The World Bank has created flutter by ranking India 130th for ease of doing business in its latest flagship report, “Doing Business Comparing Business Regulation for Domestic Firms in 190 Economies 2017”. This is in sharp contrast to the Narendra Modi government’s announcement two years ago to “improve” India’s rankings among the top 50 by 2018.
An improvement of just one against the last 2016 report, which saw India jump by 12 ranks, the country’s performance is worst among all the BRICS countries. Brazil, scoring 56.53 on a scale of 100, is ranked 123rd; Russia, scoring 73.19, ranks 40th; India, scoring 55.27, ranks 130th; China, scoring 64.28, ranks 78th; and South Africa, scoring 65.20, ranks 74th.
The only consolation for India is, among the immediate neighbours, Pakistan ranks 144 Pakistan with a score of 51.77 and Bangladesh ranks 176 Bangladesh with a score of 40.84. Interestingly, the other two neighbours – Sri Lanka (score 58.79) and Nepal (score 58.88) – rank better than India, 110th and 107th, respectively.
While agreeing that The Indian government has committed to improving its doing business ranking by steadily implementing reforms across all indicators… on a platform of increasing job creation, mostly through encouraging investment in the manufacturing sector”, the report regrets, India’s labour regulations remain “associated with a number of economic distortions.”
Pointing out that “labour market issues in India are regulated by 45 central government laws and more than 100 state statutes”, the report says, “One of the most controversial laws, the Industrial Dispute Resolution Act (IDA) of 1947, requires factories with more than 100 employees to receive government approval to dismiss workers and close down.”
“Obtaining such approvals entails a lengthy and difficult process and illegal worker dismissals can result in significant fines and a prison sentence. Industrial establishments also have to observe many other laws that regulate every aspect of their operations from the frequency of wall painting to working hours and employee benefits”, the World Bank states.
Insisting that rigid employment regulations have had “lower output, employment and productivity in formal manufacturing than they would have had if their regulations were more flexible”, the World Bank report favours rise of the “informal sector”, in which labour is “contracted”, and there is more flexibility. It believes, the states which have adopted the contractual ways have seen “a larger increase in value added per worker compared to states with more rigid regulation.”
The World Bank believes, “Although Indian labor laws aim to increase employment security and worker welfare, they often have negative impacts by creating incentives to use less labour and encouraging informality and small firm size.” It adds, “Indeed, Indian firms are more capital-intensive relative to the economy’s factor endowments.”
“High labour costs in formal manufacturing have also contributed to India’s specialization in the production and export of capital-intensive and knowledge-intensive goods despite the country’s comparative advantage in low-skilled, labour-intensive manufacturing”, the reports underlines.
Appreciating Government of India announcement about “plans for major reforms to labour regulation”, the report says, “The planned legislative amendments include the consolidation of central labour laws, facilitating the retrenchment and closing down of factories by allowing firms employing less than 300 workers to dismiss them without seeking government approval, and increasing compensation to retrenched workers.”
Among major achievements in ease of doing business, the World Bank report notes how “India has achieved significant reductions in the time and cost to provide electricity connections to businesses”. In Delhi, for instance, the “time needed to connect to electricity was reduced from 138 days in 2013/14 to 45 days in 2015/16. And in the same period, the cost was reduced from 846% of income per capita to 187%.”
Then, the World Bank notes, “India has made paying taxes easier by introducing an electronic system”. In another important change, it adds, “the minimum capital requirement for company incorporation was abolished and the requirement to obtain a certificate to commence business operations was eliminated.”