India’s EODB Ranking Impacts Too Few Businesses

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In a recent commentary in The Bloomberg Quint, businessman and serial entrepreneur Raghav Bahl brings to light the true meaning of India’s leap in Ease Of Doing Business Index.

I admire two things about Prime Minister Modi. He is an audacious and energetic propagator of his pet ideas. And he coins really smart acronyms to catch the popular imagination. Of course, once he encounters success, his performance becomes incomparably virtuoso.

That was apparent when he celebrated India’s leap of 23 spots, from rank 100 to 77, in the EODB (Ease of Doing Business) Index compiled by the World Bank. Modi beamed. He was now tantalizingly close to his target of “getting India into the Top 50”, so you could not grudge him the joy. “Now our effort is to take India to the five-trillion-dollar club as soon as possible”.

Of course, what was left unsaid is that, even at a GDP of US$ 5 trillion, India would have a per capita income of under US$ 4,000 per annum, which is a hefty distance away from the 10K mark, considered the real milestone that would justify such self-congratulation.

Eye-popping facts on EODB’s narrow remit
Several other things were left unsaid too. Most of us assume, quite innocently, that the World Bank’s EODB Index is the gold standard of economic performance. In reality, it’s an extremely narrow, even misleading, summation of a few economic rules which matter to a tiny, very tiny, sliver of India’s vast population. Here are a few eye-opening facts:

  • EODB is derived from the subjective views of a few dozen experts in Mumbai and Delhi. That’s it! It’s not based on an objective, statistical collation of hard facts gathered from across the country. And its outcome matters to less than 5% of India’s population
  • Most of the improvement came from just four rules that were swiftly changed by the finance minister at a meeting held on 26 December 2017 (this has been criticised as a “Kota coaching class” approach to “gaming the system” rather than effecting a fundamental change):
  1. Enforcing a single window clearance for building permits in Delhi and Mumbai
  2. Allowing exporters to seal their containers electronically, reducing physical inspections to 5% of shipments
  3. Introducing a single form for company incorporation
  4. Lowering the cost of getting electricity

Just these meagre tweaks to a few rules in Mumbai and Delhi are supposed to have transformed India’s economy. Never mind the fact that on three significant parameters – paying taxes, resolving insolvency and enforcing contracts – we actually slipped.

What EODB does not consider
Even more critical is to check what the EODB Index does not take into account (you will be now astonished to see how lethally narrow its underpinning is):

  1. Drop in the investment rate from 37% to 27% in less than a decade
  2. Shortfall in GST collections by nearly Rs 1 trillion in the current fiscal
  3. Withdrawal of nearly Rs 1 trillion by foreign portfolio investors this year
  4. Increase in unemployment to 18.9 million by 2019 (as per ILO)
  5. Sluggish exports through four years of Modi’s rule, failing to touch the 2013-14 record of US$ 313 billion even once
  6. Non-performing assets of nearly US$ 130 billion (about Rs 9 trillion) on banks’ balance sheets
  7. Refusal by the government to honour global arbitration awards on tax disputes

The GCCI’s distress signals
The Gujarat Chamber of Commerce and Industry (GCCI) had given a dire warning just two days ahead (on 16 November 2018) of the EODB rankings release.

  • Gujarat’s textile production to fall by at least 20-25% this year, on account of GST and attacks on migrants
  • Surat’s synthetic cloth production is down from 4 crore to 2.5 crore metres
  • Gems and jewellery exports down by 4.3% this year; 50,000 units in Surat and Saurashtra, employing 200,000 workers could down shutters because of the delayed refund of input credits
  • Over 2000 SMEs are on the verge of closure due to the ban on plastics in major Gujarat cities
  • Nearly 5.38 lakh youth were registered as unemployed in Gujarat in December 2017; only 12,689 youth got government jobs over the past two years. Ahmedabad has the highest number, ie, 62,608 unemployed youth registered at the exchange
  • This slowdown can be termed as the worst in the past four years

No problem, here’s another `Grand Challenge’
But the Gujarat warning was drowned in the EODB din, as Modi conjured up yet another big sounding theme. He announced a “Grand Challenge” for India’s techies to come up with smart ideas in “artificial intelligence, the internet of things, big data analytics and block-chain technologies to streamline and speed up processes”, that would catapult India into the Top 50. He used all the fancy tech terms in vogue to talk up his newest “brain wave”.

But Modi’s call to digital arms could fall on scared, helpless entrepreneurs, battling his regime’s tax hounds. Just over the last month, two thousand Indian start-ups have received notices from the Ministry of Corporate Affairs (MCA) asking them to “justify the premium” at which they have raised equity funds, or else face harsh penalties and taxes. This has reopened and sprinkled fresh salt on old wounds. It’s a second whammy for the same “crime”.

And  another dreaded “Angel Tax”
Two years ago, the income tax department had issued similar notices, slapped taxes, and begun prosecution under the dreaded “angel tax” provisions. It’s an outrageous levy, which places the power to “value” start-ups in the hands of clueless inspectors. Imagine, even the most successful professionals, from private equity and venture capital outfits, get valuations right less than once in ten times. Because valuations, like beauty, lie in the eyes of the beholder!

For example, if five investors had valued Flipkart at US$ 1 billion, US$ 2 billion, US$ 3 billion, US$10 billion or US$ 15 billion in 2012, who would have been right, and who wrong? Clearly, each person’s valuation would depend on her:

  • Relative risk appetite
  • Return benchmark
  • Time horizon of the invested capital
  • Understanding of the e-commerce business
  • Bullishness on India’s economy
  • etc etc!

Each person would have given different weights to these individual factors, and arrived at any number of different valuations. And each would have been right, because Flipkart was eventually sold for USD 20 billion in 2018. So now, if the taxman had whimsically determined Flipkart’s valuation at US$ 0.5 billion, he would levy taxes of US$ 200 million, US$ 600 million, US$ 1 billion, US$ 3.8 billion and US$ 5.8 billion, respectively, on each hapless investor, even before a penny of cash gains had been realised!

Do you seriously think any of our hypothetical investors would have put money under such a tax regime, where they were being coerced to pay cash taxes on unrealised/uncertain “profits”? Clearly, this tax is a travesty, and tragedy, inflicted on Indian start-ups. It’s an astonishing repudiation of Stand-up India, Start-up India, Digital India, Make In India.

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