📰 Despite the messaging, it is still advantage China
India needs to show foreign investors it has the benefits of China with fewer risks as a relocation destination
•Many U.S. companies as well as the analysts who advise them are cognisant of India’s goal of becoming an alternative supply source and investment destination to China. But based on conversations I have had with a number of different organisations and companies here in Washington, it is fair to say that expectations are tempered.
•First, despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit the People’s Republic of China (PRC). Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now. Those that do leave may not choose India as a relocation destination. Despite New Delhi’s noted success in attracting Apple suppliers to India, many U.S. companies with experience working with China are not convinced that India has the PRC’s established industrial base and expertise. They also see other Asian countries as more competitive. To change their minds, these sceptics must be convinced that India offers the benefits of China with fewer risks.
The good and bad points
•To be sure, India’s identity as a democratic “un-China” is one of its strongest selling points. There are no Indian government hackers stealing foreign companies’ industrial secrets. Although Indian officials may have spurned a meeting with Amazon’s chief executive officer Jeff Bezos due to negative India-related reporting in his The Washington Post newspaper, that is a far cry from the coercive tactics that Beijing employs against criticism by foreign companies both within and outside of its borders. India’s open and vibrant press, independent judiciary, and other advantages of democratic governance also provide a favourable contrast to China.
•Yet, India might appear more like China to potential foreign investors than New Delhi might think, particularly given policies that seemingly disadvantage foreign investors who pose the greatest competitive threat to India’s domestic counterparts.
•To be clear, India’s goal of creating national champions is not necessarily anti-competitive in itself. But when policies such as taxes on foreign e-commerce companies and education providers seem constructed to disadvantage foreign investors, investors will stay away.
•India’s large and increasingly well-off domestic market, while alluring, will likely not convince foreign companies to accept limits and conditions they might not accept elsewhere. Although early foreign investors in China endured years of losses caused by disadvantageous PRC policies, today’s shareholders demand more accountability and faster profit-making from companies in which they are invested. There are also now many more competitor investment destinations, both within and outside of Asia.
Why China scores
•Despite many documented negatives and the overall sour foreign relations picture right now, China continues to offer investors many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product. This took decades of strategic planning. India’s own planning has been impressively stepped up in recent months, with the government identifying key sectors; surveying major companies about perceived roadblocks to Indian investments; and increasing Invest India’s outreach.
•But more is needed. For example, China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities. The Indian government Budget that pledged to create equivalent zones is too small and is allocated among too many locations to compete.
Focus on States
•The recent World Trade Organization (WTO) dispute panel ruling against India’s special economic zones policies, which the Indian government intends to appeal, might actually provide a chance to take a fresh look at the kinds of WTO-consistent industrial bases that are possible. New Delhi can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors. Foreign capital could also greatly increase infrastructure funds beyond government spending alone. India might also usefully build up new industrial centres with an eye to geography, for example linking the southeast of the country to supply chains in Southeast Asia. In fact, by putting resources into States not led by the ruling national party, India will signal clearly that it is committed to economic openness, no matter who is in power, reassuring investors.
Work on the framework
•India has taken a great step to reduce the number of investments needing approval by the Centre, and to increase intra-Ministry coordination on foreign direct investment policies. The same coordination could usefully be extended to the appointment of a high-level official or body in the Prime Minister’s Office to ensure any and all proposed economic policy changes are consistent with the goal of attracting foreign investment.
•A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.
The World Bank’s decision to halt its annual ‘Doing Business’ report on data authenticity issues has major implications
•On Thursday, the World Bank halted its annual publication, ‘Doing Business’ report, as it detected irregularities of data for a few countries. A World Bank Press release (https://bit.ly/2QPSXLn) of August 27 said: “The integrity and impartiality of our data and analysis is paramount and so we are immediately taking the following actions. We are conducting a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports. We have asked the World Bank Group’s independent Internal Audit function to perform an audit of the processes for data collection and review for Doing Business and the controls to safeguard data integrity...”
Rankings and ‘Make in India’
•Should we bother about it? Yes, perhaps. India has sought to improve its ease of doing business index ranking, as a means to attract investments to achieve the targets set for ‘Make in India’, that was announced in 2014. The initiative aims at: raising the manufacturing sector’s share in GDP to 25% (from 16-17% per cent) and creating 100 million additional jobs in the manufacturing sector by 2022. India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014. Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”, the ruling coalition’s winning slogan in the 2014 general election.
•The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking. In fact, in January 2018, Justin Sandefur and Divyanshi Wadhwa’s study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
The case of Chile and Russia
•During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017. Chile’s former Socialist President (2014-18), Michelle Bachelet, accused the World Bank of manipulating the ease of doing business index methodology to show her presidency in poor light, while showing improvement in the ranking during the regime of the right-wing party. Justin Sandefur and Divyanshi Wadhwa’s study of March 2018, with a reworking of the ranks with an unchanging methodology showed very little change in Chile’s global rank. In 2017, World Bank’s Chief Economist (and later, Nobel Laureate), Paul M. Romer admitted to the World Bank’s mistakes. He said, “Based on the things we were measuring before, business conditions did not get worse in Chile under the Bachelet administration,” He further added, “I didn’t do enough due diligence and later realised that I didn’t have confidence in the integrity” of the report’s data.” — “World Bank Unfairly Influenced Its Own Competitiveness Rankings”, The Wall Street Journal , January 2018. More details are at: https://bit.ly/2YJkfqU
•The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies. Therefore, the multilateral agency’s decision to suspend the publication and conduct a systematic review of the reports of the last five years is undoubtedly welcome.
•Going beyond the data and methodology, does the ease of doing business index have predictive power? Recent evidence about India is telling. While its rank pole vaulted, it has meant nothing on the ground. The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18. Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics. To rub salt in the wound, India’s import dependence on China has shot up, compelling the Prime Minister to announce yet another initiative — Atmanirbhar Bharat.
•It has been the same with Russia. Its ease of doing business rank jumped from 120 in 2012 to 20, six years later, taking Russia ahead of China, Brazil, and India, but without becoming a magnet for investment inflows. China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.
Many flaws
•There are many shortcomings in the design and implementation of the index. The Indicators used for the index are de jure (as per the statute), not de facto (in reality). The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
•The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index. The World Bank conducts a global enterprise survey collecting information from companies. Interestingly,there is no correlation between the rankings obtained from ease of doing business and the enterprise surveys. Writing in the well-regarded Journal of Economic Perspectives (Volume 29, Number 3 – Summer 2015), Mary Hallward-Driemeier and Lant Pritchett said, “Overall, we find that the single numerical estimate of legally required time for firms to complete certain legal and regulatory processes provided by the Doing Business survey does not summarize even modestly well the experience of firms as reported by the Enterprise Surveys.”
•More seriously, the theoretical underpinning of the ease of doing business index is suspect. There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment. Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations that inform the construction of the ease of doing business index.
•Unfortunately, such simplistic homilies are used under a seemingly scientific garb of the quantitative index to the disadvantage of workers. For instance, to meet the ease of doing business targets, safety standards of factories are compromised. In 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950. In its place “third party” inspection and employers’ self-certification are mandated. Reportedly, however, no factory has complied with self-certification or submitted the third party certification. Most other States have copied the Maharashtra practice. Hence, industrial safety standards have been practically abolished. Such a change is truly a case of a “race to the bottom”, to please the rating agency — NITI Aayog in this case.
Time for a rethink
•To sum up, the World Bank’s decision to halt its annual ‘Doing Business’ report on account of data authenticity issues of some countries has implications for India. Since 2015, the government has invested considerable political and administrative capital to improve India’s global ranking, with impressive success. But the enhanced ranking has failed to augment investment and output growth. Why? Analytical and empirical foundations of the index are weak, if non-existent. The index is based on de jure measures, and not on de facto conditions. There is no credible association between improvement in ranking and a rise in capital formation and output growth, anywhere. Worst of all, it is an ideologically loaded measure against the interest of workers. It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.
