th position.
What is it not?
Even though an improvement in a country’s rankings provides the ruling dispensation with an opportunity to flaunt its efforts on easing business environment, the World Bank itself suggests against overemphasizing the rankings. “While Doing Business is a powerful tool for catalysing reforms in business regulation the indicators are not used by policy makers as the only source in structuring reform programs,” it says on the Doing Business website.
The organisation also adds that the report doesn’t really cover every aspect of a business’ operation since it looks on 11 topics which are narrowly and specifically focussed on looking at regulations and the red-tape aspect of operating in a given economy than a ground-level report on how each company/sector operates.
“Doing Business does not measure all aspects of the business environment that matter to firms or investors – or all factors that affect competitiveness,” it says. “It does not, for example, measure security, macroeconomic stability, corruption, labor skills of the population, underlying quality of institutions and infrastructure or the strength of the financial system.”
How do they determine Ease of Doing Business?
While it’s the final index that’s generally reported in the press and used to make comparisons, it is the product of a score called Distance To Frontier. This score ranks economies against the best performers in the segment across indicators such as registering a company, getting clearances, electricity access, getting credit and taxation among others.
The score largely looks at the regulatory sides of things and benchmarks the progress made by economies over the years, thus helping one make a comparison of the progress in absolute terms.
For instance, India’s Distance To Frontier this year was 54.68%, increasing only 2.01% from last year. This score measures how far an economy is from achieving the best practices benchmark. Hence, India is almost 45 percentage points away from the frontier. The frontier here refers to the highest performance recorded by an economy in the specific sector which becomes a benchmark.
As an example, consider India’s DTF score on resolving insolvency filings by companies which is among the lowest at 32% indicating there’s a long way to go while the score for starting a business is 73% implying that the country is doing substantially better here as compared to other areas.
An important point to note, however, is the fact that India is among the 11 select economies where two major business centers are considered instead of just one. This also helps put in perspective how business conditions can differ even within the same country.
For instance, construction permits remain a problematic nightmare for firms in India where it could take 147 days and 40 procedures in Mumbai or 231 days and 28 procedures in Delhi to get a go-ahead
Should we pay attention to it?
Though Ease of Doing Business is an efficient and largely comprehensive indicator of regulatory conditions in a country prevailing over the years, even the World Bank warns against falling in a rat race to compete with peers on the basis of these rankings.
It suggests that countries that have done better on the rankings are not the ones who started out with the aim to improve their rankings but the ones which had larger reforms and economic competitiveness on agenda. Other studies have suggested its focus on regulatory conditions, as opposed to actual business experience, can obscure what it is really like to work in business in these countries. Nevertheless, it forms a good basis to track regulatory reforms initiated by a country over the years and how it stands compared to its neighbours and peers.
The index’s limitations, however, are criticised in equal measure by both the economists as well as the government.
"I am grateful that the World Bank has recognised that India is now becoming an easier place to do business... I believe that this 12-point movement does not reflect the full pace of reforms that we have done," Jaitley told ET Now adding that future rankings will take in account the reforms put in place in recent times and reflect these changes.
Meanwhile, economists and business owners argue that the index doesn’t really mean that on-ground business environment has improved by a whole lot.
“Even if your ranking has increased from 134 to 130, you are still very close to the bottom. It is unlikely that investors will invest just by seeing this,” Himanshu, Associate Professor at Delhi’s Jawaharlal National University told Mint. “As it is, the indicators used may not be very appropriate to gauge the business environment.”
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