Q. The ‘ease of doing business index’ is not the true reflection of business activity in the country. Comment. Also suggest the policy measures taken to improve business activity in India. (250 words)20 Nov, 2019 GS Paper 3 Economy
World Bank releases the Ease of Doing Business Report annually. In the latest rankings, India is placed at 63rd position out of 190 countries — an improvement of 14 places from its 77th position last year. India figures in the top ten most improved countries in the world for the third consecutive year.
However, it can be said that the ranking is not the true reflection of business activity in the country due to the following reasons:
- Limited outreach: The rankings are based on samples and audits done in Mumbai and Delhi only which could be further extended to Bengaluru and Kolkata from 2020.
- Skewed process of estimation: The rankings are based on a survey consisting of a questionnaire designed for industry experts, accountants, lawyers, etc. Hence, it does not reflect the ground realities an entrepreneur faces, particularly in MSMEs.
- Does not include the informal sector: The rankings do not capture the real cost of doing business as the cost of production is different for the huge unorganized sector of the country.
- It does not measure all aspects of the business environment that matter to firms or investors, such as the macroeconomic conditions, or the level of employment, corruption, stability or poverty, in the country.
- It does not consider the strengths and weaknesses of neither the global financial system nor the financial system of the country.
- It does not cover all the regulation or all the regulatory requirements. Other types of regulation such as financial markets, environment, or intellectual property regulations that are relevant for the private sector are not considered.
Hence, the Doing Business report is not intended as a complete assessment of competitiveness or of the business environment of a country and should rather be considered as a proxy of the regulatory framework faced by the private sector in a country.
Policy measures to be taken to improve business activity in India
- Creating Demand: To address an aggregate-demand growth slowdown, an active macroeconomic policy is needed. Spending must focus on the rural sector to raise agricultural yields and build the infrastructure needed to support non-farm livelihoods so that pressure on the land can be reduced.
- Investment: Recent initiatives of the corporate tax cut could feed a private investment surge but it could also add to the ongoing shift in income distribution. Therefore, the spinoffs of public spending could lead to growth in business activity.
- Addressing legal barriers:
- Companies Act should be reviewed in order to minimize the criminalization of violations.
- Taxation laws should be made simpler and tax administration should be impersonal. Direct Tax Code (DTC) will be the right step in this direction.
- The GST law should be stabilized and the technology backbone should be strengthened rather than making more changes.
- Boosting ‘Make in India’:
- Emphasis on manufacturing would help in solving the employment crisis and will lead to increased purchasing capacity, thus boosting domestic consumption.
- Improvements have taken place due to the commitment of the Government to carry out comprehensive and complex reforms, supported by the bureaucracy which has changed its mindset from a regulator to a facilitator.
- Significant improvement is needed in key areas where India lacks behind such as ‘enforcing contracts’ (163rd rank), ‘registering property’ (154th rank), etc.