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India mustn’t take too much credit for the improvement in EODB ranking, says Kaushik Basu

India mustn’t take too much credit for the improvement in EODB ranking, says Kaushik Basu

India mustn’t take too much credit for the improvement in EODB ranking, says Kaushik Basu
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By Latha Venkatesh  Aug 7, 2018 10:57:25 AM IST (Updated)

Former chief economic adviser Kaushik Basu said India must not take too much credit for the improvement in Ease of Doing Business ranking.

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While he said the country has improved in terms of the removing obstacles to businesses, part of the jump in rankings is because of the change in World bank's way of computing which went in India's favour.
Watch Here: India's method of ease of doing business rankings not completely accurate, says Kaushik Basu
Of the 30 places jump, more than half was due to change in criteria of World Bank's calculation, Basu said and added that a part of the jump in rankings was also because of the measure India has undertaken.
Noting that the country's track record in terms of closing down businesses was abysmal, he said a lot more could be done in terms of easing up the bureaucratic steps involved.
Basu, who was also the World Bank's chief economist, said India is not really moving well towards ​getting rid of the culture of offering bribes culture and corruption in general.
Edited Excerpt:
Q: Let me start with one of the things which you have seen from both sides - the ease of doing business. You were in India ensuring that there is better atmosphere to do business and from the World Bank's point of view as well you have seen the process. India jumped 30 places, tell us how real was this achievement?
A: Doing business the way it is calculated since I got to see the other side of the actual computation when I moved to the World Bank, it is done very professionally but the measure is corrected every now and then like even GDP calculation. You know that something is not being done right, so you make corrections. Usually the way it is done is, you do it completely blind without knowing which country will be affected how and you make corrections.
Having said that India has indeed improved. Not quite as much as appeared straight away in terms of numbers, part of that is India's own move, part of that is changing measures of the World Bank. So, the 30 places that India moved, part of that was because India had made improvements, part of that is because World Bank had changed certain ways of calculations which went in favour of India. So it is a combination.
Having said that even before I went to the World Bank, when I was in the Indian government, I would always stress that this is an indicator worth watching and India should try to do better on that because Indian bureaucratic processes are so slow and cumbersome, it slows down the economy. So, on that score, it is good to see India moving in the correct direction.
Q: Can you tell us what percentage was because of India and what percentage was because the index itself changed?
A: Of the 30, more than half the movement was the changes in what the World Bank had done, less than half was because of India's move. Exact I won't put down my word because I was not at the World Bank then, but I do know that India went a substantial of way in that but more than half was because of changes in the criterion. Again I want to point out that this is done really just to improve the measure with no country in mind at least that is the way the World Bank would do when I was there.
Q: Let me come straightaway to one measure where India improved and that was in the enforcement of contract and that was because we passed the Bankruptcy Act. This Bankruptcy Code which has given us this big jump in ease of doing business, do you think it will succeed because its previous avatars - the SARFAESI Act in 2003 and the Debt Recovery Tribunal (DRT) Act in 1993 did not meet with much success?
A: India has had a bit of record of trying to do things and not managing but this is of a recent policies, I believe this is actually one of the best moves that the government of India has done - the Bankruptcy Code.
I do not know the details of it but from the little bit I have seen, I think the intentions are right. Doing business is a variety of measures, one particular measure on which India does atrociously is how long it takes to close a business. In India it is just awful. To go through the bankruptcy procedure it is much worse than other countries.
We do know that people are sensible enough, if you know that if you can't get out of a business once you have got in, you hesitate to go in in the first place, so it is a very important part of the doing business. I was glad when India took this measure.
I have spoken to some people in government and the way it was being done was right to sort of make it easier. Yes, you will have to take some losses but have some rules, who takes how much losses - the borrower, the lender, the equity holder, so that you can exit quick. So, I think is a good move and the benefits of this will be more in the long run. However we have the capacity to botch things up. So, there will be fine tuning, there will be amendments but you have to keep in mind that India takes too long to allow companies to exit and we have to shorten that.
Q: We have seen a couple of years of the Bankruptcy Act working. Until now we have two marquee cases to boast of - Bhushan Steel and Electrosteel have been sold off and cheques have been written to banks by the new owners. Are you sufficiently satisfied from your perch that we will move up further in the ease of doing business because of the Bankruptcy Code?
A: I would think so and because there the space for improvement is huge because we did very badly. I would expect India to move up more on that. A country is a thousand different things happening in business, Doing Business measures 10 different indicators, we must not get into the ditch of just gaming this system. Some countries have done that. You work on exactly the 10 measures that the World Bank is doing. However what you have to do is, take it in the spirit, that the aim of this is to ease up bureaucratic procedures and measures have been taken on this and I hope that that will be the spirit with which we will….
Q: These measures within India only look at Mumbai and Delhi whereas Ease of Doing Business is much more than that. So, how honest or how indicative is this of actual ease of doing business?
A: It is honest but the indicative is the question but let me explain. There are just 11 countries where two cities are used. For the rest of the world, for smaller countries it is one city.
Having said that in Doing Business, 70 percent is what is the case de jure or in the law books, that you can sit in any city and do grilling and find out what is in the law books. The practise of how it actually works out that you need to collect from many places, that is actually just 30 percent of the measure, there you are losing out just by doing Mumbai and Delhi but it is only a part of the measure that is losing out by that.
Q: So we can take it as a broad measure but we should not be too complacent.
A: That was my point. Just don't game that indicator, India is a big country with many things to do.
Q: Now one of the things that has changed lately is the Prevention of Corruption Act has been amended about a couple of weeks back and one of the things it says is that both the bribe giver and the bribe taker will be culpable and can be brought to book. Is India moving in the right pace, right direction?
A: I don't think so really on this measure. My own view was that this is something that I had aired, when I was in government it was never really taken on board, is to actually in cases where the bribe giver is being forced to give a bribe, has been harassed, it is a harassment bribe, there should be no punishment for the bribe giver.
Point is giving the bribe giver seven days on a very short window to come out with, most people will be scared. If that window goes, or if after that I do not manage to prove myself innocent, I will be doubly guilty because I am guilty. So it should be asymmetric punishment done very carefully.
There are examples in other countries now. We know that China has used certain kinds of asymmetric punishments, there are Scandinavian countries which have done it and I in my book 'Republic of Beliefs', I do talk at length about what my ideas were if we really want to cut down bribery type corruption. Corruption has many faces; my book addresses only one aspect of it.
Q: I hope we are able to tweak this law but is there any specific immediate advice that comes to the mind so as to tweak this law so that the bribe giver is punished but asymmetrically?
A: According to this law, Prevention of Corruption Act 1988 which is now being amended, the giver and the taker are equally punishable. There are some clauses where the giver is exempt, but the clause is not really used. My point is, it should be a very explicitly made case, not just a seven day window. When I am being asked to pay a bribe for something that legitimately the government is supposed to give me, I should be completely exempt.
It is not a question of we are giving you a short window, standup, say it boldly, and then if you do not manage to prove, then we will put you in jail, no one is going to standup. It should be a much clearer exemption. If you do that, the bureaucrat who asks for that bribe will be much more scared and it will go down is my belief. There is a group of Indian and Australian economists, there are laboratory experiments done with this idea, done in Hyderabad, which shows that it probably works in laboratory conditions at least.
Q: Do you think the Prevention of Corruption Act has been sufficiently amended to make bankers take action. The previous avatar of the law actually brought all bankers into the realm of being charge sheeted and many of them have been charge sheeted simply because the decision taken 10 years ago, on hindsight the law has gone bad and therefore you have caused damage to public money, you can be charge sheeted. Now the law says no, you should have benefitted by taking that wrong decision, you should have disproportionate assets, only then you are charge sheeted. Do you think it is being sufficiently corrected and bankers will start taking decisions now?
A: I wish I followed this closely enough. My impression, this is from reading newspapers and people like you, is that this part is a move in the right direction. I am also told that banks are now beginning to provide for their own officers some backup so that you do not get unfairly caught in this which is going to actually make you more cautious and can do harm in the long run just like we have seen in the case of bureaucracy. If you are going to catch people unfairly, one way bureaucrats can handle the problem is not take decisions. One way as a bureaucrat you can play safe is just do not take decisions, it slows things down. So correction of that is a worthwhile thing to do.
Q: I was going through your tweets and you have this very interesting graph where you point out that growth in India has broadly been rising. Up until 1970s, 1961 to 1973 we were 3.5 percent, from 1973 to 1983 we come to 5 percent, from around 1985 to 1995 we go up to 6 percent, and thereafter we come to 8.5 percent - 2003 to 2010 and then we have come down to again 6.7 or 6.5 percent. Do you think that this is a big fall, after all that 2003 to 2011 period we were beneficiaries of global growth. So would you be really unhappy about this come down or do you think this is just returning to normalcy?
A: I hope not because the 2003 to 2011, when India was growing close to 8.5 percent, it was quite a remarkable year. It is not a short stretch, it is 8 years of phenomenal growth. There were little ups and downs, there were years with over 9.5 percent, one year was bad within that, 2008, when the Lehman crisis broke, but it was a very good performance.
My own expectation was it would drop a little bit from there because it was extraordinary performance, but we would be roughly there, we would be close to 8 percent if not 8.5 percent. So the drop does disappoint me. The drop from 2011 to now is unfortunate; India need not have dropped down this low.
Two or three things are behind it which we should pay attention to. One is I do believe that the demonetization slowed India's growth down; hopefully that is behind us and we will pick up now. However, also another measure which we economist watch, but somehow it is not popular, savings and investment. The fraction of GDP that is being saved and invested, that has been going down. Over the last five to six years, the savings rate is just below 30 percent which is not bad, but India had gone up to 35-36 percent. We have to pay attention to that.
One more reason I worry about the growth dropping is, all piecemeal evidence and we do not have hard evidence, is that it is hitting the bottom segment more than the wealthier segment. There is informal sector, there is a lot of joblessness, so the growth has come down. However, that in itself I would have expected some drop; it is dropped a bit more than that and it is hitting the bottom segment more than it should have.
Q: India's growth rate which was climbing steadily decade after decade, from 1961 to 2011, after 2011 dropped from an average of 8.25 percent to an average of 6.5 percent. Where would you put the finger, where have we gone wrong?
A: Gone wrong is a strong word because the global situation did get bad. The sovereign debt crisis was hitting Europe from 2011 and that was having spillovers all over. So, we would expect some slowing down. However demonetisation probably added to some short term slowing down. GST is a good move but it was an initial disruption and its implementation could have been better. So, GST coupled with demonetisation, if they came separately it would have been a different story, I think these things slowed it down. I would like to believe that this is behind us and the growth is going to pick up here onwards but I will keep my fingers crossed on that.
Q: Would you say now 7-8 percent is at least to be expected?
A: We should very quickly get back to 8 percent.
Q: Do you think we will?
A: I don't know. There is also the export market where I was expecting India to do better on the export front than India has done over the last couple of years. However I think it is doable, whether we do it or not I don't know.
Q: We have seen consistent dropping off of the pace of export growth. Actually we were almost close to flat but now at least we have started showing some bit of growth, base is also helping but the export growth clearly is a problem because our trade deficit now is widening to almost 2.6 percent. This year the forecast in FY19 from almost all quarters is that we will be we over 2.6 percent against less than 2 percent last year. What do you think is causing this? There are some people who believe that this is an Indian competitiveness problem but there are others who believe that this is also because the currency is too strong, what are your thoughts?
A: Little bit of both. I do feel that the informal sector, the small sector, the small producers, they have not done well in India. Even getting loans to the small producers, the banking situation has been difficult. This is of course a build-up of a problem over a long time. So, that is affecting the smaller player's credit availability and those things play a role also. Along with that I do believe that the exchange rate is playing a role. I don't now work in government, I don't look at the last moment data but my hunch is that the rupee has got stronger in real terms.
There has been some correction over the last few months but not enough of a correction. This strengthening of the rupee means that exports are being hurt globally. This is my own back of the envelope calculation, I would expect something like 70-71 rupees to the dollar to be where it should rest which is going to give the space for our producers to get in competitively in the world market, that has not happened.
Fortunately India, today has the foreign exchange space with USD 405 billion, we can buy and sell dollars, we can build up the reserves a little bit more. A small economy like Hong Kong has more reserves than India, Taiwan has USD 450 billion reserves.
Q: So, you want an enforced depreciation?
A: I would think that a planned intervention which is a correction, it is not a depreciation, it is a correction for the fact that there has been real appreciation over several years, that correction should be done in a very managed way instead of having the market run away and do that. So, that would be my recommendation, if I was sitting in government I would have sat with policy makers and said that make that small correction, that is a boost that our manufacturing sector, our export sector needs.
Q: There appears to be a belief in government that actually a strong currency is a sign of a strong economy. Obviously I have not tested this with actual sources, but there are people who tell me that the government does not want to see 70 to the dollar before elections because that is scary, that looks like India is weak. Do you think this is ill-informed advice?
A: Yes, I would think so if that is the view because world over countries are fighting to get weaker currencies, from United States, to China, to Switzerland, they want that because of the export market. So trying to sort of symbolically hold it higher does not really make sense. So, yes, if that is the spirit in which it is being done, I do not think that is quite correct. However, of course you need to educate the people because if people are mis-educated on this, then that becomes a natural tendency.
Q: This is also an inflation targeting central bank, so it could have an appreciation bias simply because that only helps it to reach its target of 4 percent. Do you think the inflation targeting central bank is the reason for appreciation? Should we lay some blame on that?
A: It is possible. Even when I was in government, when inflation was quite high, I felt that we were occasionally overzealous in using monetary instruments to correct inflation because that does other kinds of problems it causes. Inflation management is hard, but there are a variety of instruments, monetary instruments are not the only one. So my feeling is that if you are doing that by appreciating the currency by causing carry trade money to flow in to the country, it is best not to do that. I would in fact allow the reserves to grow a little bit more.
Q: I do not want to accuse the Reserve Bank of India of wantonly appreciating the currency. Maybe they are stopping the depreciation. Wantonly using the currency to achieve their target perhaps is not at all on the cards. However, clearly when you read the monetary policy minutes, the committee’s minutes, and the Q&A session after the monetary policy during the press conference, there seems to be a fear that there could be a flight of dollars from emerging markets to developed markets for a whole host of reasons – the fiscal gap in the United States, that country also doing – the GDP growth also being stronger, for a whole variety of reasons -- the central banks contracting their balance sheets. Because of all this India should be domestically strong, let us have a very good fiscal deficit number, very good inflation number so that when the flight happens, India is not one of the fragile five. That is one reason why the rate hikes are keeping the currency strong. Do you think that is a fair argument, we want to be strong internally?
A: I think it is a fair argument, but that has many sides to it, from fiscal deficit to other things. So we have to work on all that and it is true that when you get global turbulence, usually money in fact goes out of, even if the cause is rich country – America I remember, S&P is downgrading of United States when I was here, money then ends up in the US. It is the opposite of what you at first expect. So there is a risk of that. For that you want the country to be very strong, economically when that time comes, the country is in a strong position to ward that off.
However, what are the strategies’ for that? Is to have a slightly bigger reserve because you have a big foreign exchange reserve to buffer yourself against these flows in and out.
Q: If there is one measure you want to advice so that we are able to boost economic growth, what would that be? Which would be a law that we should cancel or which should be a law that we should implement, or a policy that we should implement so that we get back? We are not even at the 7.5 percent, even this year the Reserve Bank of India estimate is 7.4 percent and not everyone agrees we will get there.
A: Policies like law and things like that, I believe there is a lot to be done and one of the reasons I have written a full book on law and economics because I feel that in India we do not do enough. However, if I was looking at one macroeconomic policy that we should begin to pay attention, which is good in the long run for growth, we have to get the investment rate up which had gone up to 38 percent, savings rate up.
All the East Asian countries, if you look at from South Korea, Singapore, Hong Kong, Taiwan, all of them did booming growth with very high investment and savings rate. India was there, right in that club, we are still very close to that, make no mistake, but we have slid back. So that is one variable which unfortunately you people do not give enough attention in the media, so the government does not pay enough attention to that. However, I would advise the government to pay a lot of attention to that particular indicator to get growth up.
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