Is Ease of Doing Business ranking over-rated?

In recent years, the Ease of Doing Business (EoDB) has gained significant traction in India. Prime Minister Narendra Modi wants India’s national ranking in World Bank’s EoDB Index to be under 50 (it is presently 63). Realising that much of the work has to be done at the State level, NITI Aayog came out with a State-level EoDB ranking as well.

The annual ranking, in 2019, evaluated States on an 80-point check-list of reforms across 12 broad areas. States that top the ranking go to town with it when they conduct roadshows to attract investments.

But the ground reality is that there is hardly any correlation between the ranking and flow of investments. According to Centre for Monitoring Indian Economy (CMIE) data, Tamil Nadu got 15.9 per cent of all investments as of the third quarter of FY21. Its EoDB ranking in 2019 was 14. Maharashtra, which came next with 9.8 per cent share, was ranked 13 and Gujarat with 8.6 per cent was ranked 10 while Karnataka with the same share was 17 in the EoDB pecking order. Andhra Pradesh (AP), which tops the EoDB ranking, got only 6.8 per cent of the investment flow while Uttar Pradesh, ranked second, got 5.3 per cent share and Telangana just 4.3 per cent though ranked third in Ease of Doing Business. India’s most investor-friendly States, per the EoDB ranking, are not top investment draws.

This is true when it comes to the global ranking as well. India, despite its poor World Bank EoDB ranking of 142 in 2014, was the ninth largest recipient of foreign direct investment (FDI). By 2019, it had dramatically improved its ranking to 63 but it still continued to be ninth in the FDI sweepstakes. Global investors came to India because of its attractiveness as a large market with a burgeoning middle-class and a production cost that was far lower than mature economies. Its 142nd rank did not act as a deterrent. Similarly, China tops when it comes to FDI flows taking in $141 billion in 2019 despite being ranked 31 while New Zealand, No 1 in the EoDB ranking, managed FDI of just $5.4 billion, a tenth of what India got.

Where opportunities beckon

Investors, it appears, are going where opportunities are and where infrastructure exists to tap those opportunities. The EoDB ranking does not seem to be on top of their minds. If Tamil Nadu has topped the flow of investments this year, it is because it has the necessary building blocks. It has good connectivity: three ports near Chennai alone, more than one international airport and a strong road network. It has the necessary eco-system, especially the vendor base. Auto majors such as Ford, Hyundai, Renault, Nissan, Ashok Leyland and BMW, which have set up their manufacturing facilities in and around Chennai, get almost all their supplies from within a 100-kilometre radius of their plants.

Then there is human resource. Skilled and educated manpower is critical for any investor. If that is not available, no investor would want to invest in a State however high its EoDB ranking. Bulk of the recent investments into AP came to Sri City, an SEZ located on the Tamil Nadu border. Its major attraction is that it uses much of the hard and soft infrastructure from Chennai.

Cost is an important factor, too. Availability of land, electricity and labour at relatively low costs is critical. Overall governance and state of social infrastructure also play a part. Like Tamil Nadu, Maharashtra, Gujarat and Karnataka boast of similar strengths. That explains why investors flock to these States despite their not being ranked in the EoDB Top 10.

Does this mean the EoDB ranking is meaningless? Not really. It does serve a purpose of simplifying the investment process. It helps the States to look inwards and weed out unnecessary laws, inspections and permissions/permits. Any investor, instead of running pillar to post across multiple departments, will welcome a single window system of clearing various proposals. What is causing the dissonance between the ranking and the actual investment flow is the fact that the EoDB ranking focusses on parameters that are much lower in the order for an investor. A top rank without the basic infrastructure — connectivity, strong eco-system, skilled manpower and lower cost of production — is of no use to the investor, domestic or foreign.

Hyping up the ranking

The government has been hyping up the EoDB ranking of States in a bid to get more of them on board and compete so that Ease of Doing Business improves in India, overall. Quite understandable. But it is not everything when it comes to attracting investments. States should be encouraged to develop other more important parameters that investors give a larger weightage to when deciding where to invest. Otherwise, the index runs the risk of becoming meaningless over time. When Lakshadweep is ranked higher than Karnataka, you know things are heading that way.

Also, the index would work best for States that are today topping the investment flow but rank lower down the order when it comes to EoDB. Such States should be pushed by the Centre to wholeheartedly embrace the ranking as a better performance, coupled with their existing strengths on the ground, would give them a competitive advantage not just with other competing States but also other countries like Vietnam or Thailand.

So, as things stand today, the EoDB ranking is over-rated. The Centre is giving undue importance to it. In fact, when it came out with the Good Governance Index recently, it chose to use the EoDB ranking as the input to factor in the industrial performance. That meant that Uttar Pradesh got much higher marks than highly industrialised Maharashtra, Gujarat or Tamil Nadu (which topped the overall Governance Ranking).

The EoDB ranking has a role to play in making India a better place to do business in. But it is not `be-all and end-all’ when it comes to investment attractiveness. Quicker the Centre and the States realise this, faster will the country become the go-to-destination for investors.