India’s Ease of Doing Business Improves, but Economy Still a Worry

Although Prime Minister Narendra Modi’s Bhartiya Janata Party government is boasting of India’s leap 65 rungs up the World Bank’s latest Global Ease of Doing Business index since 2014, in fact the business picture remains mixed, partly brought on by the government’s missteps.

Although the World Bank forecasts 7.3 percent gross domestic product growth in the fiscal year ending March 31 and 7.5 percent in FY 2019/20, reflecting robust private consumption and strengthening investment – well ahead of global GDP growth of 3.1 percent -- the government continues to face deep unemployment and other economic headwinds, some of them brought on by an ill-considered decision in 2016 to demonetize, announcing a sudden ban on large-denominated banknotes along with the issuance of fresh ones.

The idea behind the move, the government claimed, was to deliver a blow to the shadow economy while diminishing the use of illicit and counterfeit cash to fund illegal activity and terrorism. But it spurred business turmoil and dramatically slowed employment growth.

Also China, India’s primary Asian rival, continues to forge ahead. With India ranked 77th of 190 countries, China has risen 32 places to 46th among the global top 50, preserving its primacy as Asia’s powerhouse. Comparisons with China have triggered fears that Beijing may well leverage its improved rank and economic heft to block India's rise. Already, China's US$12.2 trillion economy is more than four times India’s US$2.6 trillion one.

Nonetheless, according to the World Bank, India, has made starting a business easier by cutting the country’s notorious red tape, for instance integrating multiple application forms into a general incorporation form.

"India also replaced the value-added tax with the GST (Goods and Services Tax) for which the registration process is faster,” according to the World Bank. “India made paying taxes easier by replacing many indirect taxes with a single indirect tax, the GST, for the entire country. India also made paying taxes less costly by reducing the corporate income tax rate and the employees' provident funds scheme rate paid by the employer.

Analysts say that in addition to the GST reform, launched last July, other initiatives in categories such as ease of obtaining construction permits, starting a business and trading across borders have also helped.

Last August, the Parliament also passed a bill to amend the Insolvency and Bankruptcy Code (IBC) 2016, finally treating home buyers as financial creditors, streamlining the country's exponentially growing and under-regulated real estate market.

Modi, on a two-day visit to Japan when the ratings were announced, commented that he has "always kept ease of doing business as my priority." His government has targeted getting to the 90th rank in 2019 and the 30th by 2030.

"India’s economy has averaged 7 percent growth since its reforms began in 1991 under Prime Minister P.V. Narasimha Rao," said Kirit Parekh, an economist with a Delhi-based think tank. "The Chinese economy, by contrast, galloped at average of almost 10 percent each year since its modernization started some 40 years ago. India definitely needs to get its act together to make the economy grow much faster."

Parekh also said that while countries like Indonesia, Vietnam and the Philippines have been able to harness the escalating trade war between the US and China as trade diversion gains, India, despite a bigger economy and a far greater demographic dividend, has failed to work on its attractiveness quotient as an investment destination.

"Economies with better business regulations are the ones that create more job opportunities and the countries with more transparent and accessible information have lower levels of corruption. The absence of judicial reforms in India, bureaucratic and legal hurdles are hurting the economy," said a former MD of Axis Bank, a private Indian bank.

The key, the banker said, is a revival in demand as well as elimination of bottlenecks that would catalyze growth. Entrepreneurs also complain about the steep cost of doing business and the bureaucratic hurdles they face in translating ideas into viable commercial ventures. Fears also persist that foreign investment activity in the country is far from vibrant.

However, the biggest worry is lack of jobs. Though Modi declared employment creation as a top priority when he took office promised to create 10 million jobs each year, there are no credible numbers to show that he’s met that goal as he nears the end of his five-year term. This, say economists, could pose a real threat to his re-election bid early next year.

An indication of just how abysmal the situation in the job market is came this March, when the government announced 90,000 vacancies at the state-run Indian Railways, the nation’s biggest civilian employer, and a whopping 28 million people applied.

"Rather than creating more jobs, there's a real worry that the growing use of digital technologies would create more skilled and productive jobs while displacing less-skillful and labor-intensive positions," Shekhar said.

The after-effects of the demonetization also continue to cast a shadow over Modi’s re-election bid. The idea behind the move, the government claimed, was to deliver a blow to the shadow economy while diminishing the use of illicit and counterfeit cash to fund illegal activity and terrorism.

However, the move generated prolonged cash shortages in the weeks that followed, creating significant disruption. The effect was felt primarily by the agricultural and informal sectors, the two most cash-dependent parts of the economy.

Research suggests that women bore the brunt of adverse consequences. The private research firm the Center for Monitoring Indian Economy, reported that the currency chaos cost 1.5 million jobs immediately. CMIE data show that unemployment in October 2017 was 6.9 percent, the highest in two years.

Although the government continues to defend demonetization as a prerequisite to purging the economy of black money, opposition parties have slammed it as causing irreparable harm to the nation.

However, analysts say it is time to move on from the debate. "To spur economic growth, we need to develop the informal sector which provides the lion’s share of jobs," said Parekh. "We also need to put in place a regulatory framework and have a targeted spending on infrastructure to improve the entire ecosystem of doing business while bolstering the job market."

Without positive economic winds, analysts fear, Modi's second coming as prime minister may well be a fraught one.