What does DBI 2018 measure? It measures ‘regulatory environment’ as it applies to domestic small and medium companies. Regulatory environment is important because it is much more effective in shaping the incentives of economic agents in ways that promote growth and development when they are reasonably efficient in design, are transparent, accessible and can be implemented at a reasonable cost. DBI 2018 captured 10 areas – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. It did not capture demonitisation and GST which have caused widespread distress in the economy.
What DBI did not capture? World Bank, which measures DBI, says it did not capture macroeconomic stability, development of financial system, market size, incidence of bribery and corruption and quality of labour force. So, to begin with, DBI is only one indicator of economic perspective.
India has been seeking to improve DBI ranking to attract FDI. Research have shown that a better business regulation is associated with higher FDI inflow. Interestingly, India has seen a dramatic rise in FDI inflow since 2014. In 2016, it was among the top three countries in attracting FDI, according to DIPP. India attracted $45.15 billion in 2014-15, $55.56 billion in 2015-16 and $60.08 billion in 2016-17 – 62% increase since the launch of ‘Make in India’.
The critical question is: Has a higher FDI inflow led to higher GDP growth, higher investment growth or higher industrial output? The answer is no and thereby hangs a tale. GDP has fallen for six consecutive quarters – from 9.2% in Jan-Mar 2016 to 5.7% in Apr-Jun 2017. Gross capital formation (GCF) has gone down from 30.3% in 2014-15 to 26.6% in 2016-17. In fact, in 2016-17, real GCF entered negative growth zone. Index of industrial production (IIP) remains considerably low since 2010-11 and the industrial sector’s capacity utilisation remains low.
One is tempted to ask why is FDI going up then and what is it doing to the economy?
World Bank cautions that though there is a significant correlation between DBI ranking and FDI inflow, this correlation (a) does not imply ‘causation’ and (b) there is no evidence of this association for ‘developing economies’. A 2016 IIM Bangalore working paper by Vivek Moorthy and A Arul Jason says, DBI ranking is a de jure measure that does not capture the de facto practices that are used to get around the law to get business done: personal connections, jugaad solutions. Besides, there is a distinction between the ease of doing business and the cost of doing business. In large unorganised economies, the cost of doing business is low (since much activity escapes the tax net) even if starting a business is difficult and the DBI rank is low.
This disconnect is captured in Ruchir Sharma’s book The Rise and Fall of Nations: Then Rules of Change in the Post-Crisis World. It talks of Putin improving Russia’s ranking from 120 to 51 between 2012 and 2015 – more than 30 places ahead of China and 60 places ahead of Brazil and India. Yet, nobody was doing any business with Moscow. Why? He explained: “Moscow in 2015 is increasingly hostile to and isolated from international business, far more so than China, Brazil or India. To the extent possible, I try to avoid relying on numbers that are vulnerable to political manipulation and marketing”. That was in 2016.
In India, it is a matter of study as to why higher FDI has not led to higher growth indicators. R Nagaraj of Indira Gandhi Institute of Development Research, Mumbai, has one explanation. He writes in an article that this is because currently FDI does not come from global producers of goods and services, but from shadow banking entities such as PE funds. He points out that in 2014-15, PE funds accounted for 60% of total FDI and top recipients (Flipkart, Paytm and Snapdeal) were retail trade of mostly imported consumer goods. PE firms do not commit to fresh capital formation or invest in technology as expected, he writes.
Amitabh Kant, CEO of Niti Aayog, is right when he says that India’s next goal is to improve domestic investment, which has completely dried up. India is facing a twin balance sheet (TBS) challenge, as CEA Arvind Subramanian keeps reminding – over indebtedness in the corporate sector depressing demand for investment and growing NPAs reducing supply of credit. Burdened with TBS, credit growth plunged to 60-year low to 5.08% in 2016-17.
CMIE’s October 2017 report reflects the grim investment scenario. It says projects worth only Rs 845 billion were ‘proposed’ during the quarter ending September 2017 – the lowest level of intention to invest during the entire Modi regime, even lower than June 2014 quarter “when investments had come to a halt for all practical purposes in the face of political uncertainty”.
Therefore, it requires a lot more than just bank recapitalisation to revive investment. In any case, recapitalisation by Rs 2.1 lakh crore is grossly inadequate when, as per Credit Suisse data, bank stressed assets hit Rs 14.5 lakh crore in the last quarter of 2016-17.
Now, it would make much more sense to replace the euphoria over DBI ranking with some serious rethink on strategies to revive the investment environment. For a change, such strategies should be extensively debated, including their modalities of implementation, before being put to work. How about starting with GST?
What DBI did not capture? World Bank, which measures DBI, says it did not capture macroeconomic stability, development of financial system, market size, incidence of bribery and corruption and quality of labour force. So, to begin with, DBI is only one indicator of economic perspective.
India has been seeking to improve DBI ranking to attract FDI. Research have shown that a better business regulation is associated with higher FDI inflow. Interestingly, India has seen a dramatic rise in FDI inflow since 2014. In 2016, it was among the top three countries in attracting FDI, according to DIPP. India attracted $45.15 billion in 2014-15, $55.56 billion in 2015-16 and $60.08 billion in 2016-17 – 62% increase since the launch of ‘Make in India’.
The critical question is: Has a higher FDI inflow led to higher GDP growth, higher investment growth or higher industrial output? The answer is no and thereby hangs a tale. GDP has fallen for six consecutive quarters – from 9.2% in Jan-Mar 2016 to 5.7% in Apr-Jun 2017. Gross capital formation (GCF) has gone down from 30.3% in 2014-15 to 26.6% in 2016-17. In fact, in 2016-17, real GCF entered negative growth zone. Index of industrial production (IIP) remains considerably low since 2010-11 and the industrial sector’s capacity utilisation remains low.
One is tempted to ask why is FDI going up then and what is it doing to the economy?
World Bank cautions that though there is a significant correlation between DBI ranking and FDI inflow, this correlation (a) does not imply ‘causation’ and (b) there is no evidence of this association for ‘developing economies’. A 2016 IIM Bangalore working paper by Vivek Moorthy and A Arul Jason says, DBI ranking is a de jure measure that does not capture the de facto practices that are used to get around the law to get business done: personal connections, jugaad solutions. Besides, there is a distinction between the ease of doing business and the cost of doing business. In large unorganised economies, the cost of doing business is low (since much activity escapes the tax net) even if starting a business is difficult and the DBI rank is low.
This disconnect is captured in Ruchir Sharma’s book The Rise and Fall of Nations: Then Rules of Change in the Post-Crisis World. It talks of Putin improving Russia’s ranking from 120 to 51 between 2012 and 2015 – more than 30 places ahead of China and 60 places ahead of Brazil and India. Yet, nobody was doing any business with Moscow. Why? He explained: “Moscow in 2015 is increasingly hostile to and isolated from international business, far more so than China, Brazil or India. To the extent possible, I try to avoid relying on numbers that are vulnerable to political manipulation and marketing”. That was in 2016.
In India, it is a matter of study as to why higher FDI has not led to higher growth indicators. R Nagaraj of Indira Gandhi Institute of Development Research, Mumbai, has one explanation. He writes in an article that this is because currently FDI does not come from global producers of goods and services, but from shadow banking entities such as PE funds. He points out that in 2014-15, PE funds accounted for 60% of total FDI and top recipients (Flipkart, Paytm and Snapdeal) were retail trade of mostly imported consumer goods. PE firms do not commit to fresh capital formation or invest in technology as expected, he writes.
Amitabh Kant, CEO of Niti Aayog, is right when he says that India’s next goal is to improve domestic investment, which has completely dried up. India is facing a twin balance sheet (TBS) challenge, as CEA Arvind Subramanian keeps reminding – over indebtedness in the corporate sector depressing demand for investment and growing NPAs reducing supply of credit. Burdened with TBS, credit growth plunged to 60-year low to 5.08% in 2016-17.
CMIE’s October 2017 report reflects the grim investment scenario. It says projects worth only Rs 845 billion were ‘proposed’ during the quarter ending September 2017 – the lowest level of intention to invest during the entire Modi regime, even lower than June 2014 quarter “when investments had come to a halt for all practical purposes in the face of political uncertainty”.
Therefore, it requires a lot more than just bank recapitalisation to revive investment. In any case, recapitalisation by Rs 2.1 lakh crore is grossly inadequate when, as per Credit Suisse data, bank stressed assets hit Rs 14.5 lakh crore in the last quarter of 2016-17.
Now, it would make much more sense to replace the euphoria over DBI ranking with some serious rethink on strategies to revive the investment environment. For a change, such strategies should be extensively debated, including their modalities of implementation, before being put to work. How about starting with GST?
