India jumped into the 63rd rank in the World Bank’s latest Ease of Doing Business rankings, soaring 14 notches from last year, as the multilateral body endorsed a string of reforms—from the signature 'Make in India' initiative to insolvency resolutions — that the Narendra Modi government has launched over the last few years.
The improvement in rankings will likely bring cheer to the government that is battling to engineer a quick turnaround in the economy buffeted by weak consumer demand and muted investment activity.
With gross domestic product (GDP) growth slumping to 5 percent in April-June, the Indian economy, hailed as global growth engine and darling of foreign investors until recently, was now seen by many as falling off a cliff.
The World Bank report also recognises India as one of the top 10 improvers in this year’s assessment, for the third successive time. India is the only large country this year to have achieved such a significant shift.
“India, which has conducted a remarkable reform effort, joins the list for the third year in a row (of top 10 improvers). Given the size of India’s economy, these reform efforts are particularly commendable,” the World Bank said in its report.
The jump is significant, as it comes after last year’s 23-rung jump when India’s rank improved to 77 among 190 countries. It has improved its rank by 67 positions in the last three years, and 79 positions in the last six years (2014-19).
In 2015 the government had set a goal was to join the 50 top economies on the ease of doing business ranking by 2020.
India’s ranking could rise even further next year after factoring in the corporate income tax changes that the government announced last month. The annual report, which ranks countries on business-friendliness, procedural ease, regulatory architecture and absence of bureaucratic red tape, takes into account reform measures implemented between June-May in any given year.
On September 20, 2019, the government slashed the corporate income tax rate from 30 percent to 22 percent for all companies. Inclusive of cess and surcharges the effective corporate tax rate in India now comes down to corporate tax to 25.17 per cent.
Newer companies, which are set up after October 1, 2019, will be subjected to an even lower effective tax rate of 17 percent.
The new rates brings India closer, in some cases lower, to the rates prevalent in many of the emerging and industrialised countries. The new corporate income tax rates in India will be lower than USA (27 percent), Japan (30.62 percent), Brazil (34 percent), Germany (30 percent) and is similar to China (25 percent) and Korea (25 percent). New companies in India with an effective tax rate of 17 percent is equivalent what corporates pay in Singapore (17 percent).
The World Bank report said that Prime Minister Narendra Modi’s “Make in India” campaign focused on attracting foreign investment, boosting the private sector—manufacturing in particular—and enhancing the country’s overall competitiveness.
“The government turned to the Doing Business indicators to show investors India’s commitment to reform and to demonstrate tangible progress,” it said.
“The administration’s reform efforts targeted all of the areas measured by Doing Business, with a focus on paying taxes, trading across borders, and resolving insolvency,” the World Bank said.
In a strong commendation of the Modi-government’s policies, the World Bank said that the case of India provides an example of successful implementation of reorganisation procedures, including the enactment of the Insolvency and Bankruptcy Code in 2016.
“Before the implementation of the reform, it was very burdensome for secured creditors to seize companies in default of their loans. The most common way for secured creditors to recover the debt was through very lengthy and burdensome foreclosure proceedings that lasted almost five years, making efficient recovery almost impossible” it said.
The new law introduced the option of reorganisation (corporate resolution insolvency process) for commercial entities as an alternative to liquidation or other mechanisms of debt enforcement, reshaping the way insolvent firms could restore their financial well-being or close down.
The multi-lateral body said that with the reorganization procedure available, companies have effective tools to restore financial viability, and creditors have access to better tools to successfully negotiate and have greater chances to revert the money loaned at the end of insolvency proceedings.
Since its implementation, more than 2,000 companies have used the new law. Of these, about 470 have commenced liquidation and more than 120 have approved reorganisation plans, with the remaining cases still pending.
Despite some challenges in the implementation of the reform—particularly regarding court operations and the application of the law by multiple stakeholders—the number of reorganizations in India has been gradually increasing.
Reorganisation has now become the most likely procedure for viable companies as measured by Doing Business, increasing the overall recovery rate from 27 to 72 cents on the dollar.
This increase in the recovery rate is based on the standardised methodology and underlying assumptions of the resolving insolvency indicator set, which measures domestic limited liability companies only.
India made starting a business easier by abolishing filing fees for the company incorporation form, electronic memorandum of association, and articles of association.
The World Bank has also acknowledged the rapid reforms in dealing with construction permits, which has streamlined the process, reduced the time and cost of obtaining construction permits, and improved building quality control by strengthening professional certification requirements.
India has also made trading across borders easier by enabling post-clearance audits, integrating trade stakeholders in a single electronic platform, upgrading port infrastructures, and enhancing the electronic submission of documents.