Kaushik Basu is the Chief Economist of the World Bank and the lead on the annual Doing Business report whose 2016 edition was released this week, with positive news of a 12-rank improvement by India for ease of doing business. The exercise of data collection and analysis underlying the compilation of the report is a complex one, and Professor Basu, who was earlier the Chief Economic Advisor for the Indian government during 2009-12, spoke about the report’s methodology, what the results mean for India under the Modi administration and challenges it could face in sustaining this such regulatory reform. Edited transcript:
The 2016 Doing Business report has in some senses been a pat on the back for India, whose ranking has improved four places. Is this a signal to critics of the Indian government to be more patient about the pace of reforms, or do the report’s findings also point to an unfinished agenda for the Modi administration to tackle?
First let me clarify: It has improved four places if you back-calculate by the same criteria. But if you take where India stood last year and where it stands now, it is an improvement of 12 places. In history, when you look back at this, you are going to look at each year’s ranking so this year will be marked as year where it was 12 places that India moved up. Either way it is a remarkable achievement because it is a large country.
Having said that India still stands at 130th among 189 countries and, really, it has no business being there. It is not impossible to move into the top 100 by next year, which means going from 130th to 99th or 98th. It is not impossible, countries have done that. . For countries as big and complex as India, it is harder, but this improvement that we have got this year is a pat on the back but also a reminder to buck up and carry on, because there is a great distance to go. It is not an easy task for India.
The DB report alludes to India’s impressive progress in advancing its frontier score or absolute score since 2004 – how much does this matter, compared to the relative score or progress?
There are two things that we should look at: the absolute index and also the ranking. In a fundamental sense it is the absolute that matters. But we also worry about where we stand vis-à-vis others. And the absolute measure and ranking can go in different ways. If the whole class of students is studying hard to do better, then even if you actually do better, it does not mean that your ranking will improve. That is the challenge with a ranking.
The ranking is nevertheless important, because global investors coming in with Foreign Direct Investment (FDI) are looking at a small cluster of potential destinations, say eight or nine countries, and trying to decide where they should go. In such situations, their eyes quickly go to the ranking, and where the country stands. Even if you have improved on your own, you could have lost out on rankings, and there are lots of examples of that happening to countries, even in this year’s report.
Again on methods – the report cautions that in most cases the entire gamut of regulatory reform has not been captured in the ranking. What does this mean for a vast country such as India, where corruption has been noted to be rampant in some states though the report focuses on Delhi and Mumbai? How does this affect the “true” ranking for India?
Let me clarify that we have made an effort over the last two years to move away from focusing on the quantity to the quality of regulation. At times there is an ideological predilection that some conservative thinkers have had that the less the regulation, the better. But that is not right. In a complex economy you need regulation and in fact some of the most successful market economies, by most measures, have more regulations. The U.S. will have many more regulations than Eritrea, for instance. So it is not the quantity of regulation but the quality, it is intelligent regulation that we need; and we have made a lot of changes, trying to reflect this.
[Regarding the focus on specific cities] Our data collections centres are Mumbai and Delhi. In all big countries we have two centres of data collection, and in smaller countries, one. In these two centres we ask questions about country-wide practices, and not just what happens in those centres. Also, the bulk of the information concerns de jure practices and on these there aren’t too many difference across regions. In terms of de facto practice there can of course be many differences. On paper, Mumbai, Chennai, Ahmedabad will not be very different [but] practices can be very different.
There are for instance differences in corruption. But for Doing Business, we don’t measure corruption. We ask: How many days does it take you to get a license? Maybe with bribery you get it sooner, but that does not affect our measure. [There is] a plus and minus to this. As soon as you get into corruption measurement becomes a subjective element; you have to collect data in ways that are very often very difficult.
But there are people who have made the valid criticism that corruption is so important in so many countries, that not to collect that information is a handicap. All we can say is that our statistical exercise shows that our measure correlates very well with the incidence of corruption. Where countries do very well with ease of regulation, corruption is less. So, though we do not collect corruption data directly, what we do collect happens to be a reasonable reflection of the incidence of corruption.
While India has performed well on some indicators such as Protecting Minority Investors, it has done less well on important criterion of Enforcing Contracts and Registering Property. Does this reflect the fundamental difference between legislative reforms, which can be relatively quick to carry out, and implementation issues, which can be problematic owing to the multiplicity of actors and perverse incentives?
There is a little bit of that, and there are people who have said that things in India move faster when you look at the de facto rules rather than the de jure. De jure is more cumbersome than in practice.
But even in practice Indian bureaucracy is extremely cumbersome and slow. We must not look away from this. The Indian bureaucrat is often not aware of this because once you are part of the system your own tasks get done quick and efficient. Since I joined the Indian government late in my career I had it fresh in my mind the hassles I faced dealing with the bureaucracy. Since the civil service is a lifetime career in India, most civil servants have little awareness of the hurdles faced by ordinary civilians and small businesses.
Doing Business only picks up a slender aspect of business. There are so many other things in life that you have to attend to when you are in business. We pick out a couple of salient things, measure that, aggregate it. This includes ten indicators, and within them a couple of sub-indicators.
The hope is that through our indicators we are giving a signal to the country to attend to the ones that we are measuring but also to what we are not able to measure, but may be as important.
From many accounts, including the Doing Business report and U.S. business interests, it would appear that a core obstacle in India is dispute resolution. Could Bilateral Investment Treaties, such as the one New Delhi has long been discussing with Washington, be key instruments to mitigating uncertainty and risk-aversion of potential investors?
Bilateral pressures are important but you have to have your antennas up. If India were to formally sign contracts with top American universities that they would have a campus in India, those universities will bring some bilateral pressure [to say]: ”You have to change these six or seven University Grants Commission rules and unless you change those, we cannot operate“
Those are worthwhile pressures but you have to keep in mind when working with global business there can be international crony capitalism. So there are certain regulations which are probably good for the economy, but through international crony capitalism you can get pressure to remove those regulations, because then it will be a free for all, which the corporation can exploit. Colonial history is full of examples where an outside investment comes and makes you change the rules, not so much for your benefit but for the benefit of the company that’s come in. In brief, you need FDI but you have to keep your eyes open.
Your association with the inside track on India’s policy strategizing dates back to 2009 at least, give us a sense of whether the trajectory of ease of doing business in the country has shifted gears or is continuing along a rather constant long-term trend of gradual improvement.
The importance of Doing Business has been recognized for long in India -- you will see this in many Economic Surveys of India, certainly in 2008-09 and 2009-10. I used it when I was Chief Economic Advisor in India. So way before I knew I would have anything to do with the production of the Doing Business report, I was making use of it. I has discussed these issues with the then Finance Minister and also the Prime Minister.
At the political level there was always sympathy for reducing these costs, but at the bureaucratic level there was resistance. What we are seeing over the last one or two years is the bureaucracy is now coming together with the political leadership in the country to try to affect this and is beginning to work to reduce these transactions costs.
Would you call that a major paradigm shift?
That is an important and positive change.
Is that the one key that had to be turned to unlock the potential for greater Ease of Doing Business?
There are three things that you need for a country like India to do well. First is infrastructural investment. India needs better ports, roads, railways, and so forth. There is a great distance to go but India’s investment to GDP rate is now well over 30 per cent so those things are improving.
Second is the ease of doing business and cutting down bureaucratic hurdles – I had always stressed this. This is much harder, but I am heartened that as our Doing Business Report shows, there is movement on this.
The third need is inclusiveness. India is a diverse society and it needs to nurture inclusiveness, or what at the World Bank we call shared prosperity. It is important to have policies whereby all groups feel a sense of belonging, that all segments of people feel a part of society. This sounds like it has nothing to do with economics, but in the long run it promotes growth and development.
How do you think we are performing in terms of inclusiveness? You have spoken in the past of the importance of mass welfare schemes for the bottom 40 per cent of the population.
At the World Bank, we now have two goals. Over and above poverty alleviation we have brought in something called shared prosperity, which draws special attention in every country to the marginalised, to the ones who are being excluded. That is hard because there are vested interests that resist this.
We should also recognize that there is potential human capital among the poor disadvantaged groups. If government provides people with education and healthcare, the returns can be disproportionately large. And it’s not just that. It is also a social and political effort to draw people in, into the mainstream. That is extremely important.
In that sense do you feel that we are on a good trajectory now? Because there have been shifts in the last few years in terms of specific allocations to certain programmes versus, under the rubric of state autonomy, giving states a free hand to allocate money within their own budgets.
India has been doing well on these fronts. We just released our Global Monitoring Report, where we track poverty. In India, poverty has been falling quite rapidly over the last decade. There are however other non-monetary dimensions on which India does not do well. There is a lot of stunting and malnutrition, for instance. So government has to spend money and intervene to improve these.
The UPA government launched schemes to tackle some of these issues, including the NREGS, food security, right to education and so forth. Is it possible that budgetary reallocations at the state level could impact the way that these interventions work on the ground?
When I was in government I had argued that we need to work on the redesign of the way in which we give benefits to the poor, so that leakage is much less. In India, about 40 per cent of the grain that is meant for the poor leaks out. There are ways of plugging this. I disagree with those who could cut these expenditures meant for the poor. But we must work relentlessly to cut leakages and target them better.
Going back to the DB report, how do you think it is going to be taken up in India? A lot of people watch it very closely.
Given that India has declared, that it wants to move up on the Doing Business ranking, this will be watched very closely. We know from the experience of some other countries that when you start big reforms on the ease of doing business, the first year usually gets some movement and then there is more in the second and third years.
Also, our data goes up to June 1, 2015. Any changes made on June 2 will not be registered for that year. We do know that India was continuing to make changes in June and July, which will be picked up in next year’s report. Really, for India to push to be in the Top 100 is not impossible.
What are the challenges that the Indian government may face in achieving this, for example could it be impacted by a lack of buy-in from the states?
The challenge you can face is that you pay disproportionate attention to the gaming part of this. American universities are ranked by lots of central ranking authorities. At times universities make changes only on those indicators where for which they get marks. Similarly, it is possible for countries to pay attention to what the World Bank is measuring and not make deeper changes. This would be unfortunate. We hope, once India begins working on these reforms it will be the spirit of improvement that is the guiding principle and it will be a movement in the right direction. There are very important changes that have been made [in India]. The improvements that we have seen in India’s rank are substantial.
