World Bank’s Ease of Doing Business Report 2018 showing India’s growth the biggest among 190 nations came in the fall of 2017, and almost immediately Bombay High Court upheld Corporate Ministry’s forced merger of NSEL’s with 63 Moons Technologies, the biggest shock for corporate India.
On paper, India’s rank rising from 130th in 2017 to 100th in 2018 reads good, though it may not necessarily mean rapid rise in investment and economic growth in the world’s second most populous nation. And the Bombay High Court decision has been described by legal luminaries as disastrous for it will end the concept of limited liability in India.
Worse, the order – an executive fiat – will adversely impact the flow of FDIs and FIIs into equity of Indian companies.
The order means NSEL, which was engulfed in a payment default crisis of Rs 5600 crore, to merge with its parent 63 moons, without even waiting for any adjudication in the said matter. And that too at a time when the entire missing cash trail had been traced to the 24 entities that had collectively defaulted to the tune of Rs 5600 crore.
So how easy is to do business in India? Does World Bank rankings matter in the face of such adverse judgements? To further illustrate the issue, why not get realistic with figures. The World Bank says the time to start a business in India – in big cities like New Delhi and Mumbai – is purportedly around 30 days for almost three years whereas the enterprise-level survey conducted by NITI Aayog and IDFC Institute says the average time to start a business in India is thrice the time offered by World Bank. In short, the gap is as high as 110 days – more than three months. For startup firms, the time taken is 85 days as compared to the 30 day period suggested in the Doing Business reports. In short, the combined weight of the evidence suggests that the recent improvement in ease of doing business rankings may not mean much for India.
The World Bank has argued strongly in favour of India, describing it as a place now competing as the preferred place to do business globally. Annette Dixon, World Bank’s vice president for South Asia, told reporters that starting a business is now faster because New Delhi had strengthened access to credit system and made it easier to secure to procure construction permits.
Interestingly, the report excluded the impact of PM Narendra Modi’s shock withdrawal of high-value banknotes last year and the implementation of a nationwide multi-rate goods and services tax (GST), steps that affected businesses and dragged the economy to a three-year-low in the April-June quarter. Dixon said the World Bank would observe the GST for couple of years to see its full implementation
But for corporate India, the NSEL-63 Moons order continued to be a subject of intense debate. Corporate India feared the order seems to have been passed with an eye on the treasury of 63 Moons without any adjudication on either of the companies. It has been proved – time and again – that the perpetrators of the NSEL crisis deliberately created the payment default with the sole intention of throwing out 63 Moons and its founder, Jignesh Shah, from the exchange businesses.
Worse, it is for the first time in the history of corporate India that the corporate veil is being lifted by merging two private companies by way of an executive order on the basis of various unproven allegations without giving the companies concerned an opportunity so that all such allegations are heard in an evidentiary trial in a competent court and without even waiting for the outcome of the sub-judice cases in the Bombay High Court.
So, how important are 'rankings' when corporate India remains uncomfortable in doing business in such sticky situations? The ranking is rarely sustained over long. For the records, seven out of ten nations which improved their ranks between 2007 and 2009 now rank worse than 2009.
The World Bank argues that the ranks are not strictly comparable because methodology changes every now and then. In 2016, the ease of getting electricity included indicators on reliability of supply, price of electricity, and transparency of tariffs. Now, if there is an altered methodology in the future, there are high chances that India could slip in rankings without any material change in regulations.
Sustained improvement does not necessarily lead to higher economic growth or greater foreign direct investment (FDI) inflows, an analysis of 10 major economies which saw large improvements in their ease of doing business rankings shows. Now, these economies are those with gross domestic product (GDP) worth at least $200 billion as of 2016 which saw the largest jumps in rank between the period 2007-09 and 2018. Improvement – for the records – is measured in terms of difference between the worst ranking between 2007 and 2009 and the latest rank.
Many economies listed in the Doing Business report have climbed several places in their ease of doing business rankings, yet they haven't witnessed much improvement in growth or FDI inflows. In countries like Egypt, Turkey and Russia, investor sentiment has substantially deteriorated. Standard & Poor’s recently included Turkey and Egypt in its list of “fragile five” economies along with Argentina, Pakistan and Qatar.
In short, factors beyond control of policymakers dampened the outlook on these economies. Political instability wrecked havoc in Egypt and Turkey while Russia had to tackle sanctions and the impact of falling oil prices. So, Doing Business reports and their much-exalted rankings seldom determine a country’s economic fortunes.
As it happened in the NSEL-63 Moons case, Mumbai is still debating what will happen if the corporate veil is lifted repeatedly at will by policymakers. Who will take India seriously and invest hard cash?
Doing Business reports will gain credence if de facto ground realities are captured, as argued recently by Matthew Lillehaugen and Milan Vaishnav, fellows at the Carnegie Endowment for International Peace.