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Thursday, 29 October 2015 01:02
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China gets largest FDI despite its middling ranking

 

Too much has been made of the 12-point gain in India’s ranking in the World Bank’s Doing Business rankings—in any case, despite moving from 142nd out of 189 countries in FY15 to 130th in FY16, India remains at the bottom third of the class, a long way from the top-50 ranking the government is aiming for in 3 years. Apart from the fact that the rankings can be gamed, they don’t cover the really important reasons for why companies invest. While being consistently ranked above India, at between 85th and 90th since the beginning of the decade, China’s ranking is just about middling. Yet, till before the current crisis, China was the world’s largest recipient of foreign investment, ahead of even the United States—and at 47% of GDP, its investment ratios are the highest in the world.

Companies look at the domestic macro environment, the size of the market, and the quality of the labour force—increasingly, as in the case of India, its ability to innovate—among others, but Doing Business captures none of these. Which is why, while Bhutan is ranked 71st and Nepal 99th in the World Bank index, India draws in far more investment, both local and foreign. In the first six months of 2015, according to data collected by the Financial Times, India was the largest recipient of FDI globally, and a large part of this money came from private equity investing in e-commerce companies looking to grab a piece of India’s large consumer market or in start-ups in the innovation space—indeed, many MNCs have a significant share of their global workforce located in India, to take advantage of India’s large talent pool.

Many of the study’s results are odd, can be gamed, and don’t capture what investor concerns are. India’s tax rate, according to the study, is 60.6% of profits, but that is completely incorrect. In India’s case, there was a sharp improvement in ‘getting electricity’ where the rank improved to 70th from 137th the year before—this, however, was because in the Delhi utility, the process for getting an electricity connection was made faster by eliminating the internal wiring inspection, while Mumbai improved internal work processes and coordination. Starting a business was made easier by eliminating the minimum capital requirement and the need to obtain a certificate to commence business. But since most large investors hire ‘consultants’ to deal with this, the more important areas are how long it takes to exit a business, how long it takes to enforce contracts (1,420 days) and the time taken to resolve insolvency (4.3 years). India is ranked 157th in ‘paying taxes’, but the number of hours taken to file your returns is easliy fixed with e-filing and simpler forms. What really upsets investors is retrospective taxation and illogical tax demands, the majority of which are struck down in courts, but after years of litigation—none of these are captured by the World Bank. The 138th rank in ‘registering property’ is also easily fixed with e-filing—it takes 47 days right now—and by lowering stamp duties but investors are worried about how it takes years to be able to buy land. None of this is to say India shouldn’t aim at improving its Doing Business ranking but, for instance, several billion dollars will come in annually in the telecom space if more spectrum is made available or in gas exploration if market pricing is allowed—getting the macro policy right is more important that fixing the micro processes which, at worst, are an irritant.

 

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