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World Bank suspends Ease of Doing Business report – How China manipulated its data?

World Bank suspends Ease of Doing Business report – How China manipulated its data?

Relevance:

  • GS 3 || Economy || External Sector || World Bank

Why in news?

World Bank finds China’s Fraud in Ease of Doing Business ranking

Present context:

  • The World Bank in a statement said it is discontinuing publishing its Ease of Doing Business ranking,
  • After an external audit unearthed undue interference from its senior staff in changing rankings of specific countries.
  • A number of irregularities have been reported regarding changes to the data in the Doing Business 2018 and Doing Business 2020 reports, published in October 2017 and 2019.”
  • “The changes in the data were inconsistent with the Doing Business methodology,” the World Bank said in a statement.

How it can benefit India?

  • Experts say the massive fraud highlighted in the audit report of Doing Business ranking by the World Bank augurs well for India and would improve its positioning as a global manufacturing hub.
  • Experts believe top MNCs would consider shifting their manufacturing base from China to India as government is continuously making policy changes in order to make it easier for foreigners to invest in the country.
  • The entire episode once again exposes the rampant fraud on which Chinese data is built and the integrity of Indian statistics.
  • China has actively defrauded the world’s investors to hide their worsening investment climate.

About ease of doing business:

  • The Doing Business project provides objective measures of business regulations and their enforcement across 190 economies and selected cities at the subnational and regional level.
  • The Doing Business project, launched in 2002, looks at domestic small and medium-size companies and measures the regulations applying to them through their life cycle.
  • 190 economies on ten parameters affecting a business through its life cycle:
    • Starting a Business,
    • Electricity availability,
    • Dealing with Construction permits
    • Property registration,
    • Protecting minority Investors,
    • Credit availability,
    • Trading across borders,
    • Paying Taxes,
    • Contracts enforcement, and
    • Resolving Insolvency.

The Benefits of EoDB:

  • Image in the international market: The country’s image in the international market improves. During the reference period, the Government of India adopted 37 changes and wishes to assess their performance.
  • Working to liberalize: The government is working to liberalize the business environment, and these measures are paying off.
  • It transforms the country’s image in the eyes of the global market into a desirable place to do business.
  • Investors are encouraged to use the rankings as a guide when making selections. As a result, the higher the report’s ranking, the higher the favorability.
  • The performance of the Government of India in terms of GST implementation will provide an answer to the question of how business-friendly this reform is (GST was not included in last year’s ranking, and this year’s ranking could not fully account for GST because the deadline for tax-related reforms was December 31st, and GST had only been in place for six months).
  • In the 1990s, industry growth averaged around 7%, and in the last decade, it grew to 7.4%. The global financial crisis put pressure on the manufacturing and export sectors at the conclusion of it. The administration hopes to attract domestic and foreign investment into the country through improving the regulatory environment.

Issue with Ease of Doing Job:

  • Erroneous assumption: It is based on the erroneous assumption that less regulation is always better. The Global Financial Crisis of 2008-09 demolished this notion.
  • Climate change risks: There are no labor or environmental rules in it. In today’s environment of escalating inequality and climate change risks, this is pretty shocking.
  • It is easy to manipulate the index without enacting enough reform. For example, in the inter-state EoDB in 2019, Uttar Pradesh, which has several bad indicators in education, skilled labor, power, and connectivity, moved to second place within India.
  • Imply better business prospects: A higher EoDB ranking may not necessarily imply better business prospects. Connectivity, a healthy ecosystem, skilled labor, and cheaper production costs, among other factors, are underrepresented in the index.
    • Because of its outstanding connections and skilled personnel, Tamil Nadu, for example, ranked first in the flow of investments.
    • As a result, Uttar Pradesh received a far higher ranking than the heavily industrialized Maharashtra, Gujarat, or Tamil Nadu.

Why is Ease of Doing business difficult?

  • In India, it takes about a month to establish a firm, whereas the OECD average is 12 days. Though certain states, such as Telangana, have made it easier to start a business, this has yet to be realized on a national level.
  • The procedures for obtaining licenses are lengthy and require permissions from a variety of departments.
  • The effectiveness of the Insolvency and Bankruptcy Code’s implementation has yet to be established.
  • Though India has made some progress in terms of contract enforcement, it currently takes longer than it did 15 years ago. The lack of effective tools for enforcing contracts stifles growth and development and acts as a deterrent to private sector investment.

How can ease of doing business be improved in India?

  • Attracting investments: The government has to understand that the EoDB is not everything when it comes to attracting investments. The government has to encourage States to develop other more important parameters that investors give a larger weightage to when deciding where to invest. Such as connectivity, strong ecosystem, skilled manpower and lower cost of production, etc.
  • Push the states: The government also needs to push the states that are lower down the order in the EoDB index. This will not only push towards competitive advantage but also help India to compete with other countries like Vietnam or Thailand.
  • As India remains uncompetitive, it has raised tariffs hugely and dropped out of the Regional Comprehensive Economic Partnership. But this will not make the Indian industry more competitive globally.
  • Dealing with Construction Permits: India made dealing with construction permits easier by introducing an online system at the Municipalities of New Delhi and Greater Mumbai, which has expedited the procedure. The online system has simplified the process of acquiring a building permit in India, decreasing the number of procedures and the time it takes to do so.
  • Minority Investor Protection: India strengthened minority investor protections by expanding the remedies available in cases of unfavorable transactions between parties.
  • Paying Taxes: India made it easy to pay taxes by requiring EPF payments to be made electronically and establishing a set of administrative steps to make corporate income tax compliance easier.
  • Import border compliance time in Mumbai was lowered by India by enhancing facilities at the Nhava Sheva Port. In both Delhi and Mumbai, the cost of export and import border compliance was reduced by eliminating merchant overtime fees and increasing the use of electronic and mobile platforms.
  • Enforcing Contracts: India made it easier to enforce contracts by developing the National Judicial Data Grid, which allows local courts to create case measurement data.
  • Resolving Insolvency: India made resolving insolvency easier by implementing a new Insolvency and Bankruptcy Code (IBC) that included a reorganization mechanism for corporate debtors and made it easier to keep the debtor’s firm running during the insolvency process.
  • India’s labor market regulations have raised the length of statutory paid maternity leave.

Conclusion:

If India is to emerge stronger after the epidemic and avoid a return to substandard 4-5 percent growth, it must address the basic issues. The country requires at least 6-7 percent growth, and much more if it is too fast from the pandemic’s two-year loss.

Mains oriented question:

What is Ease of doing business (EoDB) ? What are issues suggested with it? What are the changes needed to make EoDB more effective? (200 words)