Column: Signs of hope for India’s economy

Oct 30 2012, 01:15 IST
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SummaryStates are exercising autonomy in competing for investment. That can be good for improving conditions for doing business.

The latest World Bank report on the ease of doing business in 185 economies provides a mixed picture of India, but with some glimmers of hope. India’s overall rank based on a composite index has not changed from last year. It remains at 132, still firmly in the third division of the ease-of-doing-business league. But since most countries are making improvements on this front, India’s stasis in the relative rankings is consistent with some absolute improvements.

Since 2005, the greatest percentage improvements—measured in terms of distance from the global best-practice frontier—in India’s standing in various dimensions of doing business have come in getting credit, dealing with construction permits, and procedures for starting a business. But it still ranks 173rd in starting a business, and 182nd in dealing with construction permits. To the extent that what matters are the levels of various hurdles to doing business, absolute improvements are good. But low rankings matter wherever global competitiveness is an issue.

Comparisons in rankings and levels of barriers across developing countries for different aspects of doing business do not reveal any obvious patterns, or necessarily a tight link between ease of doing business and growth performance. Where India ranks close to dead last, however, is in enforcing contracts, and the major contributor to that ranking is the length of time taken. This suggests that the state of India’s judicial system, particularly with respect to contractual disputes, is a major weak spot for its business environment.

Fixing the judicial system requires a concerted effort by the central government. It has been weakly on the reform agenda, but without making much headway. The sad part of this is that the resources needed to reduce judicial delays in India are probably a fraction of those being thrown by the government at other areas of the economy.

In other cases, there is more hope, because positive change can come at the state level. A recent story in the Washington Post, by Simon Denyer, rediscovers the possibility that, despite the central government’s difficulties in moving economic reforms forward, individual states have considerable leeway to progress, and have been doing so. Arvind Panagariya, quoted in the story, reminds us that decentralisation of economic control was a major theme of the 1991 reforms—he himself is working on a major study assessing the comparative performance of India’s states. Ajay Shah, in the same newspaper story, notes the competition for investment among some states, but

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