Ease Of Doing Business In India: Underdog States Take The Lead In This Race

The first thing that catches one's eye on the ‘Ease of Doing Business’ page of the Directorate of Industrial Policy and Promotion (DIPP) website is the '100 per cent' score of three Indian states. As it sinks in that there are actually states that have managed 100 per cent implementation of the regulatory process reforms, the names leave you even more amused. The wonder states are Chhattisgarh, Madhya Pradesh, and West Bengal.

After all, none of these names is immediately synonymous with ‘ease of doing business’. One hasn’t forgotten West Bengal’s fiasco with the Tata Nano project at Singur about a decade ago when the auto major was driven out, mainly by protests led by Mamata Banerjee-led Trinamool Congress, then in the opposition. Chhattisgarh’s 100 per cent implementation score also comes as a surprise as its image of being the epicentre of Naxalism is not one that gels easily with one of industrialisation and zeal for attracting investment.

As if corroborating this doubt, one of the key measures of productivity, the per capita gross domestic product (GDP) of these states, is not high either. Among 30 states, Chhattisgarh ranks 19 with a per capita GDP of Rs 78,903 (2014-15) and West Bengal is at 22 with a per capita GDP of Rs 91,772 (2015-16).

Although Madhya Pradesh has been making efforts on the investments, infrastructure, and industrial growth fronts over the last decade or so, as far as the per capita GDP is concerned, the state is in the bottom six.

Clearly, ease of doing business is not reflective of the economies of the states, or their polities.

Background

Ease of doing business is, in fact, a measure of the extent to which states have reduced the regulatory role of the government – cutting down processes and approvals and also introducing information technology to make governance more efficient and effective. The end goal is unimpeded economic development.

A series of measures has been initiated by the Ministry of Commerce and Industry, DIPP, and the Government of India, in partnership with World Bank. In December 2014, a 98-point action plan was finalised at the ‘Make in India’ national workshop, and in late 2015, an assessment of the States’ Implementation of Business Reforms was released. Specifically, this latter step helped create competition between states to improve their respective state of affairs. The second assessment was based on a 340-point Business Reform Action Plan (BRAP) in October 2015. An online portal tracked real-time rankings of states on the basis of the number of reforms undertaken by them. In October 2016, the results of the assessment of the reforms for 2015-16 were announced.

In April 2017, the BRAP 2017 for implementation by states was released – this time with 405 recommendations for reforms on regulatory processes, policies, practices, and procedures spread across 12 reform areas, which included the single-window system, labour regulation enablers, land availability and allotment, construction permit enablers, utility permits, and environment registration enablers, among others. This time, there were 103 new sets of reforms (out of 405) and also two new sectors, i.e., healthcare and hospitality. The website reflects rankings based on these.

The central government has been trying its best to guide and cajole the states into easing doing business, which will not just lead to development within the state and spur the Make in India plan into action, but also lead to a higher ease-of-doing-business ranking for the country as a whole – currently at 100 in a list of 190 countries – without regional variations. In fact, for all states, the ease-of-doing-business implementation average score has gone up to 59.28 per cent – up from last year’s 48.9 per cent.

States, in keeping with the spirit of competitive federalism, seem to be complying. All states have reported improvement in their scores over the last year. Delhi and Punjab are the outliers – with lower scores this year, compared to last year. (See Table).

The real test – feedback from industry

An important factor that was missing in the last evaluation, and which is the end-goal – and indeed, the real test – of the reform plans for the states is, how the industry perceives the reforms and whether they have meaningfully eased the process or merely remain on paper. This year, this was sought to be rectified: the website states that feedback will be taken from businesses on the quality of implementation of the reforms claimed by the states and union territories. This ranking would make it substantially different from last year’s ranking, in terms of containing “evidence” of reforms. Though intended and announced, this vital measure is yet to be uploaded on the website.

Uttar Pradesh, the high aspirer

When Chief Minister Yogi Adityanath held a summit for investors in February this year, even Uttar Pradesh natives laughed. Who would want to invest in the state? Uttar Pradesh is a well-known laggard, with a per capita income second from the bottom, just above Bihar – at Rs 48,520. On most parameters of economic and social development, it has consistently under-performed. Yet, the Chief Minister decided to bring in change, and wants to turn the state’s obvious advantages of size, resources, and population into strengths. The Uttar Pradesh Investors Summit 2018 was the first-ever since India’s independence, but importantly, other measures are being taken to improve the overall investment climate in the state alongside: the measures for improving law and order, improving the efficiency of bureaucracy, and the significant Uttar Pradesh Control of Organised Crime Act (UPCOCA) Bill for the control of organised crime.

But, as a report on the website does clarify, what ease of doing business does not measure are aspects of investment attractiveness that are beyond the government’s control – like availability of raw materials, skilled human resources, law and order, and infrastructure. These aspects are important determinants of the investment climate and this must somehow reflect on the DIPP website – perhaps as another scorecard.

Incidentally, Uttar Pradesh is one of the states that has worked hard to improve reforms implementation – it has a score of 96.75 per cent this year, up from 84.52 last year.

Is this a trend then – wherein states that feel desperate to improve things work harder to implement business reforms? There is no evidence for this, though some states seem to be working harder and the ones whose rankings have improved remarkably – like Bengal ( from 15 to three), Andhra Pradesh, Telangana, and Punjab show considerable slippage.

Leaders, aspiring leaders, and others

The assessment report in 2016 had identified and named states on the basis of implementation of reforms as – leaders, aspiring leaders, acceleration required, and jump-start needed.

This year, after the first 18 states that touch a near 90-per cent implementation score, there are three states in the 50-60 per cent range. For Goa and Kerala, the scores this year were higher than last year’s – from 18.15 to 61.5, and 26.97 to 52.84 respectively. What could possibly explain Punjab’s fallen score from 91.07 to 54.77?

Surely, there are lessons to be learnt from high scorers like Uttarakhand, Himachal, and Jharkhand on how to implement reforms, considering that these states are traditionally not known for their manufacturing prowess. The best practices of states have been listed out to serve as examples for others, and among them feature: Uttarakhand, Chhattisgarh Judicial Reforms, Jharkhand Labor Reforms, Gujarat Environment and Telangana Single Window, among others.

Delhi and other concern areas

The big surprise is Delhi, the National Capital, with a score of 34.27. But then Delhi’s per capita GDP (2016-17) was Rs 303,073 – the highest in the country! Is it complacency, then, that Delhi does not improve its processes for business? What better explains this is perhaps that manufacturing holds little scope for growth in Delhi. In which case, would it be a better idea to reassess the scoring parameters for certain states? This is especially important in the case of Delhi, given that World Bank bases its India ease of doing business score on just two of our cities – Delhi and Mumbai. Delhi must be helped to improve its score.

The same goes for the jump-start-needed states – Puducherry downwards. In fact, after Kerala begins the intriguing steep decline, all the way down to score ‘zero’ for Arunachal Pradesh, Meghalaya, and Lakshadweep. Could it be that the last three have not submitted data at all? Is it a lack of connection or indifference to the Union government’s processes – because the rankings were almost equally dismal last year? Or could there be procedural or methodological differences that contribute to these low scores?

A paper written by Danish A Hashim and Aishwarya Nahata, both from the Economic Affairs division of the Confederation of Indian Industry (CII), on “Eodb: Challenges & Way Forward”, which appeared in Yojana magazine, suggests that many states at the bottom require a different approach. “These states…have a weak presence as well as the potential to leverage manufacturing, and need to be treated differently for reforms. Their dismally poor ranking may go against whatever interest investors have had in these states.”

The authors suggest that the government should help them to

a) Introduce reforms, and

b) Realise their other inherent advantages like tourism

Two more suggestions from the authors to take this business of easing doing business to the next logical stage are:

a) Carrying out assessments of reforms for the central government ministries as well, especially related to labour laws, taxation, environment, and land acquisition

b) Giving greater autonomy to states to frame laws under the concurrent list, like those related to trade unions, labour disputes, forests, factories, etc.

The government’s idea of assessing states to foster competitive federalism and reform regulations was a path-breaking one. But further think-through and refining are the need of the hour.