Doing Business Rankings: Reforms Must Focus on On-Ground Realities for Trade Facilitation

The latest Doing Business (DB) 2020 report places India 63rd among 190 countries, 14 places ahead of its position the previous year. This jump is attributed to reforms in three areas: the resolution of insolvency (52nd from 108th), construction permits (27th from 52nd) and trade across borders (68th from 80th). The report found India to be among the top 10 reformers among 190 countries along with China and Pakistan. Sustained reforms on vital parameters of DB require several calculated moves and departmental coordination, and the latest ranks, on prima facie, indicate that India’s reforms are paying off. Many national governments, including those of Pakistan, Georgia, Armenia and Nigeria, invite members of the World Banks’s (WB) DB team to consult and advise reforms that can improve the country’s rank (MG Link News 2018; Wade 2019; Armenpress 2019; Sun 2016). Many governments appear to use improvement in rankings as an evaluation of specific reforms and as a sign of greater investment in the future.  While reforms in the areas of enterprise promotion and reducing red tape are necessary, measures almost exclusively to attain a higher rank can come with risks. An improved rank does not easily translate into an increase in investments in the context of global production networks. Enterprises around the world might not wait for the DB report to take decisions on their investments or locations of activity as they scan the business environment on a real-time basis.  

Issues of Methodology 

There are other problems associated with DB rankings, particularly related to their methodology. While the WB has been publishing DB reports since 2003, they commissioned and published an independent evaluation on their approach in 2008 that warned readers of the limitations of the rankings. For instance, they identified that DB does not measure corruption (WB 2008). Moreover, criticism and controversies about the WB’s evaluation of labour regulation forced it to conduct this independent evaluation in 2008, follow it up with an examination by a consultant group in 2011 and a review by an independent panel in 2013. The panel advised the WBG to continue collecting data about labour regulations but to stop using the indicator in calculating the DB ranking of countries (WB 2013). 

Until 2009, DB surveys had collected information only based on business practices in New Delhi and Mumbai. In 2009, DB ranked 17 Indian cities, thus identifying good practices of different states (WBG 2009). To make it more representative of India’s diverse regulations at the federal levels, the group has announced that from 2021 onwards, they will also include surveys conducted in Kolkata and Bengaluru (News18 2019). As DB rankings became the government’s obsession during the early years of this decade, administrators implemented a series of measures that would make the country more business-friendly, placing important consideration on the role of states in reducing red tape. In 2014, the Department for Promotion of Industry and Internal Trade (DPIIT) started the initiative jointly with the WB to rank Indian states on their ease of doing business. Ranks were based on how far prescribed reforms—initially, a 98-point action plan, which later expanded to 340 in 2017—were completed (DPIIT 2017).  We still witness the ranking of states based on an ever-expanding set of reform topics and annual revisions in methodology. The National Council of Applied Economic Research (NCAER) publishes the “State Investment Potential Index (SIPI)” that ranks states based on different parameters. The Niti Aayog’s IDFC Institute Enterprise Survey of Indian States (2016) differs from DB rankings as it aims to capture the direct perceptions of organised manufacturing firms in states on the regulatory compliance process and approval procedures rather than the perceptions of regulatory institutions or implementing agencies. This enterprise survey also attempts to capture the difference between the de jure processes and the de facto realities due to issues of implementation and understanding of systems by enterprises and is a testimony to the poor correlation between DB rankings and enterprise surveys. Unfortunately, government officials are taking measures to achieve a higher rank in DB reports at a time when the criteria to become a favoured destination for investments and manufacturing activities changes often because of innovation in robotics, automatic, 3D printing and other areas.

One of the topics that the DB surveys consider important, but that has not been prominent in other ranking reports, is trade across borders (TaB). This is particularly important in India’s case because it was ranked 68th among 190 countries in 2020, moving 12 places ahead of its position the previous year. This ranking measures a reduction in “hassles” (in terms of time and costs) of importing and exporting. In the modern world, production networks and advancements in logistics have reduced the importance of national borders and resulted in trade in tasks—a trend where “activities of firms that were previously provided in-house are now outsourced, i.e. supplied by an independent firm” (Lanz et al 2011). Moreover, trade between firms takes place at a larger scale and greater value than trade between countries (Melitz 2003).

There are five reasons why reforms under this sub ranking must be examined and critiqued. First, one of the most cited reforms in 2015 was the reduction in the number of mandatory documents for trading from seven to three. This was also included in India’s Foreign Trade Policy 2015–20 (Ministry of Commerce 2015). The seven documents were (1) bill of landing, (2) commercial invoice, (3) foreign currency exchange form, (4) packing list, (5) shipping bill, (6) technical standards certificate, and (7) terminal handling receipt. The new requirements were just the bill of landing, the commercial invoice cum packing list, and the shipping bill (Ministry of Commerce, 2015). However, this does not have a significant impact in practice because different importing countries require about half a dozen certificates based on the sectors and products imported. Many traders in the agri-food export sector hardly felt any actual reduction in documentation in their day-to-day export and import activities (Kumar 2016). 

Second, while the Single Window Interface (SWIFT)—where various departments issue certificates online on a single paperless platform—was touted as a unifying platform, it has several limitations. It has been difficult for traders to obtain them as their offices are often not close to central ports (Kumar 2016). Third, DB’s evaluation of India’s efficacy in trade across borders was done mostly based on Mumbai’s infrastructure. Rather than a comprehensive account of all ports across India, the report focused on activities at Mumbai’s Jawaharlal Nehru Port Trust (JNPT), despite claims that reforms apply to both Mumbai and New Delhi in DB’s 2020 report (WB 2019). Thus, the measures undertaken at the JNPT alone would push India’s TaB rank significantly higher—from 146 to 80 (Hindu 2018). 

Table 1: India’s performance in the Trade across Borders parameter of DB, 2016–2020. 

Source: WB 2016; 2017; 2018; 2019; 2020.^[1] "#" refers to "distance to frontier."

Fourth, undoubtedly, as evident from Table 1, India’s efforts to facilitate trade reflect in the latest rankings and the absolute score of “distance to frontier” compared to last year. As per the DB report 2020, the rank improved from 80 to 68, and the distance to frontier score improved to 82.5 from 77.46. While there has been recorded progress in some of the parameters of TaB in between 2017 and 2018, including the absolute measure of distance to frontier, India’s rank in TaB deteriorated by three positions. Some of the figures corresponding to the time and cost remain the same across 2016 and 2017 and between 2017 and 2018, which raises reservations over the accuracy of them (Table 1). Though progress in rank in a specific area such as TaB is also dependent on reforms, the WBG had claimed the DtF maps the progress made in absolute terms.  A country’s progress in rank in a specific parameter such as TaB is dependent on reforms made in other countries as well. Thus, if other countries, particularly those at a close rank as India, achieve significant reforms in the same parameter, then, relatively, India’s rank will not change. To circumvent the limitations inherent in these relative measures, the WBG claims that measure of DtF maps the progress made in that parameter in absolute terms.

Fifth, there are points of contention related to parameters measured by DB and domestic institutions. For instance, in 2018, India’s customs department had introduced radio frequency identification to track freight containers in real-time. Based on their calculations they claimed the release of goods took about 100 hours in JNPT whereas the WBG claimed the number was about 265 hours (Times of India 2018). This indicated that the actual time taken to release a container in JNPT was almost half of what DB claimed in its 2018 report. The government department, to support their argument, claimed that this was in accordance to the data captured in the Indian Customs Electronic Gateway (ICEGATE) and this progress was not reflected in the DB’s 2018 report (Times of India 2018). In short, it appears that DB overhauled their process of collecting information from stakeholders, particularly on various subtopics, only for the 2019 DB report. This bridged the gap between perception and reality.  

Impact on Traders

A major beneficiary of India’s DB reforms is JNPT and the traders using this port. However, other ports in India do not even have basic functional customs electronic data interchange (EDI). This indicates the concentration of reforms exclusively meant to enhance a particular rank, such as the adoption of advance import declaration and development of the fourth container terminal. Proponents for such a concentrated push argue that given that JNPT is India’s largest container port (handling more than half of India’s container-based trade [JNPT 2018]), DB-induced reforms would directly benefit the greatest proportion of the traders. However, this can add to the ordeal of other ports by making them less preferred, opposing the very fundamentals of balanced growth or regional development. There are examples of exporters based in Mangaluru availing Mumbai’s JNPT, and those in Bhubaneswar sending containers to either Vishakhapatnam or Kolkata leaving aside their closest ports for the reasons stated above. 

In 2016, out of the 298 ports in India, only 132 were on the EDI platform (S Arun 2016). Further, the customs department, as per the information on the ICEGATE portal, claims around 98% of India’s foreign trade is through 134 EDI enabled ports (Department of Revenue 2019). There are issues with containerised cargo or vessel connectivity even in other major ports, and these issues ensure minor ports remain minor. When a port is congested, additional congestion charges are levied, and this is an instance where a DB reform adds to the existing congestion and regionally unbalanced development. For instance, many exporters prefer Chennai port over a few other ports as the consignment gets on board the vessel and to the buyers abroad faster.  Besides, our incentive system, where a small percentage of the value of exports are paid back to the exporters in the form of tradable scrip or duty drawback to compensate them for higher transaction and logistics costs in India, is also such that exporters prefer major EDI based ports to claim benefits under Foreign Trade Policy as they receive them faster than non-EDI ports.[2]  

The Ministry of Commerce has been implementing a series of reforms based on reports by task forces that were set up to examine transaction costs and time taken to import and export. However, the “Task Forces on Transaction Costs in Exports” was primarily constituted to improve India’s DB ranking, and it worked to reduce costs and time primarily in terms of soft infrastructure. Instead, what Indian exporters require to be competitive are substantive measures in terms of hard infrastructure (three examples are better last-mile connectivity to ports, logistics facilities at container stations and improved vessel frequency) (Ministry of Commerce 2011). Moreover, the task forces replicated the problems in the methodology of DB rankings because they mainly considered export activities only in three ports: Delhi air cargo complex, JNPT and Chennai ports (Ministry of Commerce  2014). This fails to paint a comprehensive picture of India’s trade infrastructure because the facilities and connectivity of these ports are far ahead of other ports. Given that DB considers the largest business cities, TaB ranking excludes issues faced by small export-oriented firms located in smaller towns or cities. The real success of a better rank in DB reports could be seen if it brings more individuals and small and medium enterprises progressively into trade, at the same time, making trade easier for the existing ones.

Given these multiple flaws in methodology, it becomes doubly important for governments to design reforms that are not for the sole purpose of improving the country’s DB ranking. A country like India would benefit more out of implementing hard infrastructures such as last-mile port connectivity, product- or sector-specific trade facilitation, testing and certifying facilities near ports rather than reducing a few photocopies or duplication of documents. Relatively minor reforms that would improve cargo handling and reduce turnaround time in many other ports can be useful for traders. Politicians might boast of achieving higher ranks in DB, but they do so at the risk of overlooking vital flaws in methodology surveys like the DB bring.